Interactive Intelligence DEF 14A Definitive proxy

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No. )

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* Soliciting Material Pursuant to Section 240.14a-12

INTERACTIVE INTELLIGENCE, INC.

(Name of Registrant as Specified in its Charter)

______________________________

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April 9, 2010

To Our Shareholders:

Our Board of Directors joins me in extending to you a cordial invitation to attend the 2010 Annual Meeting of Shareholders of Interactive Intelligence, Inc. The meeting will be held at our world headquarters located at 7601 Interactive Way, Indianapolis, Indiana 46278 at 1:30 p.m., Eastern Time, on Thursday, May 20, 2010.

In addition to voting on the matters described in this proxy statement, we will review our 2009 business results and discuss our plans for 2010 and beyond. There will also be an opportunity to discuss matters of interest to you as a shareholder.

This year we are again providing access to our proxy materials via the Internet. On or about April 9, 2010, we mailed a Notice of Internet Availability of Proxy Materials (the “Notice”) to certain street name holders, and on or about the same date we mailed a printed copy of this proxy statement and a proxy card to our other shareholders. On the mailing date of the Notice, all shareholders of record and street name holders will have the ability to access all of the proxy materials, including this proxy statement, on a website referred to in the Notice and this proxy statement.

Regardless of the number of shares you own, it is important that your shares be represented whether or not you attend the meeting. Shareholders of record can vote their shares via the Internet, by using a toll-free telephone number or by traditional mail. Instructions for using these convenient services appear on the Notice, the proxy card and in this proxy statement. If you received a printed copy of the proxy materials, you can vote your shares by marking your votes on the proxy card, signing and dating it and mailing it promptly using the envelope provided. Any shareholder attending our meeting may vote in person even if a proxy has been returned.

We hope that you will be able to attend our meeting, and we look forward to seeing you.

Sincerely,

Donald E. Brown, M.D.

Chairman of the Board

INTERACTIVE INTELLIGENCE, INC.

7601 INTERACTIVE WAY

INDIANAPOLIS, INDIANA 46278

NOTICE OF 2010 ANNUAL MEETING OF SHAREHOLDERS

TIME AND DATE	1:30 p.m., Eastern Time, on Thursday, May 20, 2010

PLACE	Interactive Intelligence, Inc. World Headquarters 7601 Interactive Way Indianapolis, Indiana 46278

ITEMS OF BUSINESS	1. To elect two directors to hold office for a term of three years or until their successors are elected and have qualified; 2. To approve an amendment to the Interactive Intelligence, Inc. 2006 Equity Incentive Plan; 3. To consent to the appointment of KPMG LLP as our independent registered public accounting firm for 2010; and 4. To transact any other business that may be properly brought before our meeting or any adjournment or postponement thereof.

RECORD DATE	You can vote if you are a shareholder of record on March 26, 2010.

ANNUAL REPORT	Our 2009 Annual Report on Form 10-K, which is not a part of these proxy materials, is being made available with the accompanying proxy statement.

PROXY VOTING	Your vote is important, regardless of the number of shares you own. If you do not attend the meeting to vote in person, your vote will not be counted unless a proxy representing your shares is presented at the meeting. To ensure that your shares will be voted at the meeting, please vote in one of these ways: 1. Go to www.proxyvote.com shown on the Notice of Internet Availability of Proxy Materials or your proxy card and vote via the Internet; 2. You may vote by touchtone telephone by calling 1 (800) 690-6903 (this call is toll-free in the United States); or 3. If you received a printed copy of the proxy card by mail, then MARK, SIGN, DATE AND PROMPTLY RETURN your proxy card in the postage-paid envelope.

	If you do attend the meeting, you may revoke your proxy and vote by ballot.

	By order of the Board of Directors,
	Stephen R. Head Corporate Secretary Indianapolis, Indiana April 9, 2010

TABLE OF CONTENTS

	Page No.
PROXY STATEMENT SOLICITATION OF PROXIES FOR THE 2010 ANNUAL MEETING OF SHAREHOLDERS	1
General Information	1
Voting Information	2
ELECTION OF DIRECTORS (ITEM 1 ON PROXY CARD)	6
Nominees for Term to Expire in 2013	6
Directors Whose Present Terms Expire in 2011	7
Directors Whose Present Terms Expire in 2012	8
CORPORATE GOVERNANCE	9
Corporate Governance Guidelines	9
Director Independence and Board Meetings	9
Leadership	10
Role in Risk Oversight	10
Board and Committee Membership	11
Standing Committees of the Board	11
Shareholder Communications	13
Code of Ethics	13
DIRECTOR COMPENSATION AND BENEFITS	14
Director Compensation Arrangements	14
Director Compensation in 2009	15
Non-Employee Director Change-of-Control Agreements	16
OUR EXECUTIVE OFFICERS	16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	18
EXECUTIVE COMPENSATION AND RELATED INFORMATION	19
Compensation Committee Report	19
Compensation Discussion and Analysis	19
Compensation Related Risk Assessment	26
Executive Compensation Tables and Narratives	27
- Summary Compensation Table	27
- Grants of Plan-Based Awards	29
- Narrative Discussion	31
- Outstanding Equity Awards at Fiscal Year-End	33
- Option Exercises	34
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS	34
EMPLOYMENT AGREEMENTS AND POST-TERMINATION AND CHANGE-OF-CONTROL AGREEMENTS	35
Employment Agreements	35
Change-of-Control and Retention Agreements	35
Stock Option Plans	38
APPROVAL OF THE AMENDMENT TO THE INTERACTIVE INTELLIGENCE, INC. 2006 EQUITY INCENTIVE PLAN (ITEM 2 ON PROXY CARD)	40
CONSENT TO THE APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (ITEM 3 ON PROXY CARD)	49
AUDIT COMMITTEE MATTERS	49
Audit Committee Pre-Approval Policy of Audit and Permissible Non-Audit Services of KPMG	49
Fees Paid to KPMG	49
AUDIT COMMITTEE REPORT	51
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS	52
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE	52
OTHER BUSINESS AT OUR ANNUAL MEETING	52
DATE OF RECEIPT OF SHAREHOLDER PROPOSALS FOR OUR 2011 ANNUAL MEETING OF SHAREHOLDERS	53
APPENDIX A	A-1

INTERACTIVE INTELLIGENCE, INC.

7601 INTERACTIVE WAY

INDIANAPOLIS, INDIANA 46278

__________________________________________________

PROXY STATEMENT

SOLICITATION OF PROXIES

FOR THE

2010 ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD AT 1:30 P.M. EASTERN TIME ON MAY 20, 2010

GENERAL INFORMATION

This proxy statement and accompanying proxy card are being provided to shareholders on or about April 9, 2010 in connection with the solicitation by the Board of Directors of Interactive Intelligence, Inc. (“Interactive,” “we,” “us,” “our” or the “company”) of proxies to be voted at the 2010 Annual Meeting of Shareholders on May 20, 2010 (the “annual meeting” ).

Why did I receive a Notice of Internet Availability of Proxy Materials?

Instead of initially mailing a printed copy of the proxy materials to each shareholder, we may furnish proxy materials to our shareholders via the Internet under the e-proxy rules adopted by the Securities and Exchange Commission (the “SEC”). On or about April 9, 2010, we mailed a Notice of Internet Availability of Proxy Materials (the “Notice”) to certain street name holders as of the close of business on March 26, 2010 (the “Record Date”), and we mailed a printed copy of the proxy materials to our other shareholders. If you received a Notice by mail, you will not receive a printed copy of the proxy materials unless you request such a copy in the manner described in the Notice. The Notice also instructs you as to how you may access and review this p roxy statement and our 2009 Annual Report on Form 10-K for the year ended December 31, 2009, which is our 2009 Annual Report to Shareholders, and how you may submit your proxy to vote at the annual meeting.

This proxy statement, the form of the proxy card and voting instructions are being made available to our shareholders on or about April 9, 2010 at www.proxyvote.com. Our 2009 Annual Report on Form 10-K is being made available at the same time and by the same method. The 2009 Annual Report on Form 10-K is not to be considered as part of the proxy solicitation materials or as having been incorporated by reference.

What is a proxy and how do I vote by proxy?

A proxy is your legal designation of another person (the “proxy”) to vote on your behalf. If you are a shareholder of record, we encourage you to vote via the Internet or by telephone. Internet voting information is provided on the Notice and the proxy card. You may vote by touchtone telephone by calling 1 (800) 690-6903. You will need to have the Notice or, if you received a printed copy of the proxy materials, your proxy card or voting instruction card, available when voting via the Internet or by telephone. These methods are convenient and save us significant postage and processing expense. In addition, when you vote via the Internet or by telephone prior to the meeting date, your vote is recorded immediately and there is no risk that postal delays will cause your vote to arrive late and therefore not be counted.

If you are a shareholder of record and you received a printed copy of the proxy materials, you may vote by marking your proxy card, dating and signing it, and mailing it in the postage-paid envelope. The shares represented will be voted according to your directions. If your proxy card is signed and returned without specifying a vote or an abstention on any proposal, it will be voted according to the recommendation of the Board on that proposal.

If you are a “street name” holder, you must provide instructions on voting to your broker, bank, trust or other nominee holder.

What is the difference between a “shareholder of record” and a “street name” holder?

These terms describe how your shares are held. If your shares are registered directly in your name with our independent transfer agent and registrar, Computershare Trust Company, NA, you are a “shareholder of record”. If your shares are held in the name of a brokerage, bank, trust or other nominee as a custodian, such as Broadridge Financial Solutions, Inc. (“Broadridge”), you are a “street name” holder.

How many proxy cards will I receive?

You will receive multiple proxy cards if you hold your shares in different ways (e.g., joint tenancy, trusts and custodial accounts) or in multiple accounts. If your shares are held in “street name”, you will receive your proxy card or other voting information from your broker, bank, trust or other nominee, and you will return your proxy card or cards to such broker, bank, trust or other nominee. You should complete and sign each proxy card you receive.

VOTING INFORMATION

Who is qualified to vote?

You are qualified to receive notice of and to vote at our annual meeting if you own shares of our common stock at the close of business on the Record Date for our annual meeting. At the close of business on the Record Date, there were 17,383,415 shares of our common stock issued and outstanding. Each shareholder will have one (l) vote for each share held including shares:

·	held directly in your name as the shareholder of record;

·	held in “street name” in an account with a broker, bank, trust or other nominee; and

·	attributed to your account in the Interactive Intelligence, Inc. 401(k) Savings Plan (the “401(k) Plan”).

Is there a list of shareholders entitled to vote at the annual meeting?

A list of shareholders entitled to vote at our annual meeting will be available for inspection for a purpose germane to our annual meeting by any shareholder during usual business hours at our world headquarters during the ten days prior to our meeting date.

How do I use my shares to cast a vote?

Depending on whether you hold your shares directly as a “shareholder of record” or you hold your shares as a “street name” holder, there are several methods you can choose from to cast your vote.

If you are a “shareholder of record”, you can vote your proxy in any one of these methods:

1.	Go to www.proxyvote.com shown on the Notice or your proxy card and vote via the Internet;

2.	You may vote by touchtone telephone by calling 1 (800) 690-6903 (this call is toll-free in the United States); or

3.	If you received a printed copy of the proxy card by mail, then mark, sign, date and promptly return your proxy card in the postage-paid envelope.

You will need to have the Notice or, if you received a printed copy of the proxy materials, your proxy card or voting instruction card, available when voting via the Internet or by telephone. Therefore, please follow the specific instructions set forth on the Notice, proxy card or voting instruction card. For security purposes, our electronic voting system has been designed to authenticate your identity as a shareholder of our common stock. If you vote your proxy via the Internet or by telephone, you do not need to return a proxy card.

If you hold your shares as a “street name” holder, your broker, bank, trust or other nominee will provide you with materials and instructions for voting your shares.

How do I vote my shares in the 401(k) Plan?

If you participate in the Interactive Intelligence, Inc. 401(k) Plan you may give voting instructions to Merrill Lynch Retirement Group, the plan Trustee, as to the number of shares of our common stock credited to your 401(k) Plan account as of the most recent valuation date coincident with or preceding the Record Date. The Trustee will vote your shares in accordance with your instructions received by May 18, 2010 at 11:59 p.m. Eastern Time. You may also revoke previously given voting instructions by May 18, 2010 at 11:59 p.m. Eastern Time, by delivering a new proxy via the Internet, by telephone or by mail. Your voting instructions will be kept confidential by the Trustee. If you do not send voting instruct ions, the Trustee will vote the number of shares credited to your account as directed by the Investment Committee of the 401(k) Plan. The Investment Committee intends to direct the Trustee to vote such shares "FOR" each of the director nominees and "FOR" Proposals 2 and 3.

Can I vote my shares in person at the annual meeting?

If you decide to join us in person at our annual meeting and you are a “shareholder of record”, you may vote your shares in person at the meeting. If you hold your shares as a “street name” holder, you must obtain a proxy from your broker, bank, trust or other nominee, giving you the right to vote the shares at the meeting.

Can I change my vote after I have submitted a proxy?

Shareholders who submit a proxy retain the right to revoke it at any time before it is voted by (1) attending our annual meeting and voting in person, (2) notifying our Corporate Secretary in writing of such revocation prior to our annual meeting or (3) delivering a new proxy via the Internet, by telephone or by mail. If you submit more than one proxy, the proxy having the latest date will revoke any earlier proxy.

What constitutes a quorum and why is it required?

The holders of a majority of our shares of common stock issued and outstanding and entitled to vote, present in person, or represented by proxy, shall constitute a quorum at our annual meeting. A quorum is required in order for our shareholders to conduct business at our annual meeting.

What is the Board’s recommendation on how I should vote my shares?

Our Board recommends a vote “FOR” the election of the director nominees, “FOR” the approval of the amendment to the Interactive Intelligence, Inc. 2006 Equity Incentive Plan (the “2006 Plan”) and “FOR” the consent by our shareholders to the appointment of our independent registered public accounting firm for 2010.

How would my shares be voted if I do not specify how I would prefer them to be voted?

If no choice is specified, your proxy will be voted “FOR” the election of the director nominees, “FOR” the approval of the amendment to the 2006 Plan and “FOR” the consent by our shareholders to the appointment of our indepen dent registered public accounting firm for 2010. A proxy or proxy card may indicate that all or a

portion of the shares represented by such proxy or proxy card are not being voted with respect to a specific proposal. This could occur, for example, when a broker is not permitted to vote shares held in street name on certain proposals (for example, the election of directors and the approval of the amendment to the 2006 Plan) in the absence of instructions from the beneficial owner. Shares that are not voted with respect to a specific proposal will be considered as not present and not entitled to vote on such proposal, even though such shares will be considered present for purposes of determining a quorum and voting on other proposals.

What vote is required to approve a proposal? Also, how are abstentions and broker non-votes treated?

Election of Director Nominees. The election of the director nominees will be determined by a plurality of the shares voting on such election. Plurality voting means that the two candidates who receive the highest number of “FOR” votes are elected, irrespective of the number of “FOR” votes received and even if the votes are less than a majority of the votes cast. Abstentions and broker non-votes will have no effect on the outcome of this pro posal.

Amendment to the 2006 Plan. To be approved, the amendment to the 2006 Plan requires that a majority of the total votes cast must vote in favor of the amendment. In other words, approval of the amendment to the 2006 Plan will be determined where the number of shares voted “FOR” the amendment exceeds the number of shares voted “AGAINST” or “ABSTAIN”. Abstentions on a specific proposal will be considered as present, but not as voting in favor of such proposal. Abstentions will have the same effect as a vote against the approval of the amendment to the 2006 Plan. Broker non-votes will not affect the determination of whether the amendment to the 2006 Plan will be approved.

Consent to the Appointment of the Independent Registered Public Accounting Firm. The consent by our shareholders to the appointment of the independent registered public accounting firm will be approved if more shares are voted “FOR” the proposal than “AGAINST”. Abstentions and broker non-votes will have no effect on the outcome of this proposal.

Who will pay for the cost of this proxy solicitation?

This solicitation will be conducted by mail, except that in a limited number of instances proxies may be solicited by our officers, directors and regular employees personally, by telephone, by facsimile or by other electronic communication. We do not presently anticipate payment of any compensation or fees of any nature to anyone for the solicitation of these proxies, except that we may pay persons holding shares in their name, or of their nominees, for the expense of sending proxies or proxy cards and proxy material to principals. The entire cost of solicitation will be borne by us.

Who will count the votes?

At our annual meeting, votes will be counted by an election inspector from Broadridge. Such representative will be present at the annual meeting to process the votes cast by our shareholders, make a report of inspection, count the votes cast by our shareholders and certify as to the number of votes cast on each proposal.

Where can I find the voting results of the annual meeting?

We will announce preliminary voting results at our annual meeting and publish final results on a Form 8-K furnished to the SEC within four business days after the annual meeting.

How do I submit a shareholder proposal for next year’s annual meeting?

If you wish to submit a shareholder proposal to be included in next year’s proxy statement, you must comply with our advance notice requirements set forth in our Amended and Restated By-Laws, as currently in effect, as described in “Date of Receipt of Shareholder Proposals for Our 2011 Annual Meeting of Shareholders” on page 53.

What if I want to receive a printed copy of the Annual Report on Form 10-K and this proxy statement?

If you received a Notice, you may request a printed copy of the Annual Report on Form 10-K and proxy statement by any of the following methods: via the Internet at www.proxyvote.com, by telephone at 1 (800) 579-1639, or by sending an e-mail to sendmaterial@proxyvote.com. Our shareholders may also request an Information Packet without charge, which includes our 2009 Annual Report on Form 10-K, including consolidated financial statements, as filed with the SEC (which is our Annual Report to Shareholders) and proxy statement. Please visit our Investor Relations page located on our website at http://investors.inin.com and click on the R 20;Contact Us” link. You will be asked to provide general contact information before continuing. Or you may call (317) 872-3000 and press option “4” to speak with an investor relations representative.

If you have any further questions about voting your shares or attending our annual meeting, please contact our Investor Relations Team via email at investor.relations@inin.com or by telephone at (317) 872-3000 and press option “4”.

ELECTION OF DIRECTORS (ITEM 1 ON PROXY CARD)

Our Board currently consists of six directors divided into three classes, with the term of one class of directors expiring each year, pursuant to our Amended and Restated By-Laws, as currently in effect. Generally, each director serves until the annual meeting held in the year that is three years after such director’s election and until such director’s successor is elected and has qualified. On September 11, 2009, the Board, upon the recommendation of the Nominating and Corporate Governance Committee, appointed Richard G. Halperin to serve as a member of the Board with a term to expire at our 2012 Annual Meeting of Shareholders. Mr. Halperin’s appointment filled the vacancy resulting from Samuel F. Hulbert, Ph.D.’s departure from the Board after the 2009 Annual Meeting of Shareholders.

The terms of Mark E. Hill and Michael C. Heim, two of our six directors, will expire at this annual meeting. Our Board has nominated each of these individuals upon recommendation of our Nominating and Corporate Governance Committee to be elected at this annual meeting for a term of three years to expire at our 2013 Annual Meeting of Shareholders or until his successor is elected and has qualified.

Unless proxy cards are otherwise marked, the persons named as proxies will vote the shares represented by all executed proxy cards which are received “FOR” the election of each of our director nominees.

Our Board has no reason to believe that the nominees will refuse to act or be unable to accept election; however, in such event, and if any other unforeseen contingencies should arise, it is the intention of the persons named as proxies to vote for other nominees selected by our Nominating and Corporate Governance Committee in accordance with their best judgment.

The following descriptions set forth certain information about each director, including each person’s business experience for the past five years as well as a summary description of the experiences, qualifications, attributes and skills that led the Nominating and Corporate Governance Committee to the conclusion that each such person should serve as our director. There is no family relationship between any of our directors or executive officers. The ages listed below for each director or nominee was as of March 31, 2010.

Nominees For Term To Expire in 2013

MARK E. HILL; Director since 2004; Age 53; Carmel, Indiana. Mr. Hill is Managing Partner of Collina Ventures, LLC, a private investment company focusing on technology companies. In 1983, Mr. Hill co-founded Baker Hill Corporation®, which serves as a trusted advisor to its banking clients and delivers solutions that address business process needs. In 2005, Baker Hill was acquired by Experian®, a global information solutions company. Mr. Hill oversaw the transition through 2006. Mr. Hill also serves on the board of four non-public technology companies. Mr. Hill serves Central Indiana in various capacities, including board membership on the Central Indiana Corporate Partnership, the Central Indiana Community Foundation, the United Way of Central Indiana and the TechPoint Foundation. Mr. Hill is an adjunct professor at the Indiana University School of Informatics and former chair of its Dean’s Council. Mr. Hill started his career at IBM and holds a B.B.A. from the University of Notre Dame and an M.B.A. from the Indiana University Kelley School of Business.

Mr. Hill provides valuable insight to our Board of Directors resulting from his 25 years of executive experience and his experience as a co-founder of a company that provided technological solutions for business needs. Mr. Hill’s current position as managing partner of an investment company that focuses primarily on technology companies provides him with current industry knowledge that, together with his previous hands-on technology experience, allows him to understand our business and provide useful guidance and advice to management.

MICHAEL C. HEIM; Director since 2007; Age 55; Zionsville, Indiana. Mr. Heim is the Senior Vice President, Information Technology and Chief Information Officer of Eli Lilly and Company (“Lilly”), a position

he has held since August 2009. Prior to August 2009, Mr. Heim served as Vice President, Information Technology and Chief Information Officer at Lilly since January 2004. From November 1999 until January 2004, Mr. Heim was the chief technology officer with accountability for enterprise architecture and data strategy, the global implementation of SAP, and global financial and human resources information technology solutions at Lilly. Mr. Heim joined Lilly in 1979 and has served in numerous roles including information technology, internal audit, engineering and the corporations operations committee. Mr. Heim serves on a number of executive councils including the Microsoft Pharmaceutical Advisory Council and the SAP Life Sciences Executive Council. A native of Cincinnati, Ohio, Mr. Heim received a B.A. degree in business administration from Marian College and an M.B.A. from Bowling Green State University.

Mr. Heim has held multiple executive technology related positions with Lilly over the last 30 years and has served on several executive councils. Through these positions Mr. Heim has developed a strong knowledge base of the technology industry that enables him to understand, analyze and provide guidance on our business and industry. In addition, in working in the technology group of a large company, Mr. Heim provides us insight into the technology decision-making process at large companies that we target to license our software.

The Board recommends a vote “FOR” the nominees listed above.

Directors Whose Present Terms Expire in 2011

DONALD E. BROWN, M.D.; Director since 1994; Age 54; Indianapolis, Indiana. Dr. Brown co-founded Interactive Intelligence in October 1994 and has served as our Chief Executive Officer since April 1995 and President since inception. This is the third software company founded by Dr. Brown. Dr. Brown has been a director since our inception and also serves as our Chairman of the Board, a position he has held since 1998. In March 1988, Dr. Brown co-founded Software Artistry, Inc. (“Software Artistry”), a developer of customer support software that became a public company in March 1995 and was subsequently acquired by IBM in January 1998. At Software Artistry, Dr. Brown served as Chief Executive Officer and director from inception through September 1994. Dr. Brown’s first software company was acquired by Electronic D ata Systems, Inc. in September 1987. Dr. Brown graduated from the Indiana University School of Medicine. He also holds two additional degrees from Indiana University, an M.S. in computer science and a B.S. in physics.

Dr. Brown has over 15 years of leadership experience with the company since he co-founded it in 1994. Prior to that, Dr. Brown gained executive and leadership experience at the two other technology companies that he founded. As a result, he has an extensive understanding of the research and development, sales and marketing, strategy and operations of our company as well as significant knowledge of our industry.

RICHARD A. RECK; Director since 2005; Age 60; Hinsdale, Illinois. Mr. Reck is the founder and President of Business Strategy Advisors LLC, a business strategy consultancy that focuses on serving technology, services and entertainment companies. Mr. Reck was a partner with KPMG LLP from 1973 through his retirement in 2002. Mr. Reck also serves on the board of directors of two other high-technology public companies, Merge Healthcare, Inc., a public healthcare software and information company, and Advanced Life Sciences Holdings, Inc., a public biopharmaceutical company. Mr. Reck received a Bachelor of Arts degree in mathematics from DePauw University and an M.B.A. in accounting from the University of Michigan.

Mr. Reck has many years of experience as an audit partner at KPMG LLP with extensive financial accounting knowledge and leadership experience that is critical to our Board and, more specifically, our Audit Committee. Mr. Reck has been deemed an audit committee financial expert by our Board based on his experience in the accounting industry. In addition to Mr. Reck’s accounting experience, he also has an extensive knowledge of the technology industry, which allows him to understand and provide guidance on our business.

Directors Whose Present Terms Expire in 2012

EDWARD L. HAMBURG, Ph.D.; Director since 2004; Age 58; Chicago, Illinois. Dr. Hamburg is the former Executive Vice President of Corporate Operations and Chief Financial Officer of SPSS Inc. (“SPSS”), a multinational computer software firm that provides predictive analytic technology and services. He held this position from 1992 to 2004 after heading business development for SPSS from 1986 to 1992. Dr. Hamburg held an advisory position with SPSS through December 31, 2008 and currently serves as a director and audit committee chairman of Interlink Electronics, Inc., a developer of specialized electronic component technologies. He is also a director of five privately-held high-technology companies and a venture partner with Morgan Stanley Private Equity. Dr. Hamburg received a Ph.D. from the University of Chicago and both his M. A. and B.A. from the University of Maryland at College Park.

Dr. Hamburg’s more than 30 years of executive and board of director roles at various high technology companies have provided him with leadership skills and the ability to analyze and address numerous aspects of our company’s business and industry. Dr. Hamburg has particular experience in mergers and acquisitions, business development, international operations and overall business infrastructure management. He is chairman of our Audit Committee and has been deemed an audit committee financial expert by our Board based on his executive roles and service on other companies’ audit committees.

RICHARD G. HALPERIN; Director since 2009; Age 61; Jupiter, Florida. Mr. Halperin is the former chief executive officer of Coherent Networks International Inc., a GIS software company specializing in the utility and telecom industries, until 1999. Previously, Mr. Halperin served as chief executive officer of JBA International, a unit of JBA Holdings, a global ERP software company based in the United Kingdom, from 1991 to 1998; vice president of sales and services for System Software Associates, a provider of extended enterprise solutions and services (“SSA”), from 1985 to 1989; and area director responsible for sales, support and administrative operations of Wang Laboratories, a provider of computer-based office information processing systems, from 1983 to 1985. Prior to that, Mr. Halperin spent nine years at IBM Corporation i n various marketing and management positions. Mr. Halperin previously served on the board of directors of several private companies and one public company, including Story Inc., JBA International, Advanced Graphical Applications, Airborne Control Technologies, Made2Manage Systems, Inc., Coherent Networks International, Epigragh and multiple SSA affiliates. Mr. Halperin graduated from Northwestern University with a B.S. degree in business administration.

Mr. Halperin has over 30 years of sales, marketing and management experience working with technology companies, which allows him to provide advice and guidance on our sales initiatives, particularly related to expanding our channel sales. Mr. Halperin also has considerable board of director experience through which he has gained an in-depth knowledge of the technology industry and strong leadership and decision-making skills.

CORPORATE GOVERNANCE

Corporate Governance Guidelines

On June 8, 2007, our Board adopted Corporate Governance Guidelines (the “Guidelines”) to assist the Board in the exercise of its responsibilities. These Guidelines reflect the Board’s commitment to monitoring the effectiveness of policy and decision-making both at the Board and management level, with a view to enhancing shareholder value over the long term. These Guidelines are in addition to, and are not intended to change or interpret, any federal or state law or regulation, including the Indiana Business Corporation Law, or our Restated Articles of Incorporation or Amended and Restated By-Laws, as currently in effect. The Guidelines are reviewed periodically and updated as necessary by our Board based upon recommendations from our Nominating and Corporate Governance Committee to reflect changes in regulatory requirem ents and Board oversight practices. The Guidelines comply with requirements contained in the listing standards of The NASDAQ Stock Market LLC (“NASDAQ”) (the exchange on which our equity securities are registered) and otherwise enhance our corporate governance policies. We will provide to any person, without charge, a copy of these Guidelines, upon request to our Corporate Secretary at our world headquarters. These Guidelines are also available on our website at http://investors.inin.com under “Corporate Governance”. We intend to disclose any amendments or updates to these Guidelines by posting such amendments or updates on our website.

Director Independence and Board Meetings

Our Board has determined that Dr. Hamburg and Messrs. Halperin, Heim, Hill and Reck are “independent directors”, as defined by the NASDAQ listing standards and the director independence rules of the SEC. Our Board has determined that each of Dr. Hamburg and Messrs. Halperin, Heim, Hill and Reck have no material direct or indirect relationship with us that would interfere with the exercise of his independent judgment in carrying out the responsibilities of a director on our Board.

In making its independence determination with respect to Mr. Heim, the Board considered Mr. Heim’s executive position with Lilly, a customer that uses our products and has licensed our applications directly from us. Because of Mr. Heim’s executive position at Lilly, the Board analyzed that relationship and the payments we received from Lilly for our products and applications during the last three years. As Lilly’s Chief Information Officer, it is our understanding that Mr. Heim could be involved in Lilly’s decision to license our products; however, Lilly has licensed our products since December 2001, well before Mr. Heim became Lilly’s Chief Information Officer or joined our Board. During 2009, 2008 and 2007, Lilly paid us approximately $464,000, $368,000 and $162,000, respectively, to license our applications and for related support and services. None of the payments exceeded the greater of $200,000 or 5% of our consolidated gross revenues in any of the three years, as set forth in Rule 5605(a)(2) of the NASDAQ listing standards. In addition, Mr. Heim has not received any consulting, advisory or other compensatory fees from us. After reviewing the terms of this transaction, and the relationship that Mr. Heim has with Lilly, the Board determined that Mr. Heim does not have a material direct or indirect interest in the transaction and that our business relationships with Lilly do not diminish his ability to exercise his independent judgment on issues affecting our business. Our Board will continue to monitor this relationship.

In making its independence determination with respect to Mr. Hill, the Board considered his position with Collina Ventures, LLC (“Collina”). Collina has a 37% ownership interest in Bluelock, LLC (“Bluelock”), and Mr. Hill serves as Chairman of the Board of Bluelock. Bluelock provided products and services to us during 2009 and 2008 amounting to approximately $57,000 and $72,000, respectively, which amounts were less than the $200,000 threshold set forth in Rule 5605(a)(2) of the NASDAQ listing standards and were less than 5% of Bluelock’s consolidated gross revenues in 2009 and 2008, respectively. Mr. Hill did not receive any commissions or other form of compensation in connection with the transaction between Bluelock and us. The Board determined that Mr. Hill does not have a material direct or indirect inte rest in the transaction and that our business relationships with Bluelock do not diminish his ability to exercise his independent judgment on issues affecting our business. Our Board will continue to monitor this relationship.

Our Board holds regularly scheduled quarterly meetings. Typically, committee meetings occur the day prior to the Board meeting so that the evening prior to the Board meeting and the day of the Board meeting can be devoted to presentations and discussions between the Board and senior management about our short and long-term strategies. In addition to the quarterly meetings, special meetings may be scheduled at our Board’s discretion. During 2009, our Board held six meetings. During 2009, each of our directors attended or participated in at least 75% of the aggregate of (i) the total number of meetings of our Board and (ii) the total number of meetings held by all committees of our Board on which each such director served. Subsequent to Dr. Hu lbert’s departure from the Board at the 2009 Annual Meeting of Shareholders, Dr. Hamburg was appointed to the Nominating and Corporate Governance Committee and Mr. Heim was appointed to the Compensation and Stock Option Committee. Dr. Hamburg and Mr. Heim attended all meetings held by their respective committees in 2009 after their appointment.

We have a policy that states that all directors properly nominated for election are expected to attend our annual meetings. All of our directors attended our 2009 Annual Meeting of Shareholders in person.

Leadership

The Chairman of our Board, Dr. Brown, is also our President and Chief Executive Officer. Our Guidelines provide that the Board should be free to choose its Chairman as it deems best for the company at that point in time, based on the recommendation of the Nominating and Corporate Governance Committee. Our Board does not have a policy on whether the role of Chairman and Chief Executive Officer should be separate or combined and, if separate, whether the Chairman should be selected from the non-employee directors or be an employee.

Because Dr. Brown is both our Chairman and our President and Chief Executive Officer, our Board has appointed, and annually will appoint, a lead director from among the independent directors. For 2010, our Board has appointed Mr. Hill as the independent lead director. The lead director’s responsibilities include:

•	monitoring the agendas of the Board meetings;

•	monitoring the agendas of and leading independent director meetings; and

•	temporarily taking over the Chairman/Chief Executive Officer position if the current Chairman/Chief Executive Officer is unable to perform his duties.

Dr. Brown is responsible for the day-to-day operations of our company, communicating with our constituents and implementing our strategy and other decisions of the Board. Because these items get significant focus at Board meetings, the Nominating and Corporate Governance Committee and the full Board of Directors believe that it is appropriate to have our Chief Executive Officer and President act as the Chairman of the Board. The Board of Directors also recognizes the important leadership roles that our lead director has in leading the meetings of our independent directors, and that the chairmen of each of the committees of the Board have in leading their respective committee meetings and reviewing and approving agendas in advance of such meetings. The Board evaluates its leadership structure on an ongoing basis and may change it as circumstances warrant.

Role in Risk Oversight

Our Board oversees our risk management processes to determine whether those processes are functioning as intended and are consistent with our business and strategy. Our Board conducts this oversight primarily through the Audit Committee, although some aspects of risk oversight are performed by the full Board or another committee. The Audit Committee is assigned with, among other things, oversight of our risks relating to accounting matters, financial reporting and legal and regulatory compliance. The Audit Committee meets regularly with our Chief Financial Officer, Controller, external auditors and management to discuss our major financial risk exposures and the steps management has taken to monitor and control such exposures, including

our risk assessment and risk management policies for information and financial systems. The Audit Committee also receives regular reports regarding issues such as the status and findings of audits being conducted by our independent auditors, the status of material litigation and material accounting changes or proposed audit adjustments that could affect our financial statements. Our Audit Committee has standing items on its quarterly meeting agendas relating to these responsibilities. The Audit Committee members, as well as each other director, have access to our Chief Financial Officer and any other member of our management for discussions between meetings as warranted. The Audit Committee provides reports to the full Board on risk-related items.

Board and Committee Membership

The responsibility for good corporate governance rests with our Board, whose primary role is providing oversight, counseling and direction in the best long-term interests of us and our shareholders. Our Board has three standing committees: the Audit Committee; the Compensation and Stock Option Committee; and the Nominating and Corporate Governance Committee (together, our “Standing Committees”). Each Standing Committee is described below. The following table sets forth information regarding which Standing Committee(s) each of our directors served on during 2009:

STANDING COMMITTEES OF THE BOARD

Director

Board of Directors

Audit

Committee

Compensation and

Stock Option

Committee

Nominating and

Corporate Governance

Committee

Donald E. Brown, M.D. (1)

Chair

Richard G. Halperin

Edward L. Hamburg, Ph.D.

Chair

Michael C. Heim

Mark E. Hill

Chair

Richard A. Reck

2009 Total Meetings Held

_____________________

(1)	Dr. Brown is our President and Chief Executive Officer and is our only employee that serves on our Board. Dr. Brown sometimes attends Standing Committee meetings as a member of management, except certain meetings where management was excluded.

Standing Committees of the Board

Audit Committee

Our Audit Committee operates under a written charter adopted by our Board, a copy of which is available, free of charge, on our website at http://investors.inin.com under “Corporate Governance”. Our Audit Committee reviews and assesses the adequacy of its charter and performance on an annual basis. Our Board established our Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for the primary purpose of overseeing our accounting and financial reporting processes and audits of our annual financial statements and internal control over financial reporting by our independent registered public accounting firm.

Among its current primary functions, our Audit Committee has the sole authority to perform the following:

·	retain and terminate our independent registered public accounting firm;

·	approve compensation and provide oversight of the work of our independent registered public accounting firm;

·	evaluate the qualifications, performance and independence of our independent registered public accounting firm;

pre-approve all auditing services and permitted non-audit services, including the fees and terms for such services (subject to the de minimus exception for non-audit services that are approved by our Audit Committee prior to completion of the audit) provided by our independent registered public accounting firm;

·	review and discuss with our management and our independent registered public accounting firm our annual and quarterly financial statements;

·	discuss with our management and our independent registered public accounting firm major issues regarding accounting principles and financial statement presentations and the adequacy of our internal control over financial reporting; and

·	review and approve all related person transactions.

All members of our Audit Committee have been and currently are “independent” as such term is defined for audit committee members under the NASDAQ listing standards and Rule 10A-3 of the Exchange Act. Our Board has determined that Dr. Hamburg and Mr. Reck meet the definition of an “audit committee financial expert”, as defined in Item 407(d)(5)(ii) of Regulation S-K of the Exchange Act.

Compensation and Stock Option Committee

Our Compensation and Stock Option Committee (our “Compensation Committee”) operates under a written charter adopted by our Board, a copy of which is available, free of charge, on our website at http://investors.inin.com under “Corporate Governance”. Our Compensation Committee reviews and assesses the adequacy of its charter and performance on an annual basis. Among its current primary functions, our Compensation Committee reviews and determines the annual compensation of our non-employee directors; the annual base salaries, performance-based cash incentive awards and other incentive compensation of our executive officers; administers our stock option plans in which directors, executiv e officers and other key employees participate; and discusses with management the Compensation Discussion and Analysis and, if appropriate, recommends its inclusion in our Annual Report on Form 10-K and proxy statement. For a description of the role of management and our compensation consultant in setting compensation, see “Executive Compensation and Related Information - Compensation Discussion and Analysis—Role of Management and Our Compensation Consultant in Setting Compensation”.

Compensation Committee Interlocks and Insider Participation

All members of our Compensation Committee have been and currently are “independent” directors, as defined under the NASDAQ listing standards, and no member is our employee or former employee. In addition, no member of our Compensation Committee had any relationship requiring disclosure under “Certain Relationships and Related Person Transactions” on page 52. During 2009, none of our executive officers served on the compensation committee or board of directors of another entity.

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee (our “Nominating Committee”) operates under a written charter adopted by our Board, a copy of which is available, free of charge, on our website at http://investors.inin.com under “Corporate Governance”. Our Nominating Committee assists our Board in (i) identifying individuals qualified to become Board members, (ii) developing our Guidelines, (iii) advising our Board in the annual review of our Board’s performance and (iv) recommending directors for each Standing Committee. The members of our Nominating Committee have been and currently are “independent”, as defined under the NASDAQ listing standards.

Our Nominating Committee considers candidates for membership on our Board who are recommended by shareholders and/or fellow Board members. In accordance with Rule 14a-8(i)(8) of the Exchange Act, which was

amended in December 2007 by the SEC and became effective on January 10, 2008, certain shareholder proposals related to the election of directors are no longer permitted. A shareholder who wishes to recommend a director candidate for consideration by our Nominating Committee should send such recommendation to our Corporate Secretary addressed to: Interactive Intelligence, Inc. Nominating Committee, c/o Corporate Secretary at our world headquarters. Our Corporate Secretary has been instructed by our Board to forward such shareholder director candidate recommendations to our Nominating Committee. Any such recommendation should include a description of the candidate’s qualifications for board service, the candidate’s written consent to be considered for nomination and to serve if nominated and elected and the addresses and telephone numbers for contacting the shareholder and the candidate for more information . A shareholder who wishes to nominate an individual as a director candidate at an annual meeting of shareholders, rather than recommend the individual to our Nominating Committee as a nominee, must comply with our advance notice requirements set forth in our Amended and Restated By-Laws, as currently in effect, as described in “Date of Receipt of Shareholder Proposals for Our 2011 Annual Meeting of Shareholders” on page 53.

Our Nominating Committee is responsible, when the need arises, for seeking individuals qualified to become Board members for recommendation to our Board. The Nominating Committee identifies any specific needs in terms of industry or professional background and determines independence standards for nominees. Our entire Board nominates members for election to our Board. Nominees for director are selected on the basis of board experience, judgment, integrity, ability to make independent inquiries, understanding our business and environment and willingness to devote adequate time to Board duties. In identifying potential director nominees, our Nominating Committee, in accordance with our Guidelines, also takes into account geographic, occupational, gender, race and age diversity. The Nominating Committee implements that policy, and asse sses its effectiveness, by examining the diversity of all of the directors on the Board when it selects nominees for directors. Our Nominating Committee’s process for identifying and evaluating nominees for director will be the same whether the nominee is from our Nominating Committee’s search for a candidate, or whether the nominee was recommended by a shareholder.

Shareholder Communications

Our Board has a process whereby our shareholders may send communications to our Board’s attention. Any shareholder desiring to communicate with our Board, or one or more specific members thereof, should communicate in a writing addressed to Interactive Intelligence, Inc., Board of Directors, c/o Corporate Secretary at our world headquarters. Our Corporate Secretary has been instructed by our Board to promptly forward all such communications to the specified addressees.

Code of Ethics

We have adopted a Code of Business Conduct and Ethics (our “Ethics Code”) that applies to all of our directors, officers and employees. We will provide to any person a copy of our Ethics Code, free of charge, upon request to our Corporate Secretary at our world headquarters. Our Ethics Code is available on our website at http://investors.inin.com under “Corporate Governance”. We intend to disclose any amendments or updates to our Ethics Code by posting such amendments or updates on our website. In addition, any waivers of our Ethics Code for our directors or executive officers will be posted on our website under “Corporate Governance”. There were no waivers of our Ethics Code by any of our executive officers or directors during 2009.

DIRECTOR COMPENSATION AND BENEFITS

Only non-employee directors receive compensation for their services as directors. Our compensation package for non-employee members of our Board is comprised of cash (annual retainers and committee meeting fees) and stock option grants. Directors are also entitled to reimbursement of expenses incurred in connection with attendance at Board and/or committee meetings. Our director pay package is designed to attract and retain highly-qualified, independent professionals to monitor the effectiveness of policy and decision-making both at the Board and management level, with a view to enhancing shareholder value over the long term. Our Compensation Committee generally reviews our non-employee director compensation program on an annual basis. Actual annual pay varies among directors based on committee memberships, committee chair res ponsibilities and meeting attendance.

Members of our Board are eligible to receive automatic stock option grants under the 2006 Plan, which was adopted by our Board in April 2006 and approved by our shareholders at our 2006 Annual Meeting of Shareholders. An amendment to our 2006 Plan was approved by our shareholders at our 2008 Annual Meeting of Shareholders. Our 2006 Plan replaced our Outside Directors Stock Option Plan (our “Directors Plan”), which was adopted in April 1999. Under our 2006 Plan, the exercise price for option grants is equal to the closing price of our common stock, as reported by The NASDAQ Global Market, on the business day immediately preceding the date of grant, rather than on the day of grant under the terms of the Directors Plan, and the term of the options are six years. For most options granted to our directors prior to 2005, the term of each option was ten years from the date of grant. Commencing in May 2009, we began granting our non-employee directors options annually that vest one year after the grant date. Previously, our non-employee directors were granted options that vested over four years. The fair value of these option grants is determined on the date of the grant.

Our Board also has the full and complete authority and discretion, except as limited by our 2006 Plan, to grant additional options to eligible directors from time to time and to provide the terms and conditions (which need not be identical among eligible directors), including without limitation the vesting provisions, thereof. Any option grants previously awarded under our Directors Plan, but not yet forfeited, cancelled, terminated, exercised or expired, remain subject to their original terms, which are generally not different from the terms upon which annual option grants for directors are granted under our 2006 Plan, except as described above.

Director Compensation Arrangements

On the date of the annual meeting of shareholders, each eligible non-employee director is granted an annual stock option to purchase 8,000 shares of our common stock. For any newly elected non-employee director, our Compensation Committee may approve an option award to such director to purchase an aggregate of 20,000 shares of our common stock upon joining our Board. These options have terms in accordance with our 2006 Plan, generally vest over one year (for annual non-employee director grants) and four years (for new non-employee director grants) and expire six years from the anniversary date of the grant.

In 2009, each of our non-employee directors was entitled to receive the following compensation:

Type of Compensation	Amount
Cash Retainers:
Annual Cash Retainer (1)	$	25,000
Annual Cash Retainer for Committee Chair:
Audit Committee (1)	$	15,000
Compensation and Nominating Committees (1)	$	5,000
Annual Cash Retainer for Audit Committee Members (1)	$	5,000

Board and Committee Attendance Fee (per meeting attended that was not held in conjunction with a meeting of our full Board):
In person (2)	$	1,500
By teleconference (2)	$	750

Stock Options:
Annual Stock Option Retainer (3)	8,000 shares
Stock Option Grant for Newly Elected Directors (4)	20,000 shares

_________________________

(1)	All annual cash retainers were paid in advance in equal quarterly installments, and at times some have been paid in the immediately preceding year in preparation for Board and/or committee meetings to be held during the first quarter of the following year.

(2)	All attendance fees were paid in arrears, and at times some have been paid in the following year.

(3)

Represents an annual stock option to purchase shares of our common stock, which will be granted at each annual meeting of shareholders. These options were granted to all of our non-employee directors on May 28, 2009, the date of our 2009 Annual Meeting of Shareholders, in accordance with the terms of our 2006 Plan.

(4)	Effective September 11, 2009, our Board, upon recommendation from our Nominating Committee, appointed Mr. Halperin to serve as a member of our Board of Directors, and granted Mr. Halperin a stock option to purchase 20,000 shares of our common stock.

Director Compensation in 2009

The following table sets forth information regarding the compensation that each non-employee director earned during 2009. Dr. Brown did not earn any additional compensation for serving on our Board in 2009.

DIRECTOR COMPENSATION
Name	Fees Earned or Paid in Cash (1)		Option Awards (2)		Total Compensation
Richard G. Halperin	$	7,750	$	210,396	$	218,146

Edward L. Hamburg, Ph.D.		53,500		49,282		102,782

Michael C. Heim		41,750		49,282		91,032

Mark E. Hill		40,750		49,282		90,032

Samuel F. Hulbert, Ph.D. (3)		16,500		--		16,500

Richard A. Reck		41,000		49,282		90,282

_________________________

(1)

The amounts in this column include the annual Board retainer, annual chairman retainer, annual Audit Committee retainer and the amounts earned by each director for attending Board and/or committee meetings in person and/or by teleconference that were not held in conjunction with a meeting of our full Board.

(2)

The amounts in this column represent the grant date fair value of the stock options granted to each non-employee director during the year ended December 31, 2009 in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation (“FASB ASC 718”) (except that the estimated forfeitures related to service-based vesting conditions were disregarded). For valuation assumptions used to determine these amounts, refer to Note 5 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009. Our non-employee directors had the following shares of our common stock underlying stock options (both vested and unvested) out standing as of December 31, 2009: Mr. Halperin: 20,000 shares; Dr. Hamburg: 55,556 shares; Mr. Heim: 36,000 shares; Mr. Hill: 56,114 shares; and Mr. Reck: 52,000 shares.

(3)	Dr. Hulbert served as a director until our 2009 Annual Meeting of Shareholders.

Non-Employee Director Change-of-Control Agreements

On June 7, 2007, we entered into Non-Employee Director Change-of-Control Agreements (each, a “Director Change-of-Control Agreement”) with Dr. Hamburg and Messrs. Hill and Reck. In addition, on May 29, 2008 and March 29, 2010, we entered into a Director Change-of-Control Agreement with Mr. Heim and Mr. Halperin, respectively. Under the terms of each Director Change-of-Control Agreement, in the event the service on our Board of Directors is terminated for any reason following an event where a “Change-of-Control” has occurred (as defined under “Employment Agreements and Post-Termination and Change-of-Control Arrangements”), any and all outstanding stock options granted under our 2006 Plan and/or our Directors Plan will vest on an accelerated pro-rat a monthly basis, including full credit for partial months elapsed. In addition, with respect to stock option vesting, each director will be credited with one additional month of service for each month of service completed, up to a maximum of 24 additional months of service credit.

OUR EXECUTIVE OFFICERS

The following table sets forth information, as of March 31, 2010, about our executive officers followed by their biographies:

Name	Age		Position
Donald E. Brown, M.D.		54	Chairman of the Board, President and Chief Executive Officer

Gary R. Blough		54	Executive Vice President, Worldwide Sales

William J. Gildea III		43	Vice President, Business Development

Stephen R. Head		56	Chief Financial Officer, Vice President, Finance and Administration, Secretary and Treasurer

Hans W. Heltzel		39	Vice President, Support and Professional Services

Pamela J. Hynes		48	Vice President, Customer Services

Joseph A. Staples		50	Chief Marketing Officer and Senior Vice President, Marketing

Donald E. Brown, M.D.’s biographical information is contained under “Election of Directors (Item 1 on Proxy Card) - Directors Whose Present Terms Expire in 2011” on page 7.

Gary R. Blough has served as our Executive Vice President, Worldwide Sales since July 2004. Mr. Blough served as our Vice President of Sales for Europe, the Middle East and Africa from January 2002 to July 2004 and previously served as our Area Director and Vice President of Sales for Western U.S. and Latin America since joining us in February 1997. From January 1992 to February 1997, Mr. Blough held various sales positions at Software Artistry, including Director of Western Region Sales. From January 1990 to December 1991, Mr. Blough was Director of Sales for On-Line Software, a developer of programmer productivity tools. Mr. Blough has a B.S. degree in Marketing from Virginia Polytechnic Institute and State University.

William J. Gildea III has served as our Vice President, Business Development since March 2008. Prior to joining us, Mr. Gildea was a sell-side financial analyst covering the communications technology industry at Janney Montgomery Scott from April 2004 to February 2008 and an associate analyst at Wachovia Securities from April 2000 to March 2004. Mr. Gildea started his career as a communications attorney in private practice in Washington, D.C. from October 1993 to June 1998. Mr. Gildea holds a B.A. from William & Mary, a J.D. from Catholic University, and an M.B.A. from the University of North Carolina.

Stephen R. Head has served as our Chief Financial Officer, Vice President of Finance, Secretary and Treasurer since joining us in November 2003 and our Vice President of Finance and Administration since February 2004. Mr. Head previously served as Chief Financial Officer of Gilian Technologies Ltd. (now Breach Security, Inc.), a Web security applications developer, from 2001 to 2003. Prior to Gilian Technologies, Mr. Head was Senior Vice President, Finance and Administration from 1999 to 2001 at planetU, Inc., an

e-commerce company serving the consumer packaged goods industry, which was acquired by Transora in December 2000. Other financial roles Mr. Head has held in the software industry include Vice President, Finance and Administration and Chief Financial Officer at Made2Manage Systems, Inc. (now Consona Corporation), and Vice President, Finance and Chief Financial Officer of Software Artistry. Mr. Head began his career in public accounting at KPMG LLP. He has also served in positions in private industry. Mr. Head is a graduate of Indiana University, where he received both an M.B.A. and B.S. in Business with a concentration in Accounting.

Hans W. Heltzel has served as Vice President of Support and Professional Services for us since January 2009. Previously, Mr. Heltzel served as our Director of Worldwide Support from 2004 until 2008 and served as our Practice Leader and Services Manager from 2001 until 2003. Prior to joining us in 2001, Mr. Heltzel was an implementation consultant for Tivoli Systems from 1998 until 2001 and prior to that held various operations management positions for Target Corporation in Denver, Colorado, Chicago, Illinois, and Fort Wayne, Indiana from 1992 until 1997. Mr. Heltzel has an M.S. in Information and Communication Sciences and a B.S. in History and Criminology from Ball State University.

Pamela J. Hynes has served as our Vice President, Customer Services since January 2010. Previously, Ms. Hynes served as our Vice President, Worldwide Customer Services, which includes Educational Services, Technical Support Services, Professional Services and Communication as a Service, since October 2004. From 2006 to 2008, Ms. Hynes resided in the United Kingdom and worked to grow our services presence internationally. Ms. Hynes served as our Vice President, Customer Loyalty from September 2003 to October 2004 and our Vice President, Client Services, the Americas and Europe, the Middle East and Africa from July 2001 until September 2003. Ms. Hynes served as our Vice President, North American Client Services from September 1999 until July 2001 and prior to that as our Direct or of Client Services since joining us in November 1996. Ms. Hynes was an Account Manager at Software Artistry from July 1996 to October 1996 and the Support Services Manager of Software Artistry from August 1992 to July 1996. Prior to August 1992, she served in a number of technical roles at Software Artistry, including Application Development, Technical Instructor and Field Engineer. Before joining Software Artistry, she served as Technical Support Engineer at American Financial Resources, a software development company. Ms. Hynes holds a B.S. degree in Management Information Systems from New Hampshire College.

Joseph A. Staples has served as our Chief Marketing Officer and Senior Vice President, Marketing since January 2009. Prior to that, Mr. Staples was our Senior Vice President, Worldwide Marketing since joining us in 2005. Prior to joining us, Mr. Staples was the principal of FirstLight Marketing, a marketing services company since 2002. For the six years prior to that, Mr. Staples was Executive Vice President of Corporate Marketing at Captaris, Inc., a provider of business communication solutions. Previously, Mr. Staples was the Vice President of Marketing for Callware Technologies, Inc., a provider of unified messaging software since 1994. He was also employed by Novell, Inc., in management positions over a five year period. Mr. Staples is an alumnus of Brigham You ng University and earned a bachelor’s degree in business administration from the University of Phoenix with an emphasis in Marketing.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As required by Items 403(a) and (b) of Regulation S-K, the following table sets forth, as of March 26, 2010, information about the beneficial ownership of our common stock by 5% or greater beneficial owners and ownership of management, including each of our incumbent directors and director nominees, our named executive officers and all executive officers and directors as a group. Except as otherwise indicated below, the individual or entity owns such common stock directly with sole investment and sole voting power. For each of our named executive officers and directors, the following table also includes options to purchase shares of our common stock that are exercisable on or within 60 days after March 26, 2010.

5% or Greater Beneficial Owners:
Name and Address of Beneficial Owner**	Amount and Nature of Beneficial Ownership			Percent of Class
Bares Capital Management, Inc. 221 W. 6th Street, Suite 1225 Austin, TX 78701		2,485,345	(1)		14.4	% (1)

Officer and Director Stock Ownership:
Name of Beneficial Owner	Shares (2)			Options (3)		Total Beneficial Ownership		Percent of Class
Directors
Richard G. Halperin		1,500			--		1,500		*

Edward L. Hamburg, Ph.D.		--			37,556		37,556		*

Michael C. Heim		--			12,000		12,000		*

Mark E. Hill		70,305			38,114		108,419		*

Richard A. Reck		10,000			34,000		44,000		*

Named Executive Officers
Donald E. Brown, M.D.**		4,188,459			546,950		4,735,409		26.4	%

Stephen R. Head		30,500	(4)		157,411		187,911		1.1	%

Gary R. Blough		59,977			230,655		290,632		1.6	%

Pamela J. Hynes		4,974	(5)		22,000		26,974		*

Joseph A. Staples		1,500			85,000		86,500		*

Directors and Executive Officers as a Group
All Directors and Executive Officers as a Group (12 persons)		4,377,495			1,197,626		5,575,121		30.0	%

_________________________

*	Indicates ownership of less than one percent of the outstanding shares of our common stock.

**	As discussed above, Dr. Brown is our Chairman of the Board, President and Chief Executive Officer and a beneficial owner of more than 5% of our outstanding common stock. Therefore, information pertaining to his beneficial ownership of our common stock is presented once as a named executive officer.

(1)

Information based solely on a Schedule 13G/A filed by such shareholder with the SEC on February 12, 2010, indicating beneficial ownership as of December 31, 2009. The shareholder is an investment adviser and has sole power to vote or direct the vote and dispose or direct the disposition of 55,415 shares, and shares the power to vote or direct the vote and dispose or direct the disposition of 2,429,930 shares.

(2)	Represents the number of shares beneficially owned, excluding shares which may be acquired through the exercise of stock options.

(3)	Represents shares which may be acquired through the exercise of stock options as of March 26, 2010 or within 60 days after that date.

(4)	Includes 550 shares held by his daughter, over which Mr. Head disclaims beneficial ownership.

(5)	Includes 1,900 shares held by her children and 3,074 shares held by her spouse, over which Ms. Hynes disclaims beneficial ownership.

EXECUTIVE COMPENSATION AND RELATED INFORMATION

Compensation Committee Report

We, the Compensation Committee, have reviewed and discussed the following “Compensation Discussion and Analysis” section of this proxy statement with Interactive Intelligence’s management. Based on our review and discussions, we recommended to the Board of Directors that the following “Compensation Discussion and Analysis” section be included in this proxy statement on Schedule 14A and incorporated by reference into Interactive Intelligence’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC.

Submitted by the Compensation Committee

Mark E. Hill, Chairman

Michael C. Heim

Richard A. Reck

Compensation Discussion and Analysis

Overview

This Compensation Discussion and Analysis supplements the more detailed information concerning executive compensation that appears in the tables and the narrative discussion that follows the tables. Our goal is to provide our current and potential shareholders and the investing public with a better understanding of our executive compensation practices and the decisions made concerning the compensation payable to our executive officers, including the persons named in the Summary Compensation Table, who are our named executive officers, which appears on page 27.

The Compensation Committee of our Board of Directors, referred to in this section as the Committee, plays a key role in designing and administering our executive compensation programs. All principal elements of compensation paid to our executive officers are subject to approval by the Committee. The report of the Committee appears above.

Objectives of Our Compensation Programs

We believe we have assembled a strong executive management group comprised of certain individuals that have been with us for many years and all of whom have extensive experience with other companies in the software industry. This combination of different experiences allows us to continue the innovations that have long been our core competence, while at the same time positioning us for future growth.

The purposes of our compensation programs are to attract and then retain our executives by designing compensation programs that are highly competitive with comparable positions within our industry and to align our executive officers’ compensation targets with our overall goals and shareholder interests. We compensate our executive officers using a combination of salary, performance-based cash incentive compensation and stock option awards. We design our compensation programs to align our executives’ contributions to ultimately achieve our goal of maximizing shareholder value.

The Committee determined our 2009 executive compensation with the following objectives in mind:

·	Compensation should be designed to reward employees for their individual performance as well as that of our company. To achieve this objective, executives have compensation aligned with company financial results or the financial results of the departments over which they control.

Compensation should be commensurate with comparable companies in the software industry. We must attract and retain employees who may be recruited by other companies, so our compensation programs should remain competitive. We achieve this objective by comparing our executive officers’ compensation with comparable positions within our peer group.

·	We want to reward short-term accomplishments of our executive officers, while also focusing their efforts on the achievement of our long-term objectives. We achieve this objective by offering performance-based cash incentive compensation as well as stock option awards.

Our compensation programs should align our executive officers’ objectives with those of our shareholders. The Committee believes this is best achieved by rewarding our executive officers’ efforts to attain profitability goals. We set performance criteria and targets for each of our executive officers based on our company-wide non-GAAP operating income margin and/or the dollar amount of our non-GAAP operating income for certain aspects of our business, based on such executive officer’s areas of responsibility. For purposes of our compensation programs, our non-GAAP operating targets and results exclude the impact of stock-based compensation expense.

Role of Management and Our Compensation Consultant in Setting Compensation

Dr. Brown, our Chief Executive Officer, provides the Committee with recommendations on the compensation of our executive officers. These recommendations are presented by Dr. Brown, with the assistance of Mr. Head, our Chief Financial Officer (collectively referred to in this Compensation Discussion and Analysis as “management”), taking into account such factors as compensation history, tenure, responsibilities, leadership qualities, market data for comparable positions at companies within our peer group and/or industry, retention concerns and the need to maintain consistency within the organization. The Committee gives significant consideration to the recommendations of Dr. Brown, but also considers the Committee’s own review of our executive officer compensation programs compared to those for comparable positions at companies in our peer group as described in more detail below. Mr. Head assisted in the determination of the peer group that was used in evaluating the 2009 compensation for our executive officers. The final compensation decisions affecting our executive officers are within the Committee’s discretion. The Committee reviews the performance of Dr. Brown and Mr. Head, without their participation, and determines their compensation.

In the fall of 2009, the Committee engaged a third-party compensation consulting firm, Frederick W. Cook & Co., Inc. (“Cook”), to present trends and developments in executive compensation, including a discussion of pending regulatory requirements related to executive compensation. Cook did not evaluate our 2009 or 2010 executive compensation programs or processes and did not perform any other services for us during 2009.

Review of Compensation Programs

As discussed above, Dr. Brown provided the Committee with his recommendations for the 2009 compensation programs and performance targets for each of our executive officers based on the metrics that he determined would most effectively measure the performance of each executive officer. The Committee reviewed each executive officer’s 2008 compensation plan and Dr. Brown’s recommendations for 2009. The Committee also compared the salary and performance-based cash incentive compensation programs of our executive officers with the most recently reported salary and performance-based cash incentive compensation programs of individuals holding the same or similar positions at companies within the software industry that are comparable in size to us (our “peer group”).

The peer group utilized in 2009 was determined by Mr. Hill, the chairman of the Committee, and Mr. Head, and was comprised of the following companies within the software industry who had total revenues similar to ours as of the most recent date for which compensation information was available:

3D Systems Corporation	Cogent Communications Group, Inc.	SumTotal Systems, Inc.
Actuate Corporation	CommVault Systems, Inc.	Taleo Corporation
Art Technology Group, Inc.	Concur Technologies, Inc.	Telecommunications Systems, Inc.
Bottomline Technologies, Inc.	Netsuite, Inc.	The Ultimate Software Group, Inc.
Chordiant Software, Inc.	Omniture, Inc.	Vignette Corporation
	RightNow Technologies, Inc.

The salary and performance-based cash incentive compensation information for the executive officers at each of the companies in the peer group was provided by Equilar, Inc. (“Equilar”), a provider of data on executive and director compensation. Equilar did not provide any other services to us in 2009.

The Committee set the cash incentive compensation to be paid to a particular executive officer at a level that the Committee deemed to be reasonable and competitive based on the peer group data but did not target our executive compensation to fall within a certain percentile of the peer group compensation data for cash compensation or any element of compensation paid to our executive officers. The Committee did not otherwise benchmark the compensation of our named executive officers utilizing the peer group data, and the amounts to be paid were not based on set formulas or calculations.

The changes and the reasons for the changes in the compensation programs for each of our named executive officers for 2009 are described in more detail below under the sections “Elements of our Compensation Programs—Performance-Based Cash Incentive Compensation” and “—Long-Term Stock-Based Incentive Compensation”.

Elements of our Compensation Programs

Our compensation programs are comprised of three major elements: (i) annual base salary; (ii) performance-based cash incentive compensation; and (iii) long-term stock-based incentive compensation, each of which is described below.

Annual Base Salary

We use base salary to provide an appropriate level of fixed compensation that will promote executive recruitment and retention. The annual base salary for each of our named executive officers is set on the basis of business responsibilities, personal performance during the prior year against established targets and leadership qualities. In setting base salaries for 2009, management and the Committee also reviewed base salaries for comparable positions at other companies in our peer group and took into consideration the operating results that we reported in 2008. Based on the above and the economic conditions and industry uncertainties at that time, which had resulted in a salary freeze for all of our employees, management recommended, and o n February 19, 2009 the Committee approved, that the base salaries for our named executive officers remain the same as in 2008. These base salaries are:

Named Executive Officer	2009 Base Salary
Donald E. Brown, M.D.	$	350,000

Stephen R. Head		235,000

Gary R. Blough		210,000

Pamela J. Hynes		185,000

Joseph A. Staples		220,000

Performance-Based Cash Incentive Compensation

Each year, management recommends the performance targets for our named executive officers, which are presented to the Committee for its review and approval. The 2009 performance targets for our named executive officers were developed based on our 2008 financial performance and the expected growth of our business during 2009 given the general economic conditions during 2008 and the economic predictions for 2009 at the time the compensation decisions for 2009 were being made. Each of our named executive officer’s performance bonuses are paid once the financial statements for the performance period have been approved for issuance by our Audit Committee and it is determined that targets have been met.

The performance-based cash incentive compensation plans for 2009 differed in several significant ways from the plans for 2008. In 2008, each of our named executive officers other than Mr. Blough were eligible to receive a company performance bonus and all of our named executive officers were eligible to receive a superior achievement bonus. Both of these bonuses were based on our annual non-GAAP operating income. Mr. Blough received a commissions-based sales performance bonus in 2008 instead of a company performance bonus. For 2009, the Committee determined that a company performance bonus was still appropriate for Dr. Brown and Mr. Head given their responsibilities as Chief Executive Officer and Chief Financial Officer. For Mr. Staples, Ms. Hynes and Mr. Blough, however, the performance criteria and targets for 2009 were desi gned to place more emphasis on the profitability of each of their respective areas of responsibility rather than, in the case of Mr. Staples and Ms. Hynes, company-wide performance or, in the case of Mr. Blough, strictly sales order generation. The Committee believed that this was a better reflection of individual performance and contributions of these named executive officers and better aligned their objectives with those of our shareholders.

In addition, in 2008, bonuses other than the superior achievement bonus were paid if, and only if, the targets were achieved. Our named executive officers were eligible to receive a percentage of the amount by which our non-GAAP operating income exceeded the target amount under our superior achievement bonus. For 2009, there were no superior achievement bonuses based on company-wide performance. Instead, as described above, the Committee designed each named executive officer’s bonus to focus on such officer’s areas of responsibility. To accomplish this, even though each of the bonuses described below have targeted payout amounts, each named executive officer has the ability to earn at least a portion of his or her bonus even if our actual performance does not reach the targeted level. Similarly, if our actual performance exce eds the targeted level, our named executive officers have the ability to earn more than the targeted payout amounts.

The following performance-based cash incentive compensation bonuses were established for 2009 for our named executive officers:

Company Performance Bonus. Dr. Brown’s and Mr. Head’s 2009 compensation programs included a company performance bonus to be paid based on non-GAAP operating income margin results. The Committee designed this bonus to align these named executive officers’ interests with those of our shareholders by rewarding them for their efforts to attain profitability goals. Because Dr. Brown’s and Mr. Head’s areas of responsibilities include multiple areas within the company, the Committee designed this bonus to focus on the profitability of the company as a whole and not one specific area.

Dr. Brown’s and Mr. Head’s company performance bonuses were earned and paid quarterly based on the percentage of actual non-GAAP year-to-date operating income margin. For the first three quarters of the year, payments were limited to the targeted margin of 5%. Payments for the second, third and fourth quarters were calculated based on amounts earned less payments made in prior quarters. No bonus was to be paid if our non-GAAP operating income for the applicable quarter was less than $250,000 or year-to-date non-GAAP operating income was less than $250,000 multiplied by the number of completed quarters. Dr. Brown and Mr. Head had annual targeted payout amounts of $185,000 and $100,000, respectively, if our 2009 targeted non-GAAP operating income margin of 5% was achieved, with the potential to earn more or less than the targeted amounts depending on actual annual non-GAAP operating income margin. There was no limit on the amount Dr. Brown or Mr. Head could earn. During 2009, Dr. Brown and Mr. Head earned $500,107 and $270,328, respectively, for their company performance bonus.

Operating Profit Bonuses. In 2009, Mr. Blough was eligible for an operating profit bonus, earned and paid quarterly based on achieving year-to-date sales and marketing non-GAAP operating profit. The Committee designed this bonus to encourage focus on overall sales and marketing profitability instead of strictly sales order generation. Approximately one-third of this bonus was based on North American results and approximately two-thirds of this bonus was based on results for the rest of the world. Because we have a vice president of North American sales, Mr. Blough’s bonus was designed to place more emphasis on internat ional sales, which is where management and the Committee wanted him to focus in 2009. Mr. Blough had an annual targeted payout amount of $200,000, with the potential to earn more or less than the targeted amount depending on actual annual sales and marketing non-GAAP operating profit for North America and the rest of the world. For the first three quarters of the year, payments were limited to targeted amounts. For the fourth quarter, there was no limit on the amount that Mr. Blough could earn. Payments for the second, third and fourth quarters were calculated based on amounts earned less payments made in prior quarters. No bonus was to be paid if we did not report non-GAAP operating income for the applicable quarter. Mr. Blough earned an operating profit bonus based on North American results of $80,924 and an operating profit bonus based on results for the rest of the world of $177,328 for a total bonus of $258,252 during 2009.

Mr. Staples was also eligible for an operating profit bonus in 2009, earned and paid quarterly based on achieving year-to-date worldwide sales and marketing non-GAAP operating profit. The Committee designed this bonus to be consistent with Mr. Blough’s operating profit bonus described above, to encourage collaboration between sales and marketing and to increase Mr. Staples’ focus on overall worldwide sales and marketing profitability. Mr. Staples had an annual targeted payout amount of $95,000, with the potential to earn more or less than the targeted amount depending on actual annual non-GAAP operating profit for worldwide sales and marketing. There was no limit on the amount Mr. Staples could earn in any of the quarters. Payments for the second, third and fourth quarters were calculated based on amounts earned less payments made in prior quarters. No bonus was to be paid if we did not report non-GAAP operating income for the applicable quarter. Mr. Staples earned an operating profit bonus of $124,703 during 2009.

Operating Profit and Contract Bonus. In 2009, Ms. Hynes was eligible for an operating profit and Communications as a Service (“CaaS”) contract bonus. The Committee designed this bonus to focus Ms. Hynes’ efforts on maximizing the profitability of our service offerings and to emphasize CaaS. Ms. Hynes was eligible for this bonus, earned and paid quarterly, based on achieving year-to-date non-GAAP operating profit with a portion of this bonus based on each of (i) support and professional services (40%), (ii) education services (15%) and (iii) CaaS operating results (30%). The other portion of this bonus, 15%, was based on the contracted revenue of our CaaS initiative. Ms. Hynes had an an nual targeted payout amount of $72,000, with the potential to earn more or less than the targeted amount depending on actual annual non-GAAP operating profit for these services and CaaS contracted revenue recognized in 2009. For the first three quarters of the year, payments were limited to targeted amounts. For the fourth quarter, there was no limit on the amount that Ms. Hynes could earn. Payments for the second, third and fourth quarters were calculated based on amounts earned less payments made in prior quarters. No bonus was to be paid if we did not report non-GAAP operating income for the applicable quarter. During 2009, Ms. Hynes earned an operating profit bonus based on support and professional services of $61,482, an operating profit bonus based on education services of $8,682, an operating profit bonus based on CaaS operating results of $7,859 and a contract bonus based on contracted CaaS revenue recognized in 2009 of $45,190 for a total bonus of $123,213.

See the Summary Compensation Table beginning on page 27 for further details on the performance-based cash incentive compensation earned by our named executive officers during 2009 under each of these bonuses.

Long-Term Stock-Based Incentive Compensation

In addition to offering performance-based cash incentive compensation, management and the Committee continue to view stock options as a way to motivate our executive officers and retain key employees for the long-term by aligning their goals with those of our shareholders. In 2007 and 2008, the Committee approved grants of

performance-based stock options to our executive officers within the first two months of the fiscal year, subject to cancellation if the specified performance targets for the year were not achieved. In January 2009, the Committee granted non-performance based stock options to our executive officers, rather than the performance-based awards granted in prior years, because the Committee believed non-performance based options would better promote retention of our executive officers.

On January 12, 2009, the Committee, based on the recommendation of management, approved the following option grants to each of our named executive officers:

Named Executive Officer	Number of Shares Underlying Options
Donald E. Brown, M.D.		50,000

Stephen R. Head		30,000

Gary R. Blough		35,000

Pamela J. Hynes		25,000

Joseph A. Staples		25,000

The stock options awarded to each of our named executive officers were granted at an exercise price of $6.66 per share, the closing price of our common stock, as reported by The NASDAQ Global Market, on January 11, 2009, the business day immediately preceding the grant date, in accordance with the provisions of our 2006 Plan. These stock options vest in four equal annual installments beginning on January 12, 2010.

The Committee has the ability to make grants of stock options to other designated key employees to reward them for their contributions on an annual basis. Dr. Brown presented a list of employees that he recommended to receive these options on January 12, 2009 and the Committee approved the grants of these options. In addition, the Committee approves a set number of stock options on a quarterly basis for Dr. Brown to grant at his discretion to employees (with the exception of executives). Typically the options, if granted, are used to compensate new hires or existing employees who have been promoted to key management positions.

Total Direct Compensation

In making executive compensation decisions, the Committee focuses on the “total direct compensation” that an executive officer will receive annually. This consists of salary, performance-based incentive compensation and the value of option awards granted during the given year. The Committee does not have a specific policy for allocating the amount of compensation among the pay elements (short versus long-term or cash versus equity-based compensation), but seeks to target each executive officer's total compensation opportunity to the level the Committee considers market competitive and reflective of individual performance.

Benefits Available to Executive Officers and All Other Employees

Retirement and Health and Welfare Benefits

We have never had a defined benefit pension plan. We maintain a 401(k) Savings Plan (the “401(k) Plan”) to provide retirement benefits for substantially all of our North American employees. Participants in the 401(k) Plan may elect to contribute up to 50% of their pre-tax annual compensation to the 401(k) Plan, subject to applicable Internal Revenue Service (“IRS”) limits and regulations. Participants may also contribute amounts representing qualified rollovers from other qualified benefit plans. At our discretion, we may also make company matching contributions to the 401(k) Plan.

Subject to us achieving specified operating income targets, we make an annual company matching contribution to eligible participants, including our named executive officers. For 2009, if we achieved a specified operating income target, we would make an annual company matching contribution up to 25% of the first 4% of the participants’ pre-tax compensation contributed to the 401(k) Plan. If an additional operating income target

was achieved, we would make an annual matching contribution to eligible participants up to 25% of the first 8% of the participants’ pre-tax compensation contributed to the 401(k) Plan. We met both of the performance targets during 2009, so each eligible participant received a company matching contribution up to 25% of the first 8% of the participant's pre-tax compensation contributed to the 401(k) Plan.

The company matching contribution vests in equal installments over four years based on the initial date of the participant’s employment. For an eligible participant who has worked for us for four or more years at the time of the contribution, the contribution is 100% vested. The company matching contributions we made to the 401(k) Plan accounts of our named executive officers are shown in the “All Other Compensation” column of the Summary Compensation Table on page 27.

Although we have not expressed any intent to terminate the 401(k) Plan, we have the option to do so at any time subject to the provisions of the Employee Retirement Income Security Act of 1974. Upon termination of the 401(k) Plan, either full or partial participants, including our named executive officers, become fully vested in their entire account balances.

All of our executive officers, including our named executive officers, are also eligible to participate in other employee benefit plans that are generally available to all of our employees, including our Employee Stock Purchase Plan and life and health insurance programs. The Committee believes that these additional plans are competitive with benefits offered by the other companies in our peer group.

Perquisites

Certain of our executive officers and employees may be entitled to receive perquisites, as defined in their respective employment agreements. There were no perquisites, individually or in the aggregate, that exceeded $10,000 that were given to any director or executive officer during 2009.

Employment Agreements and Change-of-Control Arrangements

We have employment agreements with Messrs. Head, Blough and Staples and Ms. Hynes. The employment agreements for Messrs. Head and Staples and Ms. Hynes provide for severance payments if they are terminated by us for any reason other than for cause. In addition, we have change-of-control and retention agreements with Messrs. Head, Blough and Staples and Ms. Hynes. These change-of-control agreements are intended to maintain continuity of management, particularly in the context of a transaction in which we undergo a change of control. These agreements are “double triggered”, which means that an executive officer is only entitled to severance payments if (1) we experience a change of control, as defined in the agreement, and (2) the executive officer's employment is terminated other tha n for cause or if the executive officer resigns for good reason within one year of the change of control. For a more detailed description of the material terms of these agreements, see “Employment Agreements and Post-Termination and Change-of-Control Arrangements—Employment Agreements” and“—Change-of-Control and Retention Agreements” beginning on page 35.

Other Benefits and Reimbursements

Our Board of Directors has adopted a travel policy whereby Dr. Brown is permitted to be reimbursed for flying a private aircraft for business travel within certain limitations. Dr. Brown often travels on short notice and to areas that have limited access to direct commercial flights. Dr. Brown is reimbursed for expenses incurred in the operation of his privately owned aircraft when used for company business, at a rate approved by our Audit Committee. Because the reimbursement is for business travel only that is integrally and directly related to the performance of his duties, our reimbursement is not considered a perquisite. For further details, see “Certain Relationships and Related Person Transactions” on page 52.

Tax Deductibility Under Code Section 162(m) and Other Related Issues

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) eliminates, subject to certain exceptions, the deductibility of compensation paid to certain executives to the extent their compensation for any year exceeds $1,000,000. Exceptions to amounts included in executive compensation for purposes of Section 162(m) involve various types of “qualifying performance based” compensation (i.e. compensation paid only if the individual's performance meets pre-established objective goals based on performance criteria approved by the Committee under plans that have been approved by our shareholders). The Committee believes that tax deductibility is an important factor when evaluating executive compensation. In evaluating compensation, the Committee has considered, and will continue to cons ider, the various alternatives to preserving the deductibility of compensation payments to the extent reasonably practicable and consistent with our compensation objectives. However, our Committee may exercise its discretion to provide base salaries or other compensation that may not be fully tax deductible to us.

The Sarbanes-Oxley Act of 2002 subjects our Chief Executive Officer and Chief Financial Officer to forfeiture of incentive compensation and profits from the sale of stock in the event of an accounting restatement associated with non-compliance, as a result of misconduct, with any financial reporting requirement under the securities laws. At this time, the Committee has not adopted any additional forfeiture provisions for incentive compensation.

Compensation Related Risk Assessment

Our Compensation Committee is responsible for overseeing the risks relating to compensation policies and programs company-wide and for our executive officers. In performing its evaluation, the committee discusses with our Chief Executive Officer the design features and characteristics of our compensation policies and programs, the relevant performance measures for our executive officers’ bonus programs and the risks related to such bonuses and the other elements of compensation awarded to our executive officers. The Compensation Committee believes the composition and balance of our compensation policies encourage appropriate risk-taking as follows:

·	Our overall compensation levels are competitive with our peer group.

·	Our compensation mix is designed in part to reward long-term performance and is balanced among (i) fixed components like salary and benefits, (ii) annual bonuses based on certain operational and financial performance measures and (iii) equity-based awards.

·	The oversight provided by our Board and Compensation Committee in budget reviews, senior management compensation programs, equity and bonus awards and integration of the independent Board members into the Compensation and Audit Committees contribute to our control environment.

Our Board regularly interacts with management and is closely involved with our Chief Executive Officer and Chief Financial Officer, helping to ensure the tone at the top is consistent with a strong control environment and that the communication of the control environment and conservative risk approach is effective.

·	We provide our executive officers with a competitive base salary to provide them with a steady income, which allows our executive officers to focus more on our long-term performance than on short-term stock price fluctuations.

We design the bonus programs for our executive officers to ensure our executive officers remain focused on financial performance measures that drive long-term shareholder value, such as non-GAAP operating profit, and continually review the operations managed by each executive officer during regularly scheduled meetings. At the same time, our use of stock option awards balances against short-term decision making.

·	In 2009, we changed the bonus payouts for our executive officers so that such bonuses are no longer “all or nothing” awards. Rather, our bonuses for our executive officers have a progressive payout formula with no “cliffs” between ranges of performance.

·	Our Compensation Committee has discretion to reduce performance-based awards when it determines that such adjustments would be appropriate based on our interests and the interests of our shareholders.

·	Equity grants typically vest over a four-year vesting period to encourage our executive officers to maintain a long-term perspective.

·	We prohibit all hedging transactions involving our stock. As a result, our executive officers cannot insulate themselves from the effects of poor stock price performance.

Some of our non-executive employees are eligible to receive bonuses and, in a limited number of plans, equity awards. With respect to the non-executive employees’ bonuses, the operational and financial measures are reasonable or clearly attainable without excessive risk-taking. The bonuses are payable at different levels depending on results and generally are not “all or nothing” awards. For those non-executive employees who are eligible to receive equity awards, the equity awards vest over four years, which encourages employees to focus on the long-term operational and financial performance of our company.

Based on these factors, the Compensation Committee determined that any risks arising from our compensation policies and programs are not reasonably likely to have a material adverse effect on us.

Executive Compensation Tables and Narratives

The Summary Compensation Table appearing below sets forth information regarding the compensation paid and/or awarded to each of our named executive officers for the years ended December 31, 2009, 2008 and 2007. For a more thorough discussion of our executive compensation practices, refer to our “Compensation Discussion and Analysis” beginning on page 19.

SUMMARY COMPENSATION TABLE

Name and Principal Position	Year	Salary (1)			Option Awards (2)		Non-Equity Incentive Plan Compensation (3)			All Other Compensation (4)		Total
Donald E. Brown, M.D. Chairman, President and Chief Executive Officer	2009	$	350,000		$	177,345	$	500,107		$	4,600	$	1,032,052
	2008		350,000			427,000		--			2,300		779,300
	2007		325,000			969,246		174,486			2,250		1,470,982

Stephen R. Head Chief Financial Officer, Vice President, Finance and Administration, Secretary and Treasurer	2009		235,000			106,407		270,328			4,600		616,335
	2008		235,000			256,200		20,000			2,300		513,500
	2007		215,000			512,139		70,794			2,250		800,183

Gary R. Blough Executive Vice President, Worldwide Sales	2009		210,000			124,142		258,252			4,600		596,994
	2008		210,000			298,900		158,506			2,300		669,706
	2007		200,000	(5)		579,415		207,921	(5)		2,250		989,586

Pamela J. Hynes Vice President, Customer Services	2009		185,000			88,673		123,213			4,125		401,011
	2008		185,000			213,500		--			2,300		400,800
	2007		175,000			362,327		34,346			2,250		573,923

Joseph A. Staples Chief Marketing Officer and Senior Vice President, Marketing	2009		220,000			88,673		124,703			4,125		437,501
	2008		220,000			213,500		10,000			2,300		445,800
	2007		215,000			512,139		65,794			2,250		795,183

_________________________

(1)	Includes the base salary earned by each named executive officer during the respective year.

(2)

The amounts in this column represent the aggregate grant date fair value of options granted to the named executive officer in the year indicated in accordance with FASB ASC 718. For the valuation assumptions used to determine these amounts for 2009, 2008 and 2007, refer to Note 5 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009 and Note 6 of Notes to Consolidated Financial Statements in our Annual Reports on Form 10-K for the years ended December 31, 2008 and 2007. As discussed in “Compensation Discussion and Analysis–Elements of our Compensation Programs–Long-Term Stock-Based Incentive Compensation”, there were no performance-based options granted to our executive officers in 2009. Prior to 2007, perform ance-based options earned were granted in the year subsequent to the related performance year. For 2007 and 2008, options were granted at the beginning of the related performance year and were subject to cancellation if the specified performance targets were not achieved. As a result of this change, the amounts in this column for 2007 include options granted on February 15, 2007 related to 2007 performance as well as options granted on February 9, 2007 related to 2006 performance. The grant date fair value of these performance-based awards was computed based on the target level of performance being achieved, which was the level of performance that was deemed probable on the grant date. The performance targets for 2008 were not met, and the stock options granted in 2008 were cancelled.

(3)

The amounts in this column represent the aggregate dollar value of performance-based cash bonuses earned with respect to performance in the respective year, regardless of when actually paid. Each performance-based cash incentive bonus for 2009 and the difference between the 2009 bonuses and prior year bonuses is described in more detail in “Compensation Discussion and Analysis–Elements of our Compensation Programs–Performance-Based Cash Incentive Compensation”. The amounts awarded to each named executive officer under his or her 2009, 2008 and 2007 compensation programs include:

Named Executive Officer	Company Performance Bonus (a)		Superior Achievement Bonus (a)		Individual Performance Bonuses (b)			Total Non- Equity Incentive Plan Compensation
Donald E. Brown, M.D.
2009	$	500,107	$	--	$	--		$	500,107
2008		--		--		--			--
2007		160,000		14,486		--			174,486

Stephen R. Head
2009		270,328		--		--			270,328
2008		10,000		--		10,000			20,000
2007		30,000		5,794		35,000			70,794

Gary R. Blough
2009		--		--		258,252			258,252
2008		--		--		158,506			158,506
2007		--		5,794		202,127	(5)		207,921	(5)

Pamela J. Hynes
2009		--		--		123,213			123,213
2008		--		--		--			--
2007		18,000		4,346		12,000			34,346

Joseph A. Staples
2009		--		--		124,703			124,703
2008		10,000		--		--			10,000
2007		30,000		5,794		30,000			65,794

_________________________

(a) During 2009, Dr. Brown and Mr. Head were the only named executive officers eligible to earn a company performance bonus as Messrs. Blough and Staples

and Ms. Hynes were instead eligible for a performance bonus designed to place more emphasis on the profitability of each of their respective areas of

responsibility. For 2009, there were no superior achievement bonuses based on company-wide performance. Instead, as described above in the

Compensation Discussion and Analysis beginning on page 19, each named executive officer had the ability to earn more than the targeted payout amounts

under his or her respective bonus.

(b) Individual performance bonuses include the following:

·	Mr. Head received an operating margin performance bonus in 2008 and an expense control performance bonus in 2007.

·	Mr. Blough received a sales and marketing operating profit bonus in 2009 and a sales performance bonus in 2008 and 2007.

·	Ms. Hynes received a services related operating profit and CaaS contract bonus in 2009 and a services revenue bonus in 2007. She did not earn an individual performance bonus in 2008.

·	Mr. Staples received a worldwide sales and marketing operating profit bonus in 2009 and a new orders gross profit quota achievement bonus in 2007. He did not earn an individual performance bonus in 2008.

(4)	The amounts in this column represent the company matching contribution made to each named executive officer’s account under our 401(k) Plan in the year indicated.

(5)

For 2008, the Compensation Committee determined that the sales performance bonus Mr. Blough received was non-equity incentive plan compensation rather than commissions. As a result, $202,127 in 2007 was reclassified and was included in the “Non-Equity Incentive Plan Compensation” column rather than the “Salary” column for the respective year. This did not affect Mr. Blough’s total compensation for any year.

GRANTS OF PLAN-BASED AWARDS

Named Executive Officer	Grant Date (1)		Estimated Possible Payouts Under Non-Equity Incentive Plan Awards Target ($)				All Other Option Awards: Number of Securities Underlying Options (#)				Exercise Price of Option Awards (2) ($/Sh)		Grant Date Fair Value of Option Awards (3) ($)
Donald E. Brown, M.D.	1/12/2009		$	--				50,000	(4	)	$	6.66	$	177,345
		--		185,000	(5	)		--				--		--

Stephen R. Head	1/12/2009			--				30,000	(4	)		6.66		106,407
		--		100,000	(5	)		--				--		--

Gary R. Blough	1/12/2009			--				35,000	(4	)		6.66		124,142
		--		62,000	(6	)		--				--		--
		--		138,000	(7	)		--				--		--

Pamela J. Hynes	1/12/2009			--				25,000	(4	)		6.66		88,673
		--		28,800	(8	)		--				--		--
		--		10,800	(9	)		--				--		--
		--		21,600	(10	)		--				--		--
		--		10,800	(11	)		--				--		--

Joseph A. Staples	1/12/2009			--				25,000	(4	)		6.66		88,673
		--		95,000	(12	)		--				--		--

______________________

(1)	For 2009, our Compensation Committee granted stock options to our named executive officers on January 12, 2009. The approval date and the grant date for the 2009 option grants were the same.

(2)

The exercise price of our stock option awards is the closing price of our common stock as reported on The NASDAQ Global Market on the business day immediately preceding the date of grant, in accordance with the provisions of our 2006 Plan. Due to the terms of our 2006 Plan, it is possible that the exercise price could be less than the closing price of our common stock on the date of grant. This was not the case in 2009.

(3)

Amounts in this column represent the aggregate grant date fair value of each option award in accordance with FASB ASC 718. For valuation assumptions used to determine the amounts, refer to Note 5 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009.

(4)	Amounts represent the number of shares underlying stock options granted to our named executive officers on January 12, 2009.

(5)

Amounts represent the company performance bonus targeted payout amounts for Dr. Brown and Mr. Head, although they had the potential to earn more or less than their targeted amounts depending on actual performance. During 2009, Dr. Brown and Mr. Head earned $500,107 and $270,328, respectively, for their company performance bonus as our actual annual non-GAAP operating income margin exceeded the 5% target.

(6)

Amount represents Mr. Blough’s North America operating profit bonus targeted payout amount, although he had the potential to earn more or less than the targeted amount depending on actual performance. Mr. Blough earned an operating profit bonus based on North American results of $80,924 during 2009 as the actual annual North America non-GAAP operating profit was greater than the targeted amount.

(7)

Amount represents Mr. Blough’s rest of the world operating profit bonus targeted payout amount, although he had the potential to earn more or less than the targeted amount depending on actual performance. Mr. Blough earned an operating profit bonus based on results for the rest of the world of $177,328 during 2009 as the actual annual non-GAAP operating profit for the rest of the world was greater than the targeted amount.

(8)

Amount represents Ms. Hynes’ support and professional services operating profit bonus targeted payout amount, although she had the potential to earn more or less than the targeted amount depending on actual performance. Ms. Hynes earned an operating profit bonus based on support and professional services of $61,482 during 2009 as the actual annual non-GAAP operating profit for support and professional services was greater than the targeted amount.

(9)

Amount represents Ms. Hynes’ educational services operating profit bonus targeted payout amount, although she had the potential to earn more or less than the targeted amount depending on actual performance. Ms. Hynes earned an operating profit bonus based on educational services of $8,682 during 2009 as the actual annual non-GAAP operating profit for educational services was less than the targeted amount.

(10)

Amount represents Ms. Hynes’ CaaS operating profit bonus targeted payout amount, although she had the potential to earn more or less than the targeted amount depending on actual performance. Ms. Hynes earned a bonus based on CaaS operating profit of $7,859 during 2009 as the actual CaaS operating profit was less than the targeted amount.

(11)

Amount represents Ms. Hynes’ contracted CaaS revenue recognized bonus targeted payout amount, although she had the potential to earn more or less than the targeted amount depending on actual performance. Ms. Hynes earned a bonus based on the amount of contracted CaaS revenue recognized in 2009 of $45,190 as the actual amount of contracted CaaS revenue recognized was greater than the targeted amount.

(12)

Amount represents Mr. Staples’ operating profit bonus targeted payout amount, although he had the potential to earn more or less than the targeted amount depending on actual performance. Mr. Staples earned an operating profit bonus of $124,703 during 2009 as the actual annual worldwide sales and marketing non-GAAP operating profit was greater than the targeted amount.

Narrative Discussion

Our Stock Option Plans

1999 and 2006 Plans

Our stock option plans, adopted in 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 Plan, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock-based awards. After adoption of the 2006 Plan by our shareholders in May 2006, we may no longer make any grants under previous plans, but any shares subject to awards under the 1999 Stock Option and Incentive Plan (the "1999 Option Plan") and the Directors Plan (collectively, the “1999 Plans”) that are cancelled are added to shares available under the 2006 Plan. A maximum of 5,850,933 shares are available for delivery under the 2006 Plan, which consists of (i) 2,150,000 shares, plus (ii ) 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 number of shares available under the 2006 Plan is subject to adjustment for certain changes in our capital structure. The exercise price of options granted under the 2006 Plan is equal to the closing price of our common stock, as reported by The NASDAQ Global Market, on the business day immediately preceding the date of grant. During the first quarter of 2010, our Board of Directors approved an increase of 1,200,000 shares available for grant under the 2006 Plan, which is subject to shareholder approval at the annual meeting. See “Approval of the Amendment to the Interactive Intelligence, Inc. 2006 Equity Incen tive Plan (Item 2 on Proxy Card).”

Stock options granted by us are categorized into three types. The first type of stock options granted by us to employees and newly-elected non-employee directors is non-performance-based stock options that are subject only to time-based vesting. These stock options vest in four equal annual installments beginning one year after the grant date. The fair value of these option grants is determined on the date of grant.

The second type is performance-based stock options that are subject to cancellation if the specified performance targets are not met. If the applicable performance targets have been achieved, the options will vest in four equal annual installments beginning one year after the performance-related period has ended. The fair value of these stock option grants is determined on the date of grant.

Commencing in May 2009, we began granting our non-employee directors options annually that are similar to the non-performance-based options described above except the director options vest one year after the grant date. The fair value of these option grants is determined on the date of the grant. Prior to May 2009, non-employee directors received non-performance-based stock options that vested over four years.

For most options granted prior to 2005, the term of each option was ten years from the date of grant. In 2005, we 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 our stock, 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 our Board at any time.

2000 Employee Stock Purchase Plan

At our 2000 Annual Meeting of Shareholders, our shareholders approved our 2000 Employee Stock Purchase Plan (our “2000 Purchase Plan”). A total of 500,000 shares of common stock were reserved for issuance under our 2000 Purchase Plan. At our 2005 Annual Meeting of Shareholders, our shareholders approved

an amendment to our 2000 Purchase Plan, which increased the number of shares of our common stock available for issuance and purchase from 500,000 to 750,000. Our 2000 Purchase Plan permits eligible employees to acquire shares of our common stock through periodic payroll deductions of up to 20% of their total compensation up to a maximum of $1,000 per pay period. Currently, the price at which our common stock may be issued and purchased is 95% of the fair market value of our common stock on the purchase date of the stock, which is generally the first business day of the next calendar quarter. An eligible participant may set aside no more than $25,000 to purchase shares annually. In addition, participants who are executive officers may not purchase, in the aggregate, more than 50% of our common stock purchased under our 2000 Purchase Plan during a calendar year. The initial offering period commenced on April 1, 2000. A total of 2 7,261 shares were purchased and issued during 2009 under the 2000 Purchase Plan at an average price per share of $11.13. As of December 31, 2009, there were 170,416 shares available for purchase and issuance under the 2000 Purchase Plan.

Our 2000 Purchase Plan was modified as of January 1, 2006 to ensure that it is considered non-compensatory under FASB ASC 718. We have not recognized any stock-based compensation expense related to this plan.

Other

For additional information regarding the cash and equity incentive awards reflected in the Grants of Plan-Based Awards table, see “Compensation Discussion and Analysis – Elements of our Compensation Programs–Performance-Based Cash Incentive Compensation” and “– Long-Term Stock-Based Incentive Compensation”.

For additional information regarding our employment agreements and our retention agreements with our named executive officers, see “Employment Agreements and Post-Termination and Change-of-Control Arrangements” beginning on page 35.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

	Option Awards (1)
Named Executive Officer	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable			Option Grant Date	Option Exercise Price ($)	Option Expiration Date
Donald E. Brown, M.D.	5,000	--			--	14.38	4/2/2011
	5,000	--			--	8.70	7/26/2011
	90,000	--			--	5.99	12/26/2011
	12,500	--			--	3.09	6/10/2012
	21,250	--			--	2.51	7/1/2012
	21,250	--			--	3.17	11/12/2012
	21,250	--			--	3.00	2/20/2013
	15,000	--			--	3.35	4/23/2013
	22,420	--			--	2.90	8/13/2013
	26,977	--			--	4.24	11/19/2013
	27,053	--			--	5.80	2/11/2014
	100,000	--			--	5.61	2/13/2014
	15,000	--			--	5.72	5/19/2014
	15,000	--			--	3.56	8/18/2014
	15,000	--			--	4.31	12/14/2014
	15,000	--			--	4.20	2/17/2011
	36,000	12,000	(2	)	1/27/2006	5.17	1/27/2012
	22,500	22,500	(2	)	2/9/2007	20.50	2/9/2013
	12,500	37,500	(3	)	2/15/2007	17.28	1/1/2014
	--	50,000	(2	)	1/12/2009	6.66	1/12/2015

Stephen R. Head	50,000	--			--	3.30	11/3/2013
	2,411	--			--	5.80	2/11/2014
	25,000	--			--	5.61	2/13/2014
	6,250	--			--	5.72	5/19/2014
	5,000	--			--	3.56	8/18/2014
	6,250	--			--	4.61	11/16/2014
	6,250	--			--	4.20	2/17/2011
	15,000	5,000	(2	)	1/27/2006	5.17	1/27/2012
	12,500	12,500	(2	)	2/9/2007	20.50	2/9/2013
	6,250	18,750	(3	)	2/15/2007	17.28	1/1/2014
	--	30,000	(2	)	1/12/2009	6.66	1/12/2015

Gary R. Blough	25,000	--			--	5.99	12/26/2011
	4,000	--			--	3.09	6/10/2012
	5,000	--			--	3.15	4/3/2013
	108,080	--			--	5.84	7/2/2014
	12,700	--			--	4.20	2/17/2011
	2,500	--			--	4.84	5/19/2011
	2,500	--			--	5.48	8/17/2011
	2,500	--			--	5.19	11/15/2011
	20,625	6,875	(2	)	1/27/2006	5.17	1/27/2012
	1,875	625	(2	)	4/21/2006	9.52	4/21/2012
	1,875	625	(2	)	7/21/2006	12.77	7/21/2012
	1,875	625	(2	)	10/20/2006	17.21	10/20/2012
	11,250	11,250	(2	)	2/9/2007	20.50	2/9/2013
	4,500	13,500	(3	)	2/15/2007	17.28	1/1/2014
	--	35,000	(2	)	1/12/2009	6.66	1/12/1015

Pamela J. Hynes	2,000	--			--	22.25	1/2/2011
	7,000	--			--	5.99	12/26/2011
	8,568	--			--	5.20	1/2/2014
	5,000	--			--	4.20	2/17/2011
	11,250	3,750	(2	)	1/27/2006	5.17	1/27/2012
	7,500	7,500	(2	)	2/9/2007	20.50	2/9/2013
	4,375	13,125	(3	)	2/15/2007	17.28	1/1/2014
	--	25,000	(2	)	1/12/2009	6.66	1/12/2015

Joseph A. Staples	22,550	--			--	4.36	1/3/2011
	18,750	6,250	(2	)	1/27/2006	5.17	1/27/2012
	12,500	12,500	(2	)	2/9/2007	20.50	2/9/2013
	6,250	18,750	(3	)	2/15/2007	17.28	1/1/2014
	--	25,000	(2	)	1/12/2009	6.66	1/12/2015

_____________________

(1)

Includes stock options to purchase shares of our common stock, granted at the closing price of our common stock, as reported on The NASDAQ Global Market, on (a) the date of grant for stock options granted prior to the adoption and approval of our 2006 Plan on May 18, 2006 or (b) the business day immediately preceding the date of grant for stock options granted under our 2006 Plan.

(2)	Options become exercisable in four equal annual installments each year beginning on the first anniversary of the grant date.

(3)	Options become exercisable in four equal annual installments each year beginning on January 1, 2009.

The following table sets forth information regarding exercises of stock options to purchase our common stock by each named executive officer during 2009. No stock awards vested in 2009.

OPTION EXERCISES

	Option Awards
Named Executive Officer	Number of Shares Acquired on Exercise (#)		Value Realized on Exercise (1)
Donald E. Brown, M.D.		--	$	--

Stephen R. Head		10,000		125,205

Gary R. Blough		--		--

Pamela J. Hynes		--		--

Joseph A. Staples		22,500		247,083

_________________________

(1) The amounts in this column represent the pre-tax dollar value realized on exercise, calculated on the basis of the difference between the option exercise price and

the market price of our common stock, as reported on The NASDAQ Global Market on the date of exercise, multiplied by the number of shares of our common

stock underlying the stock option.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Securities authorized for issuance under our equity compensation plans as of December 31, 2009 are as follows:

Plan Category		A Number of securities to be issued upon exercise of Outstanding options, warrants and rights				B Weighted average exercise price of outstanding options, warrants and rights				C Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column A)
Equity compensation plans approved by security holders (1)			3,425,743	(2)		$	9.36				1,086,210	(3)

____________________

(1)	Amount includes our 1999 Plans, 2000 Purchase Plan and 2006 Plan.

(2)	The weighted average remaining life of these options was 3.4 years.

(3)	Amount consists of 915,794 shares available for issuance under our 2006 Plan and 170,416 shares available for issuance and purchase under our 2000 Purchase Plan.

EMPLOYMENT AGREEMENTS AND POST-TERMINATION AND CHANGE-OF-CONTROL ARRANGEMENTS

Employment Agreements

On November 4, 1996, November 3, 2003, January 3, 2005 and May 26, 2006, we entered into Employment Agreements with Ms. Hynes and Messrs. Head, Staples and Blough, respectively. Ms. Hynes’ Employment Agreement was amended on February 23, 2000.

Each Employment Agreement contains non-competition, non-solicitation and non-disclosure provisions, which are in effect during the term of the agreement and for a defined period after the agreement is terminated. The non-disclosure provisions continue indefinitely after termination of employment. The non-competition and non-solicitation provisions continue for a period of 12 months after termination in the case of Mr. Staples, 18 months in the case of Mr. Head and Ms. Hynes and either 12 or 18 months in the case of Mr. Blough. If any of the aforementioned executives are terminated for cause or in the event they resign, they will receive their respective base salary and any other benefits which have been accrued and to which the executive is entitled, but will not receive any severance compensation. If any of the aforementioned execu tives, other than Mr. Blough, are terminated by us for any reason other than for cause, in addition to receiving all accrued salary and benefits to which the executives are entitled, they will also receive the following severance payments: one month of base salary in the case of Mr. Head and Ms. Hynes; and three months of base salary in the case of Mr. Staples. If Messrs. Head and Staples and Ms. Hynes were terminated for any reason other than for cause as of December 31, 2009 (assuming no Change-of-Control under the Retention Agreements as discussed below), they would have been entitled to severance payments as follows: Mr. Head: $19,583; Mr. Staples: $55,000 and Ms. Hynes: $15,417. Mr. Blough’s Employment Agreement does not provide for any severance payments.

Change-of-Control and Retention Agreements

We entered into Change-of-Control and Retention Agreements (each, a “Retention Agreement”) on March 13, 2006 with Messrs. Head and Staples and Ms. Hynes and on May 26, 2006 with Mr. Blough. Under the terms of each Retention Agreement, in the event of a “Change-of-Control” (as defined below), if employment is terminated by us for any reason other than for “Cause” (as defined below) or as a result of the executive officer’s disability or the executive officer resigns for “Good Reason” (as defined below), in each case during the period commencing on the date we publicly announce a definitive agreement that results in a Change-of-Control and ending on the date which is 18 months after the Change-of-Control, each of Messrs. Head, Staples and Blough and Ms. Hynes will be entitled (a) to rec eive a lump sum payment of all salary and accrued vacation earned through the date of termination, (b) to receive a lump sum payment for any cash incentive amounts attributable to any completed period for which a cash incentive was earned but unpaid on the date of termination and attributable to any uncompleted period for which a potential cash incentive award exists and was earned based on the level of performance achieved as of the date of termination, (c) to receive a lump sum cash severance payment equal to the lesser of his/her annual base salary or the prorated amount of salary he/she would have received had he/she remained an employee through the first anniversary date of the Change-of-Control, (d) to have accelerated the vesting of his/her unvested options to purchase our common stock and any other then unvested or restricted equity grants, in each case that would have become vested based solely on the passage of time (which excludes grants, the vesting of which is contingent upon specified perf ormance criteria having been met) during the two year period following the date of termination of employment, (e) to receive a lump sum cash stipend equal to 12 times the monthly premiums pursuant to the continuation coverage requirements of the Consolidated Budget Reconciliation Act of 1985, as amended (“COBRA”) (whether or not he/she actually elects COBRA continuation coverage), and (f) to receive coverage under our directors’ and officers’ insurance policy for 24 months following the termination of employment. The Retention

Agreements also provide that if any amounts payable to Messrs. Head, Staples or Blough or Ms. Hynes under the Retention Agreement or otherwise would be subject to the excise tax or denial of deduction imposed by Sections 280G and 4999 of the Code, then the amounts payable will be reduced in order to avoid any such excess parachute payment. The Retention Agreement provides that in the event the executive receives payments thereunder, he/she shall not be entitled to any other severance, benefits or other payments from us, including under his/her Employment Agreement or under our stock option plans.

The Retention Agreements provide for a 12-month non-solicitation period following the executive's termination upon a Change-of-Control. In addition, in order to receive the severance benefits provided for by the Retention Agreements, the executive must provide us with a general release of any claims he/she may have against us, except with respect to any claims the executive may have to be indemnified by us.

“Change-of-Control” is generally defined in the Retention Agreements as follows: (a) the acquisition by any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) of the “beneficial ownership” (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of our securities representing fifty (50%) percent or more of (i) the then outstanding shares of our common stock, or (ii) the combined voting power of our then outstanding voting securities; provided, however, that acquisitions from or by us or one of our employee benefit plans, and acquisitions by Dr. Brown or a person controlled by him or upon his death, shall not constitute a Change-of-Control; (b) we are a party to a merger or consolidation which results in our voting securities outstanding i mmediately prior thereto failing to continue to represent at least fifty (50%) percent of the combined voting power of our voting securities or the surviving entity outstanding immediately after such merger or consolidation; (c) the sale or disposition of all or substantially all of our assets; (d) a change in the composition of our Board within any consecutive two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors (meaning directors who either (i) were our directors as of the effective date of the Retention Agreement, or (ii) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors whose election or nomination was not in connection with an actual or threatened proxy contest related to the election of our directors); or (e) our dissolution or liquidation.

“Cause” means a good faith determination, on a reasonable basis, by not less than two thirds of the members of the Board that the executive:

willfully failed to follow the lawful written directions of the Board provided to the executive prior to such failure; provided that no termination for such Cause shall occur unless the executive: (i) has been provided with notice, specifying such willful failure in reasonable detail, of our intention to terminate the executive for Cause; and (ii) has failed to cure or correct such willful failure within thirty (30) days of receiving such notice;

engaged in gross misconduct which is materially detrimental to us; provided that no termination for such Cause shall occur unless the executive: (i) has been provided with notice, specifying such gross misconduct in reasonable detail, of our intention to terminate the executive for Cause; and (ii) has failed to cure or correct such gross misconduct within thirty (30) days of receiving such notice;

willfully failed to comply in any material respect with our Confidentiality and/or Proprietary Rights Agreement, insider trading policy, or any of our other reasonable policies, in each case provided, or reasonably made available, to the executive prior to such failure, where non-compliance would be materially detrimental to us; provided that no termination for such Cause shall occur unless the executive: (i) has been provided with notice, specifying such willful failure in reasonable detail, of our intention to terminate the executive for such Cause; and (ii) has failed to cure or correct such willful failure within thirty (30) days of receiving such notice; or

has been convicted of a felony (other than a felony arising from a violation of a motor vehicle law) or a crime involving moral turpitude, or it has been determined by a court that he or she committed a fraud, against us or a fraud against any other person or entity that is materially detrimental to us.

“Good Reason” generally means the occurrence of any of the following conditions, without the executive officer’s written consent:

·	assignment to the executive officer of a title, position, responsibilities or duties that is not a substantive functional equivalent to the title, position, responsibilities or duties which the executive officer had immediately prior to the Change-of-Control;

a reduction in the executive officer’s base salary or target cash incentive opportunity in effect immediately prior to the Change-of-Control (subject to applicable performance requirements with respect to the actual amount of cash incentive compensation earned that are similar to the applicable performance requirements in effect immediately prior to the Change-of-Control);

our failure (i) to continue to provide the executive officer an opportunity to participate in any benefit or compensation plans provided to employees who held positions with us or our successor comparable to the executive officer’s position immediately prior to the Change-of-Control, or (ii) to provide the executive officer all other fringe benefits (or the equivalent) in effect for the benefit of any employee group which includes any employee who held a position with us or our successor comparable to the executive officer’s position immediately prior to the Change-of-Control;

requirements by us of the executive officer to (i) relocate to any office or location more than 50 miles (one-way) from our office where the executive officer was based immediately prior to the Change-of-Control, or (ii) to engage in travel in the performance of services on our behalf at a frequency or for a duration substantially in excess of such travel required by us prior to the Change-of-Control;

·	a material breach of the Retention Agreement by us, including our failure to obtain the agreement of a successor to perform all of our obligations under the Retention Agreement; or

·	any act, set of facts or omissions with respect to the executive officer that would, under applicable law, constitute a constructive termination of the executive officer.

Notwithstanding the foregoing, nothing described in any of previous items shall constitute Good Reason unless the executive officer provides us written notice, in reasonable detail, of his/her belief that an action or inaction constituting such Good Reason has occurred and we fail to cure or correct such action or inaction, within thirty (30) days of our receipt of such written notice, such that the asserted Good Reason no longer exists.

Should Messrs. Head, Blough and Staples and Ms. Hynes have been terminated upon a Change-of-Control under the Retention Agreement as of December 31, 2009, in addition to accrued vacation, each would be entitled to severance payments indicated in the following table:

TERMINATION UPON CHANGE-OF-CONTROL UNDER THE RETENTION AGREEMENT

Name	Salary		Non-Equity Incentive Plan Compensation (1)		Health Benefits Coverage (COBRA)		Value Realized on Stock Options (2)		Total Severance Upon Change-of-Control
Stephen R. Head	$	235,000	$	195,328	$	11,925	$	257,875	$	700,128

Gary R. Blough		210,000		69,829		9,927		318,060		607,816

Pamela J. Hynes		185,000		11,202		11,925		207,413		415,540

Joseph A. Staples		220,000		40,690		14,159		245,000		519,849

____________________

(1)	Represents the aggregate dollar value of performance-based cash bonuses that were earned but unpaid as of December 31, 2009.

(2)	Represents the intrinsic value as of December 31, 2009 of the executive’s “in-the-money” unvested stock options that would vest during the two years after December 31, 2009, the vesting of which would accelerate as a result of the executive’s termination of employment on December 31, 2009 due to a

Change-of-Control (as defined in the Retention Agreement). The value is calculated on the basis of the difference between the exercise price and $18.45, the

closing price of our common stock as reported on The NASDAQ Global Market on December 31, 2009, multiplied by the number of shares of common stock .

underlying such options.

Stock Option Plans

Unless otherwise specifically provided by our Compensation Committee, the 1999 Option Plan and the 2006 Plan provide for the following treatment of outstanding options in the event of a termination of employment:

1999 Option Plan

Termination for Cause. Upon the executive’s termination of employment or service for cause (as defined in the plan), all rights under any options granted to the executive will terminate immediately, and the executive will, if the Compensation Committee, in its sole discretion determines, be obligated to repay to the company within ten (10) days of the Compensation Committee’s demand the amount of any gain realized by the executive upon any exercise within the 90-day period prior to the termination of employment of any options granted to such executive under the plan.

Termination Due to Retirement or Without Cause or Voluntary Termination. If the executive is terminated by reason of retirement, terminated by the company without cause, or by voluntary termination, the executive may exercise outstanding options, under the plan, to the extent that the executive was entitled to exercise the options at the date of termination, but only within the period of one (1) month immediately succeeding the executive’s termination, and in no event after the applicable expiration dates of the options. Any option that is not exercisable on the date of termination shall terminate and be forfeited effective on such date.

Termination Due to Death or Disability. In the event of the executive’s death or disability, the executive or the executive’s beneficiary, as the case may be, may exercise outstanding options to the extent that the executive was entitled to exercise the options at the date of termination, but only within the one (1)-year period immediately succeeding the executive’s termination of continuous service in the case of disability, and in no event after the applicable expiration date of the options. Any option that is not exercisable on the date of termination shall terminate and be forfeited effective on such date.

Termination Upon Change-of-Control. Upon a change-of-control (defined in the plan as (i) any third person becoming the beneficial owner of shares of our common stock with respect to which 25% or more of the total number of votes for the election of our Board may be cast; (ii) the persons who were our directors ceasing to constitute a majority of our Board as a result of any cash tender offer, exchange offer, merger or other business combination, sale of assets or contested election, or combination of the foregoing; or (iii) our shareholders approving an agreement providing for a transaction in which we will cease to be an independent publicly owned entity or for a sale or other disposition of all or subs tantially all of our assets), unless the Compensation Committee shall have otherwise provided in the option agreement, all outstanding options not fully exercisable shall become exercisable in full and shall remain so exercisable in accordance with their terms; provided, however, that no option which has previously been exercised or otherwise terminated shall become exercisable.

2006 Plan

Termination Due to Death or Disability. In the event of the executive’s death or disability, the executive or the executive’s beneficiary, as the case may be, may exercise outstanding options to the extent that the executive was entitled to exercise the options at the date of termination, but only within the one (1)-year period immediately succeeding the executive’s death or disability, and in no event after the applicable expiration date of the options.

Termination Upon Change-of-Control. Except as otherwise provided in an executive’s award agreement, if an executive’s employment or service is involuntarily terminated, for any reason, at any time within 12 months after a change-of-control (which is defined substantially similar to the definition of Change-of-Control under the Retention Agreements but does not include a carve out for acquisitions by Dr. Brown, a person under his control or upon his death), unless otherwise specifically prohibited by law:

§	any and all outstanding options with time-based vesting provisions will vest on a pro rata monthly basis, including full credit for partial months elapsed; and

any and all outstanding options with performance-based vesting provisions will vest on a pro rata monthly basis, including full credit for partial months elapsed, and will be paid (A) based on the level of performance achieved as of the date of the termination, if determinable, or (B) at the target level, if not determinable. The amount of the vested award may be computed under the following formula: total award number of shares times (number of full months elapsed in shortest possible vesting period divided by number of full months in shortest possible vesting period) times percent performance level achieved immediately prior to the effective date of the termination.

As stated above, there may be circumstances that constitute a “change-of-control” under the 1999 Option Plan and the 2006 Plan, but not under the Retention Agreements. If any of our named executive officers had been terminated upon a change-of-control that does not constitute a Change-of-Control under the Retention Agreements on December 31, 2009, the value realized with respect to the options granted under the plans would be as follows:

TERMINATION UPON CHANGE-OF-CONTROL

Name	Value Realized on Options Under the 1999 Option Plan (1)		Value Realized on Options Under the 2006 Plan (1)		Total Value Realized
Donald E. Brown, M.D.	$	159,360	$	333,844	$	493,204

Stephen R. Head		66,400		197,625		264,025

Gary R. Blough		96,881		225,377		322,258

Pamela J. Hynes		49,800		162,900		212,700

Joseph A. Staples		83,000		166,922		249,922

___________________

(1)

Amounts represent the intrinsic value as of December 31, 2009 of the executive’s “in the money” unvested stock options, the vesting of which would accelerate as a result of the executive’s termination of employment on December 31, 2009 due to a change-of-control (as defined in the applicable stock option plan). The value is calculated on the basis of the difference between the exercise price and $18.45, the closing price of our common stock as reported on The NASDAQ Global Market on December 31, 2009, multiplied by the number of shares of common stock underlying such options.

APPROVAL OF THE AMENDMENT TO THE

INTERACTIVE INTELLIGENCE, INC. 2006 EQUITY INCENTIVE PLAN

(ITEM 2 ON PROXY CARD)

On April 7, 2006, based on the recommendation of our Compensation Committee, the Board of Directors adopted, and on May 18, 2006 our shareholders approved, the Interactive Intelligence, Inc. 2006 Equity Incentive Plan (the “2006 Plan”). On February 22, 2008 and March 4, 2008, the Board of Directors adopted, and on May 30, 2008 our shareholders approved, amendments to the 2006 Plan to increase the total number of shares of our common stock available for issuance under the 2006 Plan from 1,250,000 to 2,150,000 shares. The amendments also revised certain definitions and payment provisions to comply with the final IRS regulations under Section 409A of the Code. On February 12, 2010, the Board of Directors adopted an amendment (the “Amendment”) to the 2006 Plan and directed that the Amendment be submitted to our shareh olders for consideration at the annual meeting. The Amendment would increase from 2,150,000 to 3,350,000 the total number of shares of our common stock available for issuance under the 2006 Plan.

The following is a summary of the principal features of the 2006 Plan and is qualified in its entirety by reference to the complete text of the 2006 Plan, as proposed to be amended, as set forth as Appendix A to this proxy statement. Shareholders are urged to read the actual text of the 2006 Plan, as proposed to be amended, as set forth in Appendix A. Capitalized terms used but not defined herein have the meanings assigned to them in the 2006 Plan.

Objectives

The objectives of the 2006 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to participants, and to optimize our profitability and growth through incentives that are consistent with our goals and that link the participants' personal interests to those of our shareholders.

Eligibility to Receive Awards

The 2006 Plan provides that awards may be granted to our employees and directors and those of our subsidiaries, as well as our consultants and other individuals as determined by the Committee (as defined below). The approximate number of persons currently eligible to participate in the 2006 Plan is 656, including all of our directors and executive officers. As of March 31, 2010, our executive officers held options to purchase 342,690 shares of our common stock that have been granted under the 2006 Plan at a weighted-average exercise price of $15.22 per share. As of March 31, 2010, our non-employee directors held options to purchase 149,956 shares of our common stock that have been granted under the 2006 Plan at a weighted-average exercise price of $14.91 per share. As of March 31, 2010, our employees as a group (not including our executive officers) held options to purchase 1,612,539 shares of our common stock that have been granted under the 2006 Plan at a weighted-average exercise price of $14.47 per share.

Types of Awards

The 2006 Plan permits the grant of the following types of awards:

·	stock options (incentive and nonqualified);

·	stock appreciation rights (“SARs”);

·	restricted stock;

·	restricted stock units (“RSUs”);

·	performance shares;

·	performance units; and

·	other stock-based awards.

Duration of the Plan

No award may be granted under the 2006 Plan after May 17, 2016.

Administration

The 2006 Plan will be administered by a committee consisting of two or more members of our Board of Directors (the “Committee”). It is intended that each member of the Committee will be a “non-employee director” within the meaning of Rule 16b-3 of the Exchange Act, an “outside director” under regulations promulgated under Section 162(m) of the Code, and an “independent director” under the NASDAQ listing standards. Our Compensation Committee acts as the Committee for the 2006 Plan; however, our entire Board of Directors will act as the Committee with respect to awards to non-employee directors. Subject to applicable law, the Committee may delegate its authority under the 2006 Plan.

Subject to the provisions of the 2006 Plan, the Committee has the authority to:

·	select the individuals to whom awards are to be granted;

·	determine whether and to what extent awards are to be granted;

·	determine the size, type, terms and conditions of awards;

·	approve the form of award agreements for use under the 2006 Plan;

·	establish performance measures for any performance period and determine whether such goals were satisfied;

·	amend any outstanding award in the event of termination of employment or service or a change in control, subject to certain limitations;

·	construe and interpret the 2006 Plan and any award agreement and apply their provisions; and

·	take any other action consistent with the terms of the 2006 Plan that the Committee deems appropriate.

All decisions, determinations and interpretations of the Committee will be final, binding and conclusive on all persons, including us and the participants.

Shares Subject to the 2006 Plan

The shares of our common stock presently subject to the 2006 Plan consist of (i) 2,150,000 shares, plus (ii) up to 320,000 shares that were available for issuance under the 1999 Plans, but that were not underlying any outstanding stock options or other awards under the 1999 Plans as of the effective date of the 2006 Plan, plus (iii) any shares allocable to outstanding stock options or other awards under the 1999 Plans as of the effective date of the 2006 Plan to the extent that on or after the effective date such stock options or other awards expired, were forfeited or otherwise terminated unexercised. Approximately 394,000 shares rem ain available for issuance as of March 31, 2010. The Amendment would increase from 2,150,000 to 3,350,000 the total number of shares of our common stock available for issuance under the 2006 Plan, subject to adjustments as provided in the 2006 Plan.

The source of shares for issuance under the 2006 Plan may be authorized and unissued shares. No additional awards may be made under the 1999 Plans.

If an award under the 2006 Plan is forfeited or terminated for any reason before being exercised, fully vested or settled, as the case may be, then the shares underlying that award will be added back to the remaining shares and will be available for further awards under the 2006 Plan. The number of shares available for future grants under the 2006 Plan, however, will be reduced by: (a) any shares subject to an award that are withheld or otherwise not issued upon the exercise of the award to satisfy the participant's tax withholding obligations or to pay the exercise price of the award; and (b) shares subject to an award that is settled in cash in lieu of shares.

Pursuant to the 2006 Plan, subject to antidilution adjustments:

·	the maximum aggregate number of shares that may be delivered in connection with stock options intended to be incentive stock options under Section 422 of the Code (“incentive stock options”) may not exceed 1,500,000 shares;

·	the maximum aggregate number of shares that may be granted to an individual participant during any calendar year:

·	pursuant to all forms of awards is 100,000 shares;

·	pursuant to incentive stock options is 100,000 shares;

·	pursuant to restricted stock and RSU awards is 50,000 shares; and

·	pursuant to performance share awards is 50,000 shares; and

·	the maximum aggregate compensation that may be paid pursuant to performance units awarded in any one calendar year to an individual participant is $250,000, or a number of shares having an aggregate fair market value not in excess of that amount.

Further, no incentive stock option will be granted to a participant if as a result of such grant the aggregate fair market value of shares with respect to which incentive stock options are exercisable for the first time in any calendar year would exceed $100,000.

The closing sale price of our common stock on March 31, 2010, as quoted on The NASDAQ Global Market was $18.69 per share.

Adjustments Upon Changes in Capitalization

In the event of any change in our capitalization or other corporate event that has a material effect on the fair market value of our common stock, the Committee will adjust, as it determines to be appropriate and equitable to prevent dilution or enlargement of rights:

·	the number and kind of shares that may be delivered under the 2006 Plan;

·	the individual limits set forth in the 2006 Plan;

·	the number and kind of shares subject to outstanding awards;

·	the exercise price, grant price or other price of shares subject to outstanding awards;

·	any performance conditions relating to outstanding awards;

·	the market price of shares, or per-share results; and

·	other terms and conditions of outstanding awards.

Corporate events that may give rise to adjustments in awards include, but are not limited to, mergers, reorganizations, consolidations, recapitalizations, liquidations, stock dividends, split-ups, spin-offs, stock splits, reverse stock splits, share combinations, share exchanges, any change in the corporate structure that affects our common stock, and the payment of a dividend or distribution to our shareholders in a form other than our common stock (except for normal cash dividends).

No Repricing Without Shareholder Approval

The 2006 Plan prohibits us from reducing the exercise price or grant price of an outstanding stock option or SAR or replacing an outstanding stock option or SAR that has an exercise price or grant price above the value of our common stock with a new option or SAR that has a lower exercise price or grant price, or with any other type of new award other than as described under “Adjustments Upon Changes in Capitalization” above, without first obtaining shareholder approval.

Stock Options

Stock options granted under the 2006 Plan may be either nonqualified or incentive stock options. Each option grant will be evidenced by an award agreement between the participant and us setting forth the terms and conditions of the option. The Committee will set the exercise price of each option, provided that the exercise price may not be less than 100% of the fair market value of our common stock on the date the option is granted. In addition, in the case of an incentive stock option granted to a participant who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of our stock, the exercise price of the incentive stock option will not be less than 110% of the fair market value of our common stock on the date the option is granted.

The Committee will determine the term of each stock option that it grants under the 2006 Plan; however, the term may not exceed 10 years from the date of grant. Moreover, in the case of an incentive stock option granted to a participant who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of our stock, the term of the option may not exceed five years from the date of grant.

Each award agreement will specify the date(s) on which a stock option granted under the 2006 Plan is to become exercisable (based on the passage of time or the achievement of performance goals).

If a participant's employment or service terminates due to death or disability, the participant may exercise any options that were exercisable on the date of termination, but only within the one year period following termination, and in no event after the date the options expire in accordance with their terms. Upon termination by us of a participant's employment or service without cause, or upon termination of employment or service by the participant for a reason other than death or disability, or upon a participant's retirement, a participant may exercise any options that were exercisable on the date of termination, but only within the one month following termination, and in no event after the date the options expire in accordance with their terms. Upon termination of employment or service for cause, a participant will immediately forfe it all of his or her outstanding options and will, if the Committee in its sole discretion so determines, repay to us the amount of any gain that the participant had realized upon any exercise within the 90-day period prior to the termination.

The Committee may, in its sole discretion, establish different terms and conditions pertaining to the effect of a participant's termination of employment or service, to the extent permitted by applicable law.

Stock Appreciation Rights

SAR grants may be either freestanding grants or grants in tandem with option grants. Each SAR grant will be evidenced by an agreement that will specify the number of shares to which the SAR pertains, the grant price, the term of the SAR and such other provisions as the Committee shall determine.

Upon exercise of a SAR, the holder will receive payment from us in an amount equal to the product of (i) the difference between the fair market value of our common stock on the date of exercise over the grant price and (ii) the number of shares with respect to which the SAR is exercised. At the discretion of the Committee, payment to the holder of a SAR may be in cash, shares of our common stock or a combination thereof.

The grant price of a freestanding SAR will not be less than 100% of the fair market value of our common stock on the grant date, and the grant price of a tandem SAR will equal the exercise price of the related option. The Committee will determine the term of each SAR that it grants under the 2006 Plan; however, the term may not exceed 10 years from the date of grant.

A tandem SAR may be exercised only with respect to the shares for which its related option is then exercisable. The exercise of all or part of a tandem SAR will result in the forfeiture of the right to purchase a number of shares under the related option equal to the number of shares with respect to which the SAR is exercised. The 2006 Plan also contains specified additional conditions on the exercise of a tandem SAR granted

in connection with an incentive stock option. Freestanding SARs may be exercised upon whatever terms and conditions the Committee imposes upon them; however, except as otherwise provided upon a termination of employment or service or in the event of a change in control or subsidiary disposition, no freestanding SARs may be exercisable prior to one year from the date of grant.

If the employment or service of a holder of a SAR is terminated, the SAR will be treated in the same manner as options are treated, as described above under “ – Stock Options.”

Restricted Stock and Restricted Stock Units

Each restricted stock or RSU grant will be evidenced by an agreement that specifies the applicable period of restriction, the number of restricted shares or RSUs granted, the vesting or settlement date, and such other provisions as the Committee determines.

The period of restriction applicable to an award of restricted stock or RSUs will be at least one year, except as provided upon a termination of employment or service or upon a change in control or a subsidiary disposition.

Participants holding restricted stock may exercise full voting rights and will receive all regular cash dividends paid with respect to those shares. Except as otherwise determined by the Committee, all other distributions paid with respect to the restricted stock will be credited to the participant subject to the same restrictions on transferability and forfeitability as the underlying restricted stock. A holder of RSUs will not have voting rights or other rights as a shareholder with respect to such RSUs.

When the applicable period of restriction on the restricted stock ends, the stock will become freely transferable, and the participant will be entitled to receive a certificate evidencing those shares. When the applicable period of restriction ends, RSUs will be settled and paid. The Committee shall determine whether the RSUs will be settled by delivery of shares or payment in cash of an amount equal to the fair market value of the shares on the settlement date, or a combination thereof.

Except as otherwise determined by the Committee, upon a participant's death or disability:

with respect to restricted stock or RSUs with a time-based period of restriction, the restrictions on the “Ratable Portion” of the award will lapse on the date of the participant's death or disability (where “Ratable Portion” means (i) the number of shares of restricted stock or the number of RSUs awarded to the participant multiplied by the portion (expressed as a percentage) of the restricted period that expired on the date of the participant's death or disability, reduced by (ii) the number of restricted shares or RSUs with respect to which the restrictions had lapsed as of such date); and

with respect to restricted stock or RSUs with a performance-based period of restriction, the unvested portion of the award will vest on a pro rata monthly basis, including full credit for partial months elapsed, and will be paid (a) based on the level of performance achieved as of the date of the termination, if determinable, or (b) at the target level, if not determinable.

Upon a participant's termination of employment or service for a reason other than death or disability, except upon a change in control or subsidiary disposition or as the Committee may otherwise determine, the participant will forfeit all unvested restricted stock or RSUs immediately after the termination of employment or service.

Performance Shares and Performance Units

Each grant of performance shares and performance units will be evidenced by an agreement that specifies the number granted, the applicable performance goals and performance periods, and such other provisions as the Committee determines. Except as otherwise provided in the applicable award agreement, upon termination of employment or service or upon a change in control or subsidiary disposition, the performance period for performance shares and performance units must be at least one year.

A participant will not have voting rights or other rights as a shareholder with respect to the shares subject to an award of performance shares or performance units until the time, if at all, when shares are issued to the participant pursuant to the terms of the applicable award agreement.

As soon as practicable following the completion of the performance period applicable to outstanding performance shares or performance units, the Committee will certify in writing the extent to which the applicable performance goals have been attained and the resulting final value of the award earned by the participant and to be paid upon its settlement. The Committee, in its sole discretion as specified in the award agreement, may pay earned performance shares or performance units by delivery of shares or by payment in cash or a combination thereof.

Except as otherwise determined by the Committee, if a participant terminates employment or service due to death or disability, the performance shares or performance units will be paid based on a pro rata monthly basis, including full credit for partial months elapsed, and will be paid (a) based on the level of performance achieved as of the date of the termination, if determinable, or (b) at the target level, if not determinable. If a participant terminates employment or service for any reason other than death or disability, the participant will forfeit any and all right to payment under the performance shares or performance units, except as otherwise determined by the Committee.

Other Stock-Based Awards

The Committee has the right to grant other stock-based awards that may include, without limitation, grants of shares based on attainment of performance goals, payment of shares as a bonus or in lieu of cash based on attainment of performance goals, and the payment of shares in lieu of cash under other of our incentive programs.

Except as otherwise provided in the applicable award agreement, upon a termination of employment or service or upon a change in control or subsidiary disposition, other stock-based awards will have a minimum period of restriction of one year, which period may, in the Committee's discretion, lapse on a pro-rated, graded, or cliff (i.e., all at once) basis. However, in the Committee's discretion, up to 5% of the shares available for issuance under the 2006 Plan may have a shorter period of restriction. Moreover, an award of payment in shares in lieu of cash under other of our incentive programs will not be subject to the minimum period of restriction limitation described above and will not be applied against or included when calculating the 5% limitation.

Performance-Based Awards

The Committee may grant awards that are intended to qualify as “performance-based compensation” for purposes of deductibility under Section 162(m) of the Code. For any such award, the Committee will establish the goals to be used (which must be one or more of the “performance measures” specified in the 2006 Plan) within 90 days after the commencement of the performance period, or, if less, the number of days equal to 25% of the performance period applicable to such award. Pursuant to the 2006 Plan, “performance measures” means any performance goal that the Committee, in its discretion, may select from among any of the following performance goals: total shareholder return; stock price; net customer sales; volume; gross profit; gross margin; operating profit; operating margin; earnings from continuing op erations before income taxes; earnings from continuing operations; earnings per share from continuing operations; net operating profit after tax; net earnings; net earnings per share; return on assets; return on investment; return on equity; return on invested capital; cost of capital; average capital employed; cash flow; cash flow from operations; working capital; working capital as a percentage of net customer sales; asset growth; asset turnover; market share; orders received; days sales outstanding; and operating unit results.

The Committee may establish performance measures, in its discretion, on a corporate-wide basis or with respect to one or more business units, divisions, subsidiaries, business segments, functions, salary grade levels, or positions, and in either absolute terms or relative to the performance of one or more comparable companies or an

index covering multiple companies. In addition, unless otherwise determined by the Committee, measurement of performance measures will exclude the impact of charges for restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring items, as well as the cumulative effects of tax or accounting changes, each as determined in accordance with generally accepted accounting principles or identified in our financial statements, notes to the financial statements, management's discussion and analysis, or other filings with the SEC.

Non-Transferability of Awards

Awards granted under the 2006 Plan will not be assignable or transferable by the participant, except by will or by the laws of descent and distribution. During the lifetime of a participant, an award may be exercised only by the participant or the participant's guardian or legal representative.

Tax Withholding Obligations

The 2006 Plan authorizes us to deduct or withhold, or to require the participant to remit to us, an amount sufficient to satisfy all applicable tax withholding requirements prior to the delivery of any shares or cash pursuant to an award.

Change in Control, Cash-Out and Subsidiary Disposition

Except as otherwise provided in the applicable award agreement, if a participant's employment or service with us is involuntarily terminated, for whatever reason, at any time within 12 months after a change in control (as defined in the 2006 Plan) of us:

·	any and all outstanding awards granted under the 2006 Plan with time-based vesting provisions will vest on a pro rata monthly basis, including full credit for partial months elapsed; and

any and all outstanding awards granted under the 2006 Plan with performance-based vesting provisions will vest on a pro rata monthly basis, including full credit for partial months elapsed, and will be paid (a) based on the level of performance achieved as of the date of the termination, if determinable, or (b) at the target level, if not determinable.

In addition, the Committee may, in its sole discretion, determine that: (a) all outstanding stock options and SARs will be terminated upon the occurrence of a change in control and that each participant will receive, with respect to each share subject to the options or SARs, an amount in cash equal to the excess of the consideration payable with respect to one share in connection with the change in control over the option's exercise price or the SAR's grant price; and (b) options and SARs outstanding as of the date of the change in control may be cancelled and terminated without payment, if the consideration payable with respect to one share in connection with the change in control is less than the option's exercise price or the SAR's grant price. Further, the Committee has the authority to provide for the automatic full vestin g and exercisability of one or more outstanding unvested awards under the 2006 Plan and the termination of restrictions on transfer and repurchase or forfeiture rights on the awards in connection with a disposition of one of our subsidiaries, but only with respect to those participants who are at the time engaged primarily in service with the subsidiary involved in the subsidiary disposition.

Amendment, Suspension and Termination of the 2006 Plan

The Board of Directors may amend, suspend or terminate the 2006 Plan at any time; provided, however, that shareholder approval is required for any amendment to the extent necessary to comply with the applicable rules of any national securities exchange or other market system or applicable laws. In addition, no termination, amendment or modification may adversely impact an award previously granted in any material way without the consent of the participant to whom such award was granted unless required by applicable law.

U.S. Federal Income Tax Treatment

The following paragraphs are a summary of the material U.S. federal income tax consequences associated with awards granted under the 2006 Plan. The summary is based on existing U.S. laws and regulations, and there can be no assurance that those laws and regulations will not change in the future. The summary does not purport to be complete and does not discuss the tax consequences upon a participant's death, or the provisions of the income tax laws of any municipality, state or foreign country in which the participant may reside. As a result, tax consequences for any particular participant may vary based on individual circumstances.

Incentive Stock Options. Except as described below, an incentive stock option results in no taxable income to the optionee and no deduction to us at the time it is granted or exercised. The excess of the fair market value of the shares acquired over the option price, however, is an item of adjustment in computing the alternative minimum taxable income of the optionee. If the optionee holds the stock received as a result of an exercise of an incentive stock option for at least two years from the date of the grant and one year from the date of exercise, then the gain realized on disposition of the stock is treated as a long-term capital gain. If the shares are disposed of during this period (i.e., a “di squalifying disposition”), however, then the optionee will recognize ordinary income in the year of the disposition, in an amount equal to the excess, if any, of the fair market value of the shares upon exercise of the option over the option price (or, if less, the excess of the amount realized upon disposition over the option price). The excess, if any, of the sale price over the fair market value on the date of exercise will be a short-term capital gain. In such case, we will be entitled to a deduction, in the year of such a disposition, for the amount includible in the optionee's income as ordinary income. The optionee's basis in the shares acquired upon exercise of an incentive stock option is equal to the option price paid, plus any amount includible in his or her income as a result of a disqualifying disposition.

Nonqualified Stock Options. A nonqualified stock option results in no taxable income to the optionee and no deduction to us at the time it is granted. An optionee exercising such an option will, at that time, recognize ordinary income, which is treated as compensation subject to all applicable employment taxes, in the amount of the difference between the option price and the then market value of the shares. Subject to the applicable provisions of the Code, a deduction for federal income tax purposes will be allowable to us in the year of exercise in an amount equal to the taxable compensation recognized by the optionee. The optionee's basis in such shares is equal to the sum of the option price plus the amo unt includible in his or her income as compensation upon exercise. Any gain (or loss) upon subsequent disposition of the shares will be a long-term or short-term gain (or loss), depending upon the holding period of the shares.

If a nonqualified stock option is exercised by tendering previously owned shares of our common stock in payment of the option price, then, instead of the treatment described immediately above, the following generally will apply:

·	the optionee will be considered to have received, in a tax-free exchange, a number of new shares equal to the number of previously owned shares tendered by the optionee in payment of the option price;

·	the optionee's basis and holding period for those new shares will be equal to the basis and holding period of the previously owned shares;

the optionee will have compensation income, which is subject to all applicable employment taxes, equal to the fair market value on the date of exercise of the excess shares (that is, the number of new shares received in total upon the exercise of the nonqualified option, less the number of previously owned shares that were tendered);

·	the optionee's basis in those excess shares will be equal to the amount of that compensation income;

·	subject to the applicable provisions of the Code, a deduction for federal income tax purposes will be allowable to us in the year of exercise in an amount equal to that compensation income; and

·	the holding period of those excess shares will begin on the date of exercise.

Any gain (or loss) upon subsequent disposition of the new shares or the excess shares will be a long-term or short-term gain (or loss), depending upon the holding period of the shares.

Stock Appreciation Rights. Generally, the recipient of a freestanding SAR will not recognize taxable income at the time the SAR is granted. If a participant receives the appreciation inherent in the SARs in cash, the participant will recognize ordinary income, which is treated as compensation, at the time it is received. If a participant receives the appreciation inherent in the SARs in stock, he or she will recognize ordinary income, which is treated as compensation, in an amount equal to the market value of the stock at the time it is received. In general, there will be no federal income tax deduction allowed to us upon the grant or termination of SARs. Upon the settlement of a SAR, however, we will be en titled to a deduction equal to the amount of income the recipient is required to recognize as a result of the settlement. Amounts treated as compensation will be subject to all applicable employment taxes.

Restricted Stock, Restricted Stock Units, Performance Shares, and Performance Units. A participant generally will not have taxable income upon the grant of restricted stock, RSUs, performance shares, or performance units. Instead, the participant will recognize ordinary income, which is treated as compensation, at the time of vesting equal to the fair market value (on the vesting date) of the shares or cash received minus any amount paid by the participant for the restricted stock, RSUs, performance shares or performance units. For restricted stock only, a participant instead may elect to be taxed at the time of grant, in which eve nt the participant will recognize ordinary income which is taxed as compensation but will not be subject to tax when the shares vest. In each of these cases, we will generally be entitled to a corresponding federal income tax deduction at the same time the participant recognizes income. If a participant elects to be taxed on the value of the restricted stock when received and the restricted stock is subsequently forfeited, the participant will be entitled to deduct only the amount, if any, that he paid for the forfeited stock, less the amount, if any, received in connection with such forfeiture. A participant’s basis in restricted stock will be equal to the price paid plus the amount of income recognized by the participant at the time the shares vested or, in the event the participant makes an election to be taxed as of the grant date, the amount of income recognized by the participant when the shares were granted. Amounts treated as compensation will be subject to all applicable employment taxes.

Other Stock-Based Awards. A participant generally will recognize ordinary income, which is treated as compensation and is subject to all applicable employment taxes, upon receipt of the shares subject to the award (or, if later, at the time of vesting of such shares), and we will generally be entitled to a corresponding federal income tax deduction at the same time.

Section 409A. Section 409A of the Code provides certain requirements for deferred compensation arrangements. If the requirements of Section 409A are not complied with, the recipient of an award could be subject to tax on the award, and an additional 20% tax, at the time the award is granted or vested plus interest at the underpayment rate plus one percentage point on any underpayment of that tax. The 2006 Plan has been designed so that certain types of awards (such as options, SARs and restricted stock) will not be “deferred compensation” for Section 409A purposes and will thereby be exempt from Section 409A’s requirements. Certain other types of awards, however, may be deferred compe nsation under Section 409A, and in those cases, the 2006 Plan is intended to comply with the requirements of Section 409A.

Section 162(m). Special rules limit the deductibility of compensation paid to the chief executive officer and to each of the next four most highly compensated executive officers. Under Section 162(m) of the Code, unless various conditions are met that enable compensation to qualify as “performance-based,” the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000. The 2006 Plan has been designed, however, to permit the Committee to grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m) of the Code, thereby permitting us to receive a federal income tax deduction in c onnection with such awards even to the extent that they exceed $1,000,000.

The Board of Directors recommends a vote “FOR” the approval of the Amendment to the Interactive Intelligence, Inc. 2006 Equity Incentive Plan.

CONSENT TO THE APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (ITEM 3 ON PROXY CARD)

KPMG has served as our independent registered public accounting firm since 2003. KPMG has issued an unqualified opinion for each of the years that it has been engaged to audit our consolidated financial statements, including 2009, and there were no disagreements on any matters regarding accounting principles or practices applied by management, financial statement disclosure or auditing scope or procedures. Representatives from KPMG will be present at our annual meeting, and will have the opportunity to make any statements they desire and are expected to be available to respond to appropriate questions. At this meeting, we are asking our shareholders to consent to the Audit Committee’s appointment of KPMG as our independent registered public accounting firm for 2010. In the event this p roposal is not approved, the Audit Committee will take into consideration the views of the shareholders and may, but will not be required to, appoint a different independent registered public accounting firm. Notwithstanding consent by the shareholders, the Audit Committee reserves the right to appoint a different independent registered public accounting firm for 2010.

The Board recommends a vote “FOR” the consent by our shareholders to the appointment of KPMG LLP as our independent registered public accounting firm for 2010.

AUDIT COMMITTEE MATTERS

Audit Committee Pre-Approval Policy of Audit and Permissible Non-Audit Services of KPMG

The Sarbanes-Oxley Act of 2002 and the independence rules of the SEC require all independent registered public accounting firms that audit issuers to obtain pre-approval from the issuers’ respective audit committees in order to provide professional services without impairing independence. As such, our Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by KPMG. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. KPMG and management are required to periodically report to our Audit Committee regarding the extent of services provided by KPMG in accordanc e with this pre-approval, and the fees for the services performed to date. Our Audit Committee may also pre-approve particular services on a case-by-case basis.

Each year, our Audit Committee discusses and approves the hiring of the independent registered public accounting firm. Once a resolution is approved, our Audit Committee Chairman executes an engagement letter for the annual audit and quarterly reviews. Our Chief Financial Officer may execute an engagement letter for additional services, such as tax consulting, with the approval of our Audit Committee. Additionally, from time to time, we may desire additional permitted professional services. Pre-approval for these services is obtained from the Audit Committee Chairman prior to such services commencing.

Fees Paid to KPMG

The following table presents fees for professional audit services rendered by KPMG for the audits of our consolidated financial statements for the years ended December 31, 2009 and 2008, and fees for other services rendered by KPMG during those periods. All of the services described in the following fee table were approved in conformity with our Audit Committee’s pre-approval process (in thousands):

	Years Ended December 31,
	2009		2008
Audit Fees	$	409	$	403

Audit-Related Fees		22		21

Tax Fees		--		6
Total	$	431	$	430

Audit Fees

Audit fees consisted of the aggregate fees billed by KPMG for professional services rendered in connection with the audit of our consolidated financial statements included in our Annual Report on Form 10-K for each of our last two years, as well as for the review of our condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q during each year. In addition, audit fees included professional services rendered in connection with KPMG’s separate audit of our internal control over financial reporting as of December 31, 2009 and 2008.

Pursuant to Section 404 of the Sarbanes-Oxley Act and due to our public float exceeding $75 million as of June 30, 2009, we continued to be classified by the SEC as an accelerated filer as of December 31, 2009. As a result, we were required to remain in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act that required: (i) management to assess the effectiveness of our internal control over financial reporting and (ii) the independent registered public accounting firm to perform its own separate audit of our internal control over financial reporting. See “Audit Committee Report” below for further details.

Audit-Related Fees

Audit-related fees consisted of the aggregate fees billed by KPMG for assurance and related services rendered in each of our last two years that were not included in “Audit Fees”, as discussed above. These fees were primarily related to the audit of our 401(k) Plan’s financial statements included in our Annual Report on Form 11-K for each year, filed with the SEC within 180 days after our year end.

Tax Fees

Tax fees consisted of the aggregate fees billed by KPMG for professional services rendered in connection with tax compliance, tax advice and tax planning during 2008. No tax fees were paid to KPMG during 2009.

AUDIT COMMITTEE REPORT

We, the Audit Committee, oversee Interactive Intelligence’s financial reporting process on behalf of the Board of Directors. Interactive Intelligence’s management is responsible for the preparation and integrity of the consolidated financial statements and notes thereto and the financial reporting process, including a system of internal control over financial reporting, and has represented to us that the consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles. The independent registered public accounting firm is responsible for performing an independent audit of Interactive Intelligence’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”) and expressin g an opinion on the conformity of those audited consolidated financial statements with U.S. generally accepted accounting principles, as well as expressing an opinion on the effectiveness of Interactive Intelligence’s internal control over financial reporting.

In fulfilling our responsibilities, we have reviewed and discussed Interactive Intelligence’s audited consolidated financial statements with its management and the independent registered public accounting firm. We met with the independent registered public accounting firm to discuss the results of its examinations and its evaluations of Interactive Intelligence’s internal control over financial reporting. We reviewed and discussed Interactive Intelligence’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002, including consideration of the PCAOB’s Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That is Integrated with an Audit of Financial Statements, which was released during May 2007 and superseded PCAOB Auditing St andard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements.

We also discussed with the independent registered public accounting firm the matters required by the American Institute of Certified Public Accountants Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended (Codification of Statement on Auditing Standards, AU 380), as adopted by the PCAOB in Rule 3200T, which include but are not limited to: (i) the scope and results of the audit, (ii) the responsibility of the independent registered public accounting firm, (iii) Interactive Intelligence’s significant accounting policies, (iv) management’s judgments and estimates and (v) significant audit adjustments.

We have also received the written disclosures and the letter from KPMG required by applicable requirements of the PCAOB regarding KPMG’s communications with us concerning independence, and have discussed with KPMG its independence from Interactive Intelligence and its management. In addition, we considered whether KPMG’s independence would be jeopardized by providing non-audit services to Interactive Intelligence.

Based on the reviews and discussions referred to above, we, the Audit Committee, recommended to the Board of Directors that the audited consolidated financial statements be included in Interactive Intelligence’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC.

Submitted by the Audit Committee

Edward L. Hamburg, Chairman

Richard A. Reck

Michael C. Heim

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

On an annual basis, each director and executive officer is obligated to complete a director and officer questionnaire which requires disclosure of any transactions with us in which the director or executive officer, or any member of his or her immediate family, has an interest. Under our Audit Committee’s charter, which is available free of charge on our website at http://investors.inin.com under “Corporate Governance”, our Audit Committee must review and approve all related person transactions in which any executive officer, director, director nominee or more than 5% shareholder of the company, or any of their immediate family members, has a direct or indirect material inter est. The Audit Committee may not approve a related person transaction unless (1) it is in or not inconsistent with our best interests and (2) where applicable, the terms of such transaction are at least as favorable to us as could be obtained from an unrelated third party.

Under our Ethics Code, which is available free of charge on our website at http://investors.inin.com under “Corporate Governance”, related person transactions are strictly prohibited unless approved or ratified by the Audit Committee, and other conflicts of interest involving our executive officers or directors are prohibited unless approved by the Audit Committee.

Donald E. Brown and Pamela J. Hynes, two of our executive officers, have relatives who are employed by us and who each earned more than $120,000 in total compensation (which includes salary, performance-based bonuses and the grant date fair value of any options received in 2009) in 2009. Dr. Brown’s sister, a manager of hosted services business development, received $171,756 in total compensation in 2009. Ms. Hynes’ spouse is employed by us as a developer and received $131,053 in total compensation in 2009. The compensation arrangements for these individuals for 2009 were ratified and approved by our Audit Committee based on the standards set forth in the Audit Committee’s charter and described above.

In November 2007, our Compensation Committee adopted a travel policy for our Chief Executive Officer wherein Dr. Brown is permitted to utilize his private airplane for business travel. As set forth in the Compensation Committee minutes approving the travel policy, Dr. Brown will be reimbursed for expenses incurred in the operation of his private plane only when used for company business. The cost reimbursement shall occur upon us receiving supporting documentation, at a practicable date after completion of each trip, of the expenses incurred by Dr. Brown and documentation evidencing that the trip was business related. During 2009, we reimbursed Dr. Brown for approximately $48,120 in expenses pursuant to this reimbursement policy. The hourly reimbursement rate in effect for 2009 was approved by our Compensation Committee and ratified and approved by our Audit Committee based on the standards set forth in the Audit Committee’s charter and described above. The hourly reimbursement rate was negotiated by us on an arms-length basis, and was made on terms no less favorable to us than could be obtained from an unaffiliated third party.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Pursuant to Section 16(a) of the Exchange Act, our executive officers, directors and holders of more than ten percent of the outstanding shares of our common stock (“Insiders”) are required to file reports (on prescribed forms) of their beneficial ownership of our common stock and/or shares of our common stock underlying stock options with the SEC and furnish copies of such forms to us. Based solely on a review of the copies of such forms furnished to us, or written representations that no other reports were required to be filed, we believe that for the year ended December 31, 2009, all Forms 3, 4 and 5 required by Section 16(a) to be filed by Insiders were filed on a timely basis, with the exception of the Form 4s for our non-employee directors, reporting the 2009 non-employee director annual grant of options to purchase shares of our common stock, and one Form 4 reporting the sale of common stock by Ms. Hynes’ spouse that were inadvertently filed late.

OTHER BUSINESS AT OUR ANNUAL MEETING

Our Board is not aware of any business which properly may be presented for action at our meeting other than the matters set forth in the Notice of Annual Meeting. Should any other matter requiring a vote of the shareholders properly arise, the enclosed proxy gives discretionary authority to the persons named in the proxy to vote on such matters in accordance with their best judgment.

DATE OF RECEIPT OF SHAREHOLDER PROPOSALS FOR OUR 2011 ANNUAL MEETING OF SHAREHOLDERS

All shareholder proposals intended for inclusion in our 2011 proxy materials for presentation at our 2011 Annual Meeting of Shareholders must be received by us (to the attention of our Corporate Secretary) at our world headquarters no later than December 10, 2010. As mentioned previously, in accordance with amended Rule 14a-8(i)(8) of the Exchange Act, certain shareholder proposals related to the election of directors are no longer permitted. In addition, our Amended and Restated By-Laws, as currently in effect, established procedures for shareholder nominations for election of directors and bringing business before our annual meeting of shareholders. Among other requirements, to bring business before our 2011 Annual Meeting of Shareholders or to nominate a person for election as a director, a shareholder must give w ritten notice to our Corporate Secretary no less than 90 days or more than 120 days prior to May 20, 2011. However, in the event our 2011 Annual Meeting of Shareholders is advanced by more than 30 days or delayed by more than 60 days from May 20, 2011, the written notice must be delivered no earlier than 120 days prior to such annual meeting and no later than the close of business on the later of 90 days prior to such annual meeting or 10 days following the day on which public announcement of the date of such meeting is first made. The notice must contain certain information concerning the proposed business or the nominee and the shareholder making the proposal. Any shareholder interested in making a nomination or proposal should request a copy of the applicable By-Law provisions, as currently in effect, from our Corporate Secretary.

By order of the Board of Directors,

Interactive Intelligence, Inc.

Stephen R. Head

Corporate Secretary

Indianapolis, Indiana

April 9, 2010

Appendix A

INTERACTIVE INTELLIGENCE, INC.

2006 EQUITY INCENTIVE PLAN

(As Proposed to Be Amended May 20, 2010)

1. Establishment, Objectives and Duration.

(a) Establishment of the Plan. Interactive Intelligence, Inc. hereby establishes the 2006 Equity Incentive Plan (“Plan”). The Plan is effective upon its approval by the Company’s shareholders at the 2006 Annual Meeting (“Effective Date”).

(b) Objectives of the Plan. The Plan’s objectives are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to Participants, and to optimize the profitability and growth of the Company through incentives that are consistent with the Company’s goals and that link Participants’ personal interests to those of the Company’s shareholders.

(c) Duration of the Plan. No Award may be granted under the Plan after the day immediately preceding the 10th anniversary of the Effective Date. The Plan will remain in effect with respect to outstanding Awards until no Awards remain outstanding.

2. Definitions. As used in the Plan, the following definitions will apply:

(a) “Affiliate” means any “parent corporation” or “subsidiary corporation” of the Company, as those terms are defined, respectively, in Code Sections 424(e) and (f).

(b) “Applicable Law” means the legal requirements relating to stock incentive plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the rules and regulations of any governing governmental agencies, the Code, and the rules of any applicable stock exchange or national market system.

(c) “Award” means, individually or collectively, Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, and Other Stock-Based Awards granted under the Plan.

(d) “Award Agreement” means an agreement entered into by the Company and a Participant setting forth the terms and provisions applicable to an Award.

(e) “Board” means the Board of Directors of the Company.

(f) “Cashless Exercise” means, to the extent permitted by Applicable Law, a program approved by the Committee in which payment of the applicable Exercise Price of an Option may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price and, if applicable, the amount necessary to satisfy the Company’s withholding obligations at the minimum statutory withholding rates, including, but not limited to, U.S. federal and state income taxes, payroll taxes, and foreign taxes, if applicable.

(g) “Cause” means, unless that term or an equivalent term is otherwise defined with respect to an Award by the Participant's Award Agreement or by a written contract of employment or service, any of the following: (i) the Participant's theft, dishonesty, willful misconduct, breach of fiduciary duty for personal profit, or falsification of any Company documents or records; (ii) the Participant's material failure to abide by the

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Company's code of conduct or other policies (including, without limitation, policies relating to confidentiality and reasonable workplace conduct); (iii) the Participant's unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of the Company (including, without limitation, the Participant's improper use or disclosure of the Company's confidential or proprietary information); (iv) any intentional act by the Participant that has a material detrimental effect on the Company's reputation or business; (v) any material breach by the Participant of any employment, service, consulting, non-disclosure, non-competition, non-solicitation or other similar agreement between the Participant and the Company, which breach is not cured pursuant to the terms of the applicable agreement; or (vi) the Participant's conviction (including any plea of guilty or nolo conte ndere) of any criminal act involving fraud, dishonesty, misappropriation or moral turpitude, or that impairs the Participant's ability to perform his or her duties with the Company.

(h) “Change in Control” means the occurrence of one or more of the following:

(i) The acquisition by any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act of the “beneficial ownership” (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing fifty (50%) percent or more of (A) the then outstanding shares of common stock of the Company, or (B) the combined voting power of the Company’s then outstanding voting securities; provided, however, that the following acquisitions will not constitute a Change in Control: (I) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (II) any acquisition by the Company, or (III) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company;

(ii) The Company is party to a merger or consolidation, or series of related transactions, that results in the voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), directly or indirectly, at least fifty (50%) percent of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation;

(iii) the sale or disposition of all or substantially all of the Company’s assets, or consummation of any transaction, or series of related transactions, having similar effect (other than to a Subsidiary);

(iv) A change in the composition of the Board within any consecutive two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors; or

(v) The liquidation or dissolution of the Company.

Notwithstanding the preceding provisions of this Subsection or any other provision of the Plan, with respect to any provision or feature of the Plan that constitutes or provides for a deferred compensation plan subject to Code Section 409A, the term “Change in Control” means a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, within the meaning of Code Section 409A(a)(2)(A)(v) and interpretive regulations.

(i) “Code” means the Internal Revenue Code of 1986, as amended, and its interpretive regulations.

(j) “Committee” means the Committee, as specified in Section 3(a), appointed by the Board to administer the Plan; provided, however, that, where appropriate, “Committee” also means (i) the Board, which, pursuant to Section 3(b), administers the Plan with respect to Non-Employee Directors; and (ii) any delegate of the Committee that, pursuant to Section 3(d), has the authority to grant Awards to Participants who are not subject to Section 16(b) of the Exchange Act and who are not (and are not anticipated to be during the term of the Award) “covered employees” under Code Section 162(m).

(k) “Company” means Interactive Intelligence, Inc., an Indiana corporation, and any successor thereto as provided in Section 23.

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(l) “Continuous Service” means an Employee’s provision of services in any capacity to the Company or any Affiliate that is not interrupted or terminated. Continuous Service will not be considered interrupted in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, any Affiliate, or any successor. A leave of absence approved by the Company may include medical leave, military leave, or any other personal leave approved by an authorized Company representative. For purposes of Incentive Stock Options, no such leave may exceed 90 days, unless reemployment upon e xpiration of the leave is guaranteed by statute or contract.

(m) “Disability” means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a period of not less than 12 months.

(n) “Dividend” means a dividend declared and paid on Shares subject to an Award.

(o) “Employee” means any employee of the Company or an Affiliate.

(p) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(q) “Exercise Price” means the price at which a Participant may purchase a Share pursuant to an Option.

(r) “Fair Market Value” means, as of any date, the value of a Share determined as follows:

(i) Where a public market exists for the Share, the Fair Market Value will be (A) the closing sales price for a Share for the last market trading day prior to the time of the determination (or, if no sales were reported on that date, on the last trading date on which sales were reported) on the New York Stock Exchange, the Nasdaq National Market or the principal securities exchange on which the Share is listed for trading, whichever is applicable, or (B) if the Share is not traded on any such exchange or national market system, the average of the closing bid and asked prices of a Share on the Nasdaq Small Cap Market, in each case, as reported in The Wall Street Journal or such other source as the Committee deems reliable; o r

(ii) In the absence of an established market for the Share of the type described above, the Committee will determine the Share’s Fair Market Value in good faith using a reasonable valuation methodology, and that determination will be conclusive and binding on all persons.

(s) “Freestanding SAR” means a SAR that is granted independently of any Options, as described in Section 8.

(t) “Incentive Stock Option” or “ISO” means an Option intended to qualify as an incentive stock option within the meaning of Code Section 422.

(u) “Incumbent Directors” means directors who either (i) were directors of the Company as of the Effective Date of this Plan, or (ii) are elected, or nominated for election, to the Board with the affirmative votes of a least a majority of those directors whose election or nomination was not in connection with an actual or threatened proxy contest related to the election of directors to the Company.

(v) “Non-Employee Director” means any individual who is a member of the Board of Directors of the Company or an Affiliate and who is not an Employee.

(w) “Nonqualified Stock Option” means an Option that is not intended to meet the requirements of Code Section 422.

(x) “Option” means an Incentive Stock Option or a Nonqualified Stock Option granted under the Plan, as described in Section 7.

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(y) “Other Stock-Based Award” means a Share-based or Share-related Award granted pursuant to Section 13.

(z) “Participant” means a current or former Employee, Non-Employee Director, consultant of the Company or any other individual who the Committee selects (or selected) to receive an Award.

(aa) “Performance-Based Exception” means the performance-based exception from the tax deductibility limitations of Code Section 162(m).

(bb) “Performance Measure” means any performance goal that the Committee, in its discretion, may select from among any of the following performance goals: total shareholder return, stock price, net customer sales, volume, gross profit, gross margin, operating profit, operating margin, earnings from continuing operations before income taxes, earnings from continuing operations, earnings per share from continuing operations, net operating profit after tax, net earnings, net earnings per share, return on assets, return on investment, return on equity, return on invested capital, cost of capital, average capital employed, cash flow, cash flow from operations, wo rking capital, working capital as a percentage of net customer sales, asset growth, asset turnover, market share, orders received, days sales outstanding and operating unit results.

(cc) “Performance Period” means the period during which a Performance Measure or other performance goal must be met.

(dd) “Performance Share” means an Award granted to a Participant pursuant to Section 11.

(ee) “Performance Unit” means an Award granted to a Participant pursuant to Section 12.

(ff) “Period of Restriction” means the period during which Restricted Stock, Restricted Stock Units or Other Stock-Based Awards are subject to a substantial risk of forfeiture and are not transferable, as provided in Sections 9, 10 and 13.

(gg) “Plan” means this Interactive Intelligence, Inc. 2006 Equity Incentive Plan, as amended from time to time.

(hh) “Prior Plans” means the Interactive Intelligence, Inc. 1999 Stock Option and Incentive Plan and the Interactive Intelligence, Inc. Outside Directors Stock Option Plan.

(ii) “Restricted Stock” means an Award granted to a Participant pursuant to Section 9.

(jj) “Restricted Stock Units” means an Award granted to a Participant pursuant to Section 10.

(kk) “Retirement” means, with respect to an Employee, termination of employment after attaining age 65, or such other age as the Company specifies in its written policies.

(ll) “SEC” means the United States Securities and Exchange Commission.

(mm) “Section” means, except where used in direct reference to a provision of the Code or the Exchange Act, a provision of this Plan.

(nn) “Share” means a share of the Company’s common stock, par value $0.01 per share, subject to adjustment pursuant to Section 18.

(oo) “Stock Appreciation Right” or “SAR” means an Award granted to a Participant, either alone or in connection with a related Option, pursuant to Section 8.

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(pp) “Subsidiary” means any corporation in which the Company owns, directly or indirectly, at least 50% of the total combined voting power of all classes of stock, or any other entity (including, but not limited to, limited liability companies, partnerships and joint ventures) in which the Company owns, directly or indirectly, at least 50% of the combined equity.

(qq) “Subsidiary Disposition” means the disposition by the Company of its equity holdings in any Subsidiary effected by a merger or consolidation involving that Subsidiary, the sale of all or substantially all of the assets of that Subsidiary, or the Company’s sale or distribution of substantially all of the outstanding capital stock of that Subsidiary.

(rr) “Tandem SAR” means a SAR that is granted in connection with a related Option, as described in Section 8.

(ss) “Voting Securities” means voting securities of the Company entitled to vote generally in the election of directors.

3. Administration of the Plan.

(a) The Committee. The Plan will be administered by the Compensation and Stock Option Committee of the Board or such other committee (“Committee”) as the Board selects consisting of two or more members of the Board each of whom is intended to be a “non-employee director” within the meaning of Rule 16b-3 (or any successor rule) of the Exchange Act, an “outside director” under regulations promulgated under Code Section 162(m), and an “independent director” under Nasdaq Stock Market or other applicable exchange listing standards. The members of the Committee will be appointed from time to time by, and will serve at the d iscretion of, the Board.

(b) Board as the Committee. Notwithstanding subsection (a) above, the Board will constitute the Committee and administer the Plan with respect to Non-Employee Directors, determine the terms of Awards, and their related Award Agreements, to Non-Employee Directors, and grant Awards to Non-Employee Directors.

(c) Authority of the Committee. Subject to Applicable Law and the Plan’s provisions, and except as the Board may provide otherwise, the Committee will have full, final and discretionary authority to take all actions it determines necessary to administer the Plan, including, without limitation, the following actions:

(i) select the individuals to whom Awards may from time to time be granted under the Plan;

(ii) determine whether and to what extent Awards are granted under the Plan;

(iii) determine the size, type, terms, and conditions of any Awards granted under the Plan;

(iv) approve forms of Award Agreements for use under the Plan;

(v) establish Performance Measures or other performance goals for any Performance Period and determine whether those goals were satisfied;

(vi) amend the terms of any outstanding Award granted under the Plan in the event of a Participant’s termination of employment or service or in the event of a Change in Control, provided that, except as otherwise provided in Section 19, no such amendment will reduce the Exercise Price of outstanding Options or the grant price of outstanding SARs without the approval of the shareholders of the Company, and provided further, that any amendment that would adversely affect the Participant’s rights under an outstanding Award will not be made without the Participant’s written consent;

(vii) construe and interpret the terms of the Plan and any Award Agreement entered into under the Plan, and decide all questions of fact arising in the application of the Plan and any Award Agreement; and

(viii) take such other action, not inconsistent with the Plan’s terms, as the Committee deems appropriate.

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(d) Delegation of Authority. As permitted by Applicable Law, the Committee may delegate, to one or more officers of the Company, its authority, including the power and authority to make Awards to Participants who are not subject to Section 16(b) of the Exchange Act and who are not (and are not anticipated to be during the term of the Award) “covered employees” under Code Section 162(m), pursuant to such conditions and limitations as the Committee may establish. The Committee may delegate authority pursuant to this provision only by resolution or other valid action it reflects in writing.

(e) Effect of Committee’s Decision. The Committee’s decisions, determinations and interpretations will be final, binding and conclusive on all persons, including the Company, its Subsidiaries, Employees, Non-Employee Directors, consultants, other Participants and their estates and beneficiaries.

4. Shares Subject to the Plan; Effect of Grants; Individual Limits.

(a) Number of Shares Available for Grants. Subject to adjustment as provided in Section 18, the maximum number of Shares that may be issued pursuant to Awards under the Plan shall be (i) 3,350,000 Shares, plus (ii) up to 320,000 Shares available for issuance under the Prior Plans, as previously approved by the shareholders of the Company, as of the Effective Date, but that are not underlying any outstanding stock options or other awards under the Prior Plans as of the Effective Date, plus (iii) any Shares allocable to outstanding stock o ptions or other awards under the Prior Plans as of the Effective Date to the extent that on or after the Effective Date such stock options or other awards expire, are forfeited or otherwise terminate unexercised; provided, however, that in no event shall the maximum number of Shares issued pursuant to Awards under the Plan exceed 7,050,933 Shares (which is the sum of 3,350,000 Shares set forth above, plus the number of Shares available for issuance under the Prior Plans as of the Effective Date, plus the aggregate number of shares subject to options previously granted and outstanding under the Prior Plans as of the Effective Date). From and after the Effective Date, no further grants or awards shall be made under the Prior Plans; however, grants or awards made under the Prior Plans before the Effective Date shall continue in effect in accordance with their terms.

(b) Limit on Awards of Incentive Stock Options. Subject to adjustment as provided in Section 18, the maximum aggregate number of Shares that may be delivered in connection with Incentive Stock Options under the Plan will not exceed 1,500,000 Shares.

(c) Limits on Awards to Individual Participants. Subject to adjustment as provided in Section 18, the following rules will apply with respect to Awards to individual Participants:

(i) Total Limit: The maximum aggregate number of Shares that can be granted to any one Participant in a particular calendar year pursuant to any and all Awards is 100,000 Shares.

(ii) Incentive Stock Options: The maximum aggregate number of Shares with respect to which Incentive Stock Options may be granted in any particular calendar year to any one Participant is 100,000 Shares.

(iii) Restricted Stock and Restricted Stock Units: The maximum aggregate number of Shares of Restricted Stock and Shares with respect to which Restricted Stock Units may be granted in a particular calendar year to any one Participant is 50,000 Shares.

(iv) Performance Shares and Performance Units: The maximum aggregate number of Performance Shares that may be granted in a particular calendar year to any one Participant is 50,000 Shares, and the maximum aggregate compensation that can be paid pursuant to Performance Units awarded in any one calendar year to any one Participant is $250,000 or a number of Shares having an aggregate Fair Market Value not in excess of that amount.

(d) Forfeited Shares. If Awards are forfeited or terminated for any reason before being exercised, fully vested, or settled, then the Shares underlying those Awards will cease to count against the limitations in subsections (a) and (b) and will become available for Awards under the Plan.

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(e) Shares for Withholding Obligations. Any Shares subject to any Award that are withheld or otherwise not issued upon exercise of any Award to satisfy the Participant’s withholding obligations or in payment of any subscription price or the Exercise Price, and Shares subject to an Award (or any portion of an Award) that is settled in cash in lieu of settlement in Shares, will reduce the number of Shares available for grant under the limitations in subsections (a) and (b).

(f) Awards Settled in Cash. Awards valued by reference to Shares that may be settled in equivalent cash value will count against the limitations in this Section 4 to the same extent as if settled in Shares.

5. Eligibility and Participation.

(a) Eligibility. Employees, Non-Employee Directors, consultants of the Company and other individuals are eligible to participate in the Plan.

(b) Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees, Non-Employee Directors, consultants of the Company and other individuals those to whom Awards will be granted and will determine the nature and amount of each Award.

(c) Service as an Employee. For purposes of an Employee's participation in the Plan, and the interpretation of the Plan's provisions, no event will constitute a termination of employment unless the event is a termination of Continuous Service.

6. Types of Awards.

(a) Type of Awards. Awards under the Plan may be in the form of Options (both Nonqualified Stock Options and/or Incentive Stock Options), SARs, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units and Other Stock-Based Awards.

(b) Designation of Award. Each Award will be designated in the Award Agreement.

7. Options.

(a) Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number and upon such terms, and at any time and from time to time, as the Committee determines.

(b) Award Agreement. Each Option grant will be evidenced by an Award Agreement that specifies the Exercise Price, the duration of the Option, the number of Shares to which the Option pertains, the Option vesting schedule, and such other provisions as the Committee determines including, without limitation, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, and payment contingencies. The Award Agreement will also specify whether the Option is intended to be an Incentive Stock Option or a Nonqualified Stock Option. Options that are intended to be Incentive Stock Options will be subject to the limitations set forth in Code Section 422 and will be subject to Section 7(m).

(c) Exercise Price. Except for Options adjusted pursuant to Section 18 and replacement Options granted in connection with a merger, acquisition, reorganization or similar transaction, the Exercise Price of each Option will not be less than 100% of the Fair Market Value of a Share on the date the Option is granted. However, in the case of an Incentive Stock Option granted to a Participant 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 or any Affiliate, the Exercise Price of the Option will not be less than 110% of the Fair Market Value of a Share on the date the Option is grant ed.

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(d) Term of Options. The term of an Option granted under the Plan will be determined by the Committee, in its sole discretion; provided, however, that the term will not exceed ten (10) years. However, in the case of an Incentive Stock Option granted to a Participant 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 or any Affiliate, the term of the Incentive Stock Option will be five (5) years from the date of grant or such shorter term as may be provided in the Award Agreement.

(e) Vesting of Options. Options granted under this Section 7 will be exercisable at such times (based on the passage of time or the achievement of performance goals) and be subject to such restrictions and conditions as set forth in the Award Agreement, which need not be the same for each grant or for each Participant.

(f) Exercise of Options. Options granted under this Section 7 will be exercised by the delivery of a written notice to the Company, setting forth the number of Shares with respect to which the Option is to be exercised and specifying the method of payment for the Exercise Price. An Option’s Exercise Price will be payable to the Company:

(i) in cash or its equivalent;

(ii) by tendering (either actually or constructively by attestation) Shares having an aggregate Fair Market Value at the time of exercise equal to the Exercise Price, provided that the Committee may, in its sole discretion, require that Shares tendered for payment have been previously held by the Participant for a minimum duration;

(iii) in any other manner then permitted by the Committee (including Cashless Exercise); or

(iv) by a combination of any of the permitted methods of payment in subsections (i), (ii), and (iii) above.

The Committee may limit any method of payment, other than that specified under (i), for administrative convenience, to comply with Applicable Law or for any other reason it deems appropriate.

(g) Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Section 7 as it deems advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which the Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to the Shares.

(h) Termination for Cause. Upon a Participant’s termination of employment or service for Cause, all rights under any Options granted to the Participant will terminate immediately, and the Participant will (if the Committee, in its sole discretion, exercises its rights under this Section 7(h) within ten (10) days of the termination) repay to the Company within ten (10) days of the Committee’s written demand the amount of any gain the Participant had realized upon any exercise within the 90-day period prior to the termination of any Options.

(i) Termination Due to Death or Disability. Upon a Participant’s termination of employment or service due to death or Disability, the Participant or the Participant’s beneficiary, as the case may be, may exercise outstanding Options to the extent the Participant was entitled to exercise the Options on the date of termination, but only within the one (1)-year period immediately following the Participant’s termination due to death or Disability, and in no event after the date the Options expire in accordance with their terms.

(j) Other Terminations. Upon the termination of a Participant's employment or service by the Company without Cause, upon the Participant's voluntary termination of employment or service for a reason other than death or Disability, or upon the Employee’s Retirement, the Participant may exercise outstanding Options to the extent that the Participant was entitled to exercise the Options at the date of termination, but only within the one (1) month period immediately following the Participant’s termination, and in no event after the date the Options expire in accordance with their terms.

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(k) Forfeiture of Options. Notwithstanding subsections (i) and (j) above, a Participant or the Participant’s beneficiary, as the case may be, will, in connection with any and all terminations of employment or service, forfeit all Options the Participant was not entitled to exercise on the date of termination.

(l) Committee Discretion. Notwithstanding the foregoing paragraphs of this Section 7, and subject to paragraph (m) below, the Committee may, in its sole discretion, establish different terms and conditions pertaining to the effect of a Participant’s termination, to the extent permitted by Applicable Law.

(m) Additional Rules For Incentive Stock Options.

(i) Incentive Stock Options may be granted only to Participants who are Employees.

(ii) No Incentive Stock Option will be granted to a Participant as a result of which the aggregate Fair Market Value (determined as of the date of grant) of the Shares with respect to which Incentive Stock Options under Code Section 422 are exercisable for the first time in any calendar year under the Plan and any other stock option plans of the Company or any Affiliate, would exceed $100,000, determined in accordance with Code Section 422(d). This limitation will be applied by taking Options into account in the order in which they were granted.

(iii) An Award of an Incentive Stock Option may provide that the Option may be exercised not later than three (3) months following the Participant’s termination of employment with the Company and all Subsidiaries, or not later than one (1) year following death or a permanent and total disability within the meaning of Code Section 22(e)(3).

(iv) Notwithstanding any other provisions of the Plan, if for any reason any Option granted under the Plan that is intended to be an Incentive Stock Option fails to qualify as an Incentive Stock Option, that Option will be deemed to be a Nonqualified Stock Option and fully authorized and validly issued under the Plan.

8. Stock Appreciation Rights.

(a) Grant of SARs. Subject to the terms and provisions of the Plan, SARs may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as the Committee determines. The Committee may grant Freestanding SARs, Tandem SARs, or any combination of these forms of SARs.

(b) Award Agreement. Each SAR grant will be evidenced by an Award Agreement that specifies the number of Shares to which the SAR pertains, the grant price, the term of the SAR, and such other provisions as the Committee determines.

(c) Grant Price. The grant price of a Freestanding SAR will not be less than 100% of the Fair Market Value of a Share on the date of grant of the SAR, and the grant price of a Tandem SAR will equal the Exercise Price of the related Option; provided, however, that these limitations will not apply to Awards that are adjusted pursuant to Section 18.

(d) Term of SARs. The term of a SAR granted under the Plan will be determined by the Committee, in its sole discretion; provided, however, that the term will not exceed ten (10) years from the date of grant.

(e) Exercise of Tandem SARs. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. To the extent exercisable, Tandem SARs may be exercised for all or part of the Shares subject to the related Option. The exercise of all or part of a Tandem SAR will result in the forfeiture of the right to purchase a number of Shares under the related Option equal to the number of Shares with respect to which the SAR is exercised. Conversely, upon exercise of all or part of an Option with respect to which a Tandem SAR has been granted, an equivalent portion of the Tandem SAR will similarly be forfeited.

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Notwithstanding any other provision of the Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR will expire no later than the expiration of the underlying ISO; (ii) the value of the payout with respect to the Tandem SAR may be for no more than 100% of the difference between the Exercise Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Exercise Price of the ISO.

(f) Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon them and sets forth in the applicable Award Agreement; provided, however, that except as otherwise provided upon a termination of employment or service or pursuant to Section 19 in the event of a Change in Control or Subsidiary Disposition, no Freestanding SARs may be exercisable prior to one (1) year from the date of grant.

(g) Payment of SAR Amount. SARs granted under this Section 8 will be exercised by the delivery of a written notice to the Company setting forth the number of Shares with respect to which the SAR is to be exercised. Upon exercise of a SAR, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying:

(i) the difference between the Fair Market Value of a Share on the date of exercise over the grant price; by

(ii) the number of Shares with respect to which the SAR is exercised.

At the discretion of the Committee as specified in the Award Agreement, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof.

(h) Termination for Cause. Upon a Participant’s termination of employment or service for Cause, all rights under any SARs granted to the Participant will terminate immediately, and the Participant will (if the Committee, in its sole discretion, exercises its rights under this Section 8(h) within ten (10) days of the termination) repay to the Company within ten (10) days of the Committee’s written demand the amount of any gain the Participant had realized upon any exercise within the 90-day period prior to the termination of any SARs.

(i) Termination Due to Death or Disability. Upon a Participant’s termination of employment or service due to death or Disability, the Participant or the Participant’s beneficiary, as the case may be, may exercise outstanding SARs to the extent the Participant was entitled to exercise the SARs on the date of termination, but only within the one (1)-year period immediately following the Participant’s termination due to death or Disability, and in no event after the date the SARs expire in accordance with their terms.

(j) Other Terminations. Upon the termination of a Participant's employment or service by the Company without Cause, upon the Participant’s voluntary termination of employment or service for a reason other than death or Disability, or upon the Employee's Retirement, the Participant may exercise outstanding SARs to the extent that the Participant was entitled to exercise the SARs at the date of termination, but only within the one (1) month period immediately following the Participant’s termination, and in no event after the date the SARs expire in accordance with their terms.

(k) Forfeiture of SARs. Notwithstanding subsections (i) and (j) above, a Participant or the Participant’s beneficiary, as the case may be, will, in connection with any and all terminations of employment or service, forfeit all outstanding SARs the Participant was not entitled to exercise on the date of termination.

(l) Committee Discretion. Notwithstanding the foregoing paragraphs of this Section 8, the Committee may, in its sole discretion, establish different terms and conditions pertaining to the effect of a Participant’s termination, to the extent permitted by Applicable Law.

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9. Restricted Stock.

(a) Grant of Restricted Stock. Subject to the terms and provisions of the Plan, Restricted Stock may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as the Committee determines.

(b) Award Agreement. Each Restricted Stock grant will be evidenced by an Award Agreement that specifies the Period(s) of Restriction, the number of Shares of Restricted Stock granted, and such other provisions as the Committee determines.

(c) Period of Restriction. Except as otherwise provided in subsection (h) below, or pursuant to Section 19 in the event of a Change in Control or Subsidiary Disposition, any Period of Restriction for an Award of Restricted Stock will not be less than one (1) year. Notwithstanding Section 3(c) of this Plan, the Committee does not have the discretion or authority to (i) grant any Award of Restricted Stock under a Period of Restriction that is shorter than the minimum Period of Restriction in this subsection (c), or (ii) shorten the Period of Restriction of any outstanding grant of Restricted Stock.

(d) Other Restrictions. The Committee may impose such other conditions or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock, a requirement that the issuance of Shares of Restricted Stock be delayed, restrictions based upon the achievement of specific performance goals, additional time-based restrictions, or restrictions under Applicable Law or under the requirements of any stock exchange or market upon which the Shares are listed or traded, or holding requirements or sale restrictions placed on the Shares by the Company upon vesting of the Restricted Stock. The Company may retain in its custody any certificate evidencing the Shares of Restricted Stock and place on them a legend and institute stop-transfer orders on the Shares, and the Participant will be obligated to sign any stock power requested by the Company relating to the Shares to give effect to the forfeiture provisions of the Restricted Stock.

(e) Removal of Restrictions. Subject to Applicable Law, Restricted Stock will become freely transferable by the Participant after the last day of the applicable Period of Restriction. Once Restricted Stock is released from the restrictions, the Participant will be entitled to receive a certificate evidencing the Shares.

(f) Voting Rights. Unless otherwise determined by the Committee and set forth in a Participant’s Award Agreement, to the extent permitted or required by Applicable Law, as determined by the Committee, Participants holding Shares of Restricted Stock granted under the Plan may exercise full voting rights with respect to those Shares during the Period of Restriction.

(g) Dividends and Other Distributions. Except as otherwise provided in a Participant’s Award Agreement, during the Period of Restriction, Participants holding Shares of Restricted Stock will receive all regular cash Dividends paid with respect to all Shares while they are so held, and, except as otherwise determined by the Committee, all other distributions paid with respect to the Restricted Stock will be credited to Participants subject to the same restrictions on transferability and forfeitability as the Restricted Stock with respect to which they were paid and paid at such time following full vesting as are paid the Shares of Restricted Stock with respect to w hich the distributions were made.

(h) Termination Due to Death or Disability. Except as otherwise determined by the Committee, upon a Participant’s termination of employment or service due to death or Disability:

(i) With respect to an Award of Restricted Stock with a time-based Period of Restriction, the restrictions on the Ratable Portion of the Award will lapse, and those Shares will be free of restrictions and will not be forfeited. The “Ratable Portion” of an Award of Restricted Stock is equal to:

(a) the number of Shares of Restricted Stock awarded to the Participant multiplied by the portion (expressed as a percentage) of the Restricted Period that expired on the date of the Participant’s death or Disability, reduced by

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(b) the number of Shares of Restricted Stock awarded with respect to which the restrictions had lapsed as of the date of the Participant’s death or Disability.

(ii) With respect to an Award of Restricted Stock with a performance-based Period of Restriction, any unvested portion of the Award will vest on a pro rata monthly basis, including full credit for partial months elapsed, and will be paid (A) based on the level of performance achieved as of the date of the termination, if determinable, or (B) at the target level, if not determinable. The amount of the vested Award may be computed under the following formula: unvested number of Shares times (number of full months elapsed in shortest possible vesting period divided by number of full months in shortest possible vesting period) times percent performance level achieved immediately prior to the effective date of the termination of employment or service.

(i) Other Terminations of Employment. Immediately after a Participant’s termination of employment or service for a reason other than death or Disability, except as provided in Section 19 or as the Committee may otherwise determine, a Participant will forfeit all Restricted Stock that, at the time of termination, remains subject to the restrictions imposed by paragraph (c) of this Section 9.

10. Restricted Stock Units.

(a) Grant of Restricted Stock Units. Subject to the terms and provisions of the Plan, Restricted Stock Units may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as the Committee determines.

(b) Award Agreement. Each grant of Restricted Stock Units will be evidenced by an Award Agreement that specifies the applicable Period of Restriction, the number of Restricted Stock Units granted, the settlement date, and such other provisions as the Committee determines.

(c) Value of Restricted Stock Units. The initial value of a Restricted Stock Unit will equal the Fair Market Value of a Share on the date of grant; provided, however, that this requirement will not apply to Awards that are adjusted pursuant to Section 18.

(d) Period of Restriction. Except as otherwise provided in subsection (g) below, or pursuant to Section 19 in the event of a Change in Control or Subsidiary Disposition, any Period of Restriction for an Award of Restricted Stock Units will not be less than one (1) year. Notwithstanding Section 3(c), the Committee does not have the discretion or authority to (i) grant any Award of Restricted Stock Units under a Period of Restriction that is shorter than the minimum Period of Restriction in this subsection (d), or (ii) shorten the Period of Restriction of any outstanding grant of Restricted Stock Units.

(e) Form and Timing of Settlement. Except as otherwise provided in Section 19 or a Participant’s Award Agreement, settlement and payment of Restricted Stock Units will be made at a specified settlement date that will not be earlier than the last day of the Period of Restriction. The Committee, in its sole discretion as specified in the Award Agreement, may settle earned Restricted Stock Units by delivery of Shares or by payment in cash of an amount equal to the Fair Market Value of the Shares on the settlement date (or a combination thereof).

(f) Voting Rights. A Participant will not have voting rights or other rights as a shareholder with respect to the Shares subject to an Award of Restricted Stock Units granted under the Plan until the time, if at all, when the Shares are issued to the Participant pursuant to the terms of the applicable Award Agreement.

(g) Termination Due to Death or Disability. Except as otherwise determined by the Committee, upon a Participant’s termination of employment or service due to death or Disability:

(i) With respect to an Award of Restricted Stock Units with a time-based Period of Restriction, the restrictions on the Ratable Portion of the Award will lapse, and those Restricted Stock Units will be free of restrictions and will not be forfeited. The “Ratable Portion” of an Award of Restricted Stock Units is equal to:

(a) the number of Restricted Stock Units awarded to the Participant multiplied by the portion (expressed as a percentage) of the Restricted Period that expired on the date of the Participant’s death or Disability, reduced by

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(b) the number of Restricted Stock Units awarded with respect to which the restrictions had lapsed as of the date of the Participant’s death or Disability.

(ii) With respect to an Award of Restricted Stock Units with a performance-based Period of Restriction, any unvested portion of the Award will vest on a pro rata monthly basis, including full credit for partial months elapsed, and will be paid (A) based on the level of performance achieved as of the date of the termination, if determinable, or (B) at the target level, if not determinable. The amount of the vested Award may be computed under the following formula: unvested number of Restricted Stock Units times (number of full months elapsed in shortest possible vesting period divided by number of full months in shortest possible vesting period) times percent performance level achieved immediately prior to the effectiv e date of the termination of employment or service.

(h) Other Terminations of Employment. Upon a Participant’s termination of employment or service for a reason other than death or Disability, except as provided in Section 19 or as the Committee may otherwise determine, a Participant will forfeit all Restricted Stock Units that, at the time of termination, remain subject to the restrictions imposed by paragraph (d) of this Section 10.

11. Performance Shares.

(a) Grant of Performance Shares. Subject to the terms and provisions of the Plan, Performance Shares may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as the Committee determines.

(b) Award Agreement. Each grant of Performance Shares will be evidenced by an Award Agreement that specifies the applicable Performance Period(s) and performance goal(s), the number of Performance Shares granted, and such other provisions as the Committee determines; provided, however, that except as otherwise provided in a Participant’s Award Agreement, upon a termination of employment or service or pursuant to Section 19 in the event of a Change in Control or Subsidiary Disposition, in no case will a Performance Period be for a period of less than one (1) year.

(c) Value of Performance Shares. The initial value of a Performance Share will equal the Fair Market Value of a Share on the date of grant; provided, however, that this restriction will not apply to Awards that are adjusted pursuant to Section 18.

(d) Form and Timing of Payment. As soon as practicable following the completion of the Performance Period applicable to outstanding Performance Shares, the Committee will certify in writing the extent to which the applicable performance goals have been attained and the resulting final value of the Award earned by the Participant and to be paid upon its settlement. By the fifteenth (15th) day of the third (3rd) month following the completion of the Performance Period applicable to outstanding Performance Shares, payment will be made to each eligible Participant of the final value of the Performance Shares. The Committee, in its sole discretion as specified in the Award A greement, may pay earned Performance Shares by delivery of Shares or by payment in cash of an amount equal to the Fair Market Value of the Shares (or a combination thereof).

(e) Voting Rights. A Participant will not have voting rights or other rights as a shareholder with respect to the Shares subject to an Award of Performance Shares granted under the Plan until the time, if at all, when the Shares are issued to the Participant pursuant to the terms of the applicable Award Agreement.

(f) Termination of Employment or Service.

(i) Except as otherwise determined by the Committee, upon a Participant’s termination of employment or service due to death or Disability, the Performance Shares will be paid based on a pro rata monthly basis, including full credit for partial months elapsed, and will be paid (A) based on the level of performance achieved as of the date of the termination, if determinable, or (B) at the target level, if not determinable. The amount of the Award to be paid may be computed under the following formula: total Performance Shares

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times (number of full months elapsed in shortest possible vesting period divided by number of full months in shortest possible vesting period) times percent performance level achieved immediately prior to the effective date of the termination of employment or service.

(ii) Except as otherwise determined by the Committee, if a Participant terminates employment or service with the Company for any reason other than death or Disability prior to the end of the Performance Period respecting an Award of Performance Shares, the Participant will forfeit any and all right to payment under the Performance Shares.

12. Performance Units.

(a) Grant of Performance Units. Subject to the terms and conditions of the Plan, Performance Units may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as the Committee determines.

(b) Award Agreement. Each grant of Performance Units will be evidenced by an Award Agreement that specifies the number of Performance Units granted, the Performance Period(s) and performance goal(s), and such other provisions as the Committee determines; provided, however, that except as otherwise provided in a Participant’s Award Agreement upon a termination of employment or service or pursuant to Section 19 in the event of a Change in Control or Subsidiary Disposition, in no case will a Performance Period be for a period of less than one (1) year.

(c) Value of Performance Units. The Committee will set performance goal(s) in its discretion that, depending on the extent to which they are met, will determine the number and/or value of Performance Units that will be paid to Participants.

(d) Form and Timing of Payment. As soon as practicable following the completion of the Performance Period applicable to outstanding Performance Units, the Committee will certify in writing the extent to which the applicable performance goals have been attained and the resulting final value of the Award earned by the Participant and to be paid upon its settlement. By the fifteenth (15th) day of the third (3rd) month following the completion of the Performance Period applicable to outstanding Performance Units, payment will be made to each eligible Participant of the final value of the Performance Units. The Committee, in its sole discretion as specified in the Award Agre ement, may pay earned Performance Units in cash or in Shares that have an aggregate Fair Market Value equal to the value of the earned Performance Units (or a combination thereof).

(e) Voting Rights. A Participant will not have voting rights or other rights as a shareholder with respect to the Shares subject to an Award of Performance Units granted under the Plan until such time, if at all, as Shares are issued to the Participant pursuant to the terms of the applicable Award Agreement.

(f) Termination of Employment or Service.

(i) Except as otherwise determined by the Committee, upon a Participant’s termination of employment or service due to death or Disability, the Performance Units will be paid based on a pro rata monthly basis, including full credit for partial months elapsed, and will be paid (A) based on the level of performance achieved as of the date of the termination, if determinable, or (B) at the target level, if not determinable. The amount of the Award to be paid may be computed under the following formula: total Performance Units times (number of full months elapsed in shortest possible vesting period divided by number of full months in shorte st possible vesting period) times percent performance level achieved immediately prior to the effective date of the termination of employment or service.

(ii) Except as otherwise determined by the Committee, if a Participant terminates employment or service with the Company for any reason other than death or Disability prior to the end of the Performance Period respecting an Award of Performance Units, the Participant will forfeit any and all right to payment under the Performance Units.

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13. Other Stock-Based Awards.

(a) Grant. The Committee has the right to grant Other Stock-Based Awards that may include, without limitation, (i) the grant of Shares based on attainment of performance goal(s) established by the Committee, (ii) the payment of Shares as a bonus or in lieu of cash based on attainment of performance goal(s) established by the Committee, and (iii) the payment of Shares in lieu of cash under other Company incentive or bonus programs.

(b) Period of Restriction. Except as otherwise provided in a Participant’s Award Agreement, upon a termination of employment or service or pursuant to Section 19 in the event of a Change in Control or Subsidiary Disposition, Other Stock-Based Awards granted pursuant to this Section 13 will have a minimum Period of Restriction of one (1) year, which period may, in the Committee’s discretion, lapse on a pro-rated, graded, or cliff basis (as specified in an Award Agreement); provided, however, that in the Committee’s discretion, up to five percent (5%) of the Shares available for issuance under the Plan may have a shorter Period of Restriction. Notwithstanding the above, an Award of payment in Shares in lieu of cash under other Company incentive or bonus programs will not be subject to the minimum Period of Restriction limitations described above and will not be applied against or included when calculating the 5% limitation in the previous sentence.

(c) Other Company Programs. Notwithstanding subsection (b) above, an Award that is payable in Shares in lieu of cash under another Company incentive or bonus program (and not this Plan) will not be subject to any Period of Restriction.

(d) Payment of Other Stock-Based Awards. Subject to Section 13(b), payment under or settlement of any such Awards will be made in such manner and at such times as the Committee determines. The Committee may provide that settlement of Other Stock-Based Awards will be deferred, on a mandatory basis or at the election of the Participant, pursuant to a deferred compensation plan designed to comply with Code Section 409A.

(e) Termination of Employment or Service. The Committee will determine the extent to which the Participant will have the right to receive Other Stock-Based Awards following termination of the Participant’s employment or service with the Company and its Subsidiaries. Those provisions will be determined in the sole discretion of the Committee, may be included in an agreement entered into with each Participant, but need not be uniform among all Other Stock-Based Awards, and may reflect distinctions based on the reasons for termination of employment or service.

14. Performance-Based Exception.

(a) If the Committee intends for an Award to qualify for the Performance-Based Exception, it shall specify that the attainment of one or more Performance Measures will determine the degree of granting, vesting or payout with respect to the Award. The Committee may establish Performance Measures, in its discretion, on a corporate-wide basis or with respect to one or more business units, divisions, subsidiaries, business segments, functions, salary grade level, or position, and in either absolute terms or relative to the performance of one or more comparable companies or an index covering multiple companies.

(b) Unless otherwise determined by the Committee, measurement of Performance Measures will exclude the impact of charges for restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring items, as well as the cumulative effects of tax or accounting changes, each as determined in accordance with generally accepted accounting principles or identified in the Company’s financial statements, notes to the financial statements, management’s discussion and analysis, or other filings with the SEC.

(d) Achievement of Performance Measures in respect of Awards intended to qualify under the Performance-Based Exception will be measured over a Performance Period specified in the Award Agreement, and the goals will be established not later than 90 days after the beginning of the Performance Period or, if less than 90 days, the number of days that is equal to 25% of the relevant Performance Period applicable to the Award.

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(e) The Committee will have the discretion to adjust the determinations of the degree of attainment of the pre-established Performance Measures; provided, however, that Awards that are designed to qualify for the Performance-Based Exception may not be adjusted upward (the Committee may, in its discretion, adjust the Awards downward).

15. Transferability of Awards; Beneficiaries.

(a) Awards Not Transferable. Except as provided in this Section 15, Awards under the Plan will not be assignable or transferable by the Participant, except by will or by the laws of descent and distribution, and will not be subject in any manner to assignment, alienation, pledge, encumbrance or charge. During the lifetime of a Participant, an Award will be exercised only by the Participant or the Participant’s guardian or legal representative.

(b) Death of Participant. Notwithstanding subsection (a), the Committee may provide in an Award Agreement that the Participant has the right to designate a beneficiary or beneficiaries who will be entitled to any rights, payments, or other benefits of the Award following the Participant’s death. In the event of the Participant’s death, the Participant’s beneficiary may exercise the Award, to the extent the Award Agreement permits, in the same manner and to the same extent that the Participant could have exercised the Award on the date of his of her death.

(c) Designation of Beneficiary. If an Award Agreement provides that a Participant has the right to designate a beneficiary or beneficiaries, the Participant must designate his or her beneficiary or beneficiaries in the manner the Committee prescribes in the Award Agreement.

(d) Failure to Designate a Beneficiary. If a Participant’s Award Agreement allows the Participant to designate a beneficiary or beneficiaries of the Award, and the Participant dies without a beneficiary designation valid under subsection (c), the Award may be exercised, within the limits of subsection (b), by the legatee of the Award under the Participant’s will, by the Participant’s estate in accordance with the Participant’s will, or the laws of descent and distribution.

16. Taxes.

Prior to the delivery of any Shares or cash pursuant to an Award, the Company has the right and power to deduct or withhold, or require the Participant to remit to the Company, an amount sufficient to satisfy all applicable tax withholding requirements. The Company may permit or require a Participant to satisfy all or part of the tax withholding obligations in connection with an Award by (a) having the Company withhold otherwise deliverable Shares, or (b) delivering to the Company Shares already owned for a period of at least six (6) months (or such longer or shorter period as may be required to avoid a charge to earnings for financial accounting purposes), in each case having a value equal to the amount to be withheld, which will not exceed the amount determined by the applicable minimum statutory tax withholding rate (or such othe r rate as will not result in a negative accounting impact). For these purposes, the value of the Shares to be withheld or delivered will be equal to the Fair Market Value as of the date that the taxes are required to be withheld.

17. Conditions Upon Issuance of Shares.

(a) Shares will not be issued pursuant to the exercise or settlement of an Award, unless the exercise of the Award and the issuance and delivery of the Shares pursuant thereto will comply with Applicable Law.

(b) As a condition to the exercise or settlement of an Award, the Company may require the person exercising the Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute the Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Law.

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18. Adjustments Upon Changes in Capitalization.

In the event of any merger, reorganization, consolidation, recapitalization, liquidation, stock dividend, split-up, spin-off, stock split, reverse stock split, share combination, share exchange, or any change in the corporate structure affecting the Shares, or in the event of payment of a dividend or distribution to the shareholders of the Company in a form other than Shares (excepting normal cash dividends) or other corporate event that has a material effect on the Fair Market Value of the Shares, such adjustment will be made in the number and kind of Shares that may be delivered under the Plan, the individual limits set forth in Section 4(c), and, with respect to outstanding Awards, in the number and kind of Shares subject to outstanding Awards, the Exercise Price, grant price or other price of Shares subject to outstanding Awards , any performance conditions relating to Shares, the market price of Shares, or per-Share results, and other terms and conditions of outstanding Awards, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that, unless otherwise determined by the Committee, the number of Shares subject to any Award will always be rounded down to a whole number. Adjustments made by the Committee pursuant to this Section 18 will be final, binding, and conclusive.

19. Change in Control, Cash-Out and Termination of Underwater Options/SARs, and Subsidiary Disposition.

(a) Change in Control. Except as otherwise provided in a Participant’s Award Agreement, if a Participant’s employment or service is involuntarily terminated, for whatever reason, at any time within twelve (12) months after a Change in Control, unless otherwise specifically prohibited under Applicable Law:

(i) any and all outstanding Awards granted under the Plan with time-based vesting provisions will vest on a pro rata monthly basis, including full credit for partial months elapsed; and

(ii) any and all Awards granted under the Plan with performance-based vesting provisions will vest on a pro rata monthly basis, including full credit for partial months elapsed, and will be paid (A) based on the level of performance achieved as of the date of the termination, if determinable, or (B) at the target level, if not determinable. The amount of the vested Award may be computed under the following formula: total Award number of Shares times (number of full months elapsed in shortest possible vesting period divided by number of full months in shortest possible vesting period) times percent performance level achieved immediately prior to the effective date of the termination.

(b) Cash-Out and Termination of Underwater Options/SARs. The Committee may, in its sole discretion, determine that (i) all outstanding Options and SARs will be terminated upon the occurrence of a Change in Control and that each Participant will receive, with respect to each Share subject to the Options or SARs, an amount in cash equal to the excess of the consideration payable with respect to one Share in connection with the Change in Control over the Option Exercise Price or the SAR grant price; and (ii) Options and SARs outstanding as of the date of the Change in Control may be cancelled and terminated without payment if the consideration payable with respec t to one Share in connection with the Change in Control is less than the Option Exercise Price or the SAR grant price.

(c) Subsidiary Disposition. The Committee will have the authority, exercisable either in advance of any actual or anticipated Subsidiary Disposition or at the time of an actual Subsidiary Disposition and either at the time of the grant of an Award or at any time while an Award remains outstanding, to provide for the automatic full vesting and exercisability of one or more outstanding unvested Awards under the Plan and the termination of restrictions on transfer and repurchase or forfeiture rights on the Awards, in connection with a Subsidiary Disposition, but only with respect to those Participants who are at the time engaged primarily in Continuous Service with the Sub sidiary involved in the Subsidiary Disposition. The Committee also will have the authority to condition any such Award vesting and exercisability or release from limitations upon the subsequent termination of the affected Participant’s Continuous Service with that Subsidiary within a specified period following the effective date of the Subsidiary Disposition. The Committee may provide that any Awards so vested or released from limitations in connection with a Subsidiary Disposition, will remain fully exercisable until the expiration or sooner termination of the Award.

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20. Amendment, Suspension or Termination of the Plan.

(a) Amendment, Modification and Termination. The Board may at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part; provided, however, that no amendment that requires shareholder approval, as described in subsection (b) below, will be effective unless the amendment is approved by the requisite vote of shareholders of the Company entitled to vote thereon within the applicable time period.

(b) Amendments Requiring Shareholder Approval. The Board will seek shareholder approval of any amendment the Board determines would require shareholder approval under the applicable rules of any national securities exchange or other market system, and such an amendment will become effective only upon its approval by the Company’s shareholders. Except for adjustments made pursuant to Section 18, plan amendments that require shareholder approval include, without limitation, any amendment that would (i) increase the maximum number of Shares for which Awards may be granted under the Plan; (ii) reduce the Exercise Price of outstanding Options or the grant price of outstanding SARs; (iii) extend the term of the Plan or the maximum term of Options granted under the Plan; or (iv) change the class of persons eligible for grants of Awards under the Plan. Except as provided in Section 18, the Committee may not take any action: (1) to reprice, replace, regrant through cancellation or modify an outstanding Option or SAR if the effect of such action would be to reduce the Exercise Price of the Option or the grant price of the SAR; or (2) to cancel an outstanding Option or SAR having an Exercise Price or grant price above the then-current Fair Market Value of the Shares in exchange for the grant of another type of Award, without, in each case, first obtaining approval of the shareholders of the Company of such action.

(c) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 18) affecting the Company or the financial statements of the Company or of changes in Applicable Law, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. With respect to any Awards intended to comply with the Performance-Based Exception, unless otherwise determined by the Committee, any such exception will be specified at such times and in such manner as will not cause such Awards to fail to qualify under the Performance-Based Exception.

(d) Awards Previously Granted. No termination, amendment or modification of the Plan or of any Award will adversely affect in any material way any Award previously granted under the Plan without the written consent of the Participant holding the Award, unless the termination, modification or amendment is required by Applicable Law and except as otherwise provided under the Plan.

(e) Compliance with the Performance-Based Exception. If an Award is intended comply with the requirements of the Performance-Based Exception, the Committee may apply any restrictions it deems appropriate such that the Awards maintain eligibility for the Performance-Based Exception. If changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Awards available under the Plan, the Committee may, subject to this Section 20, make any adjustments to the Plan or Award Agreements it deems appropriate.

21. Reservation of Shares.

(a) The Company, during the term of the Plan, will at all times reserve and keep available a number of Shares sufficient to satisfy the Plan’s requirements. Shares issued under the Plan may be either authorized but unissued Shares, or Shares held in the Company’s treasury.

(b) The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell the Shares as to which the requisite authority is not obtained.

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22. Rights of Participants.

(a) Continued Service. The Plan will not confer upon any Participant any right to continue employment or service with the Company, nor will it interfere in any way with his or her right or the Company’s right to terminate a Participant’s employment or service at any time, with or without cause.

(b) Participant. No Employee, Non-Employee Director, consultant or other individual will have the right to be selected to receive an Award under the Plan, or, having been so selected, to be selected to receive future Awards.

23. Successors.

All obligations of the Company under the Plan and with respect to Awards will be binding on any successor to the Company, whether the existence of the successor is the result of a direct or indirect purchase, merger, consolidation, or other event, or a sale or disposition of all or substantially all of the business and/or assets of the Company, and references to the “Company” in the Plan and in any Award Agreements will be deemed to refer to such successors.

24. Legal Construction.

(a) Gender, Number and References. Except where otherwise indicated by the context, any masculine term used in the Plan also will include the feminine, the plural will include the singular, and the singular will include the plural. Any reference in the Plan to a Section of the Plan either in the Plan or any Award Agreement or to an act or code or rule or regulation will be deemed to refer to that Section of the Plan, act, code, rule or regulation, as may be amended from time to time, or to any successor Section of the Plan, act, code, rule or regulation.

(b) Severability. In the event any provision of the Plan is held illegal or invalid for any reason, the illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as if the illegal or invalid provision had not been included.

(c) Requirements of Law. The granting of Awards and the issuance of Shares or cash under the Plan will be subject to all Applicable Law and to such approvals by any governmental agencies or national securities exchanges as may be required.

(d) Governing Law. To the extent not preempted by federal law, the Plan and all Award Agreements under the Plan will be construed in accordance with and governed by the laws of the State of Indiana, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan to the substantive law of another jurisdiction.

(e) Non-Exclusive Plan. Neither the adoption of the Plan by the Board nor its submission to the Company’s shareholders for approval will be construed as creating any limitations on the power of the Board or a committee of the Board to adopt any other incentive arrangements it may deem desirable.

(f) Code Section 409A Compliance. To the extent applicable, it is intended that this Plan and any Awards granted hereunder comply with the requirements of Code Section 409A and any related regulations or other guidance promulgated with respect to that section by the U.S. Department of the Treasury or the Internal Revenue Service. Any provision that would cause the Plan or any Award granted under the Plan to fail to satisfy Code Section 409A will have no force or effect until amended to comply with Code Section 409A, which amendment may be retroactive to the extent permitted by Code Section 409A. With respect to any Award hereunder that constitut es “deferred compensation” within the meaning of Code Section 409A, notwithstanding any other provision of the Plan or the applicable Award Agreement, (i) any amount that is payable on account of a separation from service to a “specified employee, ” as defined in Code Section 409A(a)(2)(B)(i), will not be paid earlier than the date that is six (6) months following the specified employee’s separation from service; and (ii) an Award recipient will not be treated as having terminated employment or service until that individual has incurred a separation from service within the meaning of Code Section 409A. The determination of which individuals are “specified employees” will be made in accordance with such rules and practices, consistent with Code Section 409A and interpretive regulations, as established from time to time by the Board, or its designee, in its discretion.

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		VOTE BY INTERNET- www.proxyvote.com
INTERACTIVE INTELLIGENCE, INC. C/O Investor Relations 7601 Interactive Way Indianapolis, IN 46278		Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. Electronic Delivery of Future PROXY MATERIALS If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years.
		VOTE BY PHONE - 1-800-690-6903
		Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions.

		VOTE BY MAIL
		Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.

TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:		KEEP THIS PORTION FOR YOUR RECORDS
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.		DETACH AND RETURN THIS PORTION ONLY

The Board of Directors recommends that you vote FOR the following:

1. Election of Directors:	For All	Withhold All	For All Except	To withhold authority to vote for any individual nominee(s), mark "For All Except" and write the number(s) of the nominee(s) on the line below.
Nominees: 01 - Mark E. Hill	£	£	£
02 - Michael C. Heim

The Board of Directors recommends you vote FOR the following proposal(s):

	For	Against	Abstain
2. Approve an Amendment to the Interactive Intelligence, Inc. 2006 Equity Incentive Plan.	£	£	£
3. Consent to the Appointment of KPMG LLP as Independent Registered Public Accounting Firm.	£	£	£

Note: In their discretion, the proxies are authorized to vote upon such other matters that may properly come before the meeting or any adjournment or adjournments thereof.

(NOTE: Please sign exactly as your name(s) appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership name, by authorized officer.


Signature [PLEASE SIGN WITHIN BOX]	Date		Signature (Joint Owners)	Date

Dear Investor,

For comments: please contact our investor relations department at (317) 872-3000.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting:

The Notice & Proxy Statement, Annual Report on Form 10-K is/are available at www.proxyvote.com.

INTERACTIVE INTELLIGENCE, INC.

2010 Annual Meeting of Shareholders

May 20, 2010 1:30 PM

This proxy is solicited by the Board of Directors

By signing the proxy, you revoke all prior proxies and appoint Donald E. Brown, M.D. and Stephen R. Head, and each of them, with full power of substitution,

to vote the shares on the matters shown on the reverse side and any other matters which may come before the Annual Meeting of Shareholders of the

Company to be held at the Company's World Headquarters, 7601 Interactive Way, Indianapolis, Indiana on Thursday, May 20, 2010 at 1:30 p.m. Eastern Time,

and at any adjournments thereof.

If you participate in the Interactive Intelligence, Inc. 401(k) Savings Plan you may give voting instructions to Merrill Lynch Retirement Group, the plan

Trustee, as to the number of shares of the Company's common stock credited to your 401(k) Savings Plan account as of the most recent valuation date

coincident with or preceding the record date. The Trustee will vote your shares in accordance with your instructions received by May 18, 2010 at 11:59 p.m.

Eastern Time. You may also revoke previously given voting instructions by May 18, 2010 at 11:59 p.m. Eastern Time, by delivering a new proxy via the Internet,

by telephone or by mail. Your voting instructions will be kept confidential by the Trustee. If you do not send voting instructions, the Trustee will vote the

number of shares credited to your account as directed by the Investment Committee of the 401(k) Savings Plan. The Investment Committee intends to direct

the Trustee to vote such shares "FOR" each of the director nominees and "FOR" Proposals 2 and 3.

  THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED BY THE SHAREHOLDER. IF NO SUCH DIRECTIONS ARE MADE,

THIS PROXY WILL BE VOTED FOR THE ELECTION OF NOMINEES LISTED ON THE REVERSE SIDE FOR THE BOARD OF DIRECTORS AND

FOR PROPOSALS 2 AND 3.

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED REPLY ENVELOPE

Continued and to be signed on reverse side

Interactive Intelligence Inactive DEF 14ADefinitive proxy