form11-k.htm

INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN

Notes to Financial Statements

December 31, 2008

1.	DESCRIPTION OF THE PLAN

The following brief description of the Interactive Intelligence, Inc. 401(k) Savings Plan (the “Plan”) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan’s provisions. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).

General

The Plan is a defined contribution plan established by Interactive Intelligence, Inc. (the “Company” and “Plan Administrator”) for qualifying employees effective January 1, 1996. The Plan is administered by an Investment Committee appointed by the Company. The trustee and record-keeper of the Plan is Merrill Lynch Trust Company, FSB (“Merrill Lynch” or the “Trustee”). The purpose of the Plan is to provide retirement income and other benefits to eligible employees of the Company.

Plan Termination

Although the Company has not expressed any intent to terminate the Plan, it has the option to do so at any time subject to the provisions of ERISA. Upon termination of the Plan, either full or partial, participants become fully vested in their entire account balances.

Eligibility

For purposes of making a pretax contribution or rollover contribution, an employee must have reached 21 years of age to be eligible for participation in the Plan. If an employee has met the age requirement, he or she is eligible to participate in the Plan as of his or her first day of service.

Contributions

Each year participants may contribute up to 50% of their pretax annual compensation, as defined in the Plan. Participant contributions are subject to the maximum limitations as defined in the Internal Revenue Code, as amended (the “Code”), plus “catch-up” adjustments as permitted by the Code. Participants may also contribute amounts representing qualified rollovers from other qualified benefit plans. Qualified matching and qualified non-elective Company contributions may be made as determined by the Company.

In February 2008, the Company announced to its employees that for the year ended December 31, 2008, and subject to the Company achieving specified annual financial performance targets, the Company would make a matching contribution to eligible participants, up to 25% of the first 8% of the participants’ pre-tax contributions to the Plan. If the Company achieved a U.S. Generally Accepted Accounting Principles (“GAAP”) reported operating margin of at least 5%, the Company would match up to 25% of the first 4% of the participants’ contributions to the Plan. If GAAP reported operating margin was greater than 9%, the Company would match up to 25% of the first 8% of the participants’ contributions to the Plan. Upon determination of the Company’s fiscal 2008 financial results, which were not finalized until early 2009, it was determined that the Company had met the first tier of the annual performance target during 2008, and each eligible participant received the applicable Company matching contribution during the first quarter of 2009. The total amount of the Company’s matching contribution for the year ended December 31, 2008 was $348,267.

Rollover and Transfer Contributions

The Plan permits participants to have their account balance in other qualified plans rolled over to the Plan. Such transfers or rollovers to the Plan may only be made with the approval of the Plan Administrator and do not affect any other contributions made by or on behalf of a participant.

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INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN

Notes to Financial Statements (continued)

Vesting

Participants are immediately vested in their contributions plus the actual earnings thereon. For an eligible participant who has worked for the Company for less than four years at the time of the Company matching contribution, the contribution will vest in equal installments over four years based on the anniversary date of the participant’s employment. For an eligible participant who has worked for the Company for four or more years at the time of contribution, the contribution will be 100% vested.

Participant Accounts

Each participant’s account is credited with the participant’s contributions, rollovers, Company contributions, if any, and an allocation of Plan earnings. Investment earnings are allocated proportionately among all participants’ accounts based on the ratio of their account balance to the total fund balance. The benefit to which a participant is entitled equals the participant’s vested account balance.

Party-in-Interest Transactions

Certain Plan investments are shares of mutual funds and a collective fund managed by Merrill Lynch, the trustee and record-keeper of the Plan, as defined by the Plan, and therefore, these transactions qualify as party-in-interest transactions.

The Plan also invests in shares of the Company. The Company is the Plan sponsor and, therefore, these transactions qualify as party-in-interest transactions.

Investment Options

Participants may direct their pretax contributions to any of the investment options selected by the Plan Administrator. All investment elections are participant-directed.

Payment of Benefits

Upon termination of service or retirement, participants may elect to receive payments over a period provided in the Plan document or in a lump sum amount equal to the vested portion of their accounts as of the most recent valuation date before the distribution. Participants may also elect in-service withdrawals or may roll over their accounts from the Plan to another qualified retirement plan. Such benefit payments are subject to the provisions of the Plan. In the event of an active or inactive participant’s death, the value of the vested participant’s account balance will become payable to the participant’s beneficiary.

Participant Loans

A participant of the Plan can borrow from his or her account. Amounts borrowed by the participant are transferred from one or more of the investment funds. The participant pays interest on the loan based on market rates at the date the loan is issued. This interest is credited to the participant’s account balance. Both the maximum amounts available and repayment terms for such borrowings are subject to the provisions of the Plan.

Forfeitures

Forfeitures are non-vested account balances of terminated employees, which may be applied at the discretion of the Company. Forfeitures will be used first to reduce Company contributions. Any remaining forfeitures will be used to offset Plan expenses with any remaining forfeitures then allocated to participants’ account balances. Forfeitures totaling $24,806 and $21,328 were used to reduce 2008 and 2007 Company contributions, respectively. There were no unallocated forfeitures as of December 31, 2008 and 2007.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The financial statements of the Plan have been prepared under the accrual basis of accounting.

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INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN

Notes to Financial Statements (continued)

As described in Financial Accounting Standards Board Staff Position AAG INV-1 and Statement of Position 94-4-1, Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Audit Guide and Defined-Contribution Health and Welfare and Pension Plans (the “FSP”), investment contracts held by a defined-contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attributable to fully benefit-responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the plan. As required by the FSP, the statement of net assets available for benefits presents the fair value of the investment contracts as well as the adjustment of the fully benefit-responsive investment contracts from fair value to contract value. The statement of changes in net assets available for benefits is prepared on a contract value basis.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Investment Valuation and Income Recognition

The Plan’s investments are stated at fair value. If available, quoted market prices are used to value investments. Shares of mutual funds are valued at the net asset value of shares held by the Plan at year end. Participant loans are carried at amortized cost plus accrued interest, which approximates fair value.

Net appreciation in fair value of investments is reflected in the statements of changes in net assets available for benefits and includes realized gains and losses on investments bought and sold and the change in appreciation from one period to the next. Purchases and sales are recorded on a trade-date basis. Interest income is recorded on an accrual basis. Dividends are recorded on the ex-dividend date.

The Plan has $979,101 of investments in a collective investment trust fund which is reported at fair value and adjusted to a contract value of $1,137,167 to determine the net assets available for benefits. The Plan has concluded that the net asset value reported by the underlying fund approximates the fair value of the investment. These investments are redeemable with the fund at contract value. Due to the nature of the investments held by the funds, changes in the market conditions and the economic environment may significantly impact the net asset value of the funds and, consequently, the fair value of the Plan’s interests in the funds.

Although a secondary market exists for these investments, it is not active and individual transactions are typically not observable. When transactions occur in this limited secondary market, they may occur at discounts to the reported net asset value. Therefore, if the redemption rights in the funds were restricted or eliminated and the Plan was to sell these investments in the secondary market, it is reasonably possible that a buyer in the secondary market may require a discount to the reported net asset value, and the discount could be significant.

The Financial Accounting Standards Board recently added a project to its agenda to provide guidance on applying fair value to investments in alternative investment funds. The guidance resulting from this project may impact the carrying amount of such investments in future periods.

Payments to Participants

Payments to participants, including in-service withdrawals, transfers and qualified distributions, are recorded when paid.

Administrative Expenses

Expenses related to the Plan may be paid by either the Plan or the Company; however, the Company has typically paid for substantially all of the Plan’s expenses.

3.	FAIR VALUE MEASUREMENTS

SFAS 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are described below:

·	Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·	Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN

Notes to Financial Statements (continued)

The Plan’s investments that are measured at fair value on a recurring basis, such as money market funds, mutual funds and equity securities, are generally classified within Level 1 of the fair value hierarchy. The fair value of these investments is valued based on quoted market prices in active markets. The Plan also invests in a common collective trust whose funds are traded daily and does not adjust the quoted price for such investments.

The following table sets forth a summary of the Plan’s investments measured at fair value on a recurring basis as of December 31, 2008:

	Fair Value Measurements at Reporting Date Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mutual funds		11,538,449		11,538,449		N/A		N/A
Interactive Intelligence, Inc. common stock		407,663		407,663		N/A		N/A
Common collective trust		979,101		N/A		979,101		N/A
Total	$	12,925,213	$	11,946,112	$	979,101		N/A

The following table sets forth a summary of the Plan’s investments measured at fair value on a recurring basis as of December 31, 2007:

Fair Value Measurements at

Reporting Date Using

Description

Total

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

Significant

Other Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Mutual funds

15,060,984

N/A

Interactive Intelligence, Inc. common stock

1,019,912

N/A

Common collective trust

837,463

N/A

837,463

N/A

Total

16,918,359

16,080,896

837,463

N/A

The Plan’s investments are stated at fair value. The investments in the common collective trust (primarily fully benefit-responsive investment contracts) are stated at fair value above and adjusted to contract value on the statement of net assets available for benefits which is equal to the principal balance plus accrued interest. The fair value of fully benefit-responsive investment contracts is calculated using a discounted cash flow model which considers recent fee bids as determined by recognized dealers, discount rate and the duration of the underlying portfolio securities.

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INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN

Notes to Financial Statements (continued)

4.	INVESTMENTS

The market value of individual investments that represent 5% or more of the Plan’s net assets as follows:

		December 31,
		2008			2007
	Mutual funds:
	Davis NY Venture A	$	2,054,633		$	2,508,092
	American Funds Growth Fund of America R3		1,795,699			2,363,987
	PIMCO Total Return A		1,601,806			1,209,011
	American Funds Capital World Growth & Income R3		1,539,125			2,237,794
	Eaton Vance Small Cap		1,431,450			**
*	BlackRock S&P 500 Index I		887,040			1,260,012
*	BlackRock Global Allocation A		718,231			832,641
	MFS Utilities Fund A		**			808,890
	Franklin Small-Mid Cap Growth A (1)		--			2,444,540

	Common stock:
*	Interactive Intelligence, Inc.		407,663			1,019,912

	Common collective trust:
*	Retirement Preservation Trust (2)		979,101	(2)		837,463	(2)

_______________

* Indicates a party-in-interest to the Plan.

** Investment did not represent 5% or more of the Plan’s net assets.

(1)	No longer an investment option in the Plan.

(2)	The amounts as of December 31, 2008 and 2007 represent the fair value. The contract value of these amounts was $1,137,167 and $845,069 as of December 31, 2008 and 2007, respectively, which is the amount available for Plan benefits.

During 2008, the Plan’s investments (including gains and losses on investments purchased and sold, as well as held during the year) depreciated in fair value as determined by quoted market prices as follows:

	Net Realized and Unrealized Depreciation in Fair Value of Investments
Mutual funds	$	(6,429,563)
Interactive Intelligence, Inc. common stock		(907,031)
	$	(7,336,594)

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INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN

Notes to Financial Statements (continued)

5.	INVESTMENT CONTRACTS

The Retirement Preservation Trust is a collective investment trust fund that invests mainly in insurance companies, synthetic guaranteed investment contracts (“GICS”) and money market instruments, with the majority of the investments being held in GICS. The underlying investments of the GICS are primarily in pools of investment contracts that are issued by insurance companies and commercial banks, as well as a wrapper contract issued by a financially responsible third-party. The investments of the Trust are valued at contract value. The contract value represents the amount participants in the Trust would receive if they were to initiate permitted transactions under the term of the underlying Plan.

6.	INCOME TAX STATUS

The Plan is a proto-type plan administered by Merrill Lynch. The Internal Revenue Service has determined and informed the Plan Administrator by a letter dated March 31, 2008 that its amended and restated prototype plan as of January 1, 2007 is designed in accordance with Section 401(a) of the Code and, therefore, the related trust is exempt from taxation. The Plan is required to operate in conformity with the Code to maintain its qualification. The Plan Administrator believes the Plan is designed, and is currently being operated, in compliance with the applicable requirements of the Code and, therefore, believes that the Plan is qualified and the related trust is tax-exempt.

7.	RISKS AND UNCERTAINTIES

The Plan invests in various types of investment securities. Investment securities, in general, are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is reasonably possible to expect that changes in the values of investment securities will occur in the near term and that such changes could materially affect the participants’ account balances and the amounts reported in the statements of net assets available for benefits.

Recent market conditions have resulted in an unusually high degree of volatility and increased the risk and short-term liquidity associated with certain investments held by the Plan, which could impact the value of investments after the date of these financial statements.

In addition, the Plan’s investments include shares of the Company’s common stock. Therefore, transactions involving the acquisition or disposition of the Company’s common stock also qualify as party-in-interest transactions. The Company has never declared or paid cash dividends on its common stock and does not expect to declare or pay any cash dividends in the foreseeable future.

8.	RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500

The following is a reconciliation of net assets available for benefits according to the financial statements at December 31, 2008 as compared to the Form 5500:

	2008
Net assets available for benefits according to the financial statements	$	13,626,107
Less: Adjustment from fair value to contract value for fully benefit-responsive investment contracts		(158,066	)
Net assets available for benefits according to the Form 5500	$	13,468,041

The following is a reconciliation of benefits paid according to the financial statements at December 31, 2008 as compared to the Form 5500:

	2008
Benefit payments according to the financial statements	$	514,645
Less: Amounts allocated to withdrawing participants at December 31, 2007		(43,873	)
Benefit payments according to the Form 5500	$	470,772

Amounts allocated to withdrawing participants are recorded on the Form 5500 for benefit claims that were processed and approved for payment prior to December 31, but not yet distributed as of that date. The benefit claims were distributed during 2008 and are shown on the Form 5500 as a reduction to benefit payments.

The following is a reconciliation of the value of the interests in common collective trusts according to the financial statements at December 31, 2008 as compared to the Form 5500:

	2008
Total investment loss per the financial statements	$	(6,819,327	)
Less: Adjustment from fair value to contract value for fully benefit-responsive investment contracts		(158,066	)
Total investment loss per the Plan’s Form 5500	$	(6,977,393	)

9.	SUBSEQUENT EVENT

In February 2009, the Company announced to its employees that for the year ended December 31, 2009, and subject to the Company achieving specified financial performance targets, the Company will make a matching contribution to eligible participants consistent with 2008. Eligible participants can earn up to 25% of the first 8% of their pre-tax compensation contributed to the Plan. If the Company achieves a GAAP reported operating margin of at least 5%, the Company will match up to 25% of the first 4% of the participants' contributions to the Plan. If GAAP reported operating margin is greater than 9%, the Company will match up to 25% of the first 8% of the participants' contributions to the Plan. The Company matching contribution will be credited to the participants’ accounts as soon as practicable after the Company’s annual financial results are determined and the Company achieves the financial performance target.

		Page
Financial Statements and Exhibits

(a) Financial Statements:

	Report of Independent Registered Public Accounting Firm	3

	Financial Statements:

	Statements of Net Assets Available for Benefits as of December 31, 2008 and 2007	4

	Statement of Changes in Net Assets Available for Benefits for the Year Ended December 31, 2008	5

	Notes to Financial Statements	6

(b) Supplemental Schedule:

	Schedule H, Line 4i - Schedule of Assets (Held At End of Year) - December 31, 2008	12

(c) Signatures		13

(d) Exhibits		14

	See Exhibit Index

	December 31,
Assets:	2008		2007
Cash and cash equivalents	$	18,723	$	45,053
Investments, at fair value		12,925,213		16,918,359
Participant loans		200,644		178,246

Receivables:
Employer contributions		323,461		311,809
Net assets available for benefits, before adjustments		13,468,041		17,453,467
Adjustment from fair value to contract value for fully benefit-responsive investment contracts		158,066		7,606
Net assets available for benefits	$	13,626,107	$	17,461,073

Additions to net assets attributed to:
Contributions:
Participants	$	2,944,624
Rollovers		212,017
Employer		344,789
		3,501,430
Investment income (loss):
Dividend income		500,927
Net realized and unrealized depreciation in fair value of investments		(7,336,594	)
Interest income		16,340
		(6,819,327	)
Net activity		(3,317,897	)

Deductions from net assets attributed to:
Benefits paid to participants		514,645
Administrative expenses		2,424
Total deductions		517,069

Net decrease		(3,834,966	)

Net assets available for benefits at:
Beginning of year		17,461,073
End of year	$	13,626,107

		INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN
		(Name of Plan)

Date: June 29, 2009	By:	/s/ Stephen R. Head
		Stephen R. Head, Chief Financial Officer
		Interactive Intelligence, Inc.

		/s/ Debra L. Jones
		Debra L. Jones, Director of Human Resources
		Interactive Intelligence, Inc.

Exhibit No.		Description
23.1		Consent of KPMG LLP, Independent Registered Public Accounting Firm


		Description of investment including
	Identity of issue, borrower, lessor or similar party	maturity date, rate of interest, collateral, par, or maturity value			Current value
Mutual funds:
	Davis NY Venture A		86,987	shares	$	2,054,633
	American Funds Growth Fund of America R3		88,896	shares		1,795,699
	PIMCO Total Return A		157,969	shares		1,601,806
	American Funds Capital World Growth & Income R3		58,212	shares		1,539,125
	Eaton Vance Small Cap		173,299	shares		1,431,450
*	Blackrock S&P 500 Index I		80,640	shares		887,040
*	Blackrock Global Allocation A		47,978	shares		718,231
	MFS Utilities Fund A		38,630	shares		451,198
	Oppenheimer Developing Markets A		21,069	shares		334,786
*	Blackrock Small Cap		14,672	shares		195,871
*	Blackrock Healthcare A		38,654	shares		171,237
	Seligman Communication & Information A		5,598	shares		135,752
	Eaton Vance Income Fund of Boston A		33,463	shares		131,175
	Goldman Sachs Mid Cap Value A		4,100	shares		90,446
	Total mutual funds					11,538,449

Common stock:
*	Interactive Intelligence, Inc.		63,598	shares		407,663

Common collective trust:
*	Retirement Preservation Trust		1,137,167	shares		979,101

*	Participant loans	Interest rates range from 5.25% to 9.25% with various maturity dates				200,644
					$	13,125,857