UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549
 
 ____________
 
 FORM
10-Q
  (Mark
One)
 
 R
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended June 30, 2008
 
 Or
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the transition period from ____________to____________
 
 Commission
File Number: 000-27385
  CORPORATE LOGO
 INTERACTIVE
INTELLIGENCE, INC.
 (Exact
name of registrant as specified in its charter)
 
 Indiana
                (State
      or other jurisdiction
                of
      incorporation or organization)
              
              35-1933097
                (I.R.S.
      Employer
                Identification
      No.)7601
      Interactive Way
                Indianapolis,
      IN 46278
                (Address
      of principal executive offices, including zip code)(317)
      872-3000
                (Registrant’s
      telephone number, including area code)Not
      Applicable(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. YesRNor
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.(Check One):
  Large
      accelerated filer
              r
              
              Accelerated
      filer
              RNon-accelerated
      filer
              r(Do not
      check if a smaller reporting company)
              Smaller
      reporting company
              r
  Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes r No R
 
 As of
July 31, 2008, there were 17,991,526shares outstanding of the registrant’s common stock, $0.01 par
value.
















TABLE OF
CONTENTS





PART
      I. FINANCIAL INFORMATION
            PageItem
      1.
            Financial
      Statements.Condensed
      Consolidated Balance Sheets as of June 30, 2008 and December 31,
      2007
            1Condensed
      Consolidated Statements of Income for the Three and Six Months Ended June
      30, 2008 and 2007
            2Condensed
      Consolidated Statement of Shareholders’ Equity for the Six Months Ended
      June 30, 2008
            3Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended June 30,
      2008 and 2007
            4Notes
      to Condensed Consolidated Financial Statements
            5Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
            10Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk.
            17Item
      4.
            Controls
      and Procedures.
            17PART
      II. OTHER INFORMATIONItem
      1.
            Legal
      Proceedings.
            17Item
      1A.
            Risk
      Factors.
            17Item
      4.
            Submission
      of Matters to a Vote of Security Holders.
            18Item
      6.
            Exhibits.
            19SIGNATURES
            20





PART
I. FINANCIAL INFORMATION





Item
1. Condensed Consolidated Financial Statements and Notes to Condensed
Consolidated Financial Statements.





Interactive Intelligence, Inc.


Condensed
Consolidated Balance Sheets


As
of June 30, 2008 and December 31, 2007


(In
thousands, except share and per share amounts)





June
      30,
                2008
            
            
            December
      31,
                2007(unaudited)
            
            
            (Note
      1)AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            35,684
            
            
            $
            29,359Short-term
      investments
            
            
            13,967
            
            
            
            16,968Accounts
      receivable, net of allowance for doubtful accounts of
              $871
      at June 30, 2008 and $1,076 at December 31, 2007
            
            
            25,764
            
            
            
            27,527Deferred
      tax assets, net
            
            
            5,833
            
            
            
            5,833Prepaid
      expenses
            
            
            5,427
            
            
            
            5,501Other
      current assets
            
            
            1,806
            
            
            
            1,414Total
      current assets
            
            
            88,481
            
            
            
            86,602Property
      and equipment, net
            
            
            9,361
            
            
            
            6,932Deferred
      tax assets, net
            
            
            6,043
            
            
            
            7,520Other
      assets, net
            
            
            2,533
            
            
            
            2,384Total
      assets
            
            $
            106,418
            
            
            $
            103,438Liabilities
      and Shareholders’ EquityCurrent
      liabilities:Accounts
      payable and accrued liabilities
            
            $
            11,104
            
            
            $
            9,594Accrued
      compensation and related expenses
            
            
            3,263
            
            
            
            4,381Deferred
      product revenues
            
            
            5,436
            
            
            
            6,843Deferred
      services revenues
            
            
            27,708
            
            
            
            28,711Total
      current liabilities
            
            
            47,511
            
            
            
            49,529Noncurrent
      deferred services revenues
            
            
            5,930
            
            
            
            5,290Total
      liabilities
            
            
            53,441
            
            
            
            54,819Commitments
      and contingencies
            
            
            --
            
            
            
            --Shareholders’
      equity:Preferred
      stock, no par value: 10,000,000 shares authorized; no shares issued and
      outstanding
            
            
            --
            
            
            
            --Common
      stock, $0.01 par value: 100,000,000 shares authorized;
              17,991,426
      issued and outstanding at June 30, 2008
              and
      17,901,084 issued and outstanding at December 31, 2007
            
            
            180
            
            
            
            179Additional
      paid-in capital
            
            
            81,800
            
            
            
            79,405Accumulated
      deficit
            
            
            (29,003
            )
            
            
            (30,965
            )Total
      shareholders’ equity
            
            
            52,977
            
            
            
            48,619Total
      liabilities and shareholders’ equity
            
            $
            106,418
            
            
            $
            103,438







See
Accompanying Notes to Condensed Consolidated Financial
Statements


1


Interactive Intelligence, Inc.


Condensed
Consolidated Statements of Income (unaudited)


For
the Three and Six Months Ended June 30, 2008 and 2007


(In
thousands, except per share amounts)





Three
      Months Ended
                June
      30,
            
            
            Six
      Months Ended
                June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues:Product
            
            $
            15,321
            
            
            $
            14,602
            
            
            $
            30,166
            
            
            $
            26,958Services
            
            
            15,289
            
            
            
            12,533
            
            
            
            29,927
            
            
            
            24,465Total
      revenues
            
            
            30,610
            
            
            
            27,135
            
            
            
            60,093
            
            
            
            51,423Cost
      of revenues:Product
            
            
            3,909
            
            
            
            3,500
            
            
            
            7,039
            
            
            
            5,941Services
            
            
            6,088
            
            
            
            5,145
            
            
            
            11,985
            
            
            
            9,942Total
      cost of revenues
            
            
            9,997
            
            
            
            8,645
            
            
            
            19,024
            
            
            
            15,883Gross
      profit
            
            
            20,613
            
            
            
            18,490
            
            
            
            41,069
            
            
            
            35,540Operating
      expenses:Sales
      and marketing
            
            
            10,142
            
            
            
            8,822
            
            
            
            20,320
            
            
            
            17,476Research
      and development
            
            
            5,336
            
            
            
            4,227
            
            
            
            10,301
            
            
            
            8,124General
      and administrative
            
            
            3,882
            
            
            
            3,285
            
            
            
            7,709
            
            
            
            6,350Total
      operating expenses
            
            
            19,360
            
            
            
            16,334
            
            
            
            38,330
            
            
            
            31,950Operating
      income
            
            
            1,253
            
            
            
            2,156
            
            
            
            2,739
            
            
            
            3,590Other
      income (expense):Interest
      income, net
            
            
            344
            
            
            
            384
            
            
            
            803
            
            
            
            856Other
      income (expense), net
            
            
            (52
            )
            
            
            (42
            )
            
            
            45
            
            
            
            (98
            )Total
      other income, net
            
            
            292
            
            
            
            342
            
            
            
            848
            
            
            
            758Income
      before income taxes
            
            
            1,545
            
            
            
            2,498
            
            
            
            3,587
            
            
            
            4,348Income
      tax expense
            
            
            (700
            )
            
            
            (103
            )
            
            
            (1,625
            )
            
            
            (200
            )Net
      income
            
            $
            845
            
            
            $
            2,395
            
            
            $
            1,962
            
            
            $
            4,148Net
      income per share:Basic
            
            $
            0.05
            
            
            $
            0.14
            
            
            $
            0.11
            
            
            $
            0.24Diluted
            
            
            0.04
            
            
            
            0.12
            
            
            
            0.10
            
            
            
            0.22Shares
      used to compute net income per share:Basic
            
            
            17,972
            
            
            
            17,401
            
            
            
            17,956
            
            
            
            17,325Diluted
            
            
            19,077
            
            
            
            19,291
            
            
            
            19,149
            
            
            
            19,265








See
Accompanying Notes to Condensed Consolidated Financial Statements








2


Interactive Intelligence, Inc.
 Condensed
Consolidated Statement of Shareholders’ Equity (unaudited)
 For
the Six Months Ended June 30, 2008
 (In
thousands)
 
 Common StockShares
              
              
              Amount
              
              
              Additional
      Paid-in Capital
              
              
              Accumulated
                Deficit
              
              
              TotalBalances,
      December 31, 2007
              
              
              17,901
              
              
              $
              179
              
              
              $
              79,405
              
              
              $
              (30,965
              )
              
              $
              48,619Issuances
      of common stock
              
              
              8
              
              
              
              -
              
              
              
              131
              
              
              
              -
              
              
              
              131Exercise
      of stock options
              
              
              82
              
              
              
              1
              
              
              
              441
              
              
              
              -
              
              
              
              442Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              1,876
              
              
              
              -
              
              
              
              1,876Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,962
              
              
              
              1,962Net
      unrealized investment loss
              
              
              -
              
              
              
              -
              
              
              
              (53
              )
              
              
              -
              
              
              
              (53
              )Total
      comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              (53
              )
              
              
              1,962
              
              
              
              1,909Balances,
      June 30, 2008
              
              
              17,991
              
              
              $
              180
              
              
              $
              81,800
              
              
              $
              (29,003
              )
              
              $
              52,977
 
 
 See
Accompanying Notes to Condensed Consolidated Financial
Statements
  3
  Interactive Intelligence, Inc.
 Condensed
Consolidated Statements of Cash Flows (unaudited)
 For
the Six Months Ended June 30, 2008 and 2007
 (In
thousands)
 
 Six
      Months Ended
                June
      30,2008
              
              
              2007Operating
      activities:Net
      income
              
              $
              1,962
              
              
              $
              4,148Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
              
              
              1,690
              
              
              
              1,231Accretion
      of investment income
              
              
              (89
              )
              
              
              (240
              )Stock-based
      compensation expense related to stock options
              
              
              1,876
              
              
              
              1,474Deferred
      income tax
              
              
              1,477
              
              
              
              --Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              1,763
              
              
              
              (2,714
              )Prepaid
      expenses
              
              
              74
              
              
              
              (57
              )Other
      current assets
              
              
              (392
              )
              
              
              (151
              )Other
      assets
              
              
              (149
              )
              
              
              (196
              )Accounts
      payable and accrued liabilities
              
              
              1,438
              
              
              
              1,087Accrued
      compensation and related expenses
              
              
              (1,118
              )
              
              
              51Deferred
      product revenues
              
              
              (1,407
              )
              
              
              (90
              )Deferred
      services revenues
              
              
              (363
              )
              
              
              2,372Net
      cash provided by operating activities
              
              
              6,762
              
              
              
              6,915Investing
      activities:Sales
      of available-for-sale investments
              
              
              17,650
              
              
              
              10,315Purchases
      of available-for-sale investments
              
              
              (14,613
              )
              
              
              (10,214
              )Purchases
      of property and equipment
              
              
              (4,047
              )
              
              
              (2,556
              )Acquisition
      of professional services division
              
              
              -
              
              
              
              (853
              )Net
      cash used in investing activities
              
              
              (1,010
              )
              
              
              (3,308
              )Financing
      activities:Proceeds
      from stock options exercised
              
              
              442
              
              
              
              1,207Proceeds
      from issuance of common stock
              
              
              131
              
              
              
              104Net
      cash provided by financing activities
              
              
              573
              
              
              
              1,311Net
      increase in cash and cash equivalents
              
              
              6,325
              
              
              
              4,918Cash
      and cash equivalents, beginning of period
              
              
              29,359
              
              
              
              13,531Cash
      and cash equivalents, end of period
              
              $
              35,684
              
              
              $
              18,449Cash
      paid during the period for:Income
      taxes
              
              $
              170
              
              
              $
              78Other
      non-cash item:Purchases
      of property and equipment payable at end of period
              
              $
              (72
              )
              
              $
              --
 
 
 See
Accompanying Notes to Condensed Consolidated Financial
Statements
  4
  Interactive Intelligence, Inc.
 Notes
to Condensed Consolidated Financial Statements
 June
30, 2008 and 2007 (unaudited)
 
 1.
              FINANCIAL
      STATEMENT PRESENTATION
  The
accompanying unaudited condensed consolidated financial statements of
Interactive Intelligence, Inc. (the “Company”) have been prepared in conformity
with accounting principles generally accepted in the United States of America
(“US GAAP”) and with the instructions for Form 10-Q and Article 10 of Regulation
S-X for interim financial information. Accordingly, certain information and note
disclosures normally included in the Company’s financial statements prepared in
accordance with US GAAP have been condensed, or omitted, pursuant to the rules
and regulations of the United States Securities and Exchange Commission (the
“SEC”).
 
 The
preparation of the Company’s condensed consolidated financial statements
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities, at the respective balance sheet dates, and
the reported amounts of revenues and expenses during the respective reporting
periods. Despite management’s best effort to establish good faith estimates and
assumptions, actual results could differ from these estimates. In management’s
opinion, the Company’s accompanying condensed consolidated financial statements
include all adjustments necessary (which are of a normal and recurring nature)
for the fair presentation of the results of the interim periods
presented.
 
 The
Company’s accompanying condensed consolidated balance sheet as of December 31,
2007 has been derived from the Company’s audited consolidated financial
statements at that date but does not include all of the information and notes
required by US GAAP for complete financial statements. These accompanying
condensed consolidated financial statements should be read in conjunction with
the Company’s audited consolidated financial statements for the year ended
December 31, 2007, included in the Company’s most recent Annual Report on Form
10-K as filed with the SEC on March 17, 2008. The Company’s results of
operations for any interim period are not necessarily indicative of the results
of operations for any other interim period or for a full fiscal
year.
 
 Principles
of Consolidation
 
 The
accompanying condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination of all
significant intercompany accounts and transactions.
 
 Reclassifications
and Adjustments
  During
the second quarter of 2008, the Company identified an error in the
classification of the unearned premium/discount between cash and cash
equivalents and short-term investments.  In the December 31, 2007
balance sheet, $89,000 has been reclassified from cash and cash equivalents to
short-term investments. This reclassification did not have any impact on results
previously reported.
 
 Effective
March 31, 2008, in order to properly classify noncurrent deferred revenues from
the current portion, the Company reclassified $5.3 million
of noncurrent deferred revenues to a separate line item on the accompanying
condensed consolidated balance sheets. In addition, $582,000 of related prepaid
commissions associated with the Company’s noncurrent deferred revenues have also
been appropriately reclassified from the current portion of prepaid expenses and
included in noncurrent other assets, net. This error did not have any impact on
results previously reported.
 
 During
the fourth quarter of 2007, the Company identified an error that affected
amounts previously reported on its Quarterly Reports on Form 10-Q for the first
three 2007 quarterly periods.  During the first three 2007 quarterly
periods, the Company deferred maintenance and support revenues based on an
assumed 18 month maintenance and support period but in certain cases, the actual
support period was less than the maximum period. With respect to the three and
six months ended June 30, 2007, the Company under-recognized product revenues in
the amount of $155,000 and $250,000, respectively, and related commission
expenses during the same periods was also under-recognized by $17,000 and
$27,000, respectively. This error did not have a material impact on results
previously reported.
 
 Prior to
July 1, 2007, costs related to certain commissions for the sale of services were
included in cost of services. Beginning July 1, 2007, for all periods, these
costs have been reclassified from cost of services to sales and marketing
expenses, including $100,000 of commissions reclassified for the three
months ended June 30, 2007.
 
 2.
              SUMMARY
      OF CERTAIN ACCOUNTING POLICIES AND RECENT ACCOUNTING
      PRONOUNCEMENTS
 
 The
Company’s interim critical accounting policies and estimates include the
recognition of income taxes using an estimated annual effective tax rate. For a
complete summary of the Company’s other significant accounting policies and
other critical accounting estimates, refer to Note 2 of Notes to Consolidated
Financial Statements included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2007.
 
 During
the six months ended June 30, 2008, there were no material changes to the
Company’s significant accounting policies or critical accounting estimates other
than the recent accounting pronouncements discussed below.
 
 In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted
Accounting Principles(“SFAS 162”).SFAS 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with US GAAP.SFAS 162 is effective sixty days following
the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”)
amendments to AU Section 411, The Meaning of ‘Present Fairly in
Conformity with Generally Accepted Accounting Principles’. The Company is
currently evaluating the potential impact, if any, of the adoption ofSFAS 162 on its consolidated financial
statements.
  
 5
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations(“SFAS
141R”) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements– an amendment to ARB No. 51(“SFAS
160”). SFAS 141R and SFAS 160 require most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business combination to be
recorded at “full fair value” and require noncontrolling interests (previously
referred to as minority interests) to be reported as a component of equity,
which changes the accounting for transactions with noncontrolling interest
holders. Both SFAS 141R and SFAS 160 are effective for periods beginning on
or after December 15, 2008, and earlier adoption is prohibited. SFAS 141R will
be applied to business combinations occurring after the effective date. SFAS 160
will be applied prospectively to all noncontrolling interests, including any
that arose before the effective date. The Company does not expect that the
adoption of SFAS 141R and SFAS 160 will have a material impact on its results of
operations and financial position.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of SFAS No.
115, Accounting for
Certain Investments in Debt and Equity Securities(“SFAS 159”). SFAS 159
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS 159 became
effective for the Company beginning January 1, 2008.  Upon adoption of
SFAS 159, there was no material impact on the Company’s condensed consolidated
financial statements.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. This Statement applies to previous
accounting pronouncements that require or permit fair value measurements.
Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157
became effective for the Company beginning January 1, 2008. Upon adoption of
SFAS 157, there was no material impact on the Company’s condensed consolidated
financial statements.
  In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2 (“FSP
157-2”), which delays the effective date of SFAS 157 for one year for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company elected a partial deferral of SFAS 157 under the provisions
of FSP 157-2 related to the measurement of fair value used when evaluating
goodwill, other intangible assets and other long-lived assets for impairment.
See Note 3 for further information and related disclosures regarding the
Company’s fair value measurements.
 3.
              FAIR
      VALUE MEASUREMENTS
 
 SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also 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 standard describes the following three levels of inputs that may be used to
measure fair value:
 
 ·
              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.
  The
Company’s assets that are measured at fair value on a recurring basis are
generally classified within Level 1 or Level 2 of the fair value
hierarchy.  The types of instruments valued based on quoted market
prices in active markets include most money market securities and equity
investments.  Such instruments are generally classified within Level 1
of the fair value hierarchy.  The Company invests in money market
funds that are traded daily and does not adjust the quoted price for such
instruments.  The types of instruments valued based on quoted prices
in less active markets, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency include the Company’s
corporate notes, commercial paper and asset-backed securities.  Such
instruments are generally classified within Level 2 of the fair value
hierarchy.  The Company uses consensus pricing, which is based on
multiple pricing sources, to value its fixed income investments.
 
 The
following table sets forth a summary of the Company’s financial assets,
classified as cash and cash equivalents and short-term investments on its
condensed consolidated balance sheet, measured at fair value on a recurring
basis as of June 30, 2008 (in thousands):
 
 Fair
      Value Measurements at
                    Reporting
      Date UsingDescription
                  
                  Total
                  
                  
                  Quoted
      Prices in
                      Active
      Markets for
                      Identical
      Assets
                      (Level
      1)
                  
                  
                  Significant
                      Other
      Observable
                      Inputs
                      (Level
      2)
                  
                  
                  Significant
                      Unobservable
                      Inputs
                      (Level
      3)Cash
      & cash equivalents:Money
      Market Funds
                  
                  $
                  21,729
                  
                  
                  $
                  21,729
                  
                  
                  $
                  --
                  
                  
                  $
                  --Short-term
      investments:Corporate
      Notes
                  
                  $
                  6,661
                  
                  
                  
                  --
                  
                  
                  $
                  6,661
                  
                  
                  
                  --Commercial
      Paper
                  
                  
                  3,996
                  
                  
                  
                  --
                  
                  
                  
                  3,996
                  
                  
                  
                  --Asset-Backed
      Securities
                  
                  
                  2,310
                  
                  
                  
                  --
                  
                  
                  
                  2,310
                  
                  
                  
                  --Certificates
      of Deposits
                  
                  
                  1,000
                  
                  
                  
                  --
                  
                  
                  
                  1,000
                  
                  
                  
                  --Total
                  
                  $
                  13,967
                  
                  
                  $
                  --
                  
                  
                  $
                  13,967
                  
                  
                  $
                  --
 6
 
 4.
              NET
      INCOME PER SHARE
 
 Basic net
income per share is calculated based on the weighted-average number of common
shares outstanding in accordance with SFAS No. 128, Earnings per Share. Diluted
net income per share is calculated based on the weighted-average number of
common shares outstanding plus the effect of dilutive potential common shares.
When the Company reports net income, the calculation of diluted net income per
share excludes shares underlying stock options outstanding that would be
anti-dilutive. Potential common shares are composed of shares of common stock
issuable upon the exercise of stock options. The following table sets forth the
calculation of basic and diluted net income per share (in thousands, except per
share amounts):
 
 Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income, as reported (A)
              
              $
              845
              
              
              $
              2,395
              
              
              $
              1,962
              
              
              $
              4,148Weighted
      average shares of common stock outstanding (B)
              
              
              17,972
              
              
              
              17,401
              
              
              
              17,956
              
              
              
              17,325Dilutive
      effect of employee stock options
              
              
              1,105
              
              
              
              1,890
              
              
              
              1,193
              
              
              
              1,940Common
      stock and common stock equivalents (C)
              
              
              19,077
              
              
              
              19,291
              
              
              
              19,149
              
              
              
              19,265Net
      income per share:Basic
      (A/B)
              
              $
              0.05
              
              
              $
              0.14
              
              
              $
              0.11
              
              
              $
              0.24Diluted
      (A/C)
              
              
              0.04
              
              
              
              0.12
              
              
              
              0.10
              
              
              
              0.22
 
 The
Company’s calculation of diluted net income per share for the three months ended
June 30, 2008 and 2007 excludes stock options to purchase approximately 1.4
million and 741,000 shares of the Company’s common stock, respectively, and
diluted net income per share for the six months ended June 30, 2008 and 2007,
excludes stock options to purchase approximately 1.2 million and 577,000 shares
of the Company’s common stock, respectively, as their effect would be
antidilutive.
 
 5.
              STOCK-BASED
      COMPENSATION
 
 Stock
Option Plans
 
 The
Company’s Stock Option Plans, adopted in 1995, 1999 and 2006, authorize the
Board of Directors or the Compensation Committee, as applicable, to grant
incentive and nonqualified stock options, and, in the case of the 2006 Equity
Incentive Plan, as amended (the “2006 Plan”), stock appreciation rights,
restricted stock, restricted stock units, performance shares, performance units
and other stock-based awards. After adoption of the original 2006 Plan by the
Company’s shareholders in May 2006, the Company may no longer make any grants
under previous plans, but any shares subject to awards under the 1999 Stock
Option and Incentive Plan and the Outside Directors Stock Option Plan
(collectively, the “1999 Plans”) that are cancelled are added to shares
available under the 2006 Plan. The exercise price of options granted under the
2006 Plan is equal to the closing price of the Company’s common stock, as
reported by The NASDAQ Global Market, on the business day immediately preceding
the date of grant. The number of shares available under the 2006 Plan is subject
to adjustment for certain changes in the Company’s capital
structure.
 
 At the
Company’s 2008 Annual Meeting of Shareholders held on May 30, 2008, the
Company’s shareholders approved an amendment to the 2006 Plan. A maximum of
5,850,933 shares are available for delivery under the 2006 Plan, which consists
of (i) the 2,150,000 shares, plus (ii) up to 320,000 shares available for
issuance under the 1999 Plans, but not underlying any outstanding stock options
or other awards under the 1999 Plans, plus (iii) up to 3,380,933 shares subject
to outstanding stock options or other awards under the 1999 Plans that expire,
are forfeited or otherwise terminate unexercised on or after May 18,
2006.
 
 The
Company currently issues two types of stock options: (1) non-executive employee
and director grants and (2) executive officer grants. Stock options granted to
non-executive employees and directors are subject only to time-based vesting.
The fair value of these option grants is determined on the date of grant and the
related compensation expense is recognized for the entire award on a
straight-line basis over the vesting period.
 
 Performance-based
stock options are typically granted to executive officers during the first
quarter of the year with the grants subject to cancellation if specified
performance targets, as approved by the Company’s Compensation Committee,
are not achieved. If the applicable performance targets have been achieved, the
options will vest in four equal annual installments beginning one year after the
performance-related year has ended.
  7
  
 The fair
value of the executive officer option grants is determined on the date of grant
and the related compensation expense is recognized over the requisite service
period, including the initial period for which the specified performance targets
must be met. Although the valuation assumptions used for executive officer
grants are similar to grants made to non-executive employee and director grants,
the assumptions for executive officer grants are used to measure each vesting
tranche of the awards.
 
 For most
options granted through December 31, 2004, the term of each option is ten years
from the date of grant. In 2005, the Company began issuing options with a term
of six years from the date of grant.
 
 If an
incentive stock option is granted to an employee who, at the time the option is
granted, owns stock representing more than 10% of the voting power of all
classes of stock of the Company, the exercise price of the option may not be
less than 110% of the market value per share on the date the option is granted
and the term of the option shall be not more than five years from the date of
grant.
 
 The plans
may be terminated by the Company’s Board of Directors at any time.
 
 Stock-Based
Compensation Expense Information
 
 The
following table summarizes the allocation of stock-based compensation expense
related to employee and director stock options under SFAS No. 123 (revised
2004), Share-Based
Payment, and the guidance of Staff Accounting Bulletin No. 107, as
amended by Staff Accounting Bulletin No. 110, for the three and six months
ended June 30, 2008 and 2007 (in thousands):
 
 Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Stock-based
      compensation expense by category:Cost
      of services
              
              $
              69
              
              
              $
              68
              
              
              $
              141
              
              
              $
              114Sales
      and marketing
              
              
              382
              
              
              
              330
              
              
              
              744
              
              
              
              630Research
      and development
              
              
              224
              
              
              
              158
              
              
              
              432
              
              
              
              258General
      and administrative
              
              
              269
              
              
              
              250
              
              
              
              559
              
              
              
              472Total
      stock-based compensation expense
              
              $
              944
              
              
              $
              806
              
              
              $
              1,876
              
              
              $
              1,474
 
 6.
              CONCENTRATION
      OF CREDIT RISK
 
 No
customer or partner accounted for 10% or more of the Company’s accounts
receivable as of June 30, 2008 or December 31, 2007. In addition, no customer or
partner accounted for 10% or more of the Company’s revenues for the three and
six months ended June 30, 2008 and 2007.
 
 7.
              COMMITMENTS
      AND CONTINGENCIES
 
 Legal
Proceedings
 
 From time
to time, the Company has received notification from competitors and other
technology providers claiming that the Company’s technology infringes their
proprietary rights. The Company cannot assure you that these matters can be
resolved amicably without litigation, or that the Company will be able to enter
into licensing arrangements on terms and conditions that would not have a
material adverse effect on its business, financial condition or results of
operations.
 
 In
November 2002, the Company received a notification from the French government as
a result of a tax audit that had been conducted encompassing the years 1998,
1999, 2000 and 2001. In December 2005, the Company received an additional
notification from the French government as a result of an updated tax audit that
they conducted. Both of these assessments claim various taxes are owed related
to Value Added Tax (“VAT”) and corporation taxes in addition to what has
previously been paid and accrued. In May 2007, the French court ruled against
the Company on the first notification and declared the amounts due ($3.7 million
for VAT and $371,000 for corporation taxes). Because the judgment from the
French court was against Interactive Intelligence France S.A.R.L. (“SARL”), a
wholly owned subsidiary of the Company, the Company does not believe that the
French government can impose the liability on Interactive Intelligence, Inc. and
SARL does not have any significant assets with which to pay. In addition, the
Company’s tax counsel and advisors contend that the case is without merit and
the Company has two more appeal routes, which could take up to ten years to
resolve.
 
 As of
June 30, 2008, the assessment related to VAT was approximately $6.7 million and
the assessment related to corporation taxes was approximately $807,000. As of
June 30, 2008 and December 31, 2007, the Company has recorded an accrual
for an amount it deems probable of payment for the corporation tax
assessment. No accrual has been made by the Company with respect to the VAT
assessment.
  8
  
 The
Company has filed for VAT refunds in France of more than $600,000, which the
Company has not recorded as a receivable and to which the French government has
not yet responded. The Company believes that these VAT refunds could be used to
offset amounts owed to the French government in connection with the assessments,
if necessary. Although the Company is appealing both the VAT and corporation tax
assessments, it cannot assure you that these matters will be resolved without
further litigation or that it will not have to pay some or all of the
assessments.
 
 The
Company has recently been in negotiations with the French Taxing Authority to
settle all the claims. Currently, the Company does not believe it is necessary
to make any adjustments to its financial statements based upon these
discussions.
 
 From time
to time, the Company is also involved in certain legal proceedings in the
ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its financial
position or results of operations. Litigation in general, and intellectual
property litigation in particular, can be expensive and disruptive to normal
business operations. Moreover, the results of complex legal proceedings are
difficult to predict.
 
 Lease
Commitment
 
 The
Company leases its world headquarters building under an operating lease
agreement (“world headquarters lease”), which expires on March 31, 2018. The
120,000 square foot building is located in Indianapolis, Indiana. In addition,
on June 19, 2007 and March 14, 2008, the Company entered into the third and
fourth amendments, respectively, of its world headquarters lease under
which the current leased space is to be expanded in three installments through
March 2009 totaling approximately 80,000 square feet in an office building that
is adjacent to the Company’s world headquarters. Rent payments for the expanded
space commenced in March 2008. In consideration for entering into the
amendments, the landlord paid the Company a total discretionary allowance of
$478,000. The allowance, which the Company intends to use for certain costs
associated with its world headquarters building and/or the additional space, as
defined in the amendment, will be recognized as a reduction of rent expense over
the term of the world headquarters lease.
 
 Other
Contingencies
 
 The
Company has received and may continue to receive certain payroll tax credits and
real estate tax abatements that were granted to the Company based upon certain
growth projections. If the Company’s actual results are less than those
projections, the Company may be subject to repayment of some or all of the
payroll tax credits or payment of additional real estate taxes in the case of
the abatements. The Company does not believe that it will be subject to payment
of any money related to these taxes, however the Company cannot provide
assurance as to the outcome.
 
 8.
              INCOME
      TAXES
  The
following table is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the federal
statutory rate, 35%, on income before income taxes (in
thousands):
 
 Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Expected
      income tax expense
              
              $
              (541
              )
              
              $
              (874
              )
              
              $
              (1,255
              )
              
              $
              (1,522
              )State
      taxes, net of federal benefit
              
              
              (77
              )
              
              
              (125
              )
              
              
              (179
              )
              
              
              (217
              )Non-deductible
      stock-based compensation expense
              
              
              (154
              )
              
              
              (178
              )
              
              
              (344
              )
              
              
              (340
              )Change
      in deferred tax asset valuation allowance
              
              
              --
              
              
              
              971
              
              
              
              --
              
              
              
              1,679Other
              
              
              72
              
              
              
              103
              
              
              
              153
              
              
              
              200Income
      tax expense
              
              $
              (700
              )
              
              $
              (103
              )
              
              $
              (1,625
              )
              
              $
              (200
              )
 
 Upon
adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109, the Company has
identified an uncertain tax position related to the tax credits that the Company
currently believes meets the “more likely than not” recognition threshold to be
sustained upon examination. Prior to the fourth quarter of 2007, this uncertain
tax position had not been recognized because the Company had a valuation
allowance established. The balance of the unrecognized tax benefit was
approximately $328,000 at December 31, 2007 and, if recognized, would impact the
effective tax rate. As of June 30, 2008, the unrecognized tax benefit has not
changed.
 
 The
Company and its subsidiaries file federal income tax returns and income tax
returns in various states and foreign jurisdictions. Tax years 2004 and forward
remain open for examination for federal tax purposes and tax years 2003 and
forward remain open for examination for the Company’s more significant state tax
jurisdictions. To the extent utilized in future years’ tax returns, net
operating loss and capital loss carryforwards at December 31, 2007 will remain
subject to examination until the respective tax year is closed.
  9
  
 Item 2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
 
 The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations is intended to provide our investors with an understanding
of our past performance, our financial condition and our prospects and should be
read in conjunction with other sections of this Quarterly Report on Form 10-Q.
Investors should carefully review the information contained in this report under
Part II, Item 1A “Risk Factors” and in the Item 1A “Risk Factors” section of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2007. The
following will be discussed and analyzed:
  ·           Forward-Looking
Information
 
 ·           Overview
 
 ·           Financial
Highlights
 
 ·           Historical
Results of Operations
 
 ·           Liquidity
and Capital Resources
 
 ·           Critical
Accounting Policies and Estimates
 
 Forward-Looking
Information
 
 Certain
statements in this Quarterly Report on Form 10-Q contain “forward-looking”
information (as defined in the Private Securities Litigation Reform Act of
1995,Section 27A
of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended) that involves risks and uncertainties which
may cause actual results to differ materially from those predicted in the
forward-looking statements. Forward-looking statements can often be identified
by their use of such verbs as “expects”, “anticipates”, “believes”, “intend”,
“plan”, “may”, “should”, “will”, “would”, “will be”, “will continue”, “will
likely result”, or similar verbs or conjugations of such verbs. If any of our
assumptions on which the statements are based prove incorrect or should
unanticipated circumstances arise, our actual results could materially differ
from those anticipated by such forward-looking statements. The differences could
be caused by a number of factors or combination of factors, including, but not
limited to, rapid technological changes in the industry; our ability to maintain
profitability, to manage successfully our growth and increasingly complex third
party relationships, to maintain successful relationships with our current and
any new partners, to maintain and improve our current products and to develop
new products and to protect our proprietary rights adequately; and other factors
set forth in our Securities and Exchange Commission (“SEC”) filings, including
the Item 1A “Risk Factors” section of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007.
  Overview
 
 Interactive
Intelligence, Inc. (“Interactive Intelligence”, “we”, “us” or “our”) was formed
in 1994 as an Indiana corporation and maintains its world headquarters and
executive offices at 7601 Interactive Way, Indianapolis, Indiana 46278. Our
telephone number is (317) 872-3000. You can find our website at http://www.inin.com.
Our periodic and current reports and all amendments to those reports required to
be filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 are available free of charge through our investor relations
website located at http://investors.inin.com
under “SEC Filings”.
 
 We are a
leading provider of software applications for contact centers and we are
leveraging that leadership position to provide mission-critical Voice over
Internet Protocol (“VoIP”) applications to enterprises. Our solutions are
installed by customers in a wide range of industries including, but not limited
to, financial institutions, higher education, healthcare, retail, technology,
government, business services and increasingly for the remote and mobile
workforce.  We also offer a pre-integrated all-software Internet
Protocol Private Branch Exchange (“IP PBX”) system, a phone and communications
solution for mid- to large-sized enterprises that rely on the Microsoft
Corporation (“Microsoft”) platform. We offer innovative software products and
services for multi-channel contact management, business communications,
messaging, and VoIP solutions supported on the Session Initiation Protocol
(“SIP”) global communications standard. Many of our solutions can be deployed at
the customer’s site or can be provided in a Software as a Service
model.
 
 Our
application-based solutions are integrated on a platform developed to increase
security, broaden integration to business systems and end-user devices, enhance
mobility for today’s workforce, scale to thousands of users, and more wholly
satisfy today’s diverse interaction needs in markets for:
 
 ·
              Contact
      Centers
 
 ·
              Enterprise
      IP Telephony
 
 ·
              Enterprise
      Messaging
  10
  
 By
implementing our all-in-one solutions, businesses are able to unify
multi-channel communications media, enhance workforce effectiveness and
productivity, and more readily adapt to constantly-changing market and customer
requirements. Moreover, organizations in every industry are able to reduce the
cost and complexity of traditional “multi-point” legacy communications hardware
systems that are seldom fully integrated.
 
 For
further information on our business and the products and services we offer,
refer to the Item 1 “Business” section of our Annual Report on Form 10-K for the
year ended December 31, 2007.
 
 Financial
Highlights
  The
information below shows our total revenues (in millions) for the most recent
five quarters and the years ended December 31, 2007, 2006 and 2005 and the
percentage change over the previous period.
 
 Period
                
                Revenues
                
                
                Growth %Three Months Ended:June
      30, 2008
                
                $
                30.6
                
                
                
                4
                %March
      31, 2008
                
                
                29.5
                
                
                
                1
                %December
      31, 2007
                
                
                29.3
                
                
                
                --
                %September
      30, 2007
                
                
                29.2
                
                
                
                8
                %June
      30, 2007
                
                
                27.1
                
                
                
                12
                %Year Ended December 31:2007
                
                $
                109.9
                
                
                
                32
                %2006
                
                
                83.0
                
                
                
                32
                %2005
                
                
                62.9
                
                
                
                14
                %
 
 We have
experienced revenue growth of 4%, 1% and 0% over the most recent three quarterly
periods, respectively, as illustrated in the table above. We believe that these
growth rates are attributable to the general economic conditions and the fact
that companies are being more cautious in making large system purchases. In the
second quarter of 2008, we saw a decline in the dollar amount of orders we
received from existing customers wanting new functionality or additional
licenses. Although the sequential growth rates for the last three quarters are
lower than historical growth rates, the volume of activity we are experiencing
in the sales cycle is still high and we believe that our success rates remain
consistent. We expect that as the economic conditions improve so will the dollar
value of orders that we receive.
 
 For the
three months ended June 30, 2008, revenues grew 13% over the three months ended
June 30, 2007 primarily due to contracts that were deferred in previous periods
being recognized during the quarter, partially offset by a lower dollar amount
of orders from existing customers compared to the same period in the prior
year.
 
 The
dollar amount of orders we receive does not entirely determine the amount of
revenues recognized because the terms in the contracts, collection history with
the customer or partner and other contractual conditions can affect whether we
recognize the order during the quarter or in subsequent quarters. Consequently,
product revenues for any particular quarter are impacted not only by orders
received in the current quarter but also by orders received in previous quarters
that are being recognized in the current quarter.
 
 During
the three and six months ended June 30, 2008, services revenues increased
primarily due to additional support fees and annually renewable license fees,
which were recognized for our growing installed customer base, compared to the
same periods in 2007. The increase in recognized support was offset in part by
professional services revenues decreases for the three and six months ended June
30, 2008 compared to same periods in 2007. These professional services are not
essential to the functionality of our software. Professional services revenues
decreased due to a reduction in the delivery of professional services that
assisted in implementation of our solutions at our customers’
locations.
 
 Our costs
of product increased due to our media servers and gateway appliances that we
have developed and licensed, additional hardware delivered by us and increased
royalty expenses as a result of licensing more third party software as part of
the orders received.
 
 Our costs
of services and operating expenses, which include sales and marketing, research
and development and general and administrative expenses, increased for the three
and six months ended June 30, 2008, compared to the same periods in 2007,
primarily due to a $2.4 million and $5.1 million increase, respectively, in
company-wide compensation and related costs. Staffing increased 14% overall at
June 30, 2008 from June 30, 2007. In addition, our general corporate allocable
costs including rent, insurance and depreciation increased primarily due to
additional offices we opened during the last two years. In March 2008, we
expanded into one floor of a new building adjacent to our world headquarters and
will be expanding into another floor during the third quarter of 2008. We also
opened or expanded offices domestically and internationally.
  11
  During
the three and six months ended June 30, 2008, we recorded income tax expense of
$700,000 and $1.6 million, respectively, compared to $103,000 and $200,000 in
the same periods during 2007. During the fourth quarter of 2007 we recorded a
tax benefit of $8.1 million associated with the elimination of the valuation
allowance on the deferred tax assets. Of the total income tax expense recorded,
only $44,000 and $148,000 for the three and six months ended June 30, 2008,
respectively, is expected to result in cash payments, and the remainder of the
expense reduced recorded deferred tax assets.
 
 Due to
the growth rate in the dollar amount of orders during the last three quarters,
we have reduced our spending plans for the rest of 2008 where possible. We
expect to hire for certain positions but expect to maintain a relatively steady
total number of staff. We do have certain facilities and related equipment and
furniture commitments which will increase our expenses. As a result, we expect
to recognize higher operating expenses in the third and fourth quarters of 2008
compared to the first two quarters of 2008.
 Historical
Results of Operations
 
 The
following table presents certain financial data, derived from our unaudited
statements of income, as a percentage of total revenues for the periods
indicated. The operating results for the three and six months ended June 30,
2008 and 2007 are not necessarily indicative of the results that may be expected
for the full year or for any future period.
 
 Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenues:Product
              
              
              50
              %
              
              
              54
              %
              
              
              50
              %
              
              
              52
              %Services
              
              
              50
              
              
              
              46
              
              
              
              50
              
              
              
              48Total
      revenues
              
              
              100
              
              
              
              100
              
              
              
              100
              
              
              
              100Cost
      of revenues:Product
              
              
              13
              
              
              
              13
              
              
              
              12
              
              
              
              12Services
              
              
              20
              
              
              
              19
              
              
              
              20
              
              
              
              19Total
      cost of revenues
              
              
              33
              
              
              
              32
              
              
              
              32
              
              
              
              31Gross
      profit
              
              
              67
              
              
              
              68
              
              
              
              68
              
              
              
              69Operating
      expenses:Sales
      and marketing
              
              
              33
              
              
              
              33
              
              
              
              34
              
              
              
              34Research
      and development
              
              
              17
              
              
              
              16
              
              
              
              17
              
              
              
              16General
      and administrative
              
              
              13
              
              
              
              12
              
              
              
              12
              
              
              
              12Total
      operating expenses
              
              
              63
              
              
              
              60
              
              
              
              63
              
              
              
              62Operating
      income
              
              
              4
              
              
              
              8
              
              
              
              5
              
              
              
              7Other
      income (expense):Interest
      income, net
              
              
              1
              
              
              
              1
              
              
              
              1
              
              
              
              2Other
      income (expense), net
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Total
      other income
              
              
              1
              
              
              
              1
              
              
              
              1
              
              
              
              2Income
      before income taxes
              
              
              5
              
              
              
              9
              
              
              
              6
              
              
              
              9Income
      tax expense
              
              
              (2
              )
              
              
              --
              
              
              
              (3
              )
              
              
              (1
              )Net
      income
              
              
              3
              %
              
              
              9
              %
              
              
              3
              %
              
              
              8
              %
 
 Comparison
of Three and Six Months Ended June 30, 2008 and 2007
 
 Revenues
 Product
      Revenues
              
              Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007($
      in thousands)Product
      revenues
              
              $
              15,321
              
              
              $
              14,602
              
              
              $
              30,166
              
              
              $
              26,958Change
      from prior year period
              
              
              5
              %
              
              
              52
              %
              
              
              12
              %
              
              
              46
              %Percentage
      of total revenues
              
              
              50
              %
              
              
              54
              %
              
              
              50
              %
              
              
              52
              %
  Product
revenues, which include software and hardware, increased $719,000 during the
three months ended June 30, 2008 compared to the same period in 2007. This
increase was primarily due to contracts that were deferred in previous periods
being recognized during the quarter, partially offset by a lower dollar amount
of orders from existing customers compared to the same period in the prior
year.
 12
  Product
revenues increased $3.2 million for the six months ended June 30, 2008 compared
to the same period in 2007 primarily due to an increase in the dollar amount of
orders received during the six months ended June 30, 2008 compared to the same
period in 2007.
 
 Product revenues can fluctuate from quarter to quarter depending on the mix of
orders between perpetual licenses and annually renewable licenses. If other
revenue recognition criteria are satisfied, we recognize license revenue upfront
for perpetual licenses, and we recognize revenue for annually renewable licenses
ratably over the term. The impact of the mix of contracts on our product
revenues occurs only in the initial year of an order; subsequent renewal fees
received for the annually renewable licenses and the renewal support fees for
perpetual contracts are all allocated entirely to services
revenues.
 Services
      Revenues
              
              Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007($
      in thousands)Services
      revenues
              
              $
              15,289
              
              
              $
              12,533
              
              
              $
              29,927
              
              
              $
              24,465Change
      from prior year period
              
              
              22
              %
              
              
              30
              %
              
              
              22
              %
              
              
              31
              %Percentage
      of total revenues
              
              
              50
              %
              
              
              46
              %
              
              
              50
              %
              
              
              48
              %
 
 Services revenues include the portion
of the initial license arrangement allocated to maintenance and support revenues
from annually renewable and perpetual contracts, license renewals of annually
renewable contracts, and support fees for perpetual contracts, as well as
professional services, educational and other miscellaneous
revenues.
 
 The
increase during the three and six months ended June 30, 2008 compared to the
same periods in 2007 was primarily due to our growing installed base of
customers, both in number and dollar amount of licenses, and the revenue
recognition of related annual license renewal fees and support fees for
perpetual licenses. License renewal and support revenues increased by $2.3
million, or 24%, and $4.6 million, or 25%, during the three and six months ended
June 30, 2008, respectively, compared to the same periods in 2007. As we sign
contracts and install our solutions with new customers and partners, we expect
that our services revenues will continue to increase as customers and partners
renew licenses and pay for support on our software applications. The actual
percentage fee charged for renewal of annually renewable licenses and perpetual
support agreements as compared to the initial annually renewable license fee and
perpetual license, respectively, is comparable on a relative percentage basis,
and therefore, the mix of these types of contracts in the future is not expected
to impact our future services revenues.
 
 During
the second quarter of 2008, our professional services revenues decreased
$508,000, or 26%, but our educational and other services increased $891,000, or
85%. For the six months ended June 30, 2008, our professional services revenues
decreased $380,000, or 10%, but education revenues and other services increased
$1.1 million, or 52%. Professional services revenues fluctuate based on the
amount of assistance our customers and partners need for implementation and
installation.  Education revenues and other services increased
primarily due to more partners and customers attending our training sessions as
we expanded these globally and due to an increase in hosted and managed
services.
 
 
 Cost
      of Revenues
              
              Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007($
      in thousands)Cost
      of revenues:Product
              
              $
              3,909
              
              
              $
              3,500
              
              
              $
              7,039
              
              
              $
              5,941Services
              
              
              6,088
              
              
              
              5,145
              
              
              
              11,985
              
              
              
              9,942Total
      cost of revenues
              
              $
              9,997
              
              
              $
              8,645
              
              
              $
              19,024
              
              
              $
              15,883Change
      from prior year period
              
              
              16
              %
              
              
              64
              %
              
              
              20
              %
              
              
              64
              %Product
      costs as a % of product revenues
              
              
              26
              %
              
              
              24
              %
              
              
              23
              %
              
              
              22
              %Services
      costs as a % of services revenues
              
              
              40
              %
              
              
              41
              %
              
              
              40
              %
              
              
              41
              %
  Costs of product consist of hardware
costs, principally for media server and interaction gateway appliances which we
have developed; servers, telephone handsets and gateways which we purchase and
resell; royalties for third party software and other technologies included in
our solutions; and, to a lesser extent, software packaging costs, which include
product media, duplication and documentation. Costs of product can fluctuate
depending on which software applications are licensed to our customers, the
third party software, if any, which is licensed by the end user from us as part
of our software applications and the dollar amount of orders for
hardware.
 
 Most of
the increase in costs of product resulted primarily from a $457,000 increase in
hardware costs from $1.8 million to $2.3 million for the three months ended June
30, 2008 and a $984,000 increase in hardware costs from $3.0 million to $4.0
million for the six months ended June 30, 2008 compared to the same periods in
2007.
  13
  
 Costs of
services consist primarily of compensation expenses for technical support,
educational and professional services personnel and other costs associated with
supporting our partners and customers. These expenses increased primarily due to
a $763,000 increase in compensation expense as a result of an 18% staffing
increase in our services personnel for the three months ended June 30, 2008
compared to the three months ended June 30, 2007, and a $1.8 million increase as
a result of an 18% staffing increase for the six months June 30, 2008 compared
to the six months ended June 30, 2007. Depreciation expense increased $127,000
and $270,000 for the three and six months ended June 30, 2008, respectively,
compared to the same periods in 2007. During the six months ended June 30, 2008,
travel and related expenses increased $160,000 compared to the six months ended
June 30, 2007, which increase was offset by a $400,000 decrease in outsourced
services. The need for outsourced services decreased as we increased the
number of professional services staff.
 
 
 Gross
      Profit
              
              Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007($
      in thousands)Gross
      profit
              
              $
              20,613
              
              
              $
              18,490
              
              
              $
              41,069
              
              
              $
              35,540Change
      from prior year period
              
              
              11
              %
              
              
              32
              %
              
              
              16
              %
              
              
              29
              %Percentage
      of total revenues
              
              
              67
              %
              
              
              68
              %
              
              
              68
              %
              
              
              69
              %
 
 Gross
profit as a percentage of total revenues decreased slightly during the three and
six months ended June 30, 2008, compared to the same periods in 2007, primarily
due to additional costs of product as discussed previously. The gross margin on
our hardware sales is less than the gross margin on our software licenses;
therefore, as we continue to sell more hardware such as media servers
and interaction gateways, our total gross margin percentage may decrease
compared to historical margins. Gross margins in any particular quarter are
dependent upon revenues recognized versus costs of product and costs of services
incurred and are expected to vary.
 
 Operating
Expenses
 Sales
      and Marketing
              
              Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007($
      in thousands)Sales
      and marketing expenses
              
              $
              10,142
              
              
              $
              8,822
              
              
              $
              20,320
              
              
              $
              17,476Change
      from prior year period
              
              
              15
              %
              
              
              29
              %
              
              
              16
              %
              
              
              27
              %Percentage
      of total revenues
              
              
              33
              %
              
              
              33
              %
              
              
              34
              %
              
              
              34
              %Percentage
      of net product revenues
              
              
              89
              %
              
              
              79
              %
              
              
              88
              %
              
              
              83
              %
  Sales and
marketing expenses are comprised primarily of compensation expenses, travel and
entertainment expenses and promotional costs related to our sales, marketing,
and channel management operations. Compensation expense increased $543,000 and
$1.0 million during the three and six months ended June 30, 2008, respectively,
compared to the same periods in 2007, which was due in part to a 12% staffing
increase in our sales and marketing personnel at June 30, 2008, compared to June
30, 2007. We increased our corporate marketing costs by $149,000 and $585,000
during the three and six months ended June 30, 2008, respectively, compared to
the same periods in 2007, which included increased advertising and brand
promotions, seminars, web seminars and tradeshows. Travel expenses increased
during the second quarter of 2008 by $158,000 compared to the second quarter of
2007 and $181,000 for the six months ended June 30, 2008 compared to the six
months ended June 30, 2007. Outsourced services, mainly related to marketing
efforts, increased $243,000 during the six months ended June 30, 2008 compared
to the prior period. Finally, the fees we paid to certain third parties for
referring customers increased by $176,000 for the three months ended June 30,
2008 compared to the three months ended June 30, 2007 and $299,000 for the six
months ended June 30, 2008 compared to the six months ended June 30, 2007. The
additional increases from the prior periods were related to general corporate
expense increases including rent, depreciation and corporate
insurance.
 
 Research
      and Development
              
              Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007($
      in thousands)Research
      and development expenses
              
              $
              5,336
              
              
              $
              4,227
              
              
              $
              10,301
              
              
              $
              8,124Change
      from prior year period
              
              
              26
              %
              
              
              28
              %
              
              
              27
              %
              
              
              27
              %Percentage
      of total revenues
              
              
              17
              %
              
              
              16
              %
              
              
              17
              %
              
              
              16
              %
 
 Research
and development expenses are comprised primarily of compensation and
depreciation expenses. Research and development expenses increased during the
three months ended June 30, 2008, as compared to the same period in 2007,
primarily due to an increase in compensation expense of $906,000, resulting from
a 26% staffing increase in our research and development personnel at June 30,
2008 compared to June 30, 2007 and increased compensation expense of $1.7
million for the six months ended June 30, 2008 compared to the six months ended
June 30, 2007. Of the new hires, 18 were summer internship students.
Depreciation expense increased $147,000 and $258,000 for the three and six
months ended June 30, 2008, respectively, compared to the same periods in 2007.
Allocated general corporate expenses such as rent, communication and office
expenses also increased.
 
 We
continue to believe that investment in research and development is critical to
our future growth and competitive position in the marketplace and is directly
related to timely development of new and enhanced solutions that are central to
our business. As a result, we expect research and development expenses will
increase in future periods. In the short term, we expect research and
development expenses to remain a relatively constant percentage of
revenues.
  14
  
 General
      and Administrative
              
              Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007($
      in thousands)General
      and administrative expenses
              
              $
              3,882
              
              
              $
              3,285
              
              
              $
              7,709
              
              
              $
              6,350Change
      from prior year period
              
              
              18
              %
              
              
              16
              %
              
              
              21
              %
              
              
              18
              %Percentage
      of total revenues
              
              
              13
              %
              
              
              12
              %
              
              
              13
              %
              
              
              12
              %
  General
and administrative expenses are comprised of compensation expense and general
corporate expenses that are not allocable to other departments including legal
and other professional fees and bad debt expense. General and administrative
expenses increased during the three and six months ended June 30, 2008, as
compared to the same periods in 2007, primarily due to an increase in
compensation expense of $280,000 and $615,000 for the three and six months ended
June 30, 2008, respectively, compared to same periods in 2007. This increase was
the result of a 12% staffing increase in our general and administrative
personnel as of June 30, 2008 compared to June 30, 2007.
 Other
Income (Expense)
 
 Interest
      Income, Net
              
              Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007($
      in thousands)Cash,
      cash equivalents and short-term investments (average)
              
              $
              49,544
              
              
              $
              31,828
              
              
              $
              47,989
              
              
              $
              29,615Interest
      income
              
              
              344
              
              
              
              384
              
              
              
              803
              
              
              
              856Return
      on investment (annualized)
              
              
              2.8
              %
              
              
              4.8
              %
              
              
              3.4
              %
              
              
              5.8
              %
 
 Interest
earned on investments during the three and six months ended June 30, 2008,
compared to the same periods in 2007, decreased slightly due to lower interest
rates as a result of decreases in interest yields on investments. We continue to
monitor the allocation of funds in which we have invested to maximize our return
on investment within our established investment policy. We had short-term
investments of $14.0 million as of June 30, 2008, compared to $17.0 million as
of December 31, 2007. We do not have any investments in subprime
assets.
 
 Other Income (Expense),
      Net
              
              Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007($
      in thousands)Other
      income (expense), net
              
              $
              (52
              )
              
              $
              (42
              )
              
              $
              45
              
              
              $
              (98
              )
 
 Other
income (expense), net includes foreign currency transaction gains and losses, as
well as foreign tax withholdings. These amounts depend on the amount of revenue
that is generated in certain international currencies, particularly the Euro,
and the exchange gain or loss that results from foreign currency disbursements
and receipts. The income for the three and six months ended June 30, 2008
consisted of $50,000 and $259,000 in gains related to foreign currency
transactions, respectively, offset by $102,000 and $214,000, respectively, in
foreign tax withholdings. For the three and six months ended June 30, 2007, the
majority of the amounts related to foreign tax withholdings.
 
 Income
      tax expense
              
              Three
      Months Ended
                  June
      30,
              
              
              Six
      Months Ended
                  June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007($
      in thousands)Income
      tax expense
              
              $
              (700
              )
              
              $
              (103
              )
              
              $
              (1,625
              )
              
              $
              (200
              )
 
 In the
fourth quarter of 2007, we recorded an income tax benefit of $8.1 million to
reduce the valuation allowance of the deferred tax assets at December 31, 2007.
As a result, we began recording income tax expense in the first quarter of 2008.
We incurred $700,000 and $1.6 million of income tax expense during the three and
six months ended June 30, 2008, respectively; however, only $44,000 and $148,000
of the income tax expense recorded for the three and six months ended June 30,
2008, respectively, is expected to result in cash payments and the remainder was
the impact of utilizing the deferred tax assets.
 
 We had
over $45.5 million of tax net operating loss carryforwards and $1.6 million in
tax credit carryforwards at December 31, 2007. Included in the net operating
loss carryforwards was $23.1 million of operating losses that were generated as
a result of compensation for tax purposes for stock option exercises. In
accordance with SFAS 123R, these stock option compensation deductions have not
been recognized for financial reporting purposes because they have not yet
reduced taxes payable. The tax benefit of these deductions will be primarily
recorded as a credit to additional paid-in capital if and when realized. The
effective income tax rate was 45% as of June 30, 2008. However, due to the tax
net operating loss carryforwards, the tax credit carryforwards and stock option
related compensation deductions, we do not expect to have a significant cash
outlay to pay income taxes in 2008.
  15
  
 Liquidity
and Capital Resources
  We
generate cash from the collections we receive related to licensing our contact
center and IP-PBX applications and from annual license renewals, maintenance and
support and other services revenues. We use cash primarily for paying our
employees (including salaries, commissions and benefits), leasing office space,
paying travel expenses and marketing activities, paying vendors for hardware,
other services and supplies and purchasing property and equipment. We continue
to be debt free.
 
 We
determine liquidity by combining cash and cash equivalents and short-term
investments as shown in the table below. Based on our recent performance and
current expectations, we believe that our current liquidity position, when
combined with our anticipated cash flows from operations, will be sufficient to
satisfy our working capital needs, capital expenditures, investment
requirements, contractual obligations, commitments and other liquidity
requirements associated with our operations over the next 12 months. If cash
flows from operations are less than anticipated or we have additional cash needs
(such as an unfavorable outcome in legal proceedings), our liquidity may not be
sufficient to cover our needs. In this case, we may be forced to raise
additional capital, either through the capital markets or debt financings. In
doing so, we may not be able to receive favorable terms in raising this
capital.
 
 On
October 31, 2007, our shelf registration statement on Form S-3, as amended, was
declared effective by the SEC. This registration statement allows us to offer
and sell up to 3,000,000 shares of our common stock, and allows Donald E.
Brown, our Chairman of the Board, President and CEO, to sell up to 1,000,000
shares of our common stock that he owns, from time to time in one or more
transactions. The offer and sale of any shares of our common stock under the
shelf registration statement remains at the discretion of our Board of
Directors, and there is no assurance that we would be able to complete any such
offering of our common stock.
 
 On July
28, 2008, we announced the approval of a share repurchase program by our Board
of Directors. Under the share repurchase program, we may purchase our common
stock for up to a maximum aggregate purchase price of $10 million from time to
time over the next year. Any repurchases that we make will be made using our
cash resources.
 
 Our
liquidity position at June 30, 2008 and December 31, 2007 was as
follows:
 
 June
      30,
              
              
              December
      31,2008
              
              
              2007($
      in thousands)Cash
      and cash equivalents
              
              $
              35,684
              
              
              $
              29,359Short-term
      investments
              
              
              13,967
              
              
              
              16,968Liquidity,
      net
              
              $
              49,651
              
              
              $
              46,327
 
 The
amount that we report as cash and cash equivalents or as short-term investments
fluctuates depending on investing decisions in each period. Purchases of
short-term investments and property and equipment are reported as a use of cash
and the related receipt of proceeds upon maturity of investment is reported as a
source of cash.
 
 During
the six months ended June 30, 2008 and 2007, our operating activities resulted
in net cash provided of $6.8 million and $6.9 million,
respectively.
 
 Net cash
used in investing activities was $1.0 million and $3.3 million during the six
months ended June 30, 2008 and 2007, respectively. We purchased property and
equipment with a cost of $4.0 and $2.6 million during the six months ended June
30, 2008 and 2007, respectively. During the last two years, we have opened or
expanded offices domestically and internationally, including one floor of an
office building next to our headquarters. As staffing increases, our property
and equipment becomes obsolete and our operations continue to increase, we
anticipate that our purchases of property and equipment will continue to
increase in future periods.
 
 Net cash
provided by financing activities was $573,000 and $1.3 million for the six
months ended June 30, 2008 and 2007, respectively. The decrease in cash provided
was mainly due to lower proceeds from stock options that were exercised during
the six months ended June 30, 2008 compared to the same period in
2007.
 
 As of
June 30, 2008, there have been no material changes in our contractual
obligations as set forth in the Contractual Obligations table disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2007.
 
 Off-Balance
Sheet Arrangements
 
 Except as
set forth in the Contractual Obligations table disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2007, we have no off-balance sheet
arrangements that have or are reasonably likely to have a current or future
material impact on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources as of June 30, 2008.
  16
  
 Critical
Accounting Policies and Estimates
  The
preparation of our condensed consolidated financial statements requires us to
make estimates and judgments that affect the reported amount of assets,
liabilities, revenue and expenses. Actual results may differ from those
estimates and judgments under different assumptions or conditions. We have
discussed the critical accounting policies that we believe affect our more
significant estimates and judgments used in the preparation of our consolidated
financial statements in the “Management’s Discussion and Analysis of Financial
Condition and Results of the Operations—Critical Accounting Policies and
Estimates” section of our Annual Report on Form 10-K for the year ended December
31, 2007 and in Note 2 of Notes to Consolidated Financial Statements included in
our Annual Report on Form 10-K for the year ended December 31, 2007. For a
further summary of certain accounting policies, see Note 2 of Notes to Condensed
Consolidated Financial Statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
 
 Item 3.
              Quantitative
      and Qualitative Disclosures about Market
Risk.
 
 We
develop software application products in the United States and license our
products worldwide. As a result, our financial results could be affected by
various factors, including changes in foreign currency exchange rates or weak
economic conditions in certain markets. We transact business in certain foreign
currencies including the British pound and the Euro. However, as a majority of
the orders we receive are denominated in United States dollars, a strengthening
of the dollar could make our products more expensive and less competitive in
foreign markets. We have not historically used foreign currency options or
forward contracts to hedge our currency exposures because of variability in the
timing of cash flows associated with our larger contracts. We did not have any
such hedge instruments in place at June 30, 2008. Rather, we attempt to mitigate
our foreign currency risk by generally transacting business and paying salaries
in the functional currency of each of the major countries in which we do
business, thus creating natural hedges. Additionally, as our business matures in
foreign markets, we may offer our products and services in certain other local
currencies. As a result, foreign currency fluctuations would have a greater
impact on our company and may have an adverse effect on our results of
operations. Historically, our gains or losses on foreign currency exchange
translations have been immaterial to our consolidated financial
statements.
 
 We invest
cash balances in excess of operating requirements in short-term securities that
generally have maturities of one year or less. The carrying value of these
securities approximates market value, and there is no long-term interest rate
risk associated with these investments.
 
 Item 4.
              Controls
      and Procedures.
 
 We
maintain a set of disclosure controls and procedures that are designed to ensure
that information required to be disclosed by us in the reports filed by us under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. We carried out an evaluation, under the
supervision and with the participation of our management, including our
President and Chief Executive Officer (principal executive officer) and our
Chief Financial Officer (principal financial officer), of the effectiveness of
the design and operation of our disclosure controls and procedures as of June
30, 2008 pursuant to Rule 13a-15(b) of the Exchange Act. Based on that
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were
effective.
 
 There
have been no changes in our internal control over financial reporting that
occurred during the three months ended June 30, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
 
 PART
II. OTHER INFORMATION
 
 Item 1.
              Legal
      Proceedings.
  The
information set forth in Note 7 of Notes to Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is
incorporated herein by reference.
  Item 1A.
              Risk
      Factors.
 
 In
addition to the information set forth in this Quarterly Report on Form 10-Q and
before deciding to invest in, or retain, shares of our common stock, you also
should carefully review and consider the information contained in our other
reports and periodic filings that we make with the SEC, including, without
limitation, the information contained under the caption Item 1A “Risk Factors”
in our Annual Report on Form 10-K for the year ended December 31, 2007. Those
risk factors could materially affect our business, financial condition and
results of operations.
 
 The risks
that we describe in our public filings are not the only risks that we face.
Additional risks and uncertainties not currently known to us, or that we
presently deem to be immaterial, also may materially adversely affect our
business, financial condition and results of operations. During the three months
ended June 30, 2008, there were no material changes from the risk factors
previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2007.
  17
  
 Item
      4.
              Submission
      of Matters to a Vote of Security
Holders.
 
 We held
our Annual Meeting of Shareholders on May 30, 2008. At that meeting, our
shareholders:
 
 ·
              reelected
      Donald E. Brown, M.D. and Richard A. Reck as Directors of the Company for
      three-year terms or until their successors are elected and have qualified
      and
 
 ·
              approved
      an amendment to our 2006 Equity Incentive Plan that a) increased the total
      number of shares of our common stock available for issuance by 900,000
      from 1,250,000 shares to 2,150,000 shares and b) revised certain
      definitions and payment provisions to comply with the final IRS
      regulations under Section 409A of the Internal Revenue Code of 1986, as
      amended.
 
 The final
results of the votes taken at the annual meeting were as follows:
  Votes
                    FOR
                Votes
                    WITHHELDElection
      of Directors:Donald
      E. Brown, M.D.
                15,877,727
                343,093Richard
      A. Reck
                15,631,608
                589,212Votes
                  FOR
                Votes
                  AGAINST
                Votes
                  ABSTAINED
                Broker
                  Non-VotesVote
      on Proposal:To
      approve the amendment to the Interactive Intelligence, Inc. 2006 Equity
      Incentive Plan
                7,106,306
                5,470,762
                17,533
                3,626,219
 In
addition, the following Directors also have terms in office that continue until
the annual meeting of shareholders in the year indicated:
 
 Director
              YearEdward
      L. Hamburg, Ph.D.
              2009Samuel
      F. Hulbert, Ph.D.
              2009Michael
      C. Heim
              2010Mark
      E. Hill
              2010


18





Item
      6.
            Exhibits.





(a)
            Exhibits





Incorporated
      by ReferenceExhibit
      Number
            
            Exhibit
      Description
            
            Form
            
            Exhibit
            
            Filing
      Date
            
            Filed
      Herewith3.1
            
            Restated
      Articles of Incorporation of the Company, as currently in
      effect
            S-1
              (Registration
      No. 333-79509)
            
            3.1
            
            5/28/19993.2
            
            Amended
      By-Laws of the Company, as currently in effect
            
            8-K
            
            3.2
            
            8/21/200710.33
            
            Interactive
      Intelligence, Inc. 2006 Equity Incentive Plan, As Amended May 30,
      2008
            8-K
            
            10.33
            
            6/4/200810.38
            
            Form
      of Non-Employee Director Change of Control Agreement dated May 29, 2008 by
      and between Interactive Intelligence, Inc. and each of Michael C. Heim and
      Samuel F. Hulbert, Ph.D.
            10-Q
            
            10.38
            
            8/9/200731.1
            
            Certification
      of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
            
            
            
            
            
            
            X31.2
            
            Certification
      of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
            
            
            
            
            
            
            X32.1
            
            Certification
      of the Chief Executive Officer, pursuant to 18 U. S. C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
            
            
            
            
            
            
            X32.2
            
            Certification
      of the Chief Financial Officer, pursuant to 18 U. S. C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
            
            
            
            
            
            
            X




















19


SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.




Interactive
      Intelligence, Inc.
              (Registrant)Date:   August
      8, 2008
            
            
            
            By:
            
            /s/     Stephen R.
      HeadStephen
      R. Head
              Chief
      Financial Officer,
              Vice
      President of Finance and Administration,
              Secretary
      and Treasurer
              (Principal
      Financial Officer and Principal Accounting
  Officer)





20