zk1008111.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR
 
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

OR

 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-27466

NICE-SYSTEMS LTD. 
(Exact name of Registrant as specified in its charter)

N/A
(Translation of Registrant’s name into English)

Israel
(Jurisdiction of incorporation or organization)

8 Hapnina Street, P.O. Box 690, Ra’anana 43107, Israel
(Address of principal executive offices)

Dafna Gruber, +972-9-7753151, dafna.gruber@nice.com,
8 Hapnina Street, P.O.Box 690, Ra’anana 43107, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange
On Which Registered
   
American Depositary Shares, each representing
one Ordinary Share, par value one
New Israeli Shekel per share
NASDAQ Global Select Market
 
 
 
 
 
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:

None
(Title of Class)
 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

62,036,491 Ordinary Shares, par value NIS 1.00 Per Share (which includes 77,983 restricted shares)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

þ  Yes                      o  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.

o  Yes                      þ  No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

þ  Yes                      o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such reports).

o  Yes                      o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large accelerated filer  þ  Accelerated filer  o    Non-accelerated filer  o
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

þ           U.S. GAAP

o           International Financial Reporting Standards as issued by the International Accounting Standards Board

o           Other

If “Other” has been checked in response to the previous question indicate by check mark which financial statements the registrant has elected to follow:

o Item 17                      o Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o  Yes                      þ  No
 
 
I 
 
 
 
PRELIMINARY NOTE
 
This annual report contains historical information and forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 with respect to NICE’s business, financial condition and results of operations.  The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “strategy,” “continue,” “goal” and “target” and similar expressions, as they relate to NICE or its management, are intended to identify forward-looking statements.  Such statements reflect the current views and assumptions of NICE with respect to future events and are subject to risks and uncertainties.  The forward-looking statements relate to, among other things: operating results; anticipated cash flows; gross margins; adequacy of resources to fund operations; our ability to maintain our average selling prices despite the aggressive marketing and pricing strategies of our competitors; our ability to maintain and develop profitable relationships with our key distribution channels; the financial strength of our key distribution channels; and the market’s acceptance of our technologies, products and solutions.
 
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements.  Many factors could cause the actual results, performance or achievements of NICE to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic and business conditions, the impact of the global credit crisis, changes in currency exchange rates and interest rates, difficulties or delays in absorbing and integrating acquired operations, products, technologies and personnel, changes in business strategy and various other factors, both referenced and not referenced in this annual report.  These risks are more fully described under Item 3, “Key Information – Risk Factors” of this annual report.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected.  NICE does not intend or assume any obligation to update these forward-looking statements.  Investors should bear this in mind as they consider forward-looking statements and whether to invest or remain invested in NICE-Systems Ltd.’s securities.
 
In this annual report, all references to “NICE,” “we,” “us” or “our” are to NICE-Systems Ltd., a company organized under the laws of the State of Israel, and its wholly owned subsidiaries. For a list of our significant subsidiaries, please refer to page 43 of this annual report.
 
In this annual report, unless otherwise specified or unless the context otherwise requires, all references to “$” or “dollars” are to U.S. Dollars, all references to “EUR” are to Euros, all references to “GBP” are to British Pounds, all references to “CHF” are to Swiss Francs and all references to “NIS” are to New Israeli Shekels. Except as otherwise indicated, the financial statements of and information regarding NICE are presented in U.S. dollars.
 
During May 2006, we effected a two-for-one split of our ordinary shares.  The split was effected by way of a 100% stock dividend, which had an ex-dividend date of May 31, 2006.  Unless otherwise indicated, all ordinary share, option and per share amounts in this annual report have been adjusted to give retroactive effect to the stock split for all periods presented.
 
 
II 
 
 
TABLE OF CONTENTS

                                            PART I
Page
     
1
1
1
22
44
44
66
81
83
87
89
108
110
 
PART II
111
111
112
112
113
113
114
114
114
114
 
PART III
114
114
115
Index to Financial Statements                                                                                                                    
F-1
 
 
III 
 
 
PART I
 
Item 1.                      Identity of Directors, Senior Management and Advisers.
 
           Not Applicable.
 
Item 2.                      Offer Statistics and Expected Timetable.
 
           Not Applicable.
 
Item 3.                      Key Information.
 
Selected Financial Data
 
The following selected consolidated balance sheets data as of December 31, 2008 and 2009 and the selected consolidated statements of income data for years ended December 31, 2007, 2008 and 2009 have been derived from our audited Consolidated Financial Statements. These financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The selected consolidated statement of income data as of December 31, 2005, and 2006 and the selected consolidated balance sheet data for the years ended December 31, 2005, 2006 and 2007 have been derived from other Consolidated Financial Statements not included in this annual report and have also been prepared in accordance with U.S. GAAP and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to Item 5, “Operating and Financial Review and Prospects” and the Consolidated Financial Statements and notes thereto and other financial information included elsewhere in this annual report.
 
   
Year Ended December 31,
  
   
2005
    
2006
    
2007
    
2008
    
2009
  
   
(U.S. dollars in thousands, except per share data)
  
OPERATING DATA:
                              
Revenues
                              
     Products                                                       
   $ 206,355     $ 261,098     $ 316,888     $ 351,680     $ 281,783  
      Services                                                       
     104,755       148,546       200,486       272,482       301,332  
Total revenues                                                       
     311,110       409,644       517,374       624,162       583,115  
Cost of revenues
                                        
      Products                                                       
     67,543       84,675       89,373       95,861       88,030  
      Services                                                       
     68,683       89,539       116,969       142,885       149,175  
Total cost of revenues                                                       
     136,226       174,214       206,342       238,746       237,205  
Gross profit
     174,884       235,430       311,032       385,416       345,910  
Operating expenses:
                                        
Research and development, net
     30,896       44,880       59,632       78,445       77,382  
Selling and marketing                                                  
     72,829       95,190       120,592       147,879       141,526  
General and administrative                                                  
     37,742       60,463       85,089       97,378       72,791  
Amortization of acquired intangible assets
     1,331       4,918       9,175       14,493       16,012  
In process research and development write-off
     -       12,882       3,710       -       -  
Settlement and related expenses
     -       -       -       9,870       -  
Total operating expenses                                                       
     142,798       218,333       278,198       348,065       307,711  
Operating income                                                       
     32,086       17,097       32,834       37,351       38,199  
Financial income, net                                                       
     5,398       13,272       14,824       11,289       7,712  
Other income (expenses), net                                                       
     (13 )     623       (24 )     (53 )     (115 )
Income before taxes on income                                                       
     37,471       30,992       47,634       48,587       45,796  
Taxes on income                                                       
     902       8,591       10,254       9,480       3,040  
Net income                                                       
     36,569       22,401       37,380       39,107       42,756  
Net income
   $ 36,569     $ 22,401     $ 37,380     $ 39,107     $ 42,756  
                                         
Basic earnings per share
   $ 0.95     $ 0.45     $ 0.69     $ 0.65     $ 0.70  
Weighted average number of shares used in
   computing basic earnings per share (in thousands)
          38,242         49,572         53,921       60,088       61,395  
Diluted earnings per share
   $ 0.89     $ 0.43     $ 0.67     $ 0.64     $ 0.68  
Weighted average number of shares used in
   computing diluted earnings per share (in thousands)
       41,292           52,002         55,926       61,268       62,490  
 
   
At December 31,
   
2005
    
2006
    
2007
    
2008
    
2009
 
    
BALANCE SHEET DATA:
                            
Working capital                                                       
   $ 274,708     $ 111,800     $ 152,883     $ 217,511     $ 184,460  
Total assets                                                       
     617,250       784,344       1,192,334       1,283,015       1,399,677  
Total debt                                                       
     -       -       -       -       -  
Shareholders’ equity                                                       
     487,041       569,574       903,794       970,822       1,062,754  
 
1
 
 
Risk Factors
 
General Business Risks Relating to Our Business and Market
 
The markets in which we operate are highly competitive and we may be unable to compete successfully.
 
The market for our products, solutions and related services, in general, is highly competitive. Additionally, some of our principal competitors may have greater resources and larger customer bases than we do. We have seen evidence of price reductions by some of our competitors and expect to continue to see such behavior in the future, which may adversely affect our revenues, gross margins and results of operations. To date, we have been able to manage our product design and component costs. However, there can be no assurance that we will be able to continue to achieve reductions in component and product design costs. Further, the relative and varying rates of increases or decreases in product price and cost could have a material adverse impact on our earnings.
 
New potential entrants to the enterprise sector may offer some of the products and services that we sell at lower prices, which could result in the commoditization of our products and services, and force us to lower our prices. Furthermore, system integrators may decide to enter our market space and compete with us by offering comprehensive solutions, which may result in a substantial decline in our sales. If we are faced with such competition, it could have a material adverse effect on our business, financial condition or results of operations.
 
        We are expanding the scope of our Voice Recording Platforms and Contact Center Applications. The market for such applications is constantly gaining momentum, however it is still immature. Successful positioning of our products in this market is a critical factor in our ability to maintain growth. Furthermore, new potential entrants from the traditional enterprise business intelligence and business analytics sector, in addition to Customer Relationship Management, or CRM, and infrastructure players (mostly telephony or switch vendors), may decide to develop recording and content analysis capabilities and compete with us in this emerging opportunity. As a result, we expect to continue to make significant expenditures on research and development and marketing. We cannot ensure that the market awareness or demand for our new products will grow as rapidly as we expect, or if at all, that we will successfully develop new products or introduce new applications for existing products, that such new products and applications will achieve market acceptance or that the introduction of new products or technological developments by others will not adversely impact the demand for our products.
 
The risk and financial crime market has emerged only in recent years and is highly competitive and fragmented. Our software solutions in this field compete with software developed internally by potential clients as well as software and other solutions offered by competitors.
 
The market for digital video products and applications (or Video Platforms and Applications), is highly competitive and fragmented and includes products offering a broad range of features and capacities. The merger of our competitors in this market could substantially influence our ability to be competitive. We compete with a number of large, established manufacturers of video recording systems and distributors of similar products, as well as new emerging competitors. The price per channel of digital recording systems has decreased throughout the market in recent years, primarily due to competitive pressures. We cannot assure you that the price per channel of digital recording systems will not continue to decrease or that our gross profit will not decrease as a result. Moreover, our penetration into this market may not experience the same growth rate as the entire company’s growth rate, which might have a material adverse effect on our earnings.
 
 
2
 
 
With respect to the public safety part of our business, our ability to succeed depends on our ability to develop an effective network of distributors, while facing pricing pressures and low barriers to entry. We face significant competition from other well-established competitors. Prices have decreased throughout the market in recent years, primarily due to competitive pressures. We cannot assure you that prices will not continue to decrease or that our gross profit will not decrease as a result. We believe that our ability to sell and distribute our Voice Platforms and Applications in the public safety market depends on the success of our marketing, distribution and product development initiatives. We cannot assure you that we will be successful in these initiatives.
 
The Voice-over-Internet-Protocol (or VoIP) contact center and trading market is highly competitive and we may be unable to compete successfully. The transition of contact centers and trading floors to VoIP platforms is continuing, and may allow one or more of our competitors to take a leadership position with respect to this technology. Strategic partners may change their vendor preference as a result or may develop embedded VoIP recording as part of the VoIP switch or networking infrastructure. Successful marketing of our products and services to our customers and partners will be critical to our ability to maintain growth. We cannot assure you that our products or existing partnerships will permit us to compete successfully.
 
With respect to our intelligence solutions, we may face increasing competition in all aspects of this business, which may result in price reductions. In addition, we may encounter strong competition from alliances formed or consolidation among our competitors, in an attempt to strengthen their offering. We cannot assure you that our products and services or alliances will permit us to compete successfully.
 
 
 
3
 
 
Conditions and changes in the local and global economic environments may adversely affect our business and financial results.
 
        Adverse economic conditions in markets in which we operate can harm our business. Global financial conditions during the past two years have been characterized by increased volatility and several financial institutions have either gone into bankruptcy or have had to be rescued by governmental authorities. These economic factors include diminished liquidity and tighter credit conditions, leading to decreased credit availability, as well as declines in economic growth and employment levels in almost all sectors, all of which result in lesser demand for our products and services. Although there are currently signs of improvement in the global economy, the recession may continue for an unknown period of time. Partly as a result, entire industries have faced and may be facing extreme contraction and even the prospect of collapse. The credit crisis could have a number of follow-on effects on our business, including a possible: (i) slow-down in our business, resulting from lower customer expenditure, inability of customers to pay for products and services, insolvency of customers or insolvency of key partners, (ii) negative impact on our liquidity, financial condition and share price, which may impact our ability to raise capital in the market, obtain financing and other sources of funding in the future on terms favorable to us, and (iii) decrease in asset values that are deemed to be other than temporary, which may result in impairment losses. If such increased levels of volatility and market instability continue, it may materially adversely affect our results of operations and may increase the difficulty for us to accurately forecast and plan our future business.
  
Unfavorable economic and market conditions and reduced information technology spending may lead to a decreased demand for our products and services and may harm our business, financial condition and results of operations.
 
Recent events in the financial market have impacted our enterprise business and we may continue to experience a slowdown in our business. To the extent that our business continues to suffer as a result of such unfavorable economic and market conditions, our operating results may be materially adversely affected. In particular, enterprises may continue to reduce spending in connection with their contact centers. Financial institutions may also continue to reduce spending in relation to trading floors and operational risk management. IT-related capital expenditures are typically cyclical in nature, with generally higher budgets in times of improving economic conditions and lower budgets in times of economic slowdowns. In addition, enterprises’ ordering and payment patterns are influenced by market conditions and could cause fluctuations in our quarterly results. Moreover, our clients may, due to imminent regulatory or operational deadlines or objectives or for other reasons, prioritize other expenditures over the solutions that we offer.
 
Customer purchase decisions may be significantly affected by a variety of factors, including trends in spending for information technology and enterprise software, market competition, capital expenditure prioritization, budgeting and the viability or announcement of alternative technologies. Furthermore, even when information technology is a priority, prospective customers that made significant investments in internally developed solutions or in point solutions could incur significant costs in switching to third-party enterprise-wide products such as ours. If the current economic conditions continue or deteriorate, it may have a material adverse impact on our business, financial condition and results of operations.
 
 
 
4
 
 
The markets in which we operate are characterized by rapid technological changes and frequent new products and service introductions. We may not be able to keep up with these rapid technological and other changes.
 
We operate in several markets, each characterized by rapidly changing technology, new product introductions and evolving industry standards. The introduction of products embodying new technology and the emergence of new industry standards can render existing products obsolete and unmarketable and can exert price pressures on existing products. A number of existing and potential competitors might introduce new and enhanced products that could adversely affect the competitive position of our products. Our most significant market is the market for voice recording platforms and related enhanced applications (or Voice Platforms and Applications). Voice Platforms and Applications are utilized by the enterprise sector, which includes entities operating in the contact center, trading floor, branches, home agents and back offices, and by the security sector, which includes homeland security and first responders, transportation organizations and the public and private sector, to capture, store, retrieve and analyze recorded data. The market for our Voice Platforms and Applications is, in particular, characterized by a group of highly competitive vendors that are introducing rapidly changing competitive offerings around evolving industry standards.
 
Our ability to anticipate changes in technology and industry standards and to successfully develop and introduce new, enhanced and competitive products, on a timely basis, in all the markets in which we operate, will be a critical factor in our ability to grow and be competitive. As a result, we expect to continue to make significant expenditures on research and development, particularly with respect to new software applications, which are continuously required in all our business areas. The convergence of voice and data networks and wired and wireless communications could require substantial modification and customization of our current multi-dimensional products and business models, as well as the introduction of new multi-dimensional products. Further, customer acceptance of these new technologies may be slower than we anticipate. We cannot assure that the market or demand for our products and solutions will sustain or grow as rapidly as we expect, if at all, that we will successfully develop new products or introduce new applications for existing products, that such new products and applications will achieve market acceptance or that the introduction of new products or technological developments by others will not render our products obsolete. In addition, our products must readily integrate with major third party security, telephone, front-office and back-office systems. Any changes to these third party systems could require us to redesign our products, and any such redesign might not be possible on a timely basis or achieve market acceptance. Our inability to develop products that are competitive in technology and price and responsive to customer needs could have a material adverse effect on our business, financial condition and results of operations. Additional factors that could have a material adverse effect on our business, financial condition and results of operations include industry specific factors; our ability to continuously develop, introduce and deliver commercially viable products, solutions and technologies; the market’s rate of acceptance of the product solutions and technologies we offer; and our ability to keep pace with market and technology changes and to compete successfully.
 
 
 
5
 
 
Our failure to adequately adapt to changes in the IT industry and the size of customers could negatively impact our future operating results.
 
Technological trends, such as the evaluation of virtualization technologies, the need for IT efficiency (converting IT costs from capital expenses to operating expenses) and the increased demand for business agility are all contributing to the move of cloud computing into the mainstream.  Cloud Computing means a form of computing in which dynamically scalable and often virtual resources are provided as a service over the Internet. A cloud solution has three distinct characteristics that differentiate it from traditional on-premise solutions.  It is sold on demand, typically by the minute or the hour, it is elastic - a user can have as much or as little of a solution as they want at any given time, and the solution is fully managed by the provider (the customer needs nothing but a personal computer and Internet access).
 
If enterprise customers embrace cloud computing and change the way they source business solutions, preferring hosted and cloud-based Software-as-a-Service (or SaaS), and if we are not able to adequately adapt and evolve our delivery options to include on-premise, hosted, cloud-based SaaS, or blended-hybrid deployment offerings, our business, financial condition and results of operations could be adversely affected. In addition, cloud computing, could also make it easier for new competitors (such as telecom carriers) to enter our markets due to lower up-front technology costs.
 
In addition, the economic climate has forced many organizations to reassess their contact center solutions’ infrastructure. For the contact center, the enterprise and the remote and mobile workforce, an all-in-one contact center platform may be a preferred alternative to a multi-point system, as it may result in a reduction in the Total Cost of Ownership (TCO) and the enablement of new cross systems business processes. Although we may benefit from this trend, at the same time, we are observing that there are infrastructure players, for the most part, telephony or switch vendors, that are looking to explore the opportunity to introduce a “contact center in a box” type of solution that will include features and functionality on top of the legacy Work Force Optimization (WFO) capabilities that NICE and other WFO vendors support. Should this trend emerge, and in the event that we will not be able to create an integrated experience for our customers in the form of an integrated suite, we may be faced with a new type of competition, which could have a material adverse effect on our business, financial condition or results of operations.
 
Furthermore, some of our enterprise customers have increased in size, partly due to consolidation in the financial market. If our technology is not scalable enough to support these changes, it may have a material adverse affect on our business, financial condition and results of operation.
 
 
6
 
 
Risks associated with our distribution channels and key strategic partners, or our ability to develop such partnerships, may materially adversely affect our financial results.
 
We have agreements in place with many distributors, dealers and resellers to market and sell our products and services in addition to our direct sales force. We derive a significant percentage of our revenues from one of our distributor channels and new channels may, in the future, account for a significant percentage of our revenues. Our financial results could be materially adversely affected if our contracts with distribution channels or our other partners were terminated, if our relationship with our distribution channels or our other partners were to deteriorate or if the financial condition of our distribution channels or our other partners were to weaken. Moreover, our current distribution channels or our strategic partners may decide to enter into our markets in competition with us, which will likely result in the termination of our relationship and may lead to a significant reduction in sales through related channels.
 
A portion of our strategic partners are suppliers of telecommunication infrastructure equipment. If our competitors are able to penetrate our strategic relationships or if our strategic partners decide to end the relationship and expand their product offering to compete with us, this may result in a significant reduction of sales made by such strategic partners, as well as to customers who use such partners’ infrastructure or work in their environment.
 
We believe that developing marketing partnerships and strategic alliances is an important factor in our success in marketing our video platforms and applications and in penetrating new markets for such products. However, unlike our voice platforms and applications, we have only recently started to develop a number of strategic alliances for the marketing and distribution of our video platforms and applications. We cannot assure you that we will be able to develop such partnerships or strategic alliances on terms that are favorable to us, if at all. Failure to develop such arrangements that are satisfactory to us may limit our ability to successfully market and sell our video platforms and applications and may have a negative impact on our business and results of operations.
 
As our market opportunities change, our reliance on particular distribution channels or strategic partners may increase, which may negatively impact our gross margins. There can be no assurance that we will be successful in maintaining or expanding these channels or partnerships. If we are not successful, we may lose sales opportunities, customers and market share. In addition, some of our distribution channels or our strategic partners have developed and marketed IP-based products, software applications and storage products and services in competition with us and there can be no assurance that our distribution channels or our strategic partners will not further develop or market such products and services in the future.
 
Risks associated with the future plans of our largest global distribution channel may materially adversely affect our financial results.
 
Avaya, our largest global distribution channel, and one of the leading global providers of enterprise business communication platforms, and a leading provider of infrastructure for contact center operations, accounted for less than 10% of our revenues in 2009 and approximately 13% of our revenues in 2007 and 2008. Avaya has been communicating planned changes in its business model, including: (i) an expected release of an Avaya-branded Work Force Optimization (WFO) suite, and (ii) the shifting of its business model to a channel centric distribution model with a focus on indirect sales through Avaya’s business partners. Currently, Avaya continues to sell and support NICE products, however, it may focus on selling the Avaya-branded suite, which could be based on its relationship with our largest competitor or others, and may change the scope and nature of its relationship with us. In addition, we may be unsuccessful at maintaining or expanding our relationship with Avaya’s distribution channels. Avaya may further decide to directly compete with us by offering recording as a standard functionality in the telephony infrastructure systems (recording at the switch), which may have a substantial negative impact on our relationship with Avaya.
 
These changes may result in a significant reduction of our sales made through Avaya. Furthermore, we also sell our products, either directly or through our other distribution channels, to customers who use Avaya’s infrastructure or operate in Avaya’s environment, and therefore may experience a reduction in sales to these customers, which is broader than Avaya’s direct business with us.
 
We depend on a small number of significant customers.
 
        While we do not have a single customer that we regularly depend on, we do have a small number of significant customers in each sector of our business, which could be material to a particular sector of our business. The deferral or loss of a sale to such a customer, could have a material adverse affect on our business and operating results.

 
7
 
 
We face risks relating to large projects.
 
        Some of the customer projects for which we offer our security products, solutions and related services are growing in size, especially city center protection projects. The larger and more complex such projects are, the greater the risks associated with such projects. These risks may include our exposure to penalties and liabilities resulting from a breach of contract, our ability to fully integrate our products with third party products, a combination of various technologies and complex environments. In some of these projects we are highly depended upon subcontractors for various planning aspects, solution development, integration, delivery and the successful and timely completion of such projects. Also, we may be held liable for the failure of our subcontractors, from whom we may have no recourse. In addition, there may be more fluctuations in cash collection and revenue recognition with respect to such projects.
 
In order to successfully compete in all sectors of our business, including security projects awarded through a competitive bid, we may be required to commit to provide certain technologies and solutions which are under development or which we may have to develop, license from a third party, or acquire, specifically for that customer. This may result in technological difficulties that may prevent us from complying with our contractual obligations, exposing us to possible penalties and legal claims, and may affect the profitability of a project, which may have a negative impact on our business, financial condition and results of operations.
 
We face risks relating to government and governmental entities' contracts.
 
We sell our products and solutions to, among other customers, governments and governmental entities. These sales are subject to special risks, such as delays in funding, termination of contracts or sub-contracts at the convenience of the government, termination, reduction or modification of contracts or sub-contracts in the event of changes in the government’s policies or as a result of budgetary constraints, and increased or unexpected costs resulting in losses or reduced profits under fixed price contracts. Such occurrences have happened in the past and we cannot assure you that we will not experience problems in the future in our performance of such government contracts.
 
Operating globally exposes us to additional and unpredictable risks.
 
We sell our products and solutions throughout the world and intend to continue to increase our penetration of international markets. In 2007, 2008 and 2009, approximately 98% of our total sales were derived from sales to customers outside of Israel. A number of risks are inherent in international transactions. Our future results could be materially adversely affected by a variety of factors including changes in exchange rates, general economic conditions, regulatory requirements, tax structures or changes in tax laws or practices, and longer payment cycles in the countries in our geographic areas of operations. International sales and operations may be limited or disrupted by the imposition of governmental controls and regulations, export license requirements, political instability, trade restrictions, changes in tariffs and difficulties in managing international operations. We cannot assure you that one or more of these factors will not have a material adverse effect on our international operations and, consequently, on our business, financial condition and results of operations.
 
 
8
 
 
Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments. In particular, we may not succeed in making additional acquisitions or be effective in integrating such acquisitions.
 
As part of our growth strategy, we have made a number of acquisitions over the past few years, including four acquisitions in 2009 and the beginning of 2010 (see Item 5, “Operating and Financial Review and Prospects—Recent Acquisitions” in this annual report), and expect to continue to make acquisitions. We frequently evaluate the tactical or strategic opportunity available related to complementary businesses, products or technologies. The process of integrating an acquired company’s business into our operations and/or of investing in new technologies, may result in unforeseen operating difficulties and large expenditures and may absorb significant management attention that would otherwise be available for the ongoing development of our business, and which may result in the loss of key customers and/or personnel and expose us to unanticipated liabilities.
 
Other risks commonly encountered with acquisitions include the effect of the acquisition on our financial and strategic position and reputation, the failure of the acquired business to further our strategies, the inability to successfully integrate or commercialize acquired technologies and achieve expected synergies or economies of scale on a timely basis, and the potential impairment of acquired assets. Further, we may not be able to retain the key employees that may be necessary to operate the business we acquire, and, we may not be able to timely attract new skilled employees and management to replace them. From time to time, we may also need to acquire complementary technologies, whether to execute our strategies or in order to comply with customer needs. There are no assurances that we will be able to acquire or successfully integrate an acquired company, business or technology, or successfully leverage such complementary technology in the market.
 
Moreover, there can be no assurance that the anticipated benefits of any acquisition or investment will be realized. Future acquisitions or investments could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, and amortization expenses related to intangible assets, any of which could have a material adverse effect on our operating results and financial condition. There can be no assurance that we will be successful in making additional acquisitions or effective in integrating such acquisitions into our existing business. We may also compete with others to acquire companies, and such competition may result in decreased availability of, or increased prices for, suitable acquisition candidates. In addition, for possible commercial and economic considerations, we may not be able to consummate acquisitions that we have identified as crucial to the implementation of our strategy. We may not be able to obtain the necessary regulatory approvals, including those of competition authorities and foreign investment authorities, in countries where we seek to consummate acquisitions. For those and other reasons, we may ultimately fail to consummate an acquisition, even if we announce that we plan to acquire a company.
 
In addition, if we consummate one or more significant acquisitions in which the consideration consists, in whole or in part, of ordinary shares or American Depositary Shares (ADSs), representing our ordinary shares, shareholders would suffer dilution of their interests in us. We have also invested in companies which can still be considered in the start-up or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose our entire initial investment in these companies. Due to changes in the industry and market conditions, we could also be required to realign our resources and consider restructuring or other action, which could result in an impairment of goodwill.
 
 
9
 
 
We have expanded into new markets and may not be able to manage our expansion and anticipated growth effectively.
 
Over the last few years we have established a sales management and service infrastructure worldwide. In Asia and the Pacific (the APAC region), we recruited sales management and service personnel in order to bring about further growth in revenue in the APAC market and expanded our professional services group to include business consultants. Also, in the last couple of years, we have been expanding our presence in Europe and in the Middle East and Africa (the EMEA region) through organic growth and through acquisitions. We have also expanded our presence in the South American region and recruited sales management and service personnel in order to bring about more growth in this region. We may establish additional operations within these regions or in other regions where growth opportunities are projected. However, we cannot assure you that our revenues will increase as a result of this expansion or that we will be able to recover the expenses we incurred in effecting the expansion. In addition, our expansion into markets that may be adversely affected by political or economic instability, major hostilities or acts of terrorism, could contribute to an increase in our operational expenses. Our failure to effectively manage our expansion of our sales, marketing, service and support organizations could have a negative impact on our business. To accommodate our global expansion, we are continuously implementing new or expanded business systems, procedures and controls. There can be no assurance that the implementation of such systems, procedures, controls and other internal systems can be completed successfully.
 
Our evolving business strategy could adversely affect our business.
 
Historically we have supplied the hardware and some software for implementing multimedia recording solutions. Our shift towards providing value-added solutions and an enterprise software business model has required and will continue to require substantial change, potentially resulting in some disruption to our business. These changes may include expanded or differing competition resulting from entering the enterprise software market, increased need to expand our distribution network to include system integrators which could impact revenues and gross margins and, as our applications are sold either to our installed base or to new customers together with our recording platforms, the rate of adoption of our software applications by the market.
 
The changes in our business may place a significant strain on our operational and financial resources. We may experience substantial disruption from changes and could incur significant expenses and write-offs. Failing to carefully manage expense and inventory levels consistent with product demand and to carefully manage accounts receivable to limit credit risk, could materially adversely affect our results of operations.
 
We depend on the success of our recording solutions.
 
Our recording solutions are based on a computer telephony integrated multi-channel voice recording and retrieval system. We are dependent on the success of our recording solutions to maintain profitability. Our recording solutions currently generate, and in recent years have generated, more than half of our product revenues, and we anticipate that our recording solutions will continue to account for a significant portion of our sales in the next several years, however, there can be no assurance that the recording market will continue to grow. Also, switch manufacturers, such as Avaya and Cisco, have announced their intent to offer recording at the switch, which could result in a significant decline in sales of our recording solutions, which could also result in decline in sales of related applications, or a significant decrease in the profit margin on such solutions, could have a material adverse effect on our business, financial condition or results of operations.
 
In addition, the trend of customers of enterprises moving from voice to other means of communication (such as e-mail, instant messaging and chat) with the enterprise, may result in a reduction in the demand for our voice recording platform and applications. Furthermore, if such trend continues, our customers may cease to record voice and switch to recording other means of communication. This may have a material adverse affect on our business, financial condition or results of operations.
 
If the pace of spending by the U.S. Department of Homeland Security and other government and security organizations is slower than anticipated, our security business will likely be adversely affected, perhaps materially.
 
The market for our security solutions in closed circuit television, or CCTV, continuous recording, public safety and law enforcement is highly dependent on the spending cycle and spending scope of the U.S. Department of Homeland Security, as well as local, state and municipal governments and security organizations in international markets. We cannot be sure that the spending cycle will materialize as we expect and that we will be positioned to benefit from the potential opportunities, especially in light of the current unfavorable economic and market conditions.
 
 
10
 
 
We face foreign exchange currency risks.
 
We are impacted by exchange rates and fluctuations thereof. We are likely to face risks from fluctuations in the value of the NIS, EUR, GBP and other currencies compared to the U.S. dollar, the functional currency in our financial statements. A significant portion of the expenses associated with our Israeli operations, including personnel and facilities related expenses, are incurred in NIS, whereas most of our business and revenues are generated mostly in U.S. dollars, but also in GBP, Euros and other currencies. In addition, a significant portion of the expenses associated with our European operations, are incurred in GBP and EUR. If the value of the U.S. dollar decreases against the NIS, our earnings may be negatively impacted. In 2007 and 2008, the value of the U.S. dollar significantly decreased against the NIS, which caused us to recognize higher dollar expenses. At the end of 2009 the U.S. dollar maintained a similar value to that recorded at the end of 2007 and 2008. In 2008 the GBP and EUR decreased significantly against the U.S. dollar, which negatively impacted our earnings. In 2009 the GBP and the EUR increased slightly against the U.S. dollar. We monitor foreign currency exposure and, from time to time, may use various instruments to preserve the value of sales transactions, expenses and commitments; however, this cannot assure our full protection against risks of currency fluctuations that could affect our financial results. For information on the market risks relating to foreign exchange, please see Item 11, “Quantitative and Qualitative Disclosures about Market Risk” in this annual report.
 
Our uneven sales patterns could significantly impact our revenues and earnings.
 
The sales cycle for our products and services is variable, typically ranging between a few weeks to several months from initial contact with the potential client to the signing of a contract. Frequently, sales orders accumulate towards the latter part of a given quarter. Looking forward, given the lead-time required by our contract manufacturer, if a large portion of sales orders are received late in the quarter, we may not be able to deliver products within the quarter and thus such sales will be deferred to a future quarter. There can be no assurance that such deferrals will result in sales in the near term, or at all. Thus, delays in executing client orders may affect our revenue and cause our operating results to vary widely. Additionally, as a high percentage of our expenses, particularly employee compensation, is relatively fixed, a variation in the level of sales, especially at or near the end of any quarter, may have a material adverse impact on our quarterly operating results.
 
In addition, our quarterly operating results may be subject to significant fluctuations due to other factors, including the timing and size of orders and shipments to customers, variations in distribution channels, mix of products, new product introductions, competitive pressures and general economic conditions. It is difficult to predict the exact mix of products for any period between hardware, software and services as well as within the product category between audio platforms and related applications, transactional related platforms, digital video and communications intelligence. Because a significant portion of our overhead consists of fixed costs, our quarterly results may be adversely impacted if sales fall below management’s expectations. In addition, the period of time from order to delivery of our platforms and applications is short, and therefore our backlog for such products is currently, and is expected to continue to be, small and substantially unrelated to the level of sales in subsequent periods. As a result, our results of operations for any quarter may not necessarily be indicative of results for any future period. Due to all of the foregoing factors, in some future quarters our sales or operating results may be below our forecasts and the expectations of public market analysts or investors.
 
 
11
 
 
Our quarterly results are likely to fluctuate, which could cause us to miss market expectations and as a result may impact the trading price of our ordinary shares.
 
The trading price of our ordinary shares has experienced significant volatility in the past and may continue to do so in the future. Unfavorable changes, many of which are outside of our control, could have a material adverse effect on our business, operating results, and financial condition.
 
                Historically, our revenues have reflected seasonal fluctuations related to slower spending activities in the first quarter, and the increased activity related to the year-end purchasing cycles of many users of our products. We believe that we will continue to encounter quarter-to-quarter seasonality. The recent economic downturn could have a further impact on our quarter-to-quarter results and backlog.
 
We operate with certain backlog and we face factors such as timing and volume of orders within a given period that affect our ability to fulfill these orders and to determine the amount of our revenues within the period.
 
We derive a substantial portion of our sales through indirect channels, making it more difficult for us to predict revenues because we depend partially on estimates of future sales provided by third parties. In addition, changes in our arrangements with our network of channel partners or in the products they offer, such as the introduction of new support programs for our customers, which combines support from our channel partners with back-end support from us, could affect the timing and volume of orders. Furthermore, our expense levels are based, in part, on our expectations as to future revenues. If our revenue levels are below expectations, our operating results are likely to be adversely affected, since most of our expenses are not variable in the short term.
 
Due to the factors described above, it is possible that in a particular future quarter, our operating results may be below the expectations of public market analysts and investors. In this event, the price of our ordinary shares and ADSs would likely decline.
 
We might recognize a loss with respect to our investments in financial instruments.
 
We invest most of our cash in a variety of financial instruments. If the obligor of any of the instruments we hold defaults or undergoes reorganization in bankruptcy, we may lose a portion of such investment and our financial income may decrease. In addition, to the extent the general downturn in the credit markets continues, it could adversely affect the liquidity of our investments, or the downgrading of the credit rating of our investments could cause us to recognize some loss. For information on the types of our investments, see Item 11, “Quantitative and Qualitative Disclosures About Market Risk” in this annual report.
 
 
12
 
 
Incorrect or improper use of our products or failure to properly provide professional services and maintenance services could result in negative publicity and legal liability.
 
Our products and solutions are complex and are deployed in a wide variety of network environments. The proper use of our software requires extensive training and, if our software products are not used correctly or as intended, inaccurate results may be produced. Our products may also be intentionally misused or abused by clients who use our products. The incorrect or improper use of our products or our failure to properly provide professional services and maintenance services, including installation, training, project management, product customizations and consulting to our clients may result in losses suffered by our clients, which could result in negative publicity and product liability or other legal claims against us.
 
We rely on software from third parties. If we lose the right to use that software, we would have to spend additional capital to redesign our existing software or develop new software.
 
We integrate various third party software products as components of our products. We utilize third party software products to enhance the functionality of our products. Our business could be disrupted if functional versions of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required to spend additional capital to either redesign our software to function with alternate third party software or develop these components ourselves. We might as a result be forced to limit the features available in our current or future product offerings and the commercial release of our products could be delayed.
 
Undetected problems in our products could directly impair our financial results and we could face potential product liability claims against us.
 
If flaws in the design, production, assembly or testing of our products and solutions (by us or our suppliers) were to occur, we could experience a rate of failure in our products or solutions that would result in substantial repair, replacement or service costs and potential liability and damage to our reputation. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products or solutions will be sufficient to permit us to avoid a rate of failure in our products or solutions that results in substantial delays in shipment, significant repair or replacement costs or potential damage to our reputation, any of which could have a material adverse effect on our business, results of operations and financial condition.
 
We may be subject to claims that our products are defective or that some function or malfunction of our products caused or contributed to property, bodily or consequential damages. We attempt to minimize this risk by incorporating provisions into our distribution and standard sales agreements that are designed to limit our exposure to potential claims of liability. No assurance can be given that all claims will be barred by the contractual provisions limiting liability or that the provisions will be enforceable.  We carry product liability insurance in the amount of $25,000,000 per occurrence and $25,000,000 overall per annum. No assurance can be given that the amount of any individual claim or all claims will be covered by the insurance or that the amount of any individual claim or all claims in the aggregate will not exceed insurance policy coverage limits. A significant liability claim against us could have a material adverse effect on our results of operations and financial position.
 
 
13
 
 
If our advanced compliance recording solutions fail to record our customers’ interactions, we may be subject to liability and our reputation may be harmed.
 
Many of our customers use our solutions to record and to store recordings of commercial interactions. These recordings are used to provide back-up and verification of transactions and to guard against risks posed by lost or misinterpreted voice communications. These customers rely on our solutions to record, store and retrieve voice and other data in a timely, reliable and efficient manner. If our solutions fail to record our customers’ interactions or our customers are unable to retrieve stored recordings when necessary, we may be subject to liability and our reputation may be harmed. Although we attempt to limit any potential exposure through quality assurance programs, insurance and contractual terms, we cannot assure you that we will eliminate or successfully limit our liability for any failure of our recording and storage solutions.
 
Our software products are highly complex, and any undetected software errors in our products could adversely affect our reputation, result in significant costs to us, impair our ability to market our products and expose us to legal liability.
 
Our software products are highly complex.  Despite extensive testing by us and by our clients, we have in the past discovered errors, failures, bugs or other weaknesses in our software applications and will likely continue to do so in the future. Such errors, failures, bugs or other weaknesses in products released by us could result in product returns, loss of or delay in market acceptance of our products, loss of competitive position, or claims by clients or others, which would seriously harm our revenues, financial condition and results of operations. Correcting and repairing such errors, failures or bugs could also require significant expenditures of our capital and other resources and could cause interruptions, delays or cessation of our product licensing.
 
In addition, the identification of errors in our software applications or the detection of bugs by our clients may damage our reputation in the market as well as our relationships with existing clients, which may result in our inability to attract or retain clients.
 
Further, since our products are used for compliance recording and operational risk management functions that are often critical to our clients, the licensing and support of our products makes us potentially subject to product liability claims. In particular, some of our customers, including financial institutions, may suffer significant damages as a result of a failure of our risk and financial crime solutions to perform their functions. Although we attempt to limit any potential exposure through quality assurance programs, insurance and contractual terms, we cannot assure that we will be able to eliminate or successfully limit our liability for any failure of our risk and financial crime solutions. Any product liability insurance we carry may not be sufficient to cover our losses resulting from any such product liability claims.  The successful assertion of one or more large product liability claims against us could have a material adverse effect on our results of operations and financial condition.
 
Inadequate intellectual property protections could prevent us from enforcing or defending our intellectual property and we may be subject to liability in the event our products infringe on the proprietary rights of third parties and we are not successful in defending such claims.
 
Our success is dependent, to a significant extent, upon our proprietary technology. We currently hold 63 U.S. patents and 78 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 121 patent applications pending in the United States and other countries. We rely on a combination of patent, trade secret, copyright and trademark law, together with non-disclosure and non-competition agreements, as well as third party licenses to establish and protect the technology used in our systems. However, we cannot assure you that such measures will be adequate to protect our proprietary technology, that competitors will not develop products with features based upon, or otherwise similar to our systems, or that third party licenses will be available to us or that we will prevail in any proceeding instituted by us in order to enjoin competitors from selling similar products. Although we believe that our products do not infringe upon the proprietary rights of third parties, we cannot assure you that one or more third parties will not make a contrary claim or that we will be successful in defending such claim.
 
 
14
 
 
We generally distribute our software products under software license agreements that restrict the use of our products by terms and conditions prohibiting unauthorized reproduction or transfer of the software products. However, effective copyrights and other intellectual property rights protection may be inadequate or unavailable to us in every country in which our software products are available, and the laws of some foreign countries may not be as protective of intellectual property rights as those in Israel and the United States.
 
From time to time, we receive “cease and desist” letters alleging patent infringements. No formal claims or other actions have been filed with respect to such alleged infringements, except for claims filed by Dictaphone, Verint America Inc. and Multi-Format, Inc.  (all of which have since been settled and dismissed) and Fair Isaac Corporation  (see Item 8, “Financial Information—Legal Proceedings” in this annual report). We cannot assure you, however, that we will be successful in defending against the pending claim that has been asserted or any other claims that may be asserted. We also cannot assure you that such claim will not have a material adverse effect on our business, financial condition, or operations. Defending infringement claims or other claims could involve substantial costs and diversion of management resources.
 
In addition, to the extent we are not successful in defending such claims, we may be subject to injunctions with respect to the use or sale of certain of our products or to liabilities for damages and may be required to obtain licenses which may not be available on reasonable terms, any of which may have a material adverse impact on our business or financial condition.
 
We use certain “open source” software tools that may be subject to intellectual property infringement claims, the assertion of which could impair our product development plans, interfere with our ability to support our clients or require us to pay licensing fees.
 
Certain of our software products contain a limited amount of open source code and we may use more open source code in the future. Open source code is code that is covered by a license agreement that permits the user to liberally use, copy, modify and distribute the software without cost, provided that users and modifiers abide by certain licensing requirements. The original developers of the open source code provide no warranties on such code.
 
As a result of our use of open source software, we could be subject to suits by parties claiming ownership of what we believe to be open source code and we may incur expenses in defending claims that we did not abide by the open source code license. If we are not successful in defending against such claims, we may be subject to monetary damages or be required to remove the open source code from our products. Such events could disrupt our operations and the sales of our products, which would negatively impact our revenues and cash flow.
 
 
15
 
 
In addition, under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting derivative code available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative code at no cost are subject to varying interpretations. If we are required to publicly disclose the source code for such derivative products or to license our derivative products that use an open source license, our previously proprietary software products may be available to others without charge. If this happens, our customers and our competitors may have access to our products without cost to them, which could harm our business.
 
We monitor our use of such open source code to avoid subjecting our products to conditions we do not intend. The use of such open source code, however, may ultimately subject some of our products to unintended conditions so that we are required to take remedial action that may divert resources away from our development efforts.
 
We depend upon outsourcers for the manufacture of our key products. The failure of our product manufacturers to meet our quality or delivery requirements would likely have a material adverse effect on our business, results of operations and financial condition.
 
Pursuant to our manufacturing agreement with Flextronics Israel Ltd., a subsidiary of Flextronics, a global electronics manufacturing, services company, Flextronics provides us with a comprehensive manufacturing solution that covers all aspects of the manufacture of our products from order receipt to product shipment, including purchasing, manufacturing, testing, configuration, and delivery services. This agreement covers all of our products. As a result of these arrangements, we are dependent on Flextronics to process orders and manufacture our products. Consequently, the manufacturing process of our products is not in our direct control.
 
We may from time to time experience delivery delays due to the inability of Flextronics to consistently meet our quality or delivery requirements and we may experience production interruptions if Flextronics is for any reason unable to continue the production of our products. Should we have on-going performance issues with our contract manufacturers, the process to move from one contractor to another is a lengthy and costly process that could affect our ability to execute customer shipment requirements and/or might negatively affect revenue and/or costs. If this manufacturer or any other manufacturer were to cancel contracts or commitments with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on our business, results of operations and financial condition.
 
If we lose our key suppliers, our business may suffer.
 
Certain components and subassemblies that are used in the manufacture of our existing products are purchased from a single or a limited number of suppliers. In the event that any of these suppliers are unable to meet our requirements in a timely manner, we may experience an interruption in production until an alternative source of supply can be obtained. Any disruption, or any other interruption of a supplier’s ability to provide components to us, could result in delays in making product shipments, which could have a material adverse effect on our business, financial condition and results of operations. In addition, some of our major suppliers use proprietary technology and software code that could require significant redesign of our products in the case of a change in vendor. Further, as suppliers discontinue their products, or modify them in manners incompatible with our current use, or use manufacturing processes and tools that could not be easily migrated to other vendors, we could have significant delays in product availability, which would have a significant adverse impact on our results of operations and financial condition. Although we generally maintain an inventory for some of our components and subassemblies to limit the potential for an interruption and we believe that we can obtain alternative sources of supply in the event our suppliers are unable to meet our requirements in a timely manner, we cannot assure you that our inventory and alternative sources of supply would be sufficient to avoid a material interruption or delay in production and in availability of spare parts.
 
 
16
 
 
If we lose our key personnel or cannot recruit additional personnel, our business may suffer.
 
Due to growth or as a result of regular recruitment, we will be required to hire and integrate new employees. Recruiting and retaining qualified engineers and computer programmers to perform research and development and to commercialize our products, as well as qualified personnel to market and sell those products, are critical to our success. As of December 31, 2009, approximately 25% of our employees were devoted to research and product development and approximately 20% were devoted to marketing and sales. There can be no assurance that we will be able to successfully recruit and integrate new employees. There is often intense competition to recruit highly skilled employees in the technology industry. We may also experience personnel changes as a result of our move from multimedia recording equipment towards business performance solutions. An inability to attract and retain highly qualified employees may have an adverse effect on our ability to develop new products and enhancements for existing products and to successfully market such products, all of which would likely have a material adverse effect on our results of operations and financial position. Our success also depends, to a significant extent, upon the continued service of a number of key management, sales, marketing and development employees, the loss of any of whom could materially adversely affect our business, financial condition and results of operations.
 
If we are unable to maintain the security of our systems, our business, financial condition and operating results could be harmed.
 
The occurrence, or perception of occurrence, of security breaches in the operation of our business or by third parties using our products could harm our business, financial condition and operating results. Some of our customers use our products to compile and analyze highly sensitive or confidential information. We may come into contact with such information or data when we perform service or maintenance functions for our customers. While we have internal policies and procedures for employees in connection with performing these functions, the perception or fact that any of our employees has improperly handled sensitive information of a customer or a customer’s customer could negatively impact our business. If, in handling this information, we fail to comply with our privacy policies or privacy and security laws, we could incur civil liability to government agencies, customers and individuals whose privacy was compromised. If personal information is received or used from sources outside the United States, we could be subject to civil, administrative or criminal liability under the laws of other countries. In addition, third parties may attempt to breach our security or inappropriately use our products through computer viruses, electronic break-ins and other disruptions. If successful, confidential information, including passwords, financial information, or other personal information may be improperly obtained and we may be subject to lawsuits and other liability. Any internal or external security breaches could harm our reputation and even the perception of security risks, whether or not valid, could inhibit market acceptance of our products.
 
 
17
 
 
Our business could be materially adversely affected by changes in the legal and regulatory environment.
 
Our business, results of operations and financial condition could be materially adversely affected if laws, regulations or standards relating to our products, us or our employees (including labor laws and regulations) are newly implemented or changed. In addition, our revenues would be harmed if we fail to adapt our products to changes in regulations applicable to the business of certain of our clients, such as securities trading, broker sales compliance and anti-money laundering laws and regulations.
 
There are growing compliance and regulatory initiatives and changes for corporations and public organizations around the world that include both internal and external regulations and are driven by events and concerns such as accounting scandals, security threats and economic conditions. While we attempt to prepare in advance for these new initiatives and standards, we cannot assure that we will be successful in our efforts, that such changes will not influence the demand for our products and services, or that our competitors will not be more successful or prepared than us.

With respect to the telecommunications industry specifically, there may be increased regulations, including with respect to privacy and protection of personal information. Adoption of such regulations may require that we invest in the modification of our solutions to comply with such regulations, cause a reduction in the use of our solutions or subject us or our customers to liability resulting from a breach of such regulations. The adoption of these type of regulations could materially adversely affect our business and results of operations.
 
In recent years, the European Union issued directives on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or “RoHS,” and Waste Electrical and Electronic Equipment, or “WEEE”. We are making every effort in order to maintain compliance with these directives, without otherwise adversely affecting the quality and functionalities of our products. The countries of the European Union, as a single market for our products, accounted in 2009 for approximately 16% of our revenues. If our products fail to comply with WEEE or RoHS directives or any other directive issued from time to time by the European Union, we could be subject to penalties and other sanctions that could have a material adverse effect on our results of operations and financial condition. In addition, similar regulations are being formulated in other parts of the world. We may incur substantial costs in complying with other similar programs that might be enacted outside Europe in the future.
 
 
18
 
 
If we fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, it could have a material adverse effect on our business, operating results and share price.
 
The Sarbanes-Oxley Act of 2002 imposes certain duties on us. Our efforts to comply with the requirements of Section 404, which first applied to our financial statements for 2006, have resulted in increased general and administrative expenses and a devotion of management time and attention to compliance activities, and we expect these efforts to require the continued commitment of significant resources. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. In addition, we may identify material weaknesses or significant deficiencies in our internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation and/or sanctions by regulatory authorities, and could have a material adverse effect on our business and operating results, investor confidence in our reported financial information, and the market price of our ordinary shares and ADSs.
 
Additional tax liabilities could materially adversely affect our results of operations and financial condition.
 
As a global corporation, we are subject to income and other taxes both in Israel and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid or accrued is subject to our interpretation of applicable laws in the jurisdictions in which we do business. From time to time, we are subject to income and other tax audits, the timings of which are unpredictable. While we believe we comply with applicable tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. Should we be assessed additional taxes, there could be a material adverse effect on our results of operations and financial condition.
 
Risks relating to Israel
 
We are subject to the political, economic and security conditions in Israel.
 
Our headquarters, research and development and main manufacturing facilities, as well as the facilities of Flextronics Israel Ltd., our key manufacturer, are located in the State of Israel, and we are directly affected by the political, economic and security conditions to which Israel is subject. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a high level of violence between Israel and the Palestinians. In addition, acts of terrorism, armed conflicts or political instability in the region could negatively affect local business conditions and harm our results of operations. We cannot predict the effect on the region of any diplomatic initiatives or political developments involving Israel or the Palestinians or other countries in the Middle East. Furthermore, several countries restrict doing business with Israel and Israeli companies, and additional companies may restrict doing business with Israel and Israeli companies as a result of an increase in hostilities. Our products are heavily dependent upon components imported from, and most of our sales are made to, countries outside of Israel. Accordingly, our operations could be materially adversely affected if trade between Israel and its present trading partners were interrupted or curtailed.
 
Some of our officers and employees are currently obligated to perform annual military reserve duty. In the event of a military conflict, including the ongoing conflict with the Palestinians, these persons could be required to serve in the military for extended periods of time. We cannot assess the full impact of these requirements on our workforce or business and we cannot predict the effect on us of any expansion or reduction of these obligations.
 
 
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Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
 
Service of process upon our directors and officers, most of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, since the majority of our assets and most of our directors and officers are located outside the United States, any judgment obtained in the United States against us or these individuals or entities may not be collectible within the United States. Additionally, it may be difficult to enforce civil liabilities under U.S. federal securities law in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim.  In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim.  If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process.  Certain matters of procedure will also be governed by Israeli law.  There is little binding case law in Israel addressing these matters.
 
Our results may be affected by the availability of government grants and tax benefits.  Our participation in these programs restricts our ability to freely transfer manufacturing rights and technology out of Israel.
 
We derive and expect to continue to derive significant benefits from various programs including Israeli tax benefits relating to our “Approved and Privileged Enterprise” programs and certain grants from the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor, or OCS, for research and development. To be eligible for these grants, programs and tax benefits, we must continue to meet certain conditions, including making certain specified investments in fixed assets and conducting the research, development and manufacturing of products developed with such OCS grants in Israel (unless a special approval has been granted for performing manufacturing activities outside Israel). From time to time, the Israeli Government has discussed reducing or eliminating the availability of these grants, programs and benefits and there can be no assurance that the Israeli Government’s support of grants, programs and benefits will continue. If grants, programs and benefits available to us or the laws, rules and regulations under which they were granted are eliminated or their scope is further reduced, or if we fail to meet the conditions of existing grants, programs or benefits and are required to refund grants or tax benefits already received (together with interest and certain inflation adjustments) or fail to meet the criteria for future “Approved or Privileged Enterprises,” our business, financial condition and results of operations could be materially adversely affected including an increase in our provision for income taxes.
 
On April 1, 2005, an amendment to the Israeli law which deals with Approved Enterprises came into force. Pursuant to the amendment, a company’s facility will be granted the status of “Approved Enterprise” only if it is proven to be an industrial facility (as defined in such law) that contributes to the economic independence of the Israeli economy and is a competitive facility that contributes to the Israeli gross domestic product. The amendment incorporates certain changes to both the criteria and procedure for obtaining “Approved Enterprise” status for an investment program, and changes to the tax benefits afforded in certain circumstances to “Approved Enterprises” under such law (which is referred to as a “Privileged Enterprise” following such amendment). As of December 31, 2009, we have six Approved Enterprise programs and four Privileged Enterprise programs, which are covered by the amendment. While we believe that we meet the statutory conditions as set out in the amendment, there can be no assurance that the tax authorities in Israel will concur. Should it be determined that these Privileged Enterprise programs do not meet the statutory conditions, our provision for income taxes will increase materially.
 
 
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As a result of the amendment, tax-exempt income generated under the provisions of the amended law, will subject us to taxes upon dividend distribution or complete liquidation.
 
We do not intend to distribute any amounts of our undistributed tax exempt income as dividends as we intend to reinvest our tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to our Approved or Privileged Enterprise programs as the undistributed tax exempt income is essentially permanent in duration.
 
Under Israeli law, products incorporating know-how developed with grants from the OCS are required to be manufactured in Israel, unless prior approval of a governmental committee is obtained. As a condition to obtaining this approval, we may be required to pay to the OCS up to 300% of the grants we received and to repay these grants on an accelerated basis, depending on the portion of manufacturing performed outside Israel. In addition, we are prohibited from transferring to third parties the technology developed with these grants without the prior approval of a governmental committee and, possibly, the payment of a fee. See Item 4, “Information on the Company—Research and Development” in this annual report, for additional information about OCS programs.
 
Provisions of Israeli law may delay, prevent or impede an acquisition of us, which could prevent a change of control.
 
Israeli corporate law regulates mergers and tender offers, requires tender offers for acquisitions of shares above specified thresholds and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. These provisions could delay, prevent or impede an acquisition of us. See Item 10, “Additional Information—Mergers and Acquisitions” in this annual report, for additional discussion about some anti-takeover effects of Israeli law.
 
Risks related to our Ordinary Shares and ADSs
 
Our share price is volatile and may decline.
 
Numerous factors, some of which are beyond our control, may cause the market price of our ordinary shares or our ADSs, each of which represents one ordinary share, to fluctuate significantly. These factors include, among other things, announcements of technological innovations, development of or disputes concerning our intellectual property rights, customer orders or new products by us or our competitors, currency exchange rate fluctuations, earnings releases by us, our partners or our competitors, general economic and market conditions, market conditions in the industry and the general state of the securities markets, with particular emphasis on the technology and Israeli sectors of the securities markets.
 
 
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Future sales of our ADSs may impact the market price of our ADSs.
 
If we or our shareholders sell substantial amounts of our ADSs in the public market, the market price of our ADSs could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Following an acquisition, our ADSs held by new holders may become freely tradable.
 
Item 4.                      Information on the Company.
 
History and Development of the Company
 
Our legal and commercial name is NICE-Systems Ltd. We are a company limited by shares organized under the laws of the State of Israel.  We were originally incorporated as NICE Neptun Intelligent Computer Engineering Ltd. on September 28, 1986 and were renamed NICE-Systems Ltd. on October 14, 1991.  Our principal executive offices are located at 8 Hapnina Street, P.O. Box 690, Ra’anana 43107, Israel and the telephone number at that location is +972-9-775-3030.  Our agent for service in the United States is our subsidiary, Nice Systems Inc., 301 Route 17 North, 10th Floor, Rutherford, New Jersey 07070.
 
For a summary of our recent acquisitions and dispositions, please see Item 5, “Operating and Financial Review and Prospects—Recent Acquisitions and Dispositions” in this annual report.
 
 
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Business Overview
 
           We are a leading global provider of advanced solutions that enable enterprises and security organizations to extract insight from interactions, transactions and surveillance to drive business performance and ensure safety and security. Our solutions enable companies and public organizations to capture, manage, analyze and impact unstructured interaction as well as transactional data, enabling such entities to comply with internal and governmental regulations, enhance business and operational performance and address security threats while increasing situational awareness. Unstructured content includes cross-channel analysis of phone calls, chat, instant messaging, and email interactions to contact centers, trading floors, branches, home agents and back offices, phone calls to emergency service providers and first responders, video captured by closed circuit cameras, radio communications between emergency services’ and first responders’ personnel, internet sessions, email and instant messaging and security management solutions for command and control centers. Our solutions include integrated, scalable, cross-channel recording platforms, cross-channel real-time analytics, software management applications. These solutions address critical business processes and risk management, compliance procedures and security needs of enterprises and security organizations. Our solutions facilitate faster decision-making and real-time analysis and actions, improving business and employee performance, reducing exposure to transactional risks related to financial crime (fraud detection and Anti Money Laundering, or AML), operational risk and compliance activities, and enhancing security and public safety. Our enterprise customers span a variety of industries, such as financial services, telecommunications, healthcare, outsourcers, retail, media, travel, service providers, utilities and others. Our financial crime solutions primarily serve financial services organizations. Our security solutions are tailored to protect city centers, transportation systems, critical infrastructure, enterprise campuses and more. Our solutions are deployed at over 24,000 customers, including over 80 of the Fortune 100 companies.
 
           For a breakdown of total revenues by products and services and by geographic markets, for each of the last three years, please see Item 5, “Operating and Financial Review and Prospects—Results of Operations.”
 
Industry Background and Trends
 
Heightened regulatory and compliance requirements and the need for dispute resolution.    Compliance and regulatory pressures have increased for corporations and public organizations worldwide. These include both internal and external regulations, such as compliance and regulations that may be driven by accounting scandals (e.g., the Sarbanes-Oxley Act), security concerns (e.g., anti-money laundering legislation) and recent events in the financial industry (e.g., the increase in fraud attempts related to wire transfers). In addition, it is important to be able to eliminate and/or resolve communication disputes, such as between counterparties in a securities trade, in an efficient and definitive manner. Existing business intelligence and other IT solutions have addressed these growing challenges to some degree. However, institutions require improved solutions that not only provide better compliance and surveillance, but also more current, real-time information with increased operational visibility. Advanced compliance related solutions enable the reduction of the costs associated with ongoing compliance, improved customer service, while creating the required audit trail for regulatory purposes.
 
 
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        Increased focus on productivity, operational performance and profitability. In today’s economy, companies are increasingly focused on improving productivity and increasing profitability by creating better-quality customer experiences and through achieving higher efficiencies across the enterprise. These objectives require organizations to better manage their customer, partner and employee relationships, analyze critical customer data, maximize the value of customer interactions and execute customer-focused business processes. Considering the high cost of acquiring new customers and the maturation of many industries, it is increasingly important to maximize revenue from the retention and continued satisfaction of current customers. Similarly, due to the high cost of hiring and training new employees, it is important for organizations to address employee concerns in a timely fashion to maximize employee retention and productivity.
 
The contact center has emerged as the primary point of an enterprise’s interaction with its customers, rendering it essential to improving customer satisfaction and driving revenue. The importance of the contact center, combined with the growing complexity of the requirements for its effective management stemming from new customer interaction channels, have led to a need for an ever broadening set of operational and management tools. Companies are seeking more advanced and more integrated solutions to address contact center operational efficiency, customer experience, sales and marketing effectiveness, and adherence to policies and regulations.
 
Companies have historically invested in business intelligence solutions and operational systems which rely on structured transactional data contained in CRM, Enterprise Resource Planning (ERP) and other application databases. Traditional business intelligence solutions unlock value contained in these structured data by collecting historical data, attempting to extract from it patterns which may predict future customer behavior. Recently, however, companies have recognized the value contained in other types of data, including the vast amounts of unstructured content that is generated by ongoing interactions with their customers, employees or partners across the various available channels of interactions. Furthermore, many operational decisions can be greatly enhanced by providing near real-time insight into both transactions and interactions. By employing software-based cross-channel analytics on unstructured content, in combination with data from transactions, companies are able to detect customer intent, often through interactions in which a customer may express concerns or desires or provide other signals of their intentions. Equipped with such an “early detection” system, companies can take proactive measures to reduce customer churn, focus their marketing efforts, stop fraud, and address employee dissatisfaction. By better understanding unstructured data, companies can develop a more comprehensive view across the enterprise, increase revenue and improve service quality, productivity and profitability.
 
Risk and compliance departments are also facing growing pressure to optimize operations. This results in consolidation of activities across the enterprise and the adoption of more accurate financial crime and compliance tools that can reduce false alarms and the shift to enterprise wide investigation technologies to replace point solutions which were often developed in-house.
 
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        Continued adoption of Internet Protocol and proliferation of multi-channel content.   IP has become the standard for enterprise communications and is being deployed widely. The increasing adoption of IP is expanding the type and volume of interactions between companies and their customers, employees and partners. This proliferation, together with businesses’ replacement of legacy communications systems and related infrastructure, has created additional growth in the need for IP-based communications solutions, while resulting in a higher pressure on prices of recording solutions.
 
To remain competitive, businesses use email, instant messaging, internet and other multimedia, IP-based communications, such as VoIP, in addition to traditional means of communications, such as mail and analog voice calls. Additionally, VoIP has enabled enterprises to rapidly and economically deploy contact center solutions to branch offices and other remote locations, including to agents working from their homes. Due to these and other trends, the amount and types of communications within businesses have increased substantially. As a result, many businesses are faced with the increasing challenge of better understanding the variety of unstructured multi-channel content generated by these customer, employee and partner interactions. Similarly, we believe the security market is beginning to migrate to multimedia IP-based technologies in an effort to respond to security threats and challenges in a cost-effective and flexible manner, in addition to the general trend of proliferation of security and surveillance sensors.
 
Increase in real-time financial crime threats.  Rapid growth in the volume, value, speed and complexity of financial transactions has created new business opportunities for financial services firms, but has also created new challenges. As the use of instant remote access channels, such as online, mobile and phone, increases, and new initiatives such as Faster Payments in the UK are instituted, financial services firms must develop the means with which to monitor and address financial crime threats in real-time.  Criminal threats and tactics are on the rise and these industry changes are being exploited by the criminal community, making legacy batch solutions obsolete.  This shift is beginning to impact the priorities and day-to-day operations of fraud, AML and risk management groups across financial services firms by requiring stronger real-time and cross-channel alignment and integration, more sophisticated detection and prevention capabilities, as well as technology that can very quickly adapt and evolve with the changing risk landscape.

Security challenges for public safety, homeland security and intelligence agencies. Terrorist attacks around the world have significantly changed the geopolitical landscape and created long-term consequences for public safety, security and intelligence agencies. In addition, transportation organizations, local authorities and government-related organizations have become increasingly aware of the benefits technology can provide in the areas of crime prevention and public safety. These organizations face new challenges in detecting, protecting against and effectively responding to more sophisticated and complex threats. Organizations are also facing vast amounts of sources and information, which make it more difficult to ‘connect the dots’ and act efficiently. As a result of these global trends, the challenge of storing, managing and analyzing vast amounts of multimedia content generated by traditional and IP-based communications captured by an increasing variety of detection devices is growing. Emergency services and public organizations require increasingly sophisticated solutions to analyze content in order to strengthen the measures they take for public safety and security.
 
 
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        Emerging needs for holistic situational awareness and event management in the security market.  The number and variety of physical security sensors is growing substantially, with public and private organizations deploying security systems, such as surveillance cameras and access control and intrusion detection sensors. Organizations, municipalities and governmental entities are struggling to eliminate the number of information silos created by deployment of redundant security systems. These silos limit the control room operators’ ability to gain a cohesive and unified picture of situations. The lack of unified solutions undermines the ability to take decisive actions; furthermore, the lack of adequate tools for sharing information in real time between the various field security personnel, emergency forces and law enforcement agencies, among others, can substantially prolong response time and reduce the probability of successful event mitigation.
 
Increased focus on physical corporate security.    Companies operating throughout the world have recognized that threats to their facilities, IT networks and personnel need to be addressed at all times. For example, many companies have determined that they need to establish measures for personnel screening and observation, invest in enhanced physical security measures and incident response capability, and deploy a variety of systems to address network-based vulnerabilities. As a result of these global trends in security needs, more companies face the growing challenge of storing and analyzing vast amounts of content, such as voice, video and other IP-based communications, captured by an increasing variety of detection devices, such as closed circuit television.
 

Increased urbanization raises rates of crime and risks of terror attacks. Increased urbanization in both developed and developing countries results in higher rates of various types of crime (such as robbery, theft, murder and other assaults) and greater fears of terror attacks in city centers and other metropolitan areas and systems (such as mass transit). These growing concerns are driving large-scale security projects in these areas, aiming at improving the security of the citizens. These large-scale projects include installation and implementation of wide-scale security systems, which better synchronize and correlate multimedia data sources in order to assist law enforcement officials to detect and prevent crimes and terror attacks and investigate quickly in order to apprehend the suspects.
 
 
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Our Strategy
 
The key elements of our strategy include the following:
 
Drive adoption of cross-channel and cross-sensor analytics solutions across all lines of business. We intend to continue to address the growing unmet need to capture, manage, analyze and impact structured and unstructured data from multiple channels in a more accurate and timely fashion in a wide variety of business and operational environments. Furthermore, we aim to drive the combination of such insight, both in real-time, in order to impact the customer processes while they occur and increase their top-line (creating up-sale/cross-sale opportunities), and in off-line analysis, in order to optimize and improve customer experience related processes,  to provide enterprises and organizations with a more complete and timely view of their operations. Accordingly, we plan to continue to target these opportunities through focused sales and marketing, by developing industry specific applications that are enabled or greatly enhanced by convergence analytics, and by providing value-added services that facilitate the implementation of our solutions. Moreover, we plan to continue to invest in research and development and strategic alliances to enhance our industry-leading solutions and deliver superior insight to drive improved operational and business results. We will continue to leverage the technology, operational and partnership synergies we derive from serving both the enterprise and the security markets.
 
Continue to lead the evolution of the contact center beyond its traditional market and expand our differentiated end-to-end suite. With the increasing strategic importance and complexity of the contact center, customers have a growing need for comprehensive management solutions. We believe our set of integrated and modular tools and business solutions for contact center management represent a differentiated approach and value for our customers. Furthermore, we aim to develop industry specific business solutions to enable our customers to transform from a cost center to a profit center, increasing our ability to answer industry specific needs. We intend to augment and expand our offering of end-to-end solutions to maintain our industry leadership position.
 
Further enhance our position as the largest and broadest provider of a single financial crime, risk and compliance software platform for the financial services industry. Following our acquisition of Fortent, Inc. (please see Item 5, “Operating and Financial Review and Prospects—Recent Acquisitions and Dispositions” in this annual report) and its addition to our Actimize Ltd. (“Actimize”) business, we continue to build the largest and broadest risk and financial crime solutions provider. The consolidation of financial crime management, coupled with the industry’s evolution towards enterprise risk and compliance systems, need to monitor all channels, growing regulatory pressure and focus on costs reduction and productivity improvement, all point in the same direction. There is an opportunity for a vendor to emerge as the default choice for enterprise-wide cross-channel financial crime, risk and compliance solutions. We intend to augment and expand our offerings in this market to meet the growing needs of the industry and maintain our market leadership position.
 
Drive deployment of end-to-end security solutions. Following the acquisition of Orsus, we are now in a unique position to deliver a comprehensive solution that complements our proven Video Surveillance, Public safety and multimedia reconstruction capabilities, with an advanced security management solution that offers complete situational awareness. This end-to-end solution addresses market demand for a unified solution that eliminates information silos and enables security personnel to proactively mitigate risks through effective execution of optimal security operational procedures. We intend to leverage this broad solution portfolio to strengthen our market leadership and accelerate the penetration into transportation, critical facilities, government institutes and corporate facilities markets, while expanding the offering to our existing installed base.

 
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Drive deployment of our solutions through value-added services.   Our customers face diverse business and deployment challenges. We continuously develop our professional service organization that helps our customers capture the full value from our solutions. We help our customers analyze their business issues and re-engineer critical processes to address their specific needs. These value-added services should allow us to accelerate the market penetration of our advanced solutions and expand our offering to our installed base.
 
Expand and leverage our existing customer base, strategic alliances and global infrastructure. With over 24,000 customers in more than 150 countries, including over 80 of the Fortune 100 companies, we believe there are abundant opportunities to up-sell and cross-sell within our existing customer base by increasing their use of the full breadth of our solutions and by migrating them to our next-generation portfolio. We also have strong strategic relationships with industry leaders such as Avaya Inc., Cisco, FIS, Honeywell International Inc., IBM, IPC Systems, Inc., Motorola, Inc. and Orange Business Services. We intend to continue to leverage these relationships and invest in nurturing new strategic alliances to increase the value of our solutions to our customers, to strengthen our channels to market and to enhance our market position. We have a global infrastructure that can support, directly or through our partners, customers around the world 24 hours a day, seven days a week. We intend to utilize this infrastructure to address the growing needs of our customers.
 
Continue to pursue selective acquisitions. We have a successful acquisition history spanning thirteen transactions over the past eight years. We intend to continue augmenting our organic growth through additional acquisitions that broaden our product and technology portfolio, expand our presence in selected vertical markets and geographic areas, broaden our customer base, and increase our distribution channels and vertical market access. We believe our acquisition strategy is aligned with our customers’ desire to procure broader, higher value solutions from a smaller group of strategic vendors.
 
Our Solutions
 
We have developed fully integrated solutions that include software applications and hardware components that can be deployed in a modular manner. This flexibility allows our customers to incorporate additional functions and capabilities as their business or operational needs change. The key features of our solutions include:
 
Ability to capture, manage, analyze and act upon vast amounts of complex, unstructured cross-channel content in real-time. Our solutions capture and store a wide variety of unstructured cross-channel content, allowing both our enterprise and security customers to capture valuable interaction data. They are designed to optimally manage the storage and retrieval of unstructured data within centralized data storage warehouses, which maximizes the efficiency of our customers’ networked environments. Our solutions can be integrated with various enterprise software applications and storage systems. As a result, our solutions enable our customers to capture and manage efficiently and reliably the vast amounts of unstructured data that are generated by their daily operations. This allows our customers to gain insight, improve profitability, enhance operational effectiveness and meet compliance and regulatory requirements and allows our security customers to create situational awareness, manage events and investigate them.
 
 
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End-to-end management and optimization of the contact center. We provide a wide set of solutions that provide the enterprise with a comprehensive view of the contact center and powerful management capabilities. Our comprehensive product offering enables the enterprise to address the essential management functions required in the contact center, including quality monitoring, workforce management, performance management, analytics and unified dashboards and reporting. These modular applications can be deployed separately or as a single unified solution depending on the customer’s needs. Our solutions enable organizations to:
 
●
Streamline and improve contact center operations, focusing on its agent and enterprise performance;
 
●
monitor and improve contact center business performance and customer satisfaction related processes;
 
●
comply with regulations and policies as they pertain to capturing, archiving, and retrieving of customer interactions.
 
●
identify training requirements and other necessary improvements;
 
●
allocate the appropriate workforce level and skills to optimize customer service; and
 
Deriving insights utilizing proprietary multi-dimensional cross-channel analytic capabilities. We have developed advanced multi-dimensional cross-channel analytics and business solutions that allow our customers to derive critical insights from the vast amounts of unstructured data that they capture. In the enterprise sector, our multi-dimensional analytics enable the analysis of interactions from a wide variety of interaction channels, including phone, chat, instant messaging, surveys, and email. For example, our solutions can analyze context intonation, sentiment, emotion level and key phrases used in a voice interaction, as well as unstructured text. This analysis enables our customers to detect early signs of customer churn, gain valuable information about competitors, and identify critical market information, thereby driving the opportunity for increased revenue, profitability and productivity. Through video content analysis provided by our solutions, our security customers are able to identify suspicious objects or behavior more quickly and effectively in order to better respond in real-time to threats, prevent intrusions, detect irregular behavior, reduce crime and accelerate investigations.
 
Enterprise-wide risk management platform with dozens of specific compliance, fraud prevention and money laundering specific solutions. Our Actimize solutions are based on a scalable, proprietary software platform and flexible applications that address hundreds of compliance, fraud and money-laundering scenarios. Used by a majority of the world’s largest financial institutions, including the world’s 10 largest banks, Actimize solutions monitor billions of transactions a day, analyzing high volumes of complex data on a real-time basis and enabling customers to detect anomalous transactions, generate alerts and facilitate corrective action.
 
 
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End-to-end security solutions. We integrated a suite of security management solutions that address organizations’ complete security needs –  from real-time threat detection and verification to post incident investigation and resolution. Many of the world’s largest and busiest airports, transportation centers and transit companies, as well as government agencies and first responders, use our security solutions to monitor, manage and enhance security in every aspect of their operations. Our intelligent surveillance solutions can instantaneously alert customers to potential security threats, leading to a more timely and informed response. In the public safety sector, our solutions, experience and know-how are helping teams work smarter and faster – to detect threats, mobilize resources, investigate incidents and prosecute criminals. With our intelligent video solutions, teams stay a step ahead of critical incidents, through real-time intelligence delivered to command and control centers and responders. Our security management solutions also link disparate systems, data sources and departments to streamline incident reconstructions and investigations. Top financial companies, educational institutions, correctional facilities, utilities, casinos, and other critical infrastructure sites also rely on our end-to-end security solutions to improve safety and security, reduce risk and losses, and enhance operational performance and business results.
 
Managing the complete incident life cycle. Our Situation Management solution enables situation planning, response and analysis for security, safety and emergency events, minimizing the risk of human error that can lead to financial loss, injury, and damage to public image. This solution integrates and correlates information from multiple and diverse systems across the enterprise and coordinates the response actions ensuring that everyone in the operational chain knows what is happening and what to do.
 
Products
 
Our offerings to the enterprise sector include a suite of business solutions that address specific business issues, powered by best-in-class functional components spanning interaction recording, quality management, cross-channel and real-time interaction analytics, workforce management, performance management and customer feedback. The business solutions capture, analyze and impact customer interactions across a variety of channels, from audio, email and chat to social media and text messaging.  The solutions include nine packaged offerings: Customer Churn Reduction, Sales Effectiveness, Customer Experience, Marketing Effectiveness, Collections Optimization, Quality Optimization, First Contact Resolution Optimization, Handle Time Optimization, and Compliance Management.  These solutions can be deployed on premise, in a hosted model, or via a managed service, and can be implemented stand-alone or fully integrated with CRM and business intelligence solutions.
 
Our financial crime (fraud detection and AML), operational risk and compliance solutions for financial institutions are built on the Actimize core software platform, incorporating a graphical development interface and case management dashboard with a real-time analytics detection engine. Our securities trading and broker sales practices compliance applications identify high-risk activities by monitoring and correlating various data elements including transactions, accounts and trader information, as well as interactions and market activities. Our fraud prevention solutions pinpoint suspicious patterns and abnormal behavior amongst large amounts of data to assist in the identification of financial crimes, both internal (such as employee fraud or rogue trading) and external (such as online and call center fraud, payment fraud, ATM fraud and more).  Our AML solutions help institutions detect suspicious money transfer activities and money laundering related issues with new accounts (in alignment with Know Your Customer and Customer Due Diligence regulations), as well as combat the financing of terrorism by monitoring transactions against watch and sanction lists to identify the activities of known criminals. Our AML applications include transaction monitoring and suspicious activity reporting for all types of financial services institutions, including securities, banking, insurance, credit card and money services industries. We also provide enterprise-wide case management and investigation applications that are used by our clients to aggregate, analyze and investigate risk related cases across the organization.
 
 
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      Our security solutions are comprised of voice platforms and applications, digital video platforms and applications, and lawful interception products. Our voice platforms and applications offering to the security market ranges in size and complexity from small, single-site single-recorder systems to large, multi-site, multi-recorder systems integrated with trunked radio and computer-aided dispatch systems. We provide emergency services and air traffic control organizations with a full range of recording features for voice, radio and trunked radio, including on-line access to hundreds of hours of recording for a quick response time, a choice of different types of archiving media, and a dubbing capability to edit calls on-line for courtroom presentations. The system enables the organizations to re-construct scenarios, investigate and improve performance. Our digital video platforms and applications provide continuous CCTV management, recording, archiving, analysis and debriefing capabilities that meet the needs of today’s demanding security environments. Our lawful interception products enable the interception, delivery, monitoring, collection and advanced analysis of telecommunication interactions. These products handle both telephony and Internet data on the same platform and are fully compliant with the international standards defined by the European Telecommunications Standards Institute (ETSI), under various European legislations, and the Telecommunications Industry Association (TIA), under the Communications Assistance for Law Enforcement Act (CALEA).
 
Products
Markets Served
Purpose
     
NICE SmartCenter
Enterprise
Leverages the synergies of the combined capabilities of NICE Perform, NICE Quality Management, NICE Interaction Analytics, NICE Feedback, IEX TotalView and Performance Manager, as detailed below.
     
NICE Perform Interaction Recording
Enterprise
Records customer interactions with contact center agents, financial trading floors, investment banking and enterprises, with a separate suite of applications for contact centers and investment banking, including for organizations that have a relatively small number of input channels
     
NICE Perform eXpress (NPX)
Enterprise
Brings the capabilities of Nice Perform into a single box, low TCO solution based on commercial hardware for small businesses or small systems.
     
NICE Quality Management
Enterprise
Delivers comprehensive tools for implementing a multifaceted quality program encompassing agents, supervisors, evaluators and managers, and the ability to improve the quality and effectiveness of customer interactions in contact centers
 
 
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NICE Interaction Analytics
Enterprise
Utilizes a multi-dimensional analysis approach to analyze customer interactions across communication channels and provide automated business insight and root cause analysis based on speech analytics, E-mail and chat analysis, call flow analysis, screen content analysis and integration with CRM data
     
NICE Real-Time Guidance
 
Enterprise
Leverages Interaction Analytics in order to provide “next best action” recommendations to the agent in real-time during a phone or chat interaction with a customer, popping up contextually relevant instructions to the agent within call-out windows.
     
NICE Packaged Business Solutions
Enterprise
A comprehensive set of out-of-the-box solutions designed to address common contact center challenges, including Customer Churn Reduction, Sales Effectiveness, Customer Experience, Marketing Effectiveness, Collections Optimization, Quality Optimization, such as First Contact Resolution and Average Handling Time. The Packaged Business solutions are designed to provide immediate value, reduce deployment time and significantly improve return on investment
     
NICE Feedback
Enterprise
Advanced solution for collecting real-time customer feedback after a call or any other type of interaction with the organization. It enables businesses to enhance customer satisfaction, calibrate quality measurements and optimize processes
     
NICE IEX Workforce Management
Enterprise and Security
Forecasts customer interactions, schedules agents with appropriate skills to manage and optimize level of customer service and resources, measures agent and team performance and supports managing overall contact center performance
     
Performance Manager
Enterprise
Maps enterprise business objectives to group and individual goals; tracks and reports performance against these goals
     
 
 
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Network Embedded Logger
Enterprise
Offers a Linux based VoIP Logger embedded in Cisco routers, suitable for branch recording with NICE Perform
     
NiceCall Focus III
Enterprise and
Security
Provides a competitively priced voice recording system for organizations that have a relatively small number of input channels and a cost-effective solution for branch recording  (TDM only) with centralized storage
     
Actimize Fraud
 Prevention Suite
Enterprise - Financial Institutions 
(securities, banking)
A comprehensive suite of focused cross-channel fraud prevention solutions, available individually or as an integrated whole, used in both real-time and batch processing to detect and prevent the following types of fraud:
●  Remote banking (web, phone and more)
●  Remote brokerage
●  Commercial & retail payments (wire, ACH and more)
●  Employee fraud
●  Credit and ATM/debit card
●  Deposit fraud
●  Rogue trading
     
Actimize Anti-Money Laundering Suite
Enterprise - Financial Institutions
(securities, insurance, banking),
Government Regulatory Bodies
An end-to-end suite of solutions that are available individually or as an integrated whole used to monitor and identify suspicious activities for customers and facilitate regulatory compliance processes.  The solutions monitor for the following:
●  Suspicious transactions
●  Know Your Customer and ongoing customer due diligence
●  Sanctions lists and terrorist financing matches
     
Actimize Brokerage
Compliance Suite
Enterprise - Financial Institutions 
 (securities), Government Regulatory Bodies
Packages and solutions that enable firms to effectively adhere to global regulatory requirements and organizational standards.  By monitoring a comprehensive range of financial products to prevent, detect, and deter non-compliant activities and improve risk and compliance performance in areas such as:
●  Institutional surveillance
●  Retail surveillance
●  Employee surveillance
●  MiFID compliance
 
 
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Actimize Enterprise
Risk Case Manager
Enterprise - Financial Institutions
(securities, insurance, banking),
Government Regulatory Bodies
A centralized platform for holistic case and alert management that enables an enterprise-wide approach to risk and compliance operations management. The solution consolidates information from any existing detection system into a single, user-friendly application for managing alerts, cases, investigations, regulatory reporting, financial losses, oversight, and more
     
Mirra IV
Enterprise and Security
Provides small recording system that is suited to simple recording applications in which it can record up to 48 channels of voice traffic from a wide variety of analog and digital interfaces
     
NICE Inform
Security
Provides information management solution for comprehensive management of multimedia interactions for security command and control centers, enables effective management of multimedia incident information from various sources, for faster incident reconstruction, greater insight and improved response
     
NiceVision Net
Security
Provides a complete solution for IP video security, including encoders, decoders and network video recorders
     
NiceVision ControlCenter
Security
Provides an advanced control room management and network-based digital video matrix
     
NiceVision Analytics
Security
Provides a set of video content analytics applications for automated detection of threats, safety and operational related events
     
NiceVision Digital
Security
Provides a portfolio of digital video recorders for different capacities and performance requirements
     
NiceVision SafeRoute
Security
Provides a solution for mobile video surveillance onboard public transport vehicles
     
NICE Situator
Security
Solidifies data from desperate security systems to deliver common operational picture and rapid and collaborated response
     
FAST alpha Silver
Security
Provides high quality digital video monitoring and recording solution for large to mid-size applications
     
NiceTrack
Security
Provides interception, delivery, monitoring, collection and advanced analysis of telecommunication interactions
 
 
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Strategic Relationships
 
We have a dedicated sales organization for all of our products. In certain regions, most significantly, North America, a substantial part of our sales are made directly, while in other regions, most notably, Asia Pacific, sales are made through our distribution channels. In addition, we partner with leading companies to deliver and support our solutions. For our contact center customers, we have entered into global distribution agreements as well as alliance and partnership programs with leading vendors including Avaya, BT and Cisco. Our agreement with Avaya is a framework agreement with industry standard terms for transactions in the ordinary course of business. The agreement is non-exclusive and automatically renews for successive one year periods.
 
        In the financial institutions market, we have established marketing, sales and support arrangements with leading suppliers of complementary products and services, including, among others, BT Group PLC, FIS, IBM, IPC and Orange Business Services. These companies market and distribute our products to their customers either as stand-alone solutions or as integrated parts of their own solutions. In the security markets, we have formed alliances for the co-marketing, distribution and implementation of our products with leading companies including Honeywell, Motorola, Northrop Grumman, PlantCML, Raytheon Company and Siemens, among others.
 
Service and Support
 
We have focused on building a strong global service and support organization for all our systems and have focused on enabling our various regions to leverage the skills and personnel required by them on a global basis. Our partners and dealers are primarily responsible for supporting the day-to-day requirements of the end-users, while we provide technical support to such partners and dealers.  In order to support our direct customers and partners, we established regional support centers, the largest of which is in Denver, Colorado, with an additional support center in Richardson, Texas, to support our customers and partners in the Americas. We also have a support center in Israel and several support locations in the United Kingdom to support EMEA customers, dealers and partners, a support center in India to support APAC customers, dealers and partners, and several other smaller support offices in various locations around the world. By globalizing our support organization, we also enable our multi-regional customers to enjoy full global service customized to their needs. We maintain at our headquarters a staff of highly skilled customer service engineers that offer support to our dealers or partners that offer direct support to our customers. These service engineers provide first class field services and support worldwide. We maintain regular technical training sessions for our dealers and installation support as well.
 
We have introduced a broad professional services portfolio for the rendering of professional services and consultancy services, in addition to our legacy services to support the NICE SmartCenter suite of software applications. Such services include installation, training, project management and customization. These value added services enable our customers to improve their business processes, business analysis, operational efficiency and the services they provide to their customers.

Our systems are generally sold with a warranty for repairs of hardware and software defects and malfunctions. Our customers may renew maintenance agreements from our dealers or directly from us. The latest software maintenance agreements generally provide for maintenance, unspecified upgrades of standard system software (on a when-and-if-available basis) and on-site repair or replacement. Our software maintenance program includes an enhancement support program with ongoing delivery of “like-for-like” unspecified upgrade releases.
 
For our telecommunications monitoring systems, we provide all tiers of service and support either directly using our support organization or indirectly through local companies working closely with the law enforcement agencies.
 
 
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Manufacturing and Source of Supplies
 
Our products are built in accordance with industry standard infrastructure and are PC compatible. The hardware elements in our products are based primarily on standard commercial off-the-shelf components and utilize proprietary in-house developed circuit cards and algorithms and digital processing techniques and software. We also have “software only” solutions for use on standard servers.
 
We manufacture our products through subcontractors. Under a manufacturing agreement with Flextronics Israel Ltd. ("Flextronics"), a subsidiary of a global electronics manufacturing, services company, Flextronics provides us with a turnkey manufacturing solution including order receipt purchasing, manufacturing, testing, configuration, inventory management and delivery to customers. This agreement covers all of our product lines, including our voice recording family of products, our video product lines, our upgrade lines and our spare parts and return material authorization (RMA). NICE is entitled to, and exercises, various control mechanisms, and supervision over the entire production process. In addition, Flextronics is obligated to ensure the readiness of a back-up site, in the event that the main production site is unable to operate as required. We believe this outsourcing agreement provides us with a number of cost advantages due to Flextronics’ large-scale purchasing power, and greater supply chain flexibility.

 Some of the components we use have a single approved manufacturer while others have two or more options for purchasing. In addition, for some of the components and subassemblies we maintain an inventory to limit the potential for interruption. We also carry out relationships directly with some of the more significant manufacturers of our components.  Although certain components and subassemblies we use in our existing products are purchased from a limited number of suppliers, we believe that we can obtain alternative sources of supply in the event that such suppliers are unable to meet our requirements in a timely manner.
 
Quality control is conducted at various stages at our manufacturing outsourcers’ facilities and at their subcontractors’ facilities.  We generate reports to monitor our operations, including statistical reports that track the performance of our products from production to installation.  This comprehensive data allows us to trace failure and to perform corrective actions accordingly.
 
        We have qualified for and received the ISO-9001:2000 quality standard for a significant portion of our products, as well as the ISO 27001 and ISO 14001:2004 certifications.
 
 
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Research and Development
 
We believe that the development of new products and the enhancement of existing products are essential to our future success. Therefore, we intend to continue to devote substantial resources to research and new product development, and to continuously improve our systems and design processes in order to reduce the cost of our products. Our research and development efforts have been financed through our internal funds and programs sponsored through the Government of Israel and the European community. We believe our research and development effort has been an important factor in establishing and maintaining our competitive position. Gross expenditures on research and development in 2007, 2008 and 2009 were approximately $63.3 million, $83.3 million and $82.4 million, respectively, of which approxi­mately $2.7 million, $3.6 million and $3.8 million, respectively, were derived from third-party funding, and $1.0 million, $1.3 million and $1.2 million, respectively, were capitalized software development costs.
 
In 2009, we were qualified to participate in nine programs funded by the Office of the Chief Scientist, or OCS, of the Israeli Ministry of Industry, Trade and Labor to develop generic technology relevant to the development of our products.  Such programs are approved pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, or the Research and Development Law, and the regulations promulgated thereunder. We were eligible to receive grants constituting between 40% and 66% of certain research and development expenses relating to these programs. Some of these programs are members of  programs approved for companies with large research and development activities and some of these programs are members of certain Magnet consortiums.  Accordingly, the grants under these programs are not required to be repaid by way of royalties.  However, the restrictions of the Research and Development Law described below apply to these programs. In 2007, 2008 and 2009, we received a total of $2.0 million, $3.5 million and $3.6 million from the OCS programs, respectively, and we anticipate receiving approximately $0.5 million in 2010 from 2009 programs.
 
We previously received grants from the OCS under its “standard” programs, usually constituting a grant of up to 50% of certain approved research and development expenses, for the research and development of certain approved technology. Under the terms of these programs, a grant recipient is required to pay royalties of 3% to 5% of the net sales of products incorporating technology developed in, and related services resulting from, a project funded by the OCS. Generally, the royalties are required to be paid beginning with the commencement of sales of such products and ending when 100% of the grant is repaid in NIS, linked to the U.S. dollar plus LIBOR interest. In 2009 and 2008 we received no such grants.  In 2007 we received grants in the amount of $0.8 million, solely with respect to Actimize’s standard OCS program. Upon the acquisition of Actimize, we decided to terminate the royalty bearing obligations under Actimize’s standard OCS program. In March 2008, we paid the OCS $4.4 million in respect of the outstanding royalty obligations under such program. Notwithstanding the termination of such royalty obligations, the restrictions of the Research and Development Law described below still apply to this program.
 
 
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The Research and Development Law generally requires that the product incorporating know-how developed under an OCS-funded program be manufactured in Israel. However, upon the approval of the OCS, some of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased, which increase might be up to 300% of the grant (depending on the portion of the total manufacturing volume that is performed outside of Israel). The OCS is also authorized to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. However, upon notification to the OCS, up to 10% of the grant recipient’s approved Israeli manufacturing volume, measured on an aggregate basis, may be transferred out of Israel. The Research and Development Law also allows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the OCS is convinced that doing so is essential for the execution of the program. This declaration will be a significant factor in the determination of the OCS whether to approve a program and the amount and other terms of benefits to be granted. For example, the increased royalty rate and repayment amount will be required in such cases.
 
The Research and Development Law also provides that know-how developed under an approved research and development program may not be transferred to third parties in Israel without the approval of the OCS. Such approval is not required for the sale or export of any products resulting from such research or development. The Research and Development Law further provides that the know-how developed under an approved research and development program may not be transferred to any third party outside Israel, except in certain circumstances and subject to prior OCS approval. The OCS may approve the transfer of OCS-funded know-how outside Israel in the following cases: (a) the grant recipient pays to the OCS a portion of the sale price paid in consideration for such OCS-funded know-how (according to certain formulas); or (b) the grant recipient receives know-how from a third party in exchange for its OCS-funded know-how; or (c) such transfer of OCS-funded know-how arises in connection with certain types of cooperation in research and development activities.
 
The Research and Development Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient.  The law requires the grant recipient and its controlling shareholders and non-Israeli interested parties to notify the OCS of any change in control of the recipient, or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party directly in the recipient, and requires the new non-Israeli interested party to undertake to the OCS to comply with the Research and Development Law.  In addition, the rules of the OCS may require prior approval of the OCS or additional information or representations in respect of certain of such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company.  A person is presumed to have control if such person holds 50% or more of the means of control of a company.  “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer.  An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors.  Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares or ADSs will be required to notify the OCS that it has become an interested party and to sign an undertaking to comply with the Research and Development Law.
 
 
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           The funds available for OCS grants out of the annual budget of the State of Israel were reduced in recent years, and the Israeli authorities have indicated in the past that the government may further reduce or abolish OCS grants in the future.  Even if these grants are maintained, we cannot presently predict what would be the amounts of future grants, if any, that we might receive.
 
    In the past we were selected to participate in the European Community Framework Programme for Research, Technological Development and Demonstration, which funds and promotes research. There are no royalty obligations associated with receiving such funding. From time to time we may apply for new grants under the Framework Programme.
 
Intellectual Property
 
   We currently rely on a combination of trade secret, patent, copyright and trademark law, together with non-disclosure and non-compete agreements, to establish and/or protect the technology used in our systems.
 
           We currently hold 63 U.S. patents and 78 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 121 patent applications pending in the United States and other countries. We believe that the improvement of existing products, and the development of new products are important in establishing and maintaining a competitive advantage. We believe that the value of our products is dependent upon our proprietary software and hardware continuing to be “trade secrets” or subject to copyright or patent protection. We generally enter into non-disclosure and non-compete agreements with our employees and subcontractors. However, there can be no assurance that such measures will protect our technology, or that others will not develop a similar technology or use technology in products competitive with those offered by us. Although we believe that our products do not infringe upon the proprietary rights of third parties, there can be no assurance that one or more third parties will not make a contrary claim or that we will be successful in defending such claim.
 
From time to time, we receive “cease and desist” letters claiming patent infringements. However, no formal claims or other actions have been filed with respect to such alleged infringement, except for claims filed by Dictaphone, Verint America Inc. and Multi-Format, Inc. (all of which have since been settled and dismissed) and Fair Isaac Corporation (for further information please see Item 8, “Financial Information—Legal Proceedings” in this annual report). We cannot assure you, however, that we will be successful in defending such claims, if asserted, or that infringement claims or other claims, if asserted, will not have a material adverse effect on our business, financial condition and results of operations.  Defending infringement claims or other claims could involve substantial costs and diversion of management resources.  In addition, to the extent we are not successful in defending such claims, we may be subject to injunctions with respect to the use or sale of certain of our products or to liabilities for damages and may be required to obtain licenses which may not be available on reasonable terms.
 
We own the following trademarks and/or registered trademarks in different countries: 360º View, Alpha, ACTIMIZE, Actimize logo, Customer Feedback, Dispatcher Assessment, Encorder, eNiceLink, Executive Connect, Executive Insight, FAST, FAST alpha Blue, FAST alpha Silver, FAST Video Security, Freedom, Freedom Connect, IEX, Interaction Capture Unit, Insight from Interactions, Investigator, Last Message Replay, Mirra, My Universe, NICE, NICE logo, NICE Analyzer, NiceCall, NiceCall Focus, NiceCLS, NICE Inform, NICE Learning, NiceLog, NICE Perform, NiceScreen, NICE SmartCenter, NICE Storage Center, NiceTrack, NiceUniverse, NiceUniverse Compact, NiceVision, NiceVision Alto, NiceVision Analytics, NiceVision ControlCenter, NiceVision Digital, NiceVision Harmony, NiceVision Mobile, NiceVision Net, NiceVision NVSAT, NiceVision Pro, Performix, Playback Organizer, Renaissance, Scenario Replay, ScreenSense, Tienna, TotalNet, TotalView, Universe and Wordnet.
 
 
39
 
 
Regulation
 
Export Restrictions
 
The export of certain defense products from Israel, such as our NiceTrack line of products, requires a permit from the Israeli Ministry of Defense.  In addition, the sale of products to certain customers, mostly armed forces, also requires a permit from the Israeli Ministry of Defense.  In 2009, the vast majority of our sales were not subject to such permit requirements. To date, we have encountered no difficulties in obtaining such permits. However, the Ministry of Defense notifies us from time to time not to conduct business with specific countries that are undergoing political unrest, violating human rights or exhibiting hostility towards Israel. We may be unable to obtain permits for our defense products we could otherwise sell in particular countries in the future.
 
We may also be subject to applicable export control regulations in other countries from which we export goods and services, including the United States. Such regulations may apply with respect to product components that are developed or manufactured in the United States, or with respect to certain content contained in our products. There are restrictions that apply to software products that contain encryption functionality, especially in the United States and Israel. In the event that our products and services are subject to such controls and restrictions, we may be required to obtain an export license or authorization and comply with other applicable requirements pursuant to such regulations.
 
European Environmental Regulations
 
Our European activities require us to comply with Directive 2002/95/EC of the European Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), which came into effect on July 1, 2006. This directive provides that producers of electrical and electronic equipment may not place new equipment containing lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls and polybrominated diphenyl ethers, in amounts exceeding certain maximum concentration values, on the market in the European Union. Our products meet the requirements of the RoHS directive and we are making every effort in order to maintain compliance, without adversely affecting the quality and functionalities of our products. If we fail to maintain compliance, including by reason of failure of our suppliers to comply, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.
 
Our European activities also require us to comply with Directive 2002/96/EC of the European Parliament on Waste Electrical and Electronic Equipment (“WEEE”). The WEEE directive covers the labeling, recovery and recycling of IT/Telecommunications equipment, electrical and electronic tools, monitoring and control instruments and other types of equipment, devices and items, and already partly came into effect on August 13, 2005. Our products fall within the scope of the WEEE directive, and we have set up the operational and financial infrastructure required for collection and recycling of WEEE, as stipulated in the WEEE directive, including product labeling, registration and the joining of compliance schemes. We are taking and will continue to take all requisite steps to ensure compliance with this directive. If we fail to maintain compliance, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.
 
In addition, similar regulations are being formulated in other parts of the world. We may be required to complying with other similar programs that might be enacted outside Europe in the future.
 
 
40
 
 
Competition
 
The market for our enterprise interaction solutions is highly competitive and includes numerous products offering a broad range of features and capabilities. As the market is still developing, we anticipate that a number of our existing and potential competitors will be introducing new and enhanced products. Some of our competitors in the digital voice recording and contact center solutions include, among others, Aspect Software, Inc., Autonomy Corp. (formerly e-talk), Cybertech International, eLoyalty, Genesys Telecommunicatons, Nexidia and Verint Systems Inc.
 
We believe that competition in the evolving enterprise interaction solutions market is based on a number of factors related to the product offering and business model. With respect to products, we consider breadth of offering, application functionality, system performance and reliability, the ability to integrate with a variety of external computer and communications systems and ease of use as key factors. With respect to the business model, we consider marketing and distribution capacity, price and global service and support capacity as key factors. We believe that NICE solutions have a competitive advantage based on their ability to service large, multi-site, multi-channel contact centers and their holistic integration of various unstructured data sources, their ability to extract insight with a multi-dimensional approach, their wide-range connectivity and compatibility with telephone and computer networks and their ease of use. We believe that we have a competitive advantage because of the strength of our installed customer base, size and capabilities of our global distribution network, our business partners, and our global service and support capacity.
 
The market for operational and transactional risk management software for financial services institutions, which has emerged only in recent years, is highly competitive and fragmented.  The market is influenced by the introduction of new regulations and financial crime patterns impacting the financial services industry.  While no single company competes with us across all of our solution areas, we face significant competition with respect to each solution that we offer. We believe that the principal competitive factors in this market include our deep domain expertise, speed of development, ability to provide service across the enterprise using one core platform and our ability to serve specific “point” solutions. Our software solutions compete with software internally developed by financial services institutions, as well as software and other solutions offered by commercial competitors, that include ACI Worldwide, FICO, Mantas, Inc., Norkom Group plc, Oracle Corporation, SAS Institute Inc. and Sungard Data Systems Inc.
 
 
41
 
 
Traditionally, public safety customer voice recording requirements for emergency phones and radio were relatively basic. As the command and control center is becoming more complex and advanced systems are being deployed, and as more trunk radio and IP-based systems are offered, the recording system has to be integrated with these systems. Our ability to deliver a more integrated and sophisticated recording system that can capture voice, video, data and meta-data information from trunk radio systems and computer aided dispatch, or CAD, systems, positions our products above the competition mainly in the large high-end emergency centers. In addition, we believe that applications for scenario reconstruction of an incident connecting multimedia sources (including voice), video, data, GIS and meta-data together give us an advantage over the competition. Some of our competitors in the public safety market include ASC Telecom, AudioSoft, CyberTech International, Redbox Recorders and Verint Systems. 
 
There are several competitors who have products that compete with our video platform and applications. Our main competitors in this market are Bosch, Genetec Inc., IndigoVision, Milestone Systems A/S, ONSSI, Schneider Electric (formerly Pelco) and Verint Systems.  We believe that our approach to provide a full solution based on our self-developed recording, management software, networking devices and real-time content analysis, as well as open interfaces to third party devices and applications, creates a competitive advantage in this market.
 
There are a number of competitors in the telecommunications monitoring market, having products competing with our NiceTrack system, the major ones being Atis, ETI, JSI Telecom, Pen-link Ltd., SS8 Networks, Inc., Trovicor and Verint Systems. We believe that our solution offers innovations that provide law enforcement agencies and intelligence organizations the tools and capabilities they require to meet the challenges of today’s advanced telecommunications world.
 
Organizational Structure
 
The following is a list of all of our significant subsidiaries, including the name, country of incorporation or residence, and the proportion of our ownership interest in each.
 
Name of Subsidiary
  
Country of Incorporation or Residence
  
Percentage of Ownership Interest
Nice Systems Australia PTY Ltd.
  
Australia
  
100%
NICE Systems Technologies Brasil LTDA
  
Brazil
  
100%
NICE Systems Canada Ltd.
  
Canada
  
100%
Nice Systems S.A.R.L.
  
France
  
100%
NICE Systems GmbH
  
Germany
  
100%
NICE APAC Ltd.
  
Hong Kong
  
100%
NICE Systems Kft
  
Hungary
  
100%
Nice Interactive Solutions India Private Ltd.
  
India
  
100%
Nice Technologies Ltd.
  
Ireland
  
100%
Actimize Ltd.
  
Israel
  
100%
STS Software Systems (1993) Ltd.
  
Israel
  
100%
Actimize Japan KK Limited
  
Japan
  
100%
Nice Japan Ltd.
  
Japan
  
100%
Fortent Japan KK
  
Japan
  
100%
IEX Corporation BV
  
Netherlands
  
100%
Nice Systems (Singapore) Pte. Ltd.
  
Singapore
  
100%
Nice Switzerland AG
  
Switzerland
  
100%
Actimize UK Limited
  
United Kingdom
  
100%
Fortent Limited
  
United Kingdom
  
100%
NICE CTI Systems UK Ltd.
  
United Kingdom
  
100%
Actimize Inc.
  
United States
  
100%
Fortent Americas, Inc.
  
United States
  
100%
IEX Corporation
  
United States
  
100%
Nice Systems Inc.
  
United States
  
100%
Nice Systems Latin America, Inc.
  
United States
  
100%

 
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Property, Plants and Equipment
 
Our executive offices and engineering, research and development operations are located in Ra’anana, Israel, where we occupy the following facilities:

●
Ra’anana Central Offices, which occupies approximately 140,000 square feet of space, pursuant to a lease expiring in 2013.  The annual rent and maintenance fee for the facility is approximately $3.4 million, paid partially in NIS linked to the Israeli consumer price index and partially linked to the U.S. consumer price index.
 
●
North Ra’anana NICE offices, which occupies approximately 90,000 square feet, pursuant to a lease expiring in 2013. The annual rent and maintenance fee for this additional facility is approximately $2.28 million, paid in NIS and linked to the Israeli consumer price index.
 
●
North Ra’anana Actimize offices, which occupies approximately 30,000 square feet, pursuant to a lease expiring in September 2011. The annual rent and maintenance fee for this facility is approximately $650,000, paid in NIS and linked to the Israeli consumer price index.
 
We have leased various other offices and facilities in several other countries.  Our material leased facilities consist of the following:

 
●
Our North American headquarters in Rutherford, New Jersey, which occupy approximately 36,700 square feet. We also have two additional offices in New York, which occupy approximately 13,000 square feet and 15,000 square feet, respectively;
 
 
●
Our office in Denver, Colorado, which occupies approximately 30,775 square feet. The lease for this office expires during September 2010 and we have leased a new office in Denver, which occupies approximately 27,063 square feet, with the lease becoming effective as of April 2010;
 
 
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●
Our office in Richardson, Texas, which occupies approximately 37,564 square feet.
 
 
●
Our office in Southampton, UK, which occupies approximately 23,428 square feet; and
 
 
●
Our office in Hong Kong, which occupies approximately 9,506 square feet.
 
We believe that our existing facilities are adequate to meet our current and foreseeable needs.
 
Item 4A.                 Unresolved Staff Comments.
 
None.
 
Item 5.                   Operating and Financial Review and Prospects.
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes and other financial information included elsewhere in this annual report.  This discussion contains certain forward-looking statements that involve risks, uncertainties and assumptions. As a result of many factors, including those set forth under Item 3, “Key Information Risk Factors” and elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements.  For more information about forward-looking statements, see the Preliminary Note that precedes the Table of Contents of this annual report.
 
Overview
 
We are a leading global provider of advanced solutions that enable enterprises and security organizations to extract insight from interactions, transactions and surveillance to drive business performance and ensure safety and security. Our solutions enable companies and public organizations to capture, manage, analyze and impact unstructured interaction as well as transactional data, enabling such entities to comply with internal and governmental regulations, enhance business and operational performance and address security threats while increasing situational awareness. Unstructured content includes cross-channel analysis of phone calls, chat, instant messaging, and email interactions to contact centers, trading floors, branches, home agents and back offices, phone calls to emergency service providers and first responders, video captured by closed circuit cameras, radio communications between emergency services’ and first responders’ personnel, internet sessions, email and instant messaging and security management solutions for command and control centers. Our solutions include integrated, scalable, cross-channel recording platforms, cross-channel real-time analytics, software management applications. These solutions address critical business processes and risk management, compliance procedures and security needs of enterprises and security organizations. Our solutions facilitate faster decision-making and real-time analysis and actions, improving business and employee performance, reducing exposure to transactional risks related to financial crime (fraud detection and Anti Money Laundering, or AML), operational risk and compliance activities, and enhancing security and public safety. Our enterprise customers span a variety of industries, such as financial services, telecommunications, healthcare, outsourcers, retail, media, travel, service providers, utilities and others. Our financial crime solutions primarily serve financial services organizations. Our security solutions are tailored to protect city centers, transportation systems, critical infrastructure, enterprise campuses and more. Our solutions are deployed at over 24,000 customers, including over 80 of the Fortune 100 companies.
 
 
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Our products are sold primarily through a global network of distributors, system integrators and strategic partners; a portion of product sales and most services are sold directly to end-users. One distributor accounted for less than 10% in 2009 and approximately 13% in 2007 and 2008.
 
Recent Acquisitions
 
The following acquisitions were accounted for by the purchase method of accounting, and, accordingly, the purchase price for each acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values. The results of operations related to each acquisition are included in our consolidated statement of income from the date of acquisition.
 
On January 11, 2010, we completed the acquisition of certain assets and liabilities of Orsus Solutions Limited and certain subsidiaries of Orsus (collectively, “Orsus”), a leading provider of Security Management Solutions. The acquisition was for a total consideration of approximately $22 million in cash, subject to certain adjustments. Orsus' flagship solution, Situator, provides a framework for fusing data silos from disparate security and safety systems as well as multiple command and control centers, into a single, holistic operational view and automating security procedures.
 
On August 31, 2009, NICE and certain subsidiaries of NICE completed the acquisition of the voting securities of certain subsidiaries of Fortent, Inc. (“Fortent”), a leading provider of analytics based Anti-Money Laundering and financial crime prevention software solutions for the financial services industry. Fortent became part of our Actimize business, with the Fortent team becoming an integral part of the Actimize team. The acquisition was for a total consideration of approximately $73 million in cash. Fortent is known for its anti-money laundering deployments and expertise within the world's tier-one financial institutions and for its advanced statistical profiling analytics technology.
 
On August 31, 2009, we completed the acquisition of Hexagon System Engineering Ltd. (“Hexagon”), an Israel-based company that provides cellular location tracking technology, for approximately $7.8 million in cash and additional contingent consideration of up to $2.5 million in cash. Hexagon's unique technology enables law enforcement, internal security, and intelligence agencies to fight crime and terror more effectively.
 
On June 17, 2009, we completed the acquisition of the assets of Syfact, for approximately $4.4 million in cash. Syfact is a pioneer of enterprise investigative case management solutions. Syfact provides innovative investigative case management solutions, best practices and technologies that simplify and enrich the most complex fraud, money laundering, customer due diligence and corporate security investigations.
 
On April 28, 2008, NICE CTI Systems UK Limited completed the acquisition of certain assets of AVT Systems Limited (“AVT”), for approximately $6.2 million in cash. The business acquired includes the sale, distribution, service, maintenance and support of NICE voice recording solutions (hardware and software and associated services) in the United Kingdom. 
 
 
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       On April 8, 2008, we acquired certain assets, shares and business from Quality Plus Group Ltd., a UK-based value-added distributor of NICE’s contact center solutions, and its affiliates (“QPC”), for approximately $12.6 million in cash. The business acquired includes the sale, distribution, service, support, maintenance and development of workforce management solutions and associated services as conducted by QPC in the UK, Sweden and Australia.
 
                On August 30, 2007, we acquired Actimize Ltd., a global provider of operational risk management software solutions that enable financial services institutions to manage the challenges of regulatory compliance, internal policy enforcement and fraud prevention and money laundering. Under the terms of the Agreement and Plan of Merger, dated July 2, 2007 (the “Merger Agreement”), the consideration paid for Actimize was approximately $281.1 million, approximately 80% of which was in cash and approximately 20% of which was satisfied through the issuance of 1,501,933 of our ordinary shares based on the market price of the securities a few days before and after the terms of the acquisition were agreed upon and announced, and the fair value of the vested portion of 987,104 options and restricted shares that were issued to holders of Actimize options and restricted shares. Pursuant to the terms of the Merger Agreement, we assumed the stock options and restricted shares granted by Actimize (for further information please see Item 6, “Directors, Senior Management and Employees” in this annual report). On September 12, 2007, as required by the Merger Agreement, we filed a registration statement with the U.S. Securities and Exchange Commission, or SEC, to register for resale the securities issued pursuant to the Merger Agreement, which we maintained effective for approximately six months.
 
Off-Balance Sheet Transactions
 
We have not engaged in nor been a party to any off-balance sheet transactions.
 
Critical Accounting Policies
 
The preparation of financial statements in conformity with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Management believes that the significant accounting policies which affect its more significant judgments and estimates used in the preparation of the Consolidated Financial Statements and those that are the most critical to aid in fully understanding and evaluating our reported results include the following:
 
 
●
Revenue recognition
 
 
●
Allowance for doubtful accounts
 
 
●
Inventory valuation
 
 
●
Impairment of long-lived assets
 
 
●
Taxes on income
 
 
●
Contingencies
 
 
●
Business combination
 
 
●
Stock-based compensation
 
 
●
Valuation of investment in marketable securities
 
 
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Revenue Recognition.  We derive our revenues primarily from two sources: product revenues, which include hardware and software sales; and service revenues, which include support and maintenance, installation, project management and training revenue.  Revenue related to sales of our products is generally recognized when persuasive evidence of an agreement exists, the product has been delivered and title and risk of loss have passed to the buyer, the sales price is fixed or determinable, and collectability is probable. Sales agreements with specific acceptance terms are not recognized as revenue until either the customer has confirmed that the product or service has been accepted or as the acceptance provision has lapsed.
 
Revenues from maintenance and professional services are recognized ratably over the contract period or as services are performed.
 
For arrangements with multiple elements, we allocate revenue to each component of the arrangement using the residual value method based on vendor specific objective evidence ("VSOE") of the undelivered elements. This means that we defer the arrangement fee equivalent to the fair value of the undelivered elements until these elements are delivered.
 
Our policy for the establishment of VSOE of fair value of maintenance is through the performance of a VSOE compliance test which is an analysis of actual PCS renewals (the population used in the VSOE compliance test is only actual renewals of maintenance).
 
Our policy for the establishment of VSOE of fair value for installation and training is through an analysis of stand-alone sales of those services. The price charges in the separate sales are consistent with the prices charges when the same elements are included in multiple element arrangements.
 
We established VSOE of fair value to the project management services based on a price per day which is identical to the price per day charged for installation services (of which separate sales exist). These similar daily rates are VSOE of fair value for the project management services.
 
Revenues from fixed price contracts that require significant customization, integration and installation are recognized using the percentage-of-completion method of accounting based on the ratio of costs related to contract performance incurred to date to the total estimated amount of such costs. The amount of revenue recognized is based on the total license fees under the license agreement and the percentage of completion achieved. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contact. The revenues from such arrangements are allocated between license and professional services revenues to reflect the portion of each revenue source separately. Revenues allocated to services are based on the VSOE of fair value of the services in the arrangement and revenues allocated to license are the residual amount.
 
 
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To assess the probability of collection for revenue recognition, we have an established credit policy that determines the credit limit that reflects an amount that is deemed probably collectible for each customer.  These credit limits are reviewed and revised periodically on the basis of new customer financial statement information and payment performance.
 
We record a provision for estimated sales returns in accordance with ASC 605, "Revenue Recognition" (Formerly SFAS No. 48) in the same period as the related revenues are recorded.  We base these estimates on the historical sales returns ratio and other known factors.  Actual returns could be different from our estimates and current provisions for sales returns may need to be adjusted.
 
Allowance for Doubtful Accounts.  We regularly review our allowance for doubtful accounts by considering factors such as historical experience, age of the account receivable and current economic conditions that may affect a customer’s ability to pay. We allocate a certain percentage for the provision based on the length of time the receivables are past due.
 
Inventory Valuation.  At each balance sheet date, we evaluate our inventory balance for excess quantities and obsolescence.  This evaluation includes analyses of sales levels by product line and projections of future demand.  In addition, we write off inventories that are considered obsolete.  Remaining inventory balances are adjusted to the lower of cost or market value.  If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made.
 
Our manufacturing process of our audio and video product platforms is outsourced.  Under the outsourcing arrangements, we take ownership of inventories at the conclusion of the manufacturing process, such inventories representing finished goods or spare parts.  As we largely manufacture to order, we do not tend to accumulate finished goods.  We are obligated, however, to purchase certain excess raw material and subassembly inventories from the contract manufacturer that may be deemed obsolete or slow-moving.  We monitor the levels of the contract manufacturer’s relevant inventories periodically and, if required, will write-off such deemed excess or obsolete inventory.
 
Impairment of Long-Lived Assets.  Our long-lived assets include property and equipment, goodwill and identifiable other intangible assets that are subject to amortization. In assessing the recoverability of our goodwill, property and equipment and other identifiable intangible assets that are held and used, we make judgments regarding whether impairment indicators exist based on legal factors, market conditions and operating performances of our reporting units or asset groups. Future events could cause us to conclude that impairment indicators exist and that the carrying values of the goodwill, property and equipment and other intangible assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations.
 
 ASC 350 "Intangible – Goodwill and Other" (Formerly SFAS No. 142), requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting units’ goodwill over the implied fair value of that goodwill. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our reporting units, the period over which cash flows will occur and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. We allocate goodwill to reporting units based on the reporting unit’s expected benefit from the acquisition. We evaluate our reporting units on an annual basis and, if required, reassign goodwill using a relative fair value allocation approach.
 
 
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We are required to assess the impairment of long-lived assets, tangible and intangible, other than goodwill, under ASC 360 "Property, Plant, and Equipment" (Formerly SFAS No. 144), when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicators include any significant changes in the manner of our use of the assets or the strategy of our overall business, significant negative industry or economic trends and significant decline in our share price for a sustained period.
 
Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of aggregate undiscounted projected future cash flows to the carrying amount of the asset, an impairment charge is recorded for the excess of fair value over the carrying amount. We measure fair value using discounted projected future cash flows.
 
Taxes on Income.  We record income taxes using the asset and liability approach.  Management judgment is required in determining our provision for income taxes in each of the jurisdictions in which we operate. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws.  We have considered future reversal of existing temporary differences, future taxable income, prudent and feasible tax planning strategies and other available evidence in determining the need for a valuation allowance. Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is no assurance that the final tax outcome will not be different than those which are reflected in our historical income tax provisions and accruals.  Such differences could have a material effect on our income tax provision, net income and cash balances in the period in which such determination is made.
 
We implement a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (on a cumulative basis) likely to be realized upon ultimate settlement.
 
We recorded interest on late paid taxes as financial expenses and tax related penalties as general and administrative expenses.
 
 
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Contingencies.  From time to time, we are a defendant or plaintiff in various legal actions, which arise in the normal course of business. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful and considered analysis of each individual action together with our legal advisors. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. A change in the required reserves would affect our earnings in the period the change is made.
 
Business Combination. We adopted ASC 805 "Business Combination" (Formerly SFAS No. 141R on January 1, 2009), accordingly we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values. In allocating the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, we developed the required assumptions underlying the valuation work. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements and acquired developed technologies; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, utilizing a market participant approach, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. We were assisted by a third party appraiser in applying the required economic models (such as income approach and cost approach), in order to estimate the fair value of assets acquired and liabilities assumed in the business combination.
 
Stock-based Compensation. We account for stock-based compensation in accordance with the provisions of ASC 718 "Compensation - Stock Compensation" (Formerly SFAS No. 123R). Under the fair value recognition provisions of ASC 718, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing model and values restricted stock based on the market value of the underlying shares at the date of grant. We recognize compensation costs using the graded vesting attribution method that results in an accelerated recognition of compensation costs.
 
The fair value of an award is affected by our stock price on the date of grant and other assumptions, including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options. Share-based compensation expense recognized in our consolidated statements of income was reduced for estimated forfeitures.

 
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Valuation of investments in marketable securities. On April 1, 2009, we adopted a new guidance that changed the impairment and presentation model for our available for sale debt securities. Under the amended impairment model, other-than-temporary impairment (OTTI) loss is recognized in earnings if the entity has the intent to sell the debt security, or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, if an entity does not expect to sell a debt security and it is not more likely than not that we will be required to sell, it still needs to evaluate if it expects to recover the entire costs basis of the impaired securities and determine if a credit loss exists. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized currently in earnings. Amounts relating to factors other than credit losses are recorded in other comprehensive income. The adoption of the new guidance had no impact on our consolidated financial position, results of operations or cash flows.
 
Prior to April 1, 2009, we reviewed various factors in determining whether we should recognize an impairment charge for our marketable securities, including our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, the length of time and extent to which the fair value has been less than our cost basis, the credit ratings of the securities and the financial condition and near-term prospects of the issuers.
 
Effective January 1, 2008, we adopted the provisions of ASC 820, "Fair Value Measurements and Disclosures" (Formerly SFAS No. 157). ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, as set forth below, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
 
 
●
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
 
 
●
Level 2 – Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
 
 
●
Level 3 – Valuations based on unobservable inputs which are supported by little or no market activity and significant to the overall fair value measurement.
 
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
 
 
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Our marketable securities trades in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency and accordingly are categorized as Level 2.

We classified foreign currency derivative contracts within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

The actual value at which such securities could actually be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors, including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller.
 
Results of Operations
 
The following table sets forth our selected consolidated statements of income for the years ended December 31, 2007, 2008 and 2009 expressed as a percentage of total revenues. Totals may not add up due to rounding.
 
   
2007
    
2008
    
2009
  
Revenues
                  
Products                                                
     61.2 %     56.3 %     48.3 %
Services                                                
     38.8       43.7       51.7  
      100.0       100.0       100.0  
Cost of revenues
                        
Products*                                                
     28.2       27.3       31.2  
Services*                                                
     58.3       52.4       49.5  
      39.9       38.3       40.7  
                         
Gross Profit                                                              
     60.1       61.7       59.3  
                         
Operating expenses
                        
Research and development, net
     11.5       12.6       13.3  
Selling and marketing                                               
     23.3       23.7       24.3  
General and administrative                                               
     16.5       15.5       12.5  
Amortization of acquired Intangibles                                               
     1.8       2.3       2.7  
In process research and development write-off
     0.7       -       -  
Settlement and related expenses
     -       1.6       -  
Total operating expenses                                                              
     53.8       55.7       52.8  
                         
Operating income                                                              
     6.3       6.0       6.5  
Financial income, net                                                              
     2.9       1.8       1.3  
Other income, net                                                              
     -       -       -  
                         
Income before taxes                                                              
     9.2       7.8       7.8  
Taxes on income                                                              
     2.0       1.5       0.5  
                         
Net income                                                              
     7.2       6.3       7.3  
_______________________
(*) Respective revenues

 
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Comparison of Years Ended December 31, 2008 and 2009
 
Revenues
 
Our total revenues decreased by approximately 6.6% to $583.1 million in 2009 from $624.2 million in 2008. Revenues from sales of enterprise interactions solutions were $363.6 million in 2009, a decrease of 12.9% from 2008, revenues from sales to the public safety and security sector were $147.8 million in 2009, a decrease of 0.5% from 2008, and revenues from sales of risk and financial crime solutions were $71.7 million in 2009, an increase of 23.3% from 2008. The 12.9% decrease in revenues from the enterprise interactions solutions is mainly attributed to the macro-economic environment in 2009. Approximately 44% of the growth in risk management solutions revenue is attributable to increase in geographical area of EMEA, and approximately 39% of the growth in risk management solutions revenue is attributable to the inclusion of Fortent results for the first time in 2009 (starting September 1, 2009). The revenue from the public safety and security sector remained at the same level year over year.
 
   
Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2008
    
2009
    
Dollar Change
    
Percentage Change
  
                         
Product Revenues
   $ 351.7     $ 281.8       (69.9 )     (19.9 )
Service Revenues
     272.5       301.3       28.8       10.6  
Total Revenues
   $ 624.2     $ 583.1       (41.1 )     (6.6 )

The decrease in product revenues is due to the macro-economic environment in 2009. Approximately 54% of the decline in product revenue is attributable to a decrease in sales in EMEA, 34% of the decline in product revenue is attributable to a decrease in sales in APAC and 12% of the decline in product revenue is attributable to a decrease in product revenue in Americas.
 
The increase in service revenues is due to an increase in maintenance revenue resulting from an increase in the install base from previous years’ sales. Our service revenues represented approximately 52% of total revenues, as compared to approximately 44% in 2008.
 
Revenue by regions
 
   
Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2008
    
2009
    
Dollar Change
    
Percentage Change
  
                         
United States, Canada and Central and South America (“Americas”)
   $ 347.4     $ 365.8     $ 18.4       5.3 %
Europe, the Middle East and Africa (“EMEA”)
     188.5       150.4       (38.1 )     (20.2 )
Sales to Asia-Pacific (“APAC”)
     88.3       66.9       (21.4 )     (24.2 )
Total Revenues
   $ 624.2     $ 583.1     $ (41.1 )     (6.6 )
 
 
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  The Americas revenues increased by 5.3%, approximately 22% is attributable to organic growth in risk management solutions revenues, approximately 15% of the increase is attributable to the inclusion of Fortent results for the first time in 2009 (starting September 1, 2009) and the remainder increase is mainly due to higher post-contractual services and maintenance revenue. The decrease in EMEA and APAC revenue is attributable to the macro economic environment.
 
Cost of Revenues
 
                         
   
Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2008
    
2009
    
Dollar Change
    
Percentage
Change
  
                         
Cost of Product Revenues
   $ 95.9     $ 88.0       (7.9 )     (8.2 )%
Cost of Service Revenues
     142.9       149.2       6.3       4.4 %
                                 
  Total Cost of Revenues
   $ 238.8     $ 237.2       (1.6 )     (0.6 )%

Cost of product revenues decreased on a dollar basis while increasing as a percentage of product revenues. The decrease on a dollar basis is mostly a result of decline in product revenue, while the increase as percentage of product revenues is mainly due to a higher proportion of large security projects in the mix of products, which have higher cost of product. Cost of service revenues increased on a dollar basis due to additional investment to support the increase in the business, while decreasing as a percentage of service revenues. The decrease in the percentage of cost of service from service revenues results from the increase in maintenance revenues and the decrease in cost of wages as a result of certain cost control measurements.
 
Gross Profit
 
   
Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2008
    
2009
    
Dollar Change
    
Percentage
Change
  
                         
Gross Profit on Product Revenues                                                        
   $ 255.8     $ 193.8       (62.0 )     (24.2 )%
  as a percentage of product revenues
     72.7 %     68.8 %                
Gross Profit on Service Revenue                                                        
     129.6       152.1       22.5       17.4  
  as a percentage of service revenues
     47.6 %     50.5 %                
                                 
   Total Gross Profit                                                        
   $ 385.4     $ 345.9       (39.5 )     (10.2 )%
         as a percentage of total revenues
     61.7 %     59.3 %                
 
The decrease in gross profit margin on product revenues is mainly attributable to a decrease in volume and change in the mix as aforementioned. The improvement in gross profit margin on service revenues is mainly attributed to the change in service revenue mix as aforementioned.
 
 
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Operating Expenses
 
   
Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2008
    
2009
    
Dollar
Change
    
Percentage
Change
  
                         
   Research and development, net                                                          
   $ 78.4       77.4     $ (1.0 )     (1.3 )%
   Selling and marketing                                                          
     147.9       141.5       (6.4 )     (4.3 )
   General and administrative                                                          
     97.4       72.8       (24.6 )     (25.2 )
   Amortization of acquired intangible assets
     14.5       16.0       1.5       10.3  
Settlement and related expenses
   $ 9.9       -     $ (9.9 )     (100 )%

Research and Development, Net. Research and development expenses, before capitalization of software development costs and government grants, decreased to $82.4 million in 2009, as compared to $83.3 million in 2008 and represented 14.1% and 13.3% of revenues in 2009 and 2008, respectively. The decrease in research and development, net is due mainly from decrease in cost of wages as a result of certain cost control measurements.
 
Capitalized software development costs were $1.3 million in 2009, as compared to $1.3 million in 2008. Amortization of capitalized software development costs included in cost of product revenues were $0.9 million and $0.8 million in 2009 and 2008, respectively.
 
Selling and Marketing Expenses. Selling and marketing expenses decreased to $141.5 million in 2009, as compared to $147.9 million in 2008, and represented 24.3% of total revenues in 2009, as compared to 23.7% in 2008. The decline in selling and marketing expense is due mainly to a decrease in (i) commissions, which accounts for approximately 25% of the decline, (ii) travel expenses which accounts for approximately 41% of the decline, and (iii) participation in exhibitions which accounts for approximately 29% of the decline.
 
General and Administrative Expenses.  General and administrative expenses decreased to $72.8 million in 2009, as compared to $97.4 million in 2008, and represented 12.5% of total revenues in 2009, as compared to 15.5% in 2008. The decline in general and administrative expense is due mainly to a decrease in legal fees, which accounts for approximately 40% of the decline, and doubtful accounts expenses, which account for approximately 28% of the decline, and the remainder is mainly explained due to a decline in cost of wages as a result of certain cost control measurements
 
Amortization of acquired intangible assets.  Amortization of acquired intangibles included in the operating expenses represent 2.7% and 2.3% of our 2009 and 2008 revenues, respectively. Approximately 88% of the increase in amortization of acquired intangible assets is attributable to amortization of intangible assets related to the acquisition of Fortent and Syfact. The remainder is due to amortization of intangible assets related to the acquisition of QPC and AVT for the entire year of 2009 compared to eight months of amortization in 2008.
 
Financial and Other Income
 
   
Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2008
    
2009
    
Dollar Change
    
Percentage Change
  
                         
   Financial income, net                                                        
   $ 11.3     $ 7.7     $ (3.6 )     (31.9 )%
   Other income (expenses), net                                                        
     (0.1 )     (0.1 )     -       -  

 
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Financial Income, Net.  The decrease in financial income, net reflects lower average interest rates in 2009, as compared to 2008 and the impact of currencies exchange rate.
 
Taxes on Income. In 2009 taxes on income amounted to $3.0 million, as compared to $9.5 million in 2008. Our effective tax rate amounted to 6.6% in 2009 compared with 19.5% in 2008. The marked decrease in our effective tax rate in 2009 was mainly due to release of prior period provisions arising as a result of the unadjusted expiration of the statute of limitations for certain historic tax returns filed as well as the effects of a final settlement with a certain tax authority covering prior years.
 
The decline of the corporate tax rate in Israel from 27% in 2008 and 26% in 2009 had a minor impact on our effective tax rate. This is because the majority of our income earned in Israel benefits from the reduced tax rates applicable to us as a result of our Approved and Privileged Enterprise programs.
 
Further information with regard to our Approved and Privileged Enterprise programs can be found in Item 3, “Risk Factors” under the caption “Our results may be affected by the availability of government grants and tax benefits” and in Note 13 of our Consolidated Financial Statements under the caption “Taxes on Income.”
 
Subject to unpredictable effects of any future settlements with tax authorities, unadjusted expiration of the statute of limitations, future changes in law or accepted practice and effects of potential mergers and acquisitions, we expect our effective tax rate (which includes effects of FIN No. 48 which has been incorporated into ASC 740) to be approximately 18% in the coming years.
 
Net Income. Net income from continuing operations was $42.8 million in 2009, as compared to $39.1 million in 2008.  The increase in 2009 resulted primarily from a decrease in operating expenses compared to 2008 operating expenses that included, among other expenses, one-time settlement and related expenses, and taxes on income, partially offset by a lower gross margin.
 
Comparison of Years Ended December 31, 2007 and 2008
 
Revenues
 
Our total revenues increased by approximately 20.6% to $624.2 million in 2008 from $517.4 million in 2007. Revenues from sales of enterprise interactions solutions were $417.4 million in 2008, an increase of 9.0% from 2007, revenues from sales to the public safety and security sector were $148.6 million in 2008, an increase of 20.9% from 2007, and revenues from sales of risk and financial crime solutions were $58.2 million in 2008 compared to $11.6 in Actimize’s four month results included in 2007. Approximately 44% of the growth in revenues is attributable to the inclusion of full year results of Actimize, compared with Actimize’s four month results included in 2007 revenues. Actimize is a risk and financial crime solutions company. The remaining 56% of the growth is due to organic growth in all our regions and the revenues from our acquisitions of QPC and AVT.
 
 
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Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2007
    
2008
    
Dollar Change
    
Percentage Change
  
                         
Product Revenues
   $ 316.9     $ 351.7     $ 34.8       11.0 %
Service Revenues
     200.5       272.5       72.0       35.9  
Total Revenues
   $ 517.4     $ 624.2     $ 106.8       20.6 %

Approximately 67% of the increase in product revenues is attributable to the inclusion of full year results for Actimize compared with Actimize’s four month results included in 2007 product revenues. The remainder is due to organic growth.
 
Approximately 32% of the increase in service revenues is attributable to the inclusion of full year results for Actimize compared with Actimize’s four month results included in 2007 service revenues. The remaining 68% growth in service revenue was due to an increase in sales of interaction recording, quality management and workforce management solutions that resulted in an increase in professional services and maintenance services, and an increase in maintenance revenue resulting from an increase in our installed customer base and focus on sales of maintenance services. Most of our service revenues represented approximately 44% of total revenues, as compared to approximately 39% in 2007.
 
Revenues in 2008 in the Americas, which include the United States, Canada and Central and South America, rose 19.6% to $347.4 million, as compared to $290.3 million in 2007. Approximately 49% of the increase is attributable to the inclusion of full year results for Actimize compared with Actimize’s four month results included in 2007. The remaining 51% of growth is mainly due to higher post-contract services and maintenance revenue resulting from an increase in the install base. Sales in Europe, the Middle East and Africa (EMEA) rose 22.4% to $188.5 million in 2008, as compared to $154.0 million in 2007. Approximately 41% of the increase is attributable to the inclusion of full year results for Actimize compared with Actimize’s four month results included in 2007. The remainder of the increase is attributable to a growth in product and service revenues in the enterprise and security markets and the acquisitions of AVT and QPC. Sales to Asia-Pacific (APAC) increased 21.0% to $88.3 million in 2008, as compared to $73.0 million in 2007. Approximately 27% of the increase is attributable to the inclusion of full year results for Actimize compared with Actimize’s four month results included in 2007. The remainder of the increase is attributable to a growth in product and service revenues in the enterprise market.
 
 
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Cost of Revenues
 
                         
   
Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2007
    
2008
    
Dollar Change
    
Percentage
Change
  
                         
Cost of Product Revenues
   $ 89.4     $ 95.9     $ 6.5       7.3 %
Cost of Service Revenues
     116.9       142.9       26.0       22.2  
                                 
  Total Cost of Revenues
   $ 206.3     $ 238.8     $ 32.5       15.8 %

Cost of product revenues increased on a dollar basis while decreasing as a percentage of product revenues. The increase on a dollar basis is mostly due to higher amortization of intangible assets in the amount of $16.8 million in 2008 compared to $11.8 million in 2007. The decrease in the cost of product percentage from product revenues is a result of a higher proportion of software in the product mix. Cost of service revenues increased on a dollar basis while decreasing as a percentage of service revenues. Approximately 57% of the increase on dollar base of the cost of services is attributable to the inclusion of full year results for Actimize compared with Actimize’s four month results included in 2007. The decrease in the percentage of cost of service from service revenues is due to a better utilization of the service organization and a higher volume of service revenues.
 
Gross Profit
 
   
Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2007
    
2008
    
Dollar Change
    
Percentage
Change
  
                         
Gross Profit on Product Revenues                                                        
   $ 227.5     $ 255.8     $ 28.3       12.4 %
  as a percentage of product revenues
     71.8 %     72.7 %                
Gross Profit on Service Revenue                                                        
     83.5       129.6       46.1       55.2  
  as a percentage of service revenues
     41.7 %     47.6 %                
                                 
   Total Gross Profit                                                        
   $ 311.0     $ 385.4     $ 74.4       23.9 %
         as a percentage of total revenues
     60.1 %     61.7 %                
 
The improvement in gross profit on product revenues was primarily due to higher sales volume and product cost reductions as a result of, among other things, higher proportion of software in the product mix. The improvement in gross profit margin on service revenues reflected improved staff utilization in conjunction with higher volume of service revenues.
 
 
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Operating Expenses
 
   
Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2007
    
2008
    
Dollar
Change
    
Percentage
Change
  
                         
   Research and development, net                                                          
   $ 59.6     $ 78.4     $ 18.8       31.5 %
   Selling and marketing                                                          
     120.6       147.9       27.3       22.6  
   General and administrative                                                          
     85.1       97.4       12.3       14.5  
   Amortization of acquired intangible assets
      9.2       14.5       5.3       57.6  
In process research and development write-off
      3.7       -       (3.7 )     (100.0 )
Settlement and related expenses
   $ -     $ 9.9     $ 9.9       100 %

Research and Development, Net. Research and development expenses, before capitalization of software development costs and government grants, increased to $83.3 million in 2008, as compared to $63.3 million in 2007 and represented 13.3% and 12.2% of revenues in 2008 and 2007, respectively. Approximately 41% of the increase in research and development, net is attributable to the inclusion of Actimize for the entire year of 2008 compared to the inclusion of Actimize in the last four months of 2007. The remainder is primarily due to the strengthening of the NIS against the U.S. dollar.
 
Capitalized software development costs were $1.3 million in 2008, as compared to $1.0 million in 2007. Amortization of capitalized software development costs included in cost of product revenues were $0.8 million and $1.0 million in 2008 and 2007, respectively.
 
Selling and Marketing Expenses. Selling and marketing expenses increased to $147.9 million in 2008, as compared to $120.6 million in 2007, and represented 23.7% of total revenues in 2008, as compared to 23.3% in 2007. Approximately 49% of the increase is attributable to the inclusion of Actimize for the entire year of 2008 compared to the inclusion of Actimize in the last four months of 2007, and the reminder is attributable to an additional investment in our sales force, including an increase in the number of sales personnel.
 
General and Administrative Expenses.  General and administrative expenses represented 15.5% of total revenues in 2008, as compared to 16.5% in 2007. Approximately 26% of the increase is attributable to the inclusion of Actimize for the entire year of 2008 compared to the inclusion of Actimize in the last four months of 2007. The remainder is due to an increase in the doubtful accounts expenses, the strengthening of the NIS against the U.S. dollar and the need to support our growing business.
 
Amortization of acquired intangible assets. Amortization of acquired intangibles included in the operating expenses represent 2.3% and 1.8% of our 2008 and 2007 revenues, respectively. Approximately 70% of the increase in amortization of acquired intangible assets is attributable to the amortization of intangible assets related to the acquisition of Actimize for the entire year of 2008 compared to the amortization of intangible assets related to the acquisition of Actimize in the last four months of 2007. The remainder is due to amortization related to the QPC and AVT acquisitions.
 
Settlement and related expenses. Settlement and related expenses in the amount of $9.9 million represents an agreement to settle and dismiss patent disputes (see Item 8, “Financial Information—Legal Proceedings”).
 
Financial and Other Income
 
   
Years Ended December 31,
              
   
(U.S. dollars in millions)
              
   
2007
    
2008
    
Dollar Change
    
Percentage Change
  
                         
   Financial income, net                                                        
   $ 14.8     $ 11.3     $ (3.5 )     (23.6 )%
   Other income, net                                                        
     -       0.1       0.1          
 
 
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Financial Income, Net.  The decrease in financial income, net reflects lower average interest rates in 2008, as compared to 2007 and loss of $4.9 million on marketable securities sold or impaired in 2008.
 
Taxes on Income. In 2008 taxes on income amounted to $9.5 million, as compared to $10.3 million in 2007. Our effective tax rate amounted to 19.5% in 2008 compared with 21.5% in 2007. The slight decrease in our effective tax rate in 2008 was mainly due to an increase in our Approved and Privileged Enterprise benefits together with other favorable items partly offset by a decrease in the deferred tax assets in certain jurisdictions.
 
The reduction of the corporate tax rate in Israel from 31% in 2006 and 29% in 2007 to 27% in 2008 had a minor impact on our effective tax rate. This is because the majority of our income earned in Israel benefits from the reduced tax rates applicable to us as a result of our Approved and Privileged Enterprise programs.
 
Further information with regard to our Approved and Privileged Enterprise programs can be found in Item 3, “Risk Factors” under the caption “Our results may be affected by the availability of government grants and tax benefits” and in Note 13 of our Consolidated Financial Statements under the caption “Taxes on Income.”
 
Subject to unpredictable effects of any future settlements with tax authorities, unadjusted expiration of the statute of limitations, future changes in law or accepted practice and effects of potential mergers and acquisitions, we expect our effective tax rate (which includes effects of FIN No. 48) to be fairly stable in the coming years at around 20%.
 
Net Income. Net income from continuing operations was $39.1 million in 2008, as compared to $37.4 million in 2007.  The increase in 2008 resulted primarily from the increase in revenues and an increase in the gross margin.
 
Liquidity and Capital Resources
 
In recent years, the cash generated from our operating activities has financed our operations. Generally, we invest our excess cash in instruments that are highly liquid, investment grade securities. At December 31, 2009, we had $548.5 million of cash and cash equivalents and short-term and long-term investments, as compared to $501.4 million at December 31, 2008 and $398.2 million at December 31, 2007.
 
Cash provided by operating activities was $119.7 million, $135.7 million and $118.2 million in 2009, 2008 and 2007, respectively. Net cash from operations in 2009 consisted primarily of net income of $42.8 million and adjustments for non-cash activities including depreciation and amortization of $47.2 million, stock-based compensation of $18.2 million, a decrease in trade receivables of $8.9 million, and an increase in accrued expenses and other liabilities of $8.0 million, which were partially offset by deferred tax of $7.0 million. Net cash from operations in 2008 consisted primarily of net income of $39.1 million and adjustments for non-cash activities including depreciation and amortization of $42.7 million, stock-based compensation of $25.3 million, an increase in accrued expenses and other liabilities of $28.1 million, and loss on marketable securities sold or impaired of $4.9 million, which were partially offset by deferred tax of $5.6 million. Net cash from operations in 2007 consisted primarily of net income of $37.4 million and adjustments for non-cash activities including depreciation and amortization of $30.9 million, stock-based compensation of $23.7 million, an in-process research and development write-off of $3.7 million, an increase in accrued expenses and other liabilities of $51.9 million, and a decrease in inventories of $7.6 million, which were partially offset by an excess tax benefit from share-based payments arrangements of $4.9 million, an increase in trade receivables of $15.2 million, an increase in other receivables and prepaid expenses of $9.6 million, a decrease in trade payable of $3.0 million and deferred tax of $5.3 million.
 
 
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Net cash used in investing activities from continuing operations was $71.3 million, $120.9 million and $276.0 million in 2009, 2008 and 2007, respectively. In 2009, net cash used in investing activities consisted primarily of payment for the acquisitions of Fortent and other acquisitions of $84.9 million and purchase of property and equipment of $8.9 million, which were partially offset by net proceeds from short-term bank deposits of $24.5 million. In 2008, net cash used in investing activities consisted primarily of net investment in marketable securities of $54.5 million, net investment in short-term bank deposits of $25.4 million, purchase of property and equipment of $15.5 million and payment for the acquisitions of QPC and AVT of $12.6 million and $6.2 million, respectively. In 2007, net cash used in investing activities consisted primarily of net investment in short-term bank deposits of $39.0 million, purchase of property and equipment of $10.9 million, payment for the acquisition of Actimize Ltd. of $210.5 million, a $5.0 million earn out payment with respect to FAST Security AG acquisition and payment for working capital adjustment with respect to the acquisition of IEX Corporation of $1.5 million.
 
Net cash provided by financing activities was $20.9 million, $15.9 million and $206.2 million in 2009, 2008 and 2007, respectively. In 2009, net cash provided from financing activities consisted primarily of proceeds from the issuance of shares upon exercise of options and purchase of shares under employee share purchase plans of $19.9 million. In 2008, net cash provided from financing activities consisted primarily of proceeds from the issuance of shares upon exercise of options and purchase of shares under employee share purchase plans of $15.3 million. In 2007, net cash provided from financing activities consisted of proceeds from the issuance of shares in our public offering of $180.9 million, proceeds from the issuance of shares upon exercise of options and purchase of shares under the employee share purchase plan of $20.3 million and an excess tax benefit from share-based payments agreements of $4.9 million. As of December 31, 2009, we had non-binding arrangements, for the rendering of credit lines from banks against our portfolio with those banks.
 
We believe that based on our current operating forecast, the combination of existing working capital and expected cash flows from operations will be sufficient to finance our ongoing operations for the next twelve months.
 
Research and Development
 
For information on our research and development policies, please see Item 4, “Information on the Company” in this annual report.
 
Trend Information
 
Our development efforts are aimed at addressing several industry trends. In the enterprise sector, these include compliance and risk management, enhancement of operational efficiencies, and improving customer experience, and sales and marketing effectiveness. In the security sector there is a growing demand for more comprehensive and integrated solutions to provide better safety and security to citizens. Our development efforts are also influenced by technology trends, such as the evolvement of VoIP and the proliferation of alternate communication channels to voice, such as chat, email, and social media. We see the migration to VoIP networks and its embedded ability to consolidate data-centers and save costs as a driver for deployment of additional systems.
 
 
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We believe that enhancing operational efficiency is especially critical to our customers, who continuously seek solutions that would help them reduce costs while maintaining or even improving customer service. In addition, our customers seek solutions that can improve their customer experience across channels of interaction and can assist in cross and up-selling into their customer base.
 
Thus, we are seeing growing demand to streamline operational efficiency by deploying a more comprehensive set of our solutions, in addition to recording. These include quality monitoring, analytics, workforce management, performance management, customer feedback, etc. Our software applications enable our customers to capture, store, retrieve and analyze unstructured data (multimedia interactions) and combine them with data from other systems to create actionable insights that can be distributed via dashboards, reports and alerts to all relevant parties to improve performance.
 
We see an opportunity for applications that analyze the content of unstructured interactions across channels of communication in contact centers for quality monitoring and contact center management as well as for enterprise-wide process improvement and business performance management.
 
Our compliance and risk management solutions apply to contact centers, trading floors, branches, home agents and back offices. In this area, the continuous enactment of new regulations represents substantial growth prospects for NICE.
 
Governments, municipalities, security authorities and corporations around the world are investing in the protection of people and assets. As a result, there is a growing demand for more comprehensive and integrated solutions to provide better safety and security to citizens. These large projects include installation and implementation of wide-scale security systems, which better synchronize and correlate multimedia data sources in order to detect, prevent and resolve crime and terror in real time and investigate quickly in order to prosecute the persons involved. Our solutions offer an integrated multimedia capture and management solution that combines radio, telephony, IP data, GIS, and video. We also expect video content analysis applications to become increasingly important to city center protection, as well as various homeland security applications, mass transportation systems, campus perimeter security, and critical facilities, to enable proactive security management.
 
For more information on trends in our industry, please see Item 4, “Information on the Company—Business Overview—Industry Background and Trends.”
 
For more information on uncertainties, demands, commitments or events that are reasonably likely to have a material effect on revenue, please see Item 3, “Key Information—Risk Factors.”
 
 
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Contractual Obligations
 
Set forth below are our contractual obligations and other commercial commitments over the medium term as of December 31, 2009 (in thousands of U.S. dollars).
 
   
Payments Due by Period
  
Contractual Obligations
  
Total
    
Less than 1 year
    
1- 3 years
    
3-5 years
    
More than 5 years
  
Operating Leases
     45,664       16,797       22,319       4,857       1,671  
Unconditional Purchase Obligations
     2,658       2,658       -       -       -  
Severance Pay*
     22,979       -       -       -       -  
Uncertain Income Tax Positions **
     31,896       -       -       -       -  
Total Contractual Cash Obligations
     71,281       19,455       22,319       4,857       1,671  

         
Amount of Commitment Expiration Per Period
  
Other Commercial Commitments
  
Total Amounts Committed
    
Less than 1 year
    
1- 3 years
    
3-5 years
    
More than 5 years
  
Guarantees – continuing operations
     46,984       17,214       832       824       28,114  
 
 * Severance pay relates to accrued obligation to employees as required under the labor laws. These obligation are payable only upon termination, retirement or death of the respective employee.
 **
Uncertain income tax positions under ASC 740 (Formerly FASB Interpretation No. 48) are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 13(h) of our Consolidated Financial Statements for further information regarding our liability under ASC 740.
 
Qualitative and Quantitative Disclosure About Market Risk
 
For information on the market risks relating to our operations, please see Item 11, “Quantitative and Qualitative Disclosures about Market Risk” in this annual report.
 
Adoption of New Accounting Standards
 
                           In December 2007, the FASB issued authoritative guidance on business combinations. The guidance significantly changes the accounting for business combinations, establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquire. The guidance also sets out requirements for recognition and measurement of the goodwill acquired in the business combination or a gain from a bargain purchase. Among the more significant changes, acquired in-process research and development will be capitalized and upon completion amortized over its useful life; acquisition costs will be expensed as incurred; restructuring costs will generally be expensed in periods after the acquisition date; contingent consideration will be recognized at fair value at the acquisition date with subsequent changes recognized in earnings, and reductions in deferred tax valuation allowance relating to a business acquisition will be recognized in earnings. In April 2009, the FASB issued an amendment to the revised business combination guidance regarding the accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This authoritative guidance on business combinations was adopted by the Company for business combinations for which the acquisition date is on or after January 1, 2009.
 
 
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See Note 2(f) to Item 18 financial statements for the adoption of the updated guidance regarding recognition and presentation of other-than-temporary impairment on marketable securities.

See Note 11 to Item 18 financial statements for the adoption of the updated guidance of ASC 815 with respect to disclosure requirements regarding derivative instruments and hedging activities.
 
Recently Issued Accounting Pronouncements
 
 On July 1, 2009, the Financial Accounting Standards Board ("FASB") issued the FASB Accounting Standards Codification (the “ASC”). The ASC became the single source of authoritative nongovernmental U.S. GAAP, superseding existing pronouncements issued by the FASB, the American Institute of Certified Public Accountants, the Emerging Issues Task Force and related literature. The ASC eliminates the previous U.S. GAAP hierarchy and establishes one level of authoritative U.S. GAAP. Rules and interpretive releases issued by the U.S. Securities and Exchange Commission (“SEC") under authority of federal securities law are also sources of the authoritative U.S. GAAP for SEC registrants. All other literature is considered non-authoritative. The codification is effective for interim and annual periods ending after September 15, 2009. Throughout the notes to the consolidated financial statements references that were previously made to former authoritative U.S. GAAP pronouncements have been changed to coincide with the appropriate ASC reference.

In May 2009, FASB issued ASC Topic No. 855 "Subsequent Events" ("FASB ASC No. 855").  FASB ASC No. 855 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Specifically, FASB ASC No. 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  FASB ASC No. 855 was effective for fiscal years and interim periods ended after June 15, 2009.  The adoption did not have a material effect on the Company’s consolidated financial statements.

 
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In October 2009, the FASB issued an update to ASC 985-605, "Software-Revenue Recognition" (originally issued as EITF 09-3). In accordance with the update to the ASC, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the scope of the software revenue recognition guidance. In addition, hardware components of a tangible product containing software component are always excluded from the software revenue guidance. The update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or retrospectively, for all periods presented.  The Company is currently evaluating the impact on its consolidated results of operations and financial condition.
 
In October 2009, the FASB issued an update to ASC 605-25, "Revenue recognition – Multiple-Element Arrangements", that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements to: (i) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;  (ii) require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have VSOE of selling price  or third-party evidence of selling price; (iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method and (iv) require expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance. The update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or retrospectively, for all periods presented. The Company is currently evaluating the impact on its consolidated results of operations and financial condition.
 
 
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Item 6.                 Directors, Senior Management and Employees.
 
Directors and Senior Management
 
The following table sets forth, as of March 24, 2010, the name, age and position of each of our directors and executive officers:
 
 
 
Name
  Age
Position
Ron Gutler (1)(2)
52
Chairman of the Board of Directors
Joseph Atsmon(1)(3)
62
Vice-Chairman of the Board of Directors
Rimon Ben-Shaoul(2)
65
Director
Yoseph Dauber(2)(3)
73
Director
Dan Falk(1)(2)(3)(4)
65
Director
John Hughes(2)
58
Director
Yocheved Dvir(1)(3)(4)
57
Director
David Kostman
45
Director
Zeev Bregman
48
President and Chief Executive Officer
Udi Ziv
43
President of the Enterprise Products Group and Chief Product Officer
Israel Livnat
59
Corporate Vice President & President, Security Group
David Sosna
41
Chief Executive Officer, Actimize Ltd.
Dafna Gruber
45
Corporate Vice President and Chief Financial Officer
Yechiam Cohen
53
Corporate Vice President, General Counsel and Corporate Secretary
Eran Porat
47
Corporate Vice President, Finance
Eran Liron
42
Corporate Vice President, Business Development
Dan Yalon
38
Corporate Vice President, Strategy & Strategic Alliance
Yochai Rozenblat
48
President and Chief Executive Officer, Americas
Shlomi Cohen
45
President of EMEA
Doron Ben-Sira
50
President of NICE APAC
 
 ___________________________
(1)      Member of the Audit Committee.
(2)      Member of the Compensation Committee.
(3)      Member of the Internal Audit Committee.
(4)         Outside Director.  See Item 6, “Directors, Senior Management and Employees—Board Practices— Outside Directors.”

On July 28, 2009, our Chief Executive Officer, Haim Shani, announced his resignation, in order to move into public service. As approved by our board of directors, Zeev Bregman assumed the office of President and Chief Executive Officer on September 1, 2009.
 
As of November 2009, Eran Gorev no longer holds the position of Chief Business Officer of the Company.
 
On March 1, 2010, Tamir Ginat resigned from his position as President of EMEA. Shlomi Cohen joined NICE on March 1, 2010 and assumed the position of President of EMEA.
 
During April 2010, Benny Einhorn will assume the position of Chief Marketing Officer of NICE.
 
Set forth below is a biographical summary of each of the above-named directors and executive officers of NICE.  Each of our directors qualifies as an independent director under the NASDAQ rules.
 
 
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Ron Gutler has served as one of our directors since May 2001 and Chairman of the Board since May 2002. Mr. Gutler is currently the Chairman of G.J.E. 121 Promoting Investment Ltd., a real estate investment company, a member of the Advisory Board of Poalim Real Estate (part of Poalim Capital Market Group) and a director of Psagot Securities Ltd., Psagot Investment House Ltd., Eshel Shekel Bonds Ltd. and Hapoalim Securities USA Inc. Between 2000 and 2002, he managed the Blue Border Horizon Fund, a global macro fund. Mr. Gutler is a former Managing Director and a Partner of Bankers Trust Company (currently part of Deutsche Bank). Between 1987 and 1999, he held various positions with Bankers Trust, where Mr. Gutler headed its trading and sales activities in Asia, South America and Emerging Europe. He also established and headed the Israeli office of Bankers Trust. Mr. Gutler holds a Bachelor’s degree in Economics and International Relations and a Master’s degree in Business Administration, both from the Hebrew University in Jerusalem.
 
Joseph Atsmon has served as one of our directors since September 2001 and Vice-Chairman of the Board since May 2002. Mr. Atsmon currently serves as a director of Ceragon Networks Ltd. and Radvision Ltd. From 1995 until 2000, Mr. Atsmon served as Chief Executive Officer of Teledata Communications Ltd., a public company acquired by ADC Telecommunications Inc. in 1998. Mr. Atsmon had a twenty-year career with Tadiran Ltd. In his last role at Tadiran Ltd., Mr. Atsmon served as Corporate VP for business development. Prior to that, he served as President of various military communications divisions. Mr. Atsmon holds a Bachelor’s degree in Electrical Engineering from the Technion – Israel Institute of Technology.
 
Rimon Ben-Shaoul has served as one of our directors since September 2001. Since 2001, Mr. Ben-Shaoul has served as Co-Chairman, President, and CEO of Koonras Technologies Ltd., a technology investment company controlled by S.P.G. Ltd., a large Israeli holding company. Mr. Ben-Shaoul also served as a director of BVR Systems Ltd. and several private companies. In addition, he is the President and CEO of Polar Communications Ltd., which manages media and communications investments. Between 1997 and 2001, Mr. Ben-Shaoul was the President and CEO of Clal Industries and Investments Ltd., one of the largest holding companies in Israel with substantial holdings in the high tech industry. During that time, Mr. Ben-Shaoul also served as Chairman of the Board of Directors of Clal Electronics Industries Ltd., Scitex Corporation Ltd., and various other companies within the Clal Group. Mr. Ben-Shaoul also served as a director of ECI Telecom Ltd., Fundtech Ltd., Creo Products, Inc. and Nova Measuring Instruments Ltd. From 1985 to 1997, Mr. Ben-Shaoul was President and CEO of Clal Insurance Company Ltd. and a director of the company and its various subsidiaries. Mr. Ben-Shaoul holds a Bachelor’s degree in Economics and Statistics and a Master’s degree in Business Administration, both from Tel-Aviv University.
 
Yoseph Dauber has served as one of our directors since April 2002. Mr. Dauber has served in various senior positions at Bank Hapoalim since 1973. Until June 2002, Mr. Dauber was Deputy Chairman of the Board of Management and Joint Managing Director of Bank Hapoalim and was responsible for the commercial division of the bank. From 1994 to June 2002, Mr. Dauber served as Chairman of the Isracard Group. From 1995 to July 2002, Mr. Dauber also served as Chairman of Poalim American Express.  From 2002 to 2003, he served as Chairman of the Israel Maritime Bank Ltd. and from 2003 to 2008 he served as a director of Bank Hapoalim. Mr. Dauber currently serves as a director of Vocaltec Communications Ltd., Micromedic Ltd., Orbit Alchut Technologies Ltd., Delek Group Ltd. and Chairman of KCPS Manof Fund. Mr. Dauber holds a Bachelor’s degree in Economics and Statistics from the Hebrew University in Jerusalem and a Master’s degree in Law from Bar Ilan University.
 
Dan Falk has served as one of our statutory outside directors since 2001. From 1999 to 2000, Mr. Falk was President and Chief Operating Officer of Sapiens International Corporation N.V.  From 1985 to 1999, Mr. Falk served in various positions in Orbotech Ltd., the last of which were Chief Financial Officer and Executive Vice President. From 1973 to 1985, he served in several executive positions in the Israel Discount Bank. Mr. Falk also serves as the Chairman of Chromagen Ltd., and serves on the board of directors of Orad Hi-Tech Systems Ltd. (where he is Chairman), Orbotech Ltd., Ormat Technologies Inc., Jacada Ltd., Attunity Ltd., Nova Measuring Systems Ltd., AVT Ltd., Amiad Filteration Systems Ltd., Plastopil Ltd. and Oridion Medical Ltd. Mr. Falk holds a Bachelor’s degree in Economics and Political Science and a Master’s degree in Business Administration, both from the Hebrew University, Jerusalem.
 
 
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John Hughes has served as one of our directors since November 2002. Mr. Hughes is currently the Non-Executive Chairman of Spectris plc, Telecity Group plc and Intec Telecom Systems plc, as well as Non-Executive Deputy Chairman of Parity Group plc and Non-Executive Director of Chloride Group plc. From December 2000 to July 2004, he held senior executive positions at Thales Group, most recently as Executive Vice President and CEO of all civil activities for the Group. From 1997 to 2000, he held various positions with Lucent Technologies, including President of its GSM/UMTS division. From 1991 to 1997, Mr. Hughes served as Director of Convex Global Field Operations within the Hewlett Packard Company. Prior to that, Mr. Hughes held various positions with UK and US companies. Mr. Hughes also serves as Non-Executive Director of Chloride Group plc. Mr. Hughes holds a Bachelor of Science degree in Electrical and Electronic Engineering from the University of Hertfordshire.
 
Yocheved Dvir has served as one of our statutory outside directors since January 2008. Since 2000, Ms. Dvir has served as a strategic advisor in business development affairs to multiple companies and initiatives that were being founded. Until recently, she served on the boards of Trendline Business Information & Communications Ltd., Menorah Insurance Company Ltd., Israel Corporation Ltd., ECI Telecom Ltd., Strauss Industries Ltd., Phoenix Holding and Phoenix Insurance Co.  Between 1990 and 2000, Ms. Dvir served as a Senior Vice President of the Migdal Group. Ms. Dvir joined the Migdal Group in 1981 and, until late 2000, held a number of senior financial and managerial positions, including Head of the Group’s Economics Department (1986-1988), Head of the Group’s Corporate Office (1989-1992), Head of the Group’s General Insurance Division and Corporate Office (1993-1997), Group CFO (1997-1999), Head of the Group’s Strategic Development Division and Marketing Array and Risk Manager (2000). Ms. Dvir holds a Bachelor’s degree in Economics and Statistics from the University of Haifa and a full second degree study in Statistics from the Hebrew University of Jerusalem.
 
David Kostman has served as one of our directors since 2001, with the exception of a short period between June 2007 and July 2008. Mr. Kostman is currently Chairman and CEO of Nanoosh LLC, a restaurant operating company, and serves on the board of directors of The Selling Source, LLC. From 2006 until 2008, Mr. Kostman was a Managing Director in the investment banking division of Lehman Brothers, heading the Global Internet Group. From April 2003 until July 2006, Mr. Kostman was Chief Operating Officer and then Chief Executive Officer of Delta Galil USA, a subsidiary of Delta Galil Industries Ltd., a NASDAQ-listed apparel manufacturer. From 2000 until 2002, Mr. Kostman was President of the International Division and Chief Operating Officer of VerticalNet, Inc., a NASDAQ-listed internet and software company. Mr. Kostman holds a Bachelor’s degree in Law from Tel Aviv University and a Master’s degree in Business Administration from INSEAD.
 
 
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Zeev Bregman joined NICE in September 2009 and has served as President and Chief Executive Officer since November 2009. From 2001 to 2007, Mr. Bregman served as Chief Executive Officer of Comverse Inc. From 1987 to 2001, he served in various R&D, sales, marketing, and management positions within Comverse, including Vice President Head of the EMEA division, Vice President and Head of the Messaging division, and Chief Operating Officer. Mr. Bregman holds a Bachelor’s degree in Mathematics and Computer Science from Tel-Aviv University, a Master's degree in Computer Science from Tel-Aviv University and a Master's degree in Business Administration from a joint program of Kellog University and Tel Aviv University.
 
Udi Ziv has served as President of the Enterprise Products Group and Chief Product Officer since January 2009. From 2001 until 2007, Mr. Ziv held several senior executive positions with SAP AG, a leading global enterprise software company, including General Manager of SAP’s Small Business Solutions, Managing Director of SAP Labs Israel and Vice President responsible for the research and development of the SAP Portal product. Prior to joining SAP, Mr. Ziv was one of the original members, and the head of global research & development, of Top Tier Software, a leading enterprise portal company (acquired by SAP in 2001). Mr. Ziv holds a Bachelor of Science degree in Computer Engineering from the Technion – Israel Institute of Technology.
 
Israel Livnat has served as Corporate Vice President and President of the Security Group since May 2006. Prior to joining NICE, he served since 2001 as the President and CEO of Elta Systems Ltd. Prior to his last position as the President of Elta Systems, Mr. Livnat headed a division in Israeli Aircraft Industries Ltd., leading the development of the Arrow weapons system. Before that he was Vice President Engineering in the same division in Israeli Aircraft Industries, and director for hardware engineering at Daisy Systems Mountain View California, leading state-of-the-art developments in the hardware and software of large computer-embedded systems. Mr. Livnat holds a Bachelor of Science degree in Electrical Engineering from the Technion – Israel Institute of Technology, and an Executive MBA from Stanford University. He was awarded the prestigious Israeli Industry Prize in 2004.
 
David Sosna is the Chief Executive Officer and a co-founder of Actimize Ltd., a NICE company. Mr. Sosna joined the NICE management team in 2007, when Actimize was acquired by NICE. Prior to serving as CEO of Actimize, Mr. Sosna served as its Executive Vice President of New Business Development. Before Actimize, Mr. Sosna founded Gilon Information Systems, which grew into Israel’s largest business intelligence company. Mr. Sosna holds a Bachelor’s degree in Industrial Engineering and Management, from Ben-Gurion University.
 
Dafna Gruber has served as our Corporate Vice President and Chief Financial Officer since June 2007. From 2001 until May 2007, she served as the Chief Financial Officer of Alvarion Ltd., a NASDAQ-listed company that provides innovative wireless network solutions. From 1997 to 2001, Ms. Gruber was the Chief Financial Officer of BreezeCOM Ltd., which was merged with Floware Wireless Systems Ltd. to create Alvarion, prior to which she was the controller of BreezeCOM from 1996 to 1997. From 1993 to 1996, Ms. Gruber was a controller at Lannet Data Communications Ltd., subsequently acquired by Lucent Technologies Inc.  Ms. Gruber is a certified public accountant and holds a Bachelor’s degree in Accounting and Economics from Tel Aviv University.
 
Yechiam Cohen has served as our Corporate Vice President, General Counsel and Corporate Secretary since 2005. From 1996 to 2004, he served as General Counsel of Amdocs, a leading provider of billing and CRM software solutions to the telecommunications industry. Before joining Amdocs, Mr. Cohen was a partner in the Tel Aviv law firm of Dan Cohen, Spigelman & Company. From 1987 to 1990, he was an associate with the New York law firm of Dornbush, Mensch, Mandelstam and Schaeffer. Mr. Cohen served as a law clerk to Justice Beijski of the Supreme Court of Israel in Jerusalem. He holds a Bachelor’s degree from the Hebrew University School of Law and is admitted to practice law in Israel and New York.
 
 
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Eran Porat has served as our Corporate Vice President, Finance since 2004. From March 2000 to 2004, he served as our Corporate Controller. From 1997 to February 2000, Mr. Porat served as Corporate Controller of Tecnomatix Technologies Ltd. From 1996 to 1997, he served as Corporate Controller of Nechushtan Elevators Ltd. Mr. Porat is a certified public accountant and holds a Bachelor’s degree in economics and accounting from Tel Aviv University.
 
Eran Liron has served as our Corporate Vice President, Business Development since February 2006. From 2004 to 2006, he served as Director of Corporate Development at Mercury Interactive Corporation, a software company, and prior thereto he held several business development positions at Mercury Interactive. Before joining Mercury, Mr. Liron served in several marketing roles at software startups and at Tower Semiconductor. Mr. Liron holds a Bachelor of Science degree from the Technion – Israel Institute of Technology and a Doctorate in Business from the Stanford Graduate School of Business in California.
 
Dan Yalon has served as our Corporate VP Strategy and Strategic Alliances since November 2007. From 2003 to 2007, Mr. Yalon held several business development positions at Amdocs Ltd., the last of which was as the Head of Strategy and New Business Initiatives, where he established the company’s strategic planning and execution capabilities, translating corporate vision and strategic planning into actionable growth initiatives. From 2000 to 2003, Mr. Yalon was a strategy consultant with U.S.-based firm Monitor Company and with Israeli firm P.O.C Management Consulting. Mr. Yalon holds a Bachelor’s degree in Law and a Bachelor’s degree in management, both from the Hebrew University of Jerusalem.
 
Yochai Rozenblat has served as President and Chief Executive Officer of our American division since September 2009. Prior to his current position, Mr. Rozenblat was President of the Enterprise Group in the Americas. From 2003 to 2007, Mr. Rozenblat served as our Vice President of Sales, responsible for North America and from 2007 his responsibilities also extended to South America. Before joining NICE in 2004, Mr. Rozenblat led the Enterprise Sales Team at Clarify, the CRM division of Amdocs. Mr. Rozenblat has a Bachelor’s degree in Law from Tel Aviv University.
 
Doron Ben-Sira has served as President of NICE APAC Ltd. since May 2002. Prior to that, he was the vice president of the assembly division of Orbotech Asia Pacific. From 1996 to 1998, Mr. Ben-Sira was the Eastern European regional director for Cisco Systems and also served as the Eastern European and Middle Eastern channel director for Cisco. Mr. Ben-Sira also held management positions in Siemens Data Communication (Germany) and in Mashov Computers (Israel). Mr. Ben-Sira holds a Bachelor’s degree in Economics and Management and a Master’s degree in Business Administration, both from Tel Aviv University.
 
Shlomi Cohen has served as President of NICE EMEA since March 1, 2010. From 2007 to 2010, Mr. Cohen served as the head of the BBA Global Sales Division of Nokia Siemens Networks (located in Germany), where he ran a worldwide operation. Prior to that, he was the Senior Vice President Sales for the Carrier Ethernet and for the ATM switches technology in the Worldwide Fixed Networks Division of Siemens Communications. Before joining Siemens, he acted as the senior Vice President Sales for BATM Advanced Technologies. Mr. Cohen has a Bachelor’s of Science degree in Aeronautics Engineering from Technion – Israel Institute of Technology and a Master’s degree in Business Administration, from Bar Ilan University.
 
There are no family relationships between any of the directors or executive officers named above.
 
 
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Compensation
          
        The aggregate compensation paid to or accrued on behalf of all our directors and executive officers as a group of 22 persons during 2009 consisted of approximately $7,685,623 million in salary, fees, bonus, commissions and directors’ fees and approximately $376,927 million in amounts set aside or accrued to provide pension, retirement or similar benefits, but excluding amounts we expended for automobiles made available to our officers, expenses (including business travel, professional and business association dues and expenses) reimbursed to our officers and other fringe benefits commonly reimbursed or paid by companies in Israel.
 
During 2009, our officers and directors received, in the aggregate, options and restricted share units with respect to 1,132,667 ordinary shares under our equity based compensation plans.  These options and restricted share units have a weighted average price of $24.79 and the options will expire six years after the date the options were granted. For information regarding our option exchange program, see " – Share Ownership – Option Exchanges and Price Adjustment."
 
        Pursuant to the requirements of the Israeli Companies Law, 5759–1999, or the Companies Law, remuneration of our directors generally requires shareholder approval. Compensation and reimbursement for outside directors (as described below) is statuto­rily determined pursuant to the Companies Law.  Effective as of July 29, 2008, our shareholders approved the payment to each of our directors, including outside directors, of an annual fee of NIS 90,000 (equivalent to approximately $22,823) and a meeting attendance fee of NIS 3,250 (equivalent to approximately $824), including for meetings of committees of the board of directors.  Our directors are also entitled to an annual grant of options to purchase 5,000 of our ordinary shares and our Chairman of the Board is entitled to an annual grant of options to purchase 15,000 ordinary shares on the date of our annual general meeting during each calendar year until and including the 2010 annual general meeting. These options fully vest following the lapse of twelve (12) months from the applicable date of grant and are granted under the Nice-Systems Ltd. 2003 Stock Option Plan. In addition, effective as of July 29, 2008, our Chairman of the Board receives a special annual fee in the amount of NIS 180,000 (equivalent to approximately $45,647). Effective as of May 1, 2009, our Board resolved to voluntarily reduce the aforementioned fees paid to the directors and the Chairman of the Board’s special annual fee by 8%, until determined otherwise by the Board.
 
 
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Board Practices
 
Corporate Governance Practices
 
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Companies Law, relating to such matters as outside directors, the audit committee, the internal auditor and approvals of interested party transactions.  These matters are in addition to the ongoing listing conditions of the NASDAQ and other relevant provisions of U.S. securities laws.  Under the NASDAQ rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable NASDAQ requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. For further information see “Item 16G – Corporate Governance.”
 
General Board Practices
 
Our articles of association provide that the number of directors serving on the board shall be not less than three but shall not exceed thirteen. Our directors, other than outside directors, are elected at the annual shareholders meeting to serve until the next annual meeting or until their earlier death, resignation, bankruptcy, incapacity or removal by an extraordinary resolution of the general shareholders meeting. Directors may be re-elected at each annual shareholders meeting. The board may appoint additional directors (whether to fill a vacancy or create new directorships) to serve until the next annual shareholders meeting, provided, however, that the board shall have no obligation to fill any vacancy unless the number of directors is less than three.
 
The board may, subject to the provisions of the Companies Law, appoint a committee of the board and delegate to such committee all or any of the powers of the board, as it deems appropriate. Notwithstanding the foregoing, the board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. The board has appointed an internal audit committee, as required under the Companies Law, that has four members, an audit committee that currently has four members and a compensation committee that has five members. We do not have, nor do our subsidiaries have, any directors’ service contracts granting to the directors any benefits upon termination of their employment.
 
Outside Directors
 
Under the Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel are required to appoint at least two “outside” directors.
 
To qualify as an outside director, an individual or his or her relative, partner, employer or any entity under his or her control, may not have as of the date of appointment as an outside director, and may not have had during the previous two years, any affiliation with the company, with any entity controlling the company on the date of the appointment or with any entity whose controlling shareholder, on the date of the appointment or during the previous two years, is the company or an entity controlling the company. In general, the term “affiliation” includes:
 
•      an employment relationship;
 
•      a business or professional relationship maintained on a regular basis;
 
•      control; and
 
•      service as an office holder.
 
 
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No person may serve as an outside director if the person’s position or other activities create, or may create, a conflict of interest with the person’s responsibilities as an outside director or may otherwise interfere with the person’s ability to serve as an outside director.
 
Outside directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:
 
·
the majority of shares voted at the meeting shall include at least one-third of the shares of non-controlling shareholders present at the meeting and voting on the matter (without taking into account the votes of the abstaining shareholders); or
 
·
the total number of shares of non-controlling shareholders voted against the election of the outside directors does not exceed one percent of the aggregate voting rights in the company.
 
The term of an outside director is three years and may be extended for an additional term of three years. Thereafter, he or she may be reelected by our shareholders for additional periods of up to three years each only if the audit committee and the board of directors confirm that, in light of the outside director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period is beneficial to the company.  Each committee of a company’s board of directors which is empowered to exercise any of the board’s powers is required to include at least one outside director.
 
Mr. Dan Falk was elected for a third term as an outside director and Ms. Yocheved Dvir was elected as an outside director for the first time at our Annual General Meeting held on December 24, 2007, and their election became effective as of January 1, 2008.  An outside director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, from the company. In accordance with such regulations, at our 2008 annual general meeting of shareholders, our shareholders approved that our outside directors are to receive compensation equal to that paid to the other members of the board of directors. For further information, please see Item 6, “Directors, Senior Management and Employees—Compensation” in this annual report.
 
Financial and Accounting Expertise
 
Pursuant to new provisions of the Companies Law effective from April 2006, our board of directors has determined that at least one member of our board of directors must be an “accounting and financial expert.”  The Companies Law requires that all outside directors must be “professionally qualified.” Under the NASDAQ rules, each member of our audit committee must be financially literate and at least one of the members must have experience or background that results in such member’s financial sophistication.  Our board of directors has determined that Dan Falk is an “accounting and financial expert” for purposes of the Companies Law and is financially sophisticated for purposes of the NASDAQ rules.  See also Item 16A, “Audit Committee Financial Expert” in this annual report.
 
 
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Independent Directors
 
Under the rules of the NASDAQ Global Select Market, a majority of our directors are required to be “independent” as defined in NASDAQ’s rules.  All of our directors satisfy the respective independence requirements of NASDAQ.
 
Audit Committee
 
The NASDAQ rules also require that the audit committee of a listed company must be composed of at least three directors, each of whom is (i) independent; (ii) does not receive any compensation (except for board fees) from the company; (iii) is not an affiliated person of the company or any subsidiary; and (iv) has not participated in the preparation of the company’s (or a current subsidiary’s) financial statements during the past three years. All of the current members of our audit committee (presently comprised of Joseph Atsmon (Chairman), Ron Gutler, Dan Falk and Yocheved Dvir) meet the NASDAQ standards described above.
 
Our audit committee has adopted a charter specifying the committee’s purpose and outlining its duties and responsibilities which include, among other things: (i) appointing, retaining and compensating the company’s independent auditor, subject to shareholder approval, and (ii) pre-approving all services of the independent auditor. The audit committee must review and approve all related party transactions. Our audit committee is also authorized to act as our “qualified legal compliance committee.” As such, our audit committee will be responsible for investigating reports made by attorneys appearing and practicing before the SEC in representing us, of perceived material violations of U.S. federal or state securities laws, breaches of fiduciary duty or similar material violations of U.S. law by us or any of our agents.
 
We believe we currently meet the applicable NASDAQ requirements and we intend to continue to take all actions as may be necessary for us to maintain our compliance with applicable NASDAQ requirements.
 
Internal Audit Committee
 
The Companies Law requires public companies to appoint an internal audit committee. The role of the internal audit committee under the Companies Law is to examine flaws in the management of the company’s business in consultation with the internal auditors and the independent accountants, and to propose remedial measures to the board. The internal audit committee also reviews interested party transactions for approval as required by law. Under the Companies Law, an internal audit committee must consist of at least three directors, including all of the outside directors. The chairman of the board of directors, any director employed by or otherwise providing services to the company on a regular basis, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the internal audit committee. All of the current members of our internal audit committee (presently comprised of Joseph Dauber (Chairman), Joseph Atsmon, Dan Falk and Yocheved Dvir) meet these qualifications.

Internal Auditor
 
Under the Companies Law, the board of directors must appoint an internal auditor, proposed by the internal audit committee. The role of the internal auditor is to examine, among other matters, whether the company’s activities comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. We have appointed an internal auditor in accordance with the requirements of the Companies Law.
 
 
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Compensation Committee
 
As required by NASDAQ rules, our compensation committee approves the compensation of our executive officers.  The compensation of our chief executive officer also requires the approval of our board of directors under the Companies Law. The compensation committee is also authorized to approve the grant of stock options and other securities to eligible grantees under our benefit plans pursuant to guidelines adopted by our board of directors. However, grants of stock options and other securities to our executive officers also require approval of our board of directors.  The current members of this committee, each of whom satisfies the respective independence requirements of NASDAQ, are Dan Falk (chairman), Rimon Ben Shaoul, Joseph Dauber, Ron Gutler and John Hughes.
 
Nominations Committee
 
As required by NASDAQ rules, our nominations committee recommends candidates for election to our board of directors pursuant to a written charter.  The current members of this committee, all of whom are independent directors, are Ron Gutler and Dan Falk.
 
Employees
 
At December 31, 2009, we had 2,596 employees worldwide, which represented an increase of 8% from year-end 2008.
 
The following table sets forth the number of our full-time employees at the end of each of the last three fiscal years as well as the main category of activity and geographic location of such employees:
 

   
At December 31,
  
Category of Activity
  
2007
    
2008
    
2009
  
                   
Operations
     116       105       101  
Customer Support
     724       852       966  
Sales & Marketing
     450       492       530  
Research & Development
     564       597       638  
General & Administrative
     318       358       361  
Total 
     2,172       2,404       2,596  
                         
Geographic Location
                        
Israel
     923       1,014       1,086  
Americas
     811       864       942  
Europe
     301       355       373  
Asia Pacific
     137       171       195  
Total 
     2,172       2,404       2,596  
 
 
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We also utilize temporary employees in various activities. On average, we employed 18 temporary employees and obtained services from 401 consultants (not included in the numbers set forth above) during 2009.
 
Our future success will depend in part upon our ability to attract and retain highly skilled and qualified personnel. Although competition for such personnel is generally intense, we believe that adequate personnel resources are currently available in Israel to meet our requirements.
 
We are not a party to any collective bargaining agreement with our employees or with any labor organization. However, we are subject to certain labor related statutes, and to certain provisions of collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (includ­ing the Industrialists’ Association of Israel) that are applicable to our Israeli employ­ees by order of the Israeli Ministry of Labor and Welfare. These statutes and provisions principally concern the length of the work day and the work week, minimum wages for workers, insurance for work-related accidents, determination of severance pay and other conditions of employment. Furthermore, pursuant to such provisions, the wages of most of our Israeli employees are automatically adjusted based on changes in the Israeli consumer price index, or CPI. The amount and frequency of these adjustments are modified from time to time. Israeli law generally requires the payment by employers in Israel of severance pay upon the death of an employee, his retirement or upon termination of employment by the employer without due cause. We currently fund our ongoing severance obligations in Israel by making monthly payments to approved severance funds or insurance policies. Please see Note 2Q to our Consolidated Financial Statements. In addition, according to the National Insurance Law, Israeli employers and employees are required to pay predetermined sums to the National Insurance Institute, an organization similar to the U.S. Social Security Administration. These contributions entitle the employees to benefits in periods of unemployment, work injury, maternity leave, disability, reserve military service and bankruptcy or winding-up of the employer. Since January 1, 1995, such amount also includes payments for national health insurance. The payments to the National Insurance Institute are equal to approximately 17% of an employee’s wages (up to a certain cap as determined from time to time by law), of which the employee contributes approximately 66% and the employer contributes approximately 34%.
 
In addition to our severance obligations for employees located in Israel, we pay severance benefits to our employees located elsewhere in accordance with the local laws and practices of the countries in which they are employed.
 
Employment Agreements
 
We have employment agreements with our officers. Pursuant to these employ­ment agreements, each party may terminate the employment for no cause by giving a 30, 60 or 90 day prior written notice (six months in the case of certain senior officers). In addition, we may terminate such agreement for cause with no prior notice. The agreements generally include non-competition and non-disclosure provisions, although the enforceability of non-competition provisions in employment agreements under Israeli law is very limited.
 
 
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Share Ownership
 
As of March 12, 2010, our directors and executive officers beneficially owned an aggregate of 421,725 ordinary shares, or approximately 0.68% of our outstanding ordinary shares. This figure includes 41,945 unvested restricted shares as well as options to purchase ordinary shares that were vested on such date or that were scheduled to vest within the following 60 days. The options have an average exercise price of $26.02 per share and expire between 2010 and 2016. The restricted shares are granted at par value of the ordinary shares. No individual director or executive officer beneficially owns 1% or more of our outstanding ordinary shares.
 
The following is a description of each of our option plans, including the amount of options currently outstanding and the weighted average exercise price.
 
2003 Stock Option Plan
 
In December 2003, we adopted the NICE-Systems Ltd. 2003 Employee Stock Option Plan, or 2003 Plan, to attract, motivate and retain talented employees by rewarding performance and encouraging behavior that will improve our profitability. Under the 2003 Plan, our employees, officers and directors may be granted options to acquire our ordinary shares. The options to acquire ordinary shares are granted at an exercise price of not less than the fair market value of the ordinary shares on the date of the grant, subject to certain exceptions which may be determined by our board of directors.  We have registered, through the filing of registration statements on Form S-8 with the SEC under the Securities Act of 1933, 8,962,112 ADSs for issuance under the 2003 Plan.
 
Generally, under the terms of the 2003 Plan, 25% of the stock options granted become exercisable on the first anniversary of the date of grant and 6.25% becomes exercisable once every quarter during the subsequent three years. Stock options expire six years after the date of grant. Stock options are non-transferable except upon the death of the grantee. For information regarding options granted under the 2003 Plan to our directors, please see Item 6, “Directors, Senior Management and Employees – Compensation” in this annual report.
 
Pursuant to the Tax Reform and in order to comply with the provisions of Section 102 of the Tax Ordinance, on January 5, 2004, our board of directors adopted an addendum to our share option plan with respect to options granted as of December 2, 2003, to grantees who are residents of Israel (the “Addendum”). The Addendum does not add to nor modify our share option plan in respect of grantees that are not residents of Israel. On December 19, 2003, the board of directors resolved to elect the “Capital Gains Route” (as defined in Section 102(b)(2) of the Tax Ordinance) for the grant of options to Israeli grantees. Generally, subject to the fulfillment of the provisions of Section 102 of the Tax Ordinance, under the Capital Gains Route gains realized from the sale of shares issued upon exercise of options will mostly be taxed at a rate of only 25% and partially at the marginal income tax rate applicable to the grantee (up to 46% in 2009). In general, all options granted to Israeli grantees, shares issued upon exercise of such options and any bonus shares issued with respect to such shares will be held in trust for the benefit of the grantee for at least a period equal to the shorter of 30 months from the date of grant or two years from the end of the tax year in which the options are granted.  Following an amendment to the Tax Ordinance which came into effect on January 1, 2006, the aforementioned trust period for options granted on or after January 1, 2006 is 24 months from the date of grant. The options may not be released from the trust prior to the payment of the grantee’s tax liabilities. In the event the requirements of Section 102 for the allocation of options according to the Capital Gains Route are not met, the applicable marginal income tax rates will apply.
 
The 2003 Plan provides that the number of ordinary shares reserved for issuance thereunder shall increase each year commencing in 2004 by the lesser of (x) 600,000 ordinary shares or (y) two percent (2%) of the total number of outstanding ordinary shares as of December 31 of the immediately preceding calendar year. On September 28, 2005, our shareholders approved the transfer of ordinary shares reserved for issuance under our ESPP (as defined below) to the 2003 Plan.  According to such shareholders’ resolution, 1,437,888 ordinary shares remained registered under the ESPP at such time, and the balance of 3,062,112 ordinary shares were transferred to the 2003 Plan, of which 1,062,112 ordinary shares were transferred immediately and an additional 500,000 ordinary shares that were added annually to the pool of ordinary shares were transferred to the 2003 Plan each year until calendar year 2009. In addition, on December 21, 2006, our shareholders approved an increase in the number of ordinary shares reserved for issuance under the 2003 Plan by 1,300,000 shares.
 
 
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The 2003 Plan is generally administered by our compensation committee, which determines the grantees under the 2003 Plan and the number of options to be granted. As of March 5, 2010, options to purchase 1,731,094 ordinary shares were outstanding under the 2003 Plan at a weighted average exercise price of $24.32.
 
1999 Amended and Restated Employee Stock Purchase Plan
 
In 1999, we adopted the NICE-Systems Ltd. 1999 Employee Stock Purchase Plan, or ESPP, in order to provide an incentive to our employees and the employees of our subsidiaries by providing them with an opportunity to purchase our ordinary shares through accumulated payroll deductions, and thereby enable such persons to share in the future growth of our business. We amended the ESPP in December 2003 and in December 2005. We have registered, through the filing of registration statements on Form S-8 with the SEC under the Securities Act, 1,737,888 ADSs for issuance under the ESPP.  For information on the transfer of ordinary shares reserved for issuance under the ESPP to the 2003 Plan, please see the description under the caption “2003 Stock Option Plan” above.
 
Under the terms of the ESPP, eligible employees (generally, all our employees and the employees of our eligible subsidiaries who are not directors or controlling shareholders) may, on January 1 and July 1 of each year in which the ESPP is in effect, elect to become participants in the ESPP for that six-month period by filing an agreement with us arranging for payroll deductions of between 2% and 10% of such employee’s compensation for the relevant period. An employee’s election to purchase ordinary shares under the ESPP is subject to his or her right to withdraw from the ESPP prior to exercise, six months after the offering date. The price per ordinary share under the ESPP is 95% of the closing sales price of one ADR as quoted on NASDAQ on the semi-annual purchase date.
 
Actimize Ltd. 2003 Omnibus Stock Option and Restricted Stock Incentive Plan
 
Pursuant to the terms of the acquisition of Actimize Ltd. in August 2007, we assumed and replaced the stock options and restricted shares granted by Actimize.
 
In 2003, Actimize adopted the 2003 Omnibus Stock Option and Restricted Stock Incentive Plan, or the 2003 Actimize Plan, to afford an incentive to employees, officers, office holders, directors, subcontractors and consultants of Actimize or any subsidiary of Actimize, to acquire a proprietary interest in Actimize, to increase their efforts on behalf of Actimize and to provide the success of Actimize’s business. Under the 2003 Actimize Plan, the grantees could be granted options to acquire Actimize’s ordinary shares, restricted shares and shares. Incentive stock options to acquire ordinary shares of Actimize were granted at an exercise price not less than the fair market value of the ordinary shares of Actimize on the date of grant or as determined by Actimize’s board of directors or by a committee thereof. In addition, the options were granted at an exercise price of not less than the par value of the ordinary shares of Actimize.
 
 
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In September 2007, we registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, an aggregate of 987,104 ADSs, which are comprised of (i) 564,225 ADSs subject to issuance upon the exercise of stock options outstanding under the 2003 Actimize Plan and (ii) 422,879 ADSs representing restricted ordinary shares issued in lieu of restricted shares issued under the 2003 Actimize Plan.
 
Generally, under the terms of the 2003 Actimize Plan, 25% of the options granted become exercisable on the first anniversary of the date of grant and 6.25% become exercisable following the lapse of every consecutive quarter thereafter during the subsequent three years. Options generally expire ten years after the date of grant. Options are non-transferable except upon the death of the grantee. When applicable, the options are held by, and registered in the name of, a trustee for a period of two years after the date of grant in accordance with Section 102 of the Israeli Income Tax Ordinance.
 
As of March 5, 2010, options to purchase 251,475 ordinary shares of NICE were outstanding and 74,526 restricted shares were issued under the 2003 Actimize Plan at a weighted average exercise price of $9.90 and $0.16, respectively. No additional grants are being made under this plan following the acquisition of Actimize.
 
2008 Share Incentive Plan
 
In June 2008, we adopted the NICE-Systems Ltd. 2008 Share Incentive Plan, or 2008 Plan, to provide incentives to employees, directors, consultants and/or contractors by rewarding performance and encouraging behavior that will improve our profitability. Under the 2008 Plan, our employees, directors, consultants and/or contractors may be granted any equity-related award, including any type of an option to acquire our ordinary shares and/or share appreciation right and/or share and/or restricted share and/or restricted share unit and/or other share unit and/or other share-based award and/or other right or benefit under the Plan (each an “Award”). The options to acquire ordinary shares are granted at an exercise price of not less than the fair market value of the ordinary shares on the date of the grant, subject to certain exceptions which may be determined by our board of directors, including in some cases options granted with an exercise price of zero. We have registered, through the filing of registration statements on Form S-8 with the SEC under the Securities Act of 1933, 4,000,000 ADSs for issuance under the 2008 Plan.
 
Generally, under the terms of the 2008 Plan, 25% of an Award granted becomes exercisable on the first anniversary of the date of grant and 6.25% becomes exercisable once every quarter during the subsequent three years. Specifically with respect to restricted share units, unless determined otherwise by the board of directors, 25% of the restricted share units granted becomes vested on each of the four consecutive annual anniversaries following the date of grant. Awards with a vesting period expire six years after the date of grant. Awards are non-transferable except by will or the laws of descent and distribution.
 
Our board of directors adopted an addendum to the 2008 Plan for Awards granted to grantees who are residents of Israel (the “Addendum”). On June 16, 2008, our board of directors resolved to elect the “Capital Gains Route” (as defined in Section 102(b)(2) of the Tax Ordinance) for the grant of Awards to Israeli grantees, which is described above under “1995 Stock Option Plan.” The U.S. addendum of the 2008 Plan provides only for non-qualified stock options for purposes of U.S. tax laws.
 
 
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        The 2008 Plan provides that the number of shares that may be subject to Awards granted under the 2008 Plan shall be an amount per calendar year, equal to 3.5% of our issued and outstanding share capital as of December 31 of the preceding calendar year. Such amount is reset for each calendar year. By setting this target, our board of directors took into account the need for current employee retention and retention of future employees.
 
                The 2008 Plan is generally administered by our board of directors and compensation committee, which determines the grantees under the 2008 Plan and the number of Awards to be granted. As of March 5, 2010, options and restricted share units to purchase 3,692,078 ordinary shares were outstanding under the 2008 Plan at a weighted average exercise price of $21.83.
 
Orsus Solutions Limited 2007 Incentive Option Plan
 
In 2007, Orsus adopted the 2007 Incentive Option Plan that was further amended by Orsus on January 10, 2010 (the “2007 Orsus Plan”), to afford an incentive to employees, office holders and service providers of Orsus and its subsidiaries. Under the 2007 Orsus Plan, the grantees could be granted options to acquire Orsus’ ordinary A shares, restricted ordinary A shares or restricted ordinary A share units.
 
Pursuant to the terms of the Orsus acquisition agreement, we assumed and converted the outstanding stock options and restricted share units granted by Orsus under the Orsus 2007 Plan, into stock options to purchase ordinary shares of NICE or restricted share units of NICE, pursuant to a set formula (the “Assumed Awards”). The Assumed Awards include (i) options or restricted share units granted to certain key employees of Orsus or its subsidiaries (the “Key Employee Awards”); and (ii) retention options granted to certain employees of Orsus or its subsidiaries (the “Retention Options”). Under the terms of the 2007 Orsus Plan and the acquisition agreement, 50% of the Key Employee Awards granted become exercisable and vest after a period of twelve months of continuous employment with NICE (or its applicable subsidiary) commencing on January 11, 2010 and the remaining 50% become exercisable following the lapse of 6 months thereafter. In addition, if employment of a key employee is terminated by us without cause or if such key employee terminates his employment as a result of a reduction in compensation or a demotion in his position agreed to by the key employee at the closing of the Orsus acquisition, such key employee’s Options shall become vested immediately. The Retention Options vest over a course of four years as follows: (i) 25% vest and become exercisable at the lapse of 12-month period of continuous employment with NICE (or its applicable subsidiary) commencing on January 11, 2010, and (ii) the balance thereof vests on a quarterly basis during the 36 months period thereafter, such that 6.25% vest and become exercisable at the lapse of each quarter of continuous employment with NICE (or its applicable subsidiary). Options generally expire ten years after the date of grant and restricted share units generally expire seven years after the date of grant. Options are non-transferable except upon the death of the grantee. When applicable, the options are held by, and registered in the name of, a trustee for a period of two years after the date of grant in accordance with Section 102 of the Israeli Income Tax Ordinance.
 
As of March 5, 2010, options and restricted share units to purchase 59,675 ordinary shares of NICE were outstanding under the 2007 Orsus Plan, comprised of 35,000 ordinary shares underlying the Retention Options at an exercise price per share of $30.78; and 24,675 ordinary shares underlying the Key Employee Awards at an exercise price per share equal to the par value of the ordinary shares of NICE.
 
 
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Option Exchanges and Price Adjustment
 
On June 23, 2009, we commenced a tender offer to offer eligible employees in Israel, Hong Kong, the United States and the United Kingdom, excluding our directors, CEO and certain other executive officers, the opportunity to tender options granted before September 1, 2008 under the 2003 Plan or the 2003 Actimize Plan (almost all of which had an exercise price per share above $34.00), in exchange for restricted share units (RSUs) or options (depending on the employee’s country of residence) with a per share exercise price or per share purchase price equal to the par value of our ordinary shares, or NIS 1.00 (approximately $0.25). The exchange was on a one-for-three basis, meaning that eligible employees electing to participate received a new RSU or option with respect to one share for every three shares subject to the options tendered for exchange. The new awards vest in 25% annual increments over a four-year period starting from August 5, 2009 and have a new six-year term. Options surrendered in the exchange were cancelled.  On August 5, 2009, the expiration date of the exchange offer, we accepted for exchange eligible options to purchase an aggregate of 1,492,204 ordinary shares that had been granted under the 2003 Plan and the 2003 Actimize Plan, and granted, under the 2008 Plan, new options to purchase 311,454 ordinary shares, and new RSUs representing 185,932 ordinary shares, in exchange for the eligible options tendered and accepted pursuant to the exchange offer.
 
On June 15, 2009, our board of directors approved the reduction of the exercise price per share of our options to acquire ordinary shares granted on September 2, 2008 under the 2008 Plan held by eligible employees, including certain of our executive officers, based in Israel, Hong Kong, the United States, and the United Kingdom. The exercise price per share of these options was originally $30.25 per share, and was reduced to $22.53 per share, which was the closing price of our ADSs on the NASDAQ Global Select Market on June 15, 2009. Other than the exercise price, no other terms of these options were modified. The aggregate number of our ordinary shares that are subject to the options that have been repriced is 1,020,400.
 
In addition, on June 15, 2009 our board of directors approved an option exchange with three of our executive officers, in which such executive officers exchanged options to purchase an aggregate of 265,000 ordinary shares, issued in 2007 under the 2003 Plan and having an exercise price between $34.00 and $39.00 per share, for new options to be issued under the 2008 Plan with a per share exercise price equal to $22.53 per share, which was the closing price of our ADSs on the NASDAQ Global Select Market on June 15, 2009. The new options issued in this exchange vest in four equal annual installments (or as nearly as possible) following the new grant date and will expire six years following the new grant date.
 
Item 7.                      Major Shareholders and Related Party Transactions.
 
Major Shareholders
 
The following table sets forth certain information with respect to the beneficial ownership of our ordinary shares as of March 23, 2010, with respect to each person known to us to be the beneficial owner of 5% or more of our outstanding ordinary shares.  None of our shareholders has any different voting rights than any other shareholder
 
 
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Name and Address
Number of Shares
Percent of Shares Beneficially Owned (1)
Migdal Insurance and Financial Holdings Ltd.
4 Efal Street, P.O. Box 3063
Petach Tikva 49512, Israel
3,338,606(2)
5.3%
     
The Phoenix Holding Ltd. and Excellence Investments Ltd.(3)
3,479,696 (4)
5.6%
     
Psagot Investment House Ltd.  3,529,680 (5)  5.7%
___________
 
(1)
Based upon 62,462,051 ordinary shares issued and outstanding on March 23, 2010.

(2)
Of which: (i) 3,076,633 ordinary shares are held for members of the public through, among others, provident funds, mutual funds, pension funds and insurance policies, which are managed by subsidiaries of Migdal Insurance and Financing Holdings Ltd., according to the following segmentation: 1,802,504 ordinary shares are held by profit participating life assurance accounts; 1,062,016 ordinary shares are held by provident funds and companies that manage provident funds and 210,458 ordinary shares are held by companies for the management of funds for joint investments in trusteeship, each of which subsidiaries operates under independent management and makes independent voting and investment decisions, and (ii) 212,113 are beneficially held for Migdal Insurance and Financing Holdings Ltd. own account (Nostro account). This information is based upon a Form 13G for the period ended December 31, 2009, filed by Migdal Insurance and Financing Holdings Ltd. with the SEC on February 16, 2010.
 
(3)
Based upon information provided to us by The Phoenix Holding Ltd. ("Phoenix") and Excellence Investments Ltd. ("Excellence") on March 1, 2010. Based on public information, we believe that Phoenix and Excellence are controlled by the Delek Group and Mr. Yitzhak Tshuva.

(4)
Of which: (i) 3,471,196 ordinary shares are held for members of the public through, among others, provident funds, pension funds and mutual funds, which are managed by subsidiaries of Excellence or Phoenix, according to the following segmentation: 815,028 ordinary shares are held by provident funds and pension funds of Excellence; 294,328 ordinary shares are held by mutual funds of Excellence; 1,335,688 ordinary shares are held by other investment vehicles of Excellence; 153,855 ordinary shares are held by provident funds and pension funds of Phoenix; and 872,297 ordinary shares are held by profit participating life assurance accounts of Phoenix, and (ii) 8,500 are beneficially held for Phoenix's own account (Nostro account). This information is based upon information provided to us by Phoenix and Excellence.
 
(5)
These securities are held for members of the public through, among others, portfolio accounts, provident funds and mutual funds, which are managed by subsidiaries of Psagot Investment House Ltd., according to the following segmentation: 138,810 ordinary shares are held by Psagot Mutual Funds Ltd., 1,862,670 ordinary shares are held by Psagot Provident Funds Ltd., 506,236 ordinary shares are held by Psagot Exchange Traded Notes Ltd., and 1,021,964 ordinary shares are held by Psagot Securities Ltd. This information is based upon a Form 13G for the period ended December 31, 2009, filed by Psagot Investment House Ltd. with the SEC on March 28, 2010. Ron Gutler, our Chaiman of the Board, serves as a director of Psagot Securities Ltd. and Psagot Investment House Ltd., but does not hold shares in either of these entities.
 
As of March 17, 2010, we had approximately 70 ADS holders of record in the United States, holding approximately 57% of our outstanding ordinary shares, as reported by The Bank of New York, the depositary for our ADSs.
 
As of December 11, 2008, Migdal Insurance and Financing Holdings Ltd. held 2,944,307, or 4.8%, of our ordinary shares.  This information is based upon a Schedule 13G/A filed by Migdal Insurance and Financing Holdings Ltd. with the SEC on that date. As of December 3, 2008, Migdal Insurance and Financing Holdings Ltd. held 3,068,603, or 5.1%, of our ordinary shares, according to a Schedule 13G filed by Migdal Insurance and Financing Holdings Ltd. with the SEC on that date.
 
As of December 31, 2008, Massachusetts Financial Services Company held 336,918, or 0.6%, of our ordinary shares. This information is based upon a Form 13G/A, filed by Massachusetts Financial Services Company with the SEC on February 9, 2009. As of December 31, 2007, Massachusetts Financial Services Company held 3,040,862, or 5.2%, of our ordinary shares, according to a Schedule 13G/A filed by Massachusetts Financial Services Company with the SEC on February 8, 2008.
 
 
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As of February 13, 2008, FMR LLC (formerly FMR Corp.) held 1,585,074, or 2.7%, of our ordinary shares.  This information is based upon a Schedule 13G filed by FMR LLC with the SEC on that date.  As of December 12, 2007, FMR LLC held 4,120,994, or 6.9%, of our ordinary shares, according to a Schedule 13G filed by FMR LLC with the SEC on that date.
 
To our knowledge, we are not directly or indirectly owned or controlled by another corporation or by any foreign government and there are no arrangements that might result in a change in control of our company.
 
Related Party Transactions
 
None.           
 
Item 8.                      Financial Information.
 
Consolidated Statements and Other Financial Information
 
See Item 18, “Financial Statements.”
 
Legal Proceedings
 
We are not involved in any legal proceedings that we believe, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operation, except as noted below.
 
Fair Isaac Patent Infringement Lawsuit
 
On September 16, 2009 Fair Isaac Corporation (FICO) filed a claim in the United States District Court for the District of Delaware against Actimize Inc., a wholly owned subsidiary of ours, and NICE, claiming that Actimize and NICE are infringing two U.S. patents.  These patents cover various aspects of fraud detection. FICO requested damages and an injunction. On December 17, 2009, the parties agreed to dismiss NICE from the action. On December 21, 2009, Actimize filed a response and counterclaims. On January 25, 2010, Actimize filed an amended response and counterclaims. The parties jointly submitted a proposed scheduling order to the court on January 12, 2010. The parties are currently engaged in fact discovery.
 
Multi-Format Patent Infringement Lawsuit
 
On September 3, 2008, Multi-Format, Inc. filed a lawsuit against Harrah’s Entertainment, Inc. and Nice Systems Inc., a wholly owned subsidiary of ours, in the United States District Court for the District of New Jersey, alleging infringement of a U.S. patent and requesting damages. The patent purports to cover a PC-based system for monitoring and sorting representative images from video cameras, for security or other monitoring purposes. The parties agreed to settle this lawsuit, and on June 18, 2009, the court gave an order dismissing the case. On July 20, 2009, the parties executed a settlement agreement which ended this dispute.
 
 
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Witness Patent Infringement Lawsuits
 
On August 1, 2008, NICE and Verint Systems Inc. entered into an agreement to settle and dismiss all patent disputes between the parties (which had been commenced with Witness Systems, Inc. prior to its acquisition by Verint). The following is a list of the litigations that were formally terminated by the applicable court following the execution of the settlement agreement:
 
 
·
Patent infringement lawsuit filed on July 20, 2004, by S.T.S. Software Systems Ltd. ("STS"), a wholly owned subsidiary of ours, in the U.S. District Court for the Southern District of New York, charging Witness Systems, Inc. ("Witness") with infringement of VoIP patents in the U.S.  The Court dismissed the claim and determined that Witness does not infringe the Company’s patents.
 
 
·
Patent infringement action filed on August 30, 2004, by Witness in the Federal Court for the Northern District of Georgia against NICE Systems, Inc. An additional patent infringement action was filed by Witness on January 19, 2006, in the Federal Court for the Northern District of Georgia against NICE and NICE Systems, Inc.
 
 
·
New Patent infringement lawsuit filed on May 10, 2006, by NICE and NICE Systems, Inc. against Witness in the United States District Court for District of Delaware.
 
CipherActive Lawsuit
 
On October 19, 2004, CipherActive filed an action against us in the District Court of Tel Aviv. In this lawsuit, CipherActive claims that under a development agreement with us, it is entitled to receive license fees in respect of certain software that it allegedly developed for us and which has been embedded in one of our products. Both parties to this litigation agreed to submit the matter to binding arbitration. The arbitration agreement approved by the Court determined that our liability would not exceed $600,000 plus interest and expenses. In September 2009, the arbitrator awarded CipherActive damages in the amount of $187,982 (in original value) plus VAT and trial expenses.
 
Dictaphone Corp. v. VoicePrint.
 
On July 27, 2004, Dictaphone Corp. filed an action against VoicePrint in the United States District Court for the Central District of California asserting the infringement by VoicePrint of the same patents as those asserted in the Mercom Systems lawsuit, which we subsequently acquired from Dictaphone. The parties were unable to reach a settlement agreement and we decided to abandon this lawsuit.
 
Calyon Dispute
 
In December 2006, Calyon Corporate and Investment Bank filed a suit against us in the District Court of Tel Aviv, demanding repayment of $648,144 plus accrued interest, for a total amount of $740,395.  We had deducted this amount in January 2004 from a payment transferred in connection with our acquisition of Thales Contact Solutions ("TCS"). We had notified TCS in 2004 that we had set off such amount with respect to an overdue payment by TCS to us. The dispute was submitted to mediation, however the mediation process failed and the proceedings were returned to the District Court of Tel Aviv. This lawsuit is in its initial stages, preliminary hearings took place on September 3, 2009 and March 9, 2010 and the parties are to file their depositions.
 
 
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Formatest Dispute
 
On March 9, 2007, Formatest AG filed a claim against NICE Switzerland AG, a wholly owned subsidiary of ours, in the Cantonal Court of Zug, Switzerland.  The claim was in the amount of EUR 1,187,793 (plus interest at 5% per annum) and was made in connection with an agreement dated December 10, 2004 between FAST Video Security AG (now NICE Switzerland AG) and Formatest AG.  On June 19, 2007, NICE and Formatest AG entered into an agreement settling all claims.
 
On December 18, 2007, the selling shareholders of FAST Video Security AG (the “Sellers”) issued a Notice of Arbitration in the Zurich Chamber of Commerce, claiming that NICE should pay them an amount of $1,228,766 (plus late payment interest of 5% from July 2007), which is the remaining unpaid portion of the first earn out payment under the Agreement, release $3,000,000 (plus accrued interest) from the escrow account pursuant to the Agreement. Prior to the commencement of the arbitration proceedings, we released to the Sellers a partial payment of $1,400,000 out of the escrow funds and paid to the Sellers the amount of $1,228,767.
 
On June 23, 2008, the Sellers filed their statement of claim, asking for payments of $1,600,000 (representing the balance of the escrow funds) plus additional amounts for interest, losses on the exchange rate and legal costs and expenses.
 
On April 30, 2009, NICE and the Sellers entered into a settlement agreement. Pursuant to the joint application of NICE and the Sellers, the arbitration proceedings were closed by a termination order dated June 8, 2009.
 
Discrimination in Employment Disputes
 
On August 19, 2009, a former employee of Nice Systems, Inc. sent Nice Systems, Inc. a letter alleging unlawful termination of employment on the grounds of discrimination.  The letter asserted that this former employee had been injured by this unlawful termination, but did not request payment of a specific amount of money.  We are in the process of assessing and responding to the letter.
 
On October 20, 2009, a former employee of IEX Corp., a wholly-owned subsidiary of ours, filed a charge in the Chicago office of the Equal Employment Opportunity Commission against IEX Corp. and “NICE Systems Corp.” alleging that the companies engaged in prohibited discrimination in terminating his employment. A response to the charge was filed, denying the allegations.
 
Actimize Former Employee Dispute
 
On October 15, 2007, a former employee of Actimize Ltd., a wholly owned subsidiary of ours, filed a claim with the Tel Aviv District Labor Court, seeking a declaration that he is entitled to 0.5% of the outstanding share capital of Actimize Ltd. In its statement of defense, Actimize Ltd. claimed that once the former employee chose not to exercise his vested options upon termination of his employment with the company, such options expired. In addition, Actimize Ltd. claimed that the former employee’s options deteriorated in value due to his decision not to exercise his right to re-price such options during his employment term. The preliminary stages of the claim ended and the parties submitted their testimonies by way of written affidavits. The hearing and cross-examination of the testimonies is scheduled to take place on June 16, 2010.
 
 
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Nuvation Dispute
 
On March 10, 2010, Nuvation Research Corporation filed a lawsuit against us with the Supreme Court of the State of New York. The lawsuit alleges, among others, that we breached a contract with Nuvation and defrauded Nuvation. Nuvation is claiming damages in a total amount of $7 million.
 
Plant Dispute
 
Around December 31, 2008, Nice Systems Inc. received a letter from Plant CML, a distributor of Nice Systems Inc., asserting several indemnity claims against the company. The claims arise out of the Commonwealth of Massachusetts’ claim against Verizon relating to numerous alleged problems associated with our products used by the Commonwealth. Nice Systems Inc. sold our products to Plant pursuant to a Reseller Agreement between the parties dated December 2005, and Plant, in turn, resold the products to Verizon, who in turn sold the overall system to the Commonwealth. To date, Plant CML has taken no further action and has made no further demands and, therefore, we do not consider this dispute as outstanding anymore.
 
Dividends
 
Since our initial public offering and listing on the NASDAQ National Market (now The NASDAQ Global Select Market) in 1996, we have not declared or paid cash dividends on our ordinary shares or ADSs.  We intend to retain our earnings for future growth and therefore do not anticipate paying any cash dividends in the foreseeable future. Under Israeli law, dividends may be paid only out of profits and other surplus (as defined in the law) as of our most recent financial statements or as accrued over a period of two years, whichever is higher, provided that there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations as they come due. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on various factors, such as our statutory profits, financial condition, operating results and current and anticipated cash needs. In the event cash dividends are declared by us, we may pay such dividends in Israeli currency. Under current Israeli regulations, any cash dividend in Israeli currency paid in respect of ordinary shares purchased by non-residents of Israel with non-Israeli currency may be freely repatriated in such non-Israeli currency, at the rate of exchange prevailing at the time of conversion.
 
Significant Changes
 
None.
 
 
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Item 9.
 
Trading in the ADSs
 
Our American Depositary Shares, or ADSs, have been quoted on the NASDAQ Stock Market under the symbol “NICEV” from our initial public offering in January 1996 until April 7, 1999, and thereafter under the symbol “NICE.”  Prior to that time, there was no public market for our ordinary shares in the United States. Each ADS represents one ordinary share. The following table sets forth, for the periods indicated, the high and low reported market (sale) prices for our ADSs.
 

 
ADSs
  
 
High
    
Low
  
Annual
          
           
2005
 $ 25.05     $ 14.65  
2006
   33.41       21.55  
2007
   40.95       29.04  
2008
   35.87       16.11  
2009
   33.42       18.04  
               
Quarterly 2008
              
               
First Quarter
 $ 34.75     $ 24.90  
Second Quarter
   35.87       27.75  
Third Quarter
   31.57       24.65  
Fourth Quarter
   27.45       16.11  
               
Quarterly 2009
              
               
First Quarter
 $ 25.79     $ 18.04  
Second Quarter
   27.18       21.19  
Third Quarter
   32.29       21.79  
Fourth Quarter
   33.42       27.50  

Quarterly 2010
      
       
First Quarter
      

Monthly
          
           
September 2009                                                                                           
 $ 32.29     $ 28.75  
October 2009                                                                                           
   33.42       29.33  
November 2009                                                                                           
   30.88       27.50  
December 2009                                                                                           
   31.84       29.68  
January 2010                                                                                           
   34.30       28.99  
February 2010                                                                                           
   31.44       28.22  
March 2010 (through March 30)                                                                                           
   33.97       30.14  
 
        On March 30, 2010, the last reported price of our ADSs was $32.00 per ADS.
 
The Bank of New York is the depositary for our ADSs. Its address is 101 Barclay Street, New York, New York 10286.
 
 
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Trading in the Ordinary Shares
 

Our ordinary shares have been listed on the Tel-Aviv Stock Exchange, or TASE, since 1991. Our ordinary shares are not listed on any other stock exchange and have not been publicly traded outside Israel (other than through ADSs as noted above). The table below sets forth the high and low reported market (sale) prices of our ordinary shares (in NIS and dollars) on the TASE. The translation into dollars is based on the daily representative rate of exchange published by the Bank of Israel.
 

   
Ordinary Shares
  
   
High
    
Low
  
   
NIS
      $      NIS       $  
Annual
                          
                           
2005
     116.00       25.22       64.25       14.59  
2006
     142.50       33.16       102.00       22.48  
2007
     162.30       41.04       117.50       29.94  
2008
     133.80       35.54       63.00       16.72  
2009
     125.00       33.70       74.05       18.18  
                                 
Quarterly 2008
                                
                                 
First Quarter
     133.80       34.69       91.11       26.98  
Second Quarter
     119.40       35.51       98.36       27.82  
Third Quarter
     112.40       32.02       84.00       23.86  
Fourth Quarter
     95.50       25.28       63.00       17.52  
                                 
Quarterly 2009
                                
                                 
First Quarter 
     107.10       25.52       74.05       18.18  
Second Quarter
     112.40       26.99       84.99       21.45  
Third Quarter
     120.80       32.31       86.00       21.70  
Fourth Quarter
     125.00       33.70       105.20       27.74  
                                 
Quarterly 2010
                                
                                 
First Quarter
                                
   
Monthly
  
                                 
September 2009
     120.80       32.21       106.00       27.92  
October 2009
     125.00       33.70       110.20       29.26  
November 2009
     116.90       30.83       105.20       27.74  
December 2009
     121.90       32.10       112.70       29.88  
January 2010
     124.80       33.89       107.00       28.73  
February 2010
     120.00       31.70       107.10       28.70  
March 2010 (through March 28)
     129.70       34.66       115.20       30.57  
 
As of March 28, 2010, the last reported price of our ordinary shares on the TASE was NIS 119.60 (or $31.89) per share.
 
 
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Item 10.                      Additional Information.
 
Memorandum and Articles of Association
 
Organization and Register
 
We are a company limited by shares organized in the State of Israel under the Companies Law. We are registered with the Registrar of Companies of the State of Israel and have been assigned company number 52-0036872.
 
Objects and Purposes
 
Our objects and purposes include a wide variety of business purposes, including all kinds of research, development, manufacture, distribution, service and maintenance of products in all fields of technology and engineering and to engage in any other kind of business or commercial activity. Our objects and purposes are set forth in detail in Section 2 of our memorandum of association.
 
Directors
 
Our articles of association provide that the number of directors serving on the board shall be not less than three but shall not exceed thirteen, including two outside directors. Our directors, other than outside directors, are elected at the annual shareholders meeting to serve until the next annual meeting or until their earlier death, resignation, bankruptcy, incapacity or removal by resolution of the general shareholders meeting. Directors may be re-elected at each annual shareholders meeting. The board may appoint additional directors (whether to fill a vacancy or create new directorship) to serve until the next annual shareholders meeting, provided, however, that the board shall have no obligation to fill any vacancy unless the number of directors is less than three. Our officers serve at the discretion of the board.
 
The board of directors may meet and adjourn its meetings according to the Company’s needs but at least once every three months.  A meeting of the board may be called at the request of any director. The quorum required for a meeting of the board consists of a majority of directors who are lawfully entitled to participate in the meeting and vote thereon. The adoption of a resolution by the board requires approval by a simple majority of the directors present at a meeting in which such resolution is proposed. In lieu of a board meeting, a resolution may be adopted if all of the directors lawfully entitled to vote thereon consent not to convene a meeting.
 
 
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Subject to the Companies law, the board may appoint a committee of the board and delegate to such committee all or any of the powers of the board, as it deems appropriate. Under the Companies Law the board of directors must appoint an internal audit committee, comprised of at least three directors and including both of the outside directors. The function of the internal audit committee is to review irregularities in the management of the Company’s business and recommend remedial measures. The committee is also required, under the Companies Law to approve certain related party transactions. Notwithstanding the foregoing, the board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. The board has appointed an internal audit committee which has three members, an audit committee which has four members and a compensation committee which has four members. For more information on the Company’s committees, please see Item 6, “Directors, Senior Management and Employees—Board Practices” in this annual report.
 
Fiduciary Duties of Officers
 
The Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company.  An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty.  The duty of loyalty includes avoiding any conflict of interest between the office holder’s position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder.
 
Approval of Certain Transactions
 
Under the Companies Law, all arrangements as to compensation of office holders who are not directors, or controlling parties, require approval of the board of directors.  Similarly, adoption and amendment of equity based compensation plans require approval of the board of directors. Arrangements regarding the compensation of directors also require internal audit committee and shareholder approval. Although NASDAQ rules generally require shareholder approval when an equity based compensation plan is established or materially amended, as a foreign company we follow the aforementioned requirements of the Companies Law.
 
The Companies Law requires that an office holder of the company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company.  In addition, if the transaction is an extraordinary transaction as defined under Israeli law, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandpar­ents, descendants, spouse’s descendants and the spouses of any of the foregoing.  In addition, the office holder must also disclose any interest held by any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction other than in the ordinary course of business, otherwise than on market terms, or that is likely to have a material impact on the company’s profitability, assets or liabilities.
 
 
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In the case of a transaction which is not an extraordinary transaction, after the office holder complies with the above disclosure requirement, only board approval is required unless the articles of association of the company provide otherwise. The transaction must not be adverse to the company’s interest.  Furthermore, if the transaction is an extraordinary transaction, then, in addition to any approval stipulated by the articles of association, it also must be approved by the company’s audit committee and then by the board of directors, and, under certain circumstances, by a meeting of the shareholders of the company.  An office holder who has a personal interest in a transaction that is considered at a meeting of the board of directors or the audit committee generally may not be present at the deliberations or vote on this matter. If a majority of the directors has a personal interest in an extraordinary transaction with the Company, shareholder approval of the transaction is required.
 

The Companies Law applies the same disclosure requirements to a controlling share­holder of a public company, which includes a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Extraor­dinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of compensation of a controlling shareholder who is an office holder, require the approval of the audit committee, the board of directors and the shareholders of the company by simple majority, provided that either such majority vote must include at least one-third of the shareholders who have no personal interest in the transaction and are present at the meeting (without taking into account the votes of the abstaining shareholders), or that the total shareholdings of those who have no personal interest in the transaction who vote against the transaction represent no more than one percent of the voting rights in the company.
 
In addition, under the Companies Law, a private placement of securities requires approval by the board of directors and the shareholders of the company if it will cause a person to become a controlling shareholder or if:
 
·
the securities issued amount to twenty percent or more of the company’s outstanding voting rights before the issuance;
 
·
some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and
 
·
the transaction will increase the relative holdings of a shareholder that holds five percent or more of the company’s outstanding share capital or voting rights or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the company’s outstanding share capital or voting rights.
 
According to the Company’s Articles of Association certain resolutions, such as resolutions regarding mergers, and windings up, require approval of the holders of 75% of the shares represented at the meeting and voting thereon.
 
 
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Duties of Shareholders
 
Under the Companies Law, a shareholder has a duty to act in good faith towards the Company and other shareholders and to refrain from abusing his or her power in the company including, among other things, voting in a general meeting of shareholders on the following matters:
 
·
any amendment to the articles of association;
 
·
an increase of the company’s authorized share capital;
 
·
a merger; or
 
·
approval of interested party transactions which require shareholder approval.
 
In addition, any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company’s articles of association, has the power to appoint or prevent the appointment of an office holder in the company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty but provides that a breach of his duty is tantamount to a breach of fiduciary duty of an officer of the Company.
 
Exemption, Insurance and Indemnification of Directors and Officers
 
Exemption of Office Holders
 
           Under the Companies Law, an Israeli company may not exempt an office holder from liability for breach of his duty of loyalty, but may exempt in advance an office holder from liability to the company, in whole or in part, for a breach of his duty of care (except in connection with distributions), provided the articles of association of the company allow it to do so.  Our articles of association do not allow us to do so.
 
Office Holder Insurance
 
Our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders with respect to:
 
·
a breach of his duty of care to us or to another person,
 
·
a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable grounds to assume that his act would not prejudice our interests, or
 
·
a financial liability imposed upon him in favor of another person concerning an act performed by him in his capacity as an office holder.
 
 
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Indemnification of Office Holders
 
 Our articles of association provide that we may indemnify an office holder against:
 
·
a financial liability imposed on or incurred by an office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court concerning an act performed in his capacity as an office holder. Such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that the undertaking is limited to types of events which our board of directors deems to be foreseeable in light of our actual operations at the time of the undertaking and limited to an amount or criterion determined by our board of directors to be reasonable under the circumstances, and further provided that such events and amounts or criterion are set forth in the undertaking to indemnify, and provided that the total amount of indemnification for all persons we have agreed to indemnify in such circumstances does not exceed, in the aggregate twenty-five percent (25%) of our shareholders’ equity at the time of the actual indemnification;
 
·
reasonable litigation expenses, including attorney’s fees, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; and
 
·
reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged to him by a court, in proceedings instituted against him by or on our behalf or by another person, or in a criminal charge from which he was acquitted, or a criminal charge in which he was convicted for a criminal offense that does not require proof of intent, in each case relating to an act performed in his capacity as an office holder.
 
We have undertaken to indemnify our directors and officers pursuant to applicable law. We have obtained directors' and officers' liability insurance for the benefit of our directors and officers.
 
Limitations on Exemption, Insurance and Indemnification
 
The Companies Law provides that a company may not exempt or indemnify an office holder, or enter into an insurance contract, which would provide coverage for any monetary liability incurred as a result of any of the following:
 
·
a breach by the office holder of his duty of loyalty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
 
·
a breach by the office holder of his duty of care if the breach was done intentionally or recklessly;
 
·
any act or omission done with the intent to derive an illegal personal benefit; or
 
·
any fine levied against the office holder.
 
 
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Required Approvals
 
In addition, under the Companies Law, any exemption of, indemnification of, or procurement of insurance coverage for, our office holders must be approved by our audit committee and our board of directors and, if the beneficiary is a director, by our shareholders.  We have obtained such approvals for the procurement of liability insurance covering our officers and directors and for the grant of indemnification letters to our officers and directors.
 
Rights of Ordinary Shares
 
Our Ordinary Shares confer upon our shareholders the right to receive notices of, and to attend, shareholder meetings, the right to one vote per Ordinary Share at all shareholders’ meetings for all purposes, and to share equally, on a per share basis, in such dividends as may be declared by our board of directors; and upon liquidation or dissolution, the right to participate in the distribution of any surplus assets of the Company legally available for distribution to shareholders after payment of all debts and other liabilities of the Company.  All Ordinary Shares rank pari passu in all respects with each other.  Our board of directors may, from time to time, make such calls as it may think fit upon a shareholder in respect of any sum unpaid in respect of shares held by such shareholder which is not payable at a fixed time, and each shareholder shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments).
 
Meetings of Shareholders
 
An annual general meeting of our shareholders shall be held once in every calendar year at such time and at such place either within or without the State of Israel as may be determined by our board of directors.
 
Our board of directors may, whenever it thinks fit, convene a special general meeting at such time and place, within or without the State of Israel, as may be determined by the board of directors. Special general meetings may also be convened upon requisition in accordance with the Companies Law.
 
The quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 25% of the outstanding voting shares, unless otherwise required by applicable rules.  Although NASDAQ generally requires a quorum of 33-1/3%, we have an exception under the NASDAQ rules and follow the generally accepted business practice for companies in Israel, which have a quorum requirement of 25%. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the chairman may designate with the consent of a majority of the voting power represented at the meeting and voting on the matter adjourned.  At such reconvened meeting the required quorum consists of any two members present in person or by proxy.
 
 
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Mergers and Acquisitions
 
A merger of the Company shall require the approval of the holders of a majority of seventy five percent (75%) of the voting power represented at the annual or special general meeting in person or by proxy or by written ballot, as shall be permitted, and voting thereon in accordance with the provisions of the Companies Law. Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger.  In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.
 
The Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company.  An acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder in the company.  These requirements do not apply if the acquisition (i) occurs in the context of a private placement by the company that received shareholder approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company.  The tender offer must be extended to all shareholders, but the offerer is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are tendered by shareholders.  The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offerer and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
 
If as a result of an acquisition of shares the acquirer will hold more than 90% of a company’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares.  If as a result of a full tender offer the acquirer would own more than 95% of the outstanding shares, then all the shares that the acquirer offered to purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within three months following the consummation of a full tender offer.  If as a result of a full tender offer the acquirer would own 95% or less of the outstanding shares, then the acquirer may not acquire shares that will cause his shareholding to exceed 90% of the outstanding shares.
 
Material Contracts
 
Actimize Ltd. Acquisition
 
On August 30, 2007, we acquired Actimize Ltd., a global provider of operational risk management software solutions that enable financial services institutions to manage the challenges of regulatory compliance, internal policy enforcement and fraud prevention and money laundering. Under the terms of the Agreement and Plan of Merger, dated July 2, 2007 (the “Merger Agreement”), the consideration paid for Actimize was approximately $281 million, approximately 80% of which was in cash and approximately 20% of which was satisfied through the issuance of 1,501,933 of our ordinary shares based on the market price of the securities a few days before and after the terms of the acquisition were agreed upon and announced. Pursuant to the terms of the Merger Agreement, we assumed the stock options and restricted shares granted by Actimize (for further information please see Item 6, “Directors, Senior Management and Employees” in this annual report). On August 29, 2007, we entered into an unsecured loan agreement and a letter of undertaking with Bank Hapoalim B.M., which provided for a term loan of $120 million to finance a portion of the cash consideration for the Actimize transaction. The loan was repaid in one installment on September 28, 2007. On September 12, 2007, as required by the Merger Agreement, we filed a registration statement with the U.S. Securities and Exchange Commission to register for resale the securities issued pursuant to the Merger Agreement, which we maintained effective for approximately six months.
 
 
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Fortent Acquisition
 
On August 31, 2009, we completed the acquisition of Fortent, a leading provider of analytics based Anti-Money Laundering and financial crime prevention software solutions for the financial services industry. Fortent became part of Actimize, with the Fortent team becoming an integral part of the Actimize team. The acquisition was for a total consideration of approximately $73 million. Fortent is known for its anti-money laundering deployments and expertise within the world's tier-one financial institutions and for its advanced statistical profiling analytics technology.
 
Orsus Acquisition
 
On January 11, 2010, we completed the acquisition of Orsus, a leading provider of Security Management Solutions. The acquisition was for a total consideration of approximately $22 million, subject to certain adjustments. Orsus` flagship solution, Situator, provides a framework for fusing data silos from disparate security and safety systems as well as multiple command and control centers, into a single, holistic operational view and automating security procedures.
 
Exchange Controls
 
Holders of ADSs are able to convert dividends and liquidation distributions into freely repatriable non-Israeli currencies at the rate of exchange prevailing at the time of repatriation, pursuant to regulations issued under the Currency Control Law, 5738–1978, provided that Israeli income tax has been withheld by us with respect to amounts that are being repatriated to the extent applicable or an exemption has been obtained.
 
Our ADSs may be freely held and traded pursuant to the General Permit and the Currency Control Law. The ownership or voting of ADSs by non-residents of Israel, except with respect to citizens of countries that are in a state of war with Israel, are not restricted in any way by the our memorandum of association or articles of association or by the laws of the State of Israel.
 
 
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Taxation
 
The following is a discussion of Israeli and United States tax consequences material to our shareholders.  The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations.
 
Holders of our ADSs should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ADSs, including, in particular, the effect of any foreign, state or local taxes.
 
Israeli Tax Considerations
 
The following is a summary of the principal tax laws applicable to companies in Israel, with special reference to their effect on us. The following also contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares or ADSs.  This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law.  To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.  The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
 
General Corporate Tax Structure
 
Generally, Israeli companies are subject to Corporate Tax on taxable income at the rate of 26% for the 2009 tax year and 25% for the 2010 tax year. Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), which came into effect on January 1, 2009, the corporate tax rate is scheduled to decrease as follows: 24% for the 2011 tax year, 23% for the 2012 tax year, 22% for the 2012 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and 18% for the 2016 tax year and thereafter. Israeli companies are generally subject to capital gains tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003, and such tax rate is scheduled to be equal to the corporate tax rate for future tax years.  However, the effective tax rate payable by a company that derives income from an Approved or Privileged Enterprise may be considerably less.
 
Following a Temporary Order, which came into effect on January 1, 2009 and expired at the end of one year, an Israeli corporation could elect a 5% rate of corporate tax (instead of 25%) for dividend distributions received in 2009 from a foreign subsidiary, which is used in Israel either in 2009 or within one year after actual receipt of the dividend, whichever is later. The 5% tax rate is subject to various conditions, which include conditions with regard to the identity of the corporation that distributes the dividends, the source of the dividend, the nature of the use of the dividend income, and the period during which the dividend income will be used in Israel.
 
 
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Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959, as amended.
 
We derive and expect to continue to derive significant tax benefits in Israel relating to our “Approved and Privileged Enterprise” programs, pursuant to the Law for Encouragement of Capital Investments, 1959, or the Investments Law. To be eligible for these tax benefits, we must continue to meet certain conditions, including making certain specified investments in fixed assets. In the event of a failure to comply with these conditions, the benefits may be canceled and we may be required to refund the amount of the benefits, in whole or in part, including interest and certain inflation adjustments. As of December 31, 2009 we believe that we are in compliance with all the conditions required by the law.
 
Full details regarding our Approved and Privileged Enterprises may be found in Note 13(a)(2) of our Consolidated Financial Statements.
 
Other than by way of our complete liquidation, if we distribute dividends from the income of our “Approved Enterprises” which was exempted from taxes pursuant to our “Approved Enterprise” benefits, we will be taxed as if the exempt income was subject to the regular reduced corporate tax rate arising under our “Approved Enterprise” programs. Tax-exempt income generated under our Privileged Enterprises, will subject the Company to taxes upon dividend distribution or complete liquidation.
 
The Company does not intend to distribute any amounts of its undistributed tax-exempt income as dividends as it intends to reinvest its tax-exempt income within the Company. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s Approved or Privileged Enterprise programs as the undistributed tax exempt income is essentially permanent in duration.
 
Income from sources other than the “Approved or Privileged Enterprises” during the period of benefits will be taxable at regular corporate tax rates.
 
Tax Benefits and Grants for Research and Development
 
Israeli tax law allows, under specified conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred.  These expenses must relate to scientific research and development projects and must be approved by the relevant Israeli government ministry, determined by the field of research, and the research and development must be for the promotion of the company and carried out by or on behalf of the company seeking such deduction. However, the amount of such deductible expenses shall be reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects.  Expenditures not so approved are deductible over a three-year period.
 
Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969
 
Under the Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”), Industrial Companies (as defined below) are entitled to the following tax benefits, among others:
 
 
·
deductions over an eight-year period for purchases of know-how and patents;
 
 
·
deductions over a three-year period of expenses involved with the issuance and listing of shares on a stock market;
 
 
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·
the right to elect, under specified conditions, to file a consolidated tax return with other related Israeli Industrial Companies; and
 
 
·
accelerated depreciation rates on equipment and buildings.
 
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.  Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it.  An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity. We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law.  No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
 
In 2009, we elected to measure our Israeli taxable income in relation to changes in the U.S. dollar/NIS exchange rate rather than the Israeli inflation index. We were permitted to make such a change pursuant to regulations published by the Israeli Minister of Finance, which provide the conditions for so doing. We believe that we meet and will continue to meet, the necessary conditions and as such, will continue to measure our results for tax purposes based on the U.S. dollar/NIS exchange rate.
 
Israeli Transfer Pricing Regulations
 
On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into force (the “Transfer Pricing Regulations”). Section 85A of the Tax Ordinance and the Transfer Pricing Regulations generally require that all cross-border transactions carried out between related parties will be conducted on an arm’s length principle basis and will be taxed accordingly.  As the Transfer Pricing Regulations are broadly similar to transfer pricing regimes already in place in other jurisdictions in which we operate outside of Israel, we do not expect the Transfer Pricing Regulations to have a material impact on the Company.
 
Capital Gains Tax on Sales of Our Ordinary Shares
 
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain, which is equivalent to the increase of the relevant asset’s purchase price, which is attributable to the increase in the Israeli consumer price index, or a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.
 
The following discussion refers to the sale of our ordinary shares. However, the same tax treatment would apply to the sale of our ADSs.
 
 
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Taxation of Israeli Residents
 
As of January 1, 2006, the tax rate generally applicable to the capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale (i.e., such shareholder holds directly or indirectly, including jointly with others, at least 10% of any means of control in the company) the tax rate will be 25%. Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of listed shares, unless such companies were not subject to the Adjustments Law (or certain regulations) as of August 10, 2005, in which case the applicable tax rate is 25%. However, different tax rates may apply to dealers in securities and shareholders who acquired their shares prior to an initial public offering.
 
The tax basis of our shares acquired prior to January 1, 2003, will generally be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
 
Taxation of Non-Israeli Residents
 
Non-Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the TASE provided such gains did not derive from a permanent establishment of such shareholders in Israel. Non-Israeli residents are also exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock market outside of Israel, provided such shareholders did not acquire their shares prior to the issuer’s initial public offering (in which case a partial exemption may be available), that the gains did not derive from a permanent establishment of such shareholders in Israel. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
 
In addition, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) and who holds ordinary shares as a capital asset is also exempt from Israeli capital gains tax under the U.S.-Israel Tax Treaty unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel. If the above conditions are not met, the U.S. resident would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the gain would be treated as foreign source income for United States foreign tax credit purposes and such U.S. resident would be permitted to claim a credit for such taxes against the United States income tax imposed on such sale, exchange or disposition, subject to the limitations under the United States federal income tax laws applicable to foreign tax credits.
 
 
100
 
 
Taxation of Dividends Paid on our Ordinary Shares
 
The following discussion refers to dividends paid on our ordinary shares. However, the same tax treatment would apply to dividends paid on our ADSs.
 
Taxation of Israeli Residents
 
Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, other than bonus shares (share dividends) or stock dividends, at the rate of 20%, or 25% for a shareholder that is considered a significant shareholder at any time during the 12-month period preceding such distribution. A different rate may apply to dividends paid on shares deriving from the exercise of stock options or other equity based awards granted as compensation to our employees or officers. Dividends paid from income derived from our Approved or Privileged Enterprises are subject to withholding at the rate of 15%, although we cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability.
 
Taxation of Non-Israeli Residents
 
Non-residents of Israel, both companies and individuals, are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, at the aforementioned rates applicable to Israeli residents, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence.
 
Under the U.S.-Israel Treaty, the maximum Israeli withholding tax on dividends paid by us is 25%. Dividends of an Israeli company distributed from income of an Approved Enterprise (or Privileged Enterprise) are subject to a 15% withholding tax under the U.S.-Israel Tax Treaty. The U.S.-Israel Tax Treaty further provides for a 12.5% Israeli dividend withholding tax on dividends paid by an Israeli company to a United States corporation owning at least 10% or more of such Israeli company’s issued voting power for, in general, the part of the tax year which precedes the date of payment of the dividend and the entire preceding tax year. The lower 12.5% rate applies only to dividends from income not derived from an Approved Enterprise (or Privileged Enterprise) in the applicable period and does not apply if the company has more than 25% of its gross income derived from certain types of passive income.  Residents of the United States generally will have withholding tax in Israel deducted at source. They may be entitled to a credit or deduction for United States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.
 
A non-resident of Israel who has dividend income derived from or accrued in Israel, from which tax was withheld at source, is generally exempt from the duty to file tax returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer.
 
U.S. Federal Income Tax Considerations
 
The following is a summary of the material U.S. Federal income tax consequences that apply to U.S. holders who hold ADSs as capital assets for tax purposes. This summary is based on U.S. Federal income tax laws, regulations, rulings and decisions and the U.S.-Israel income tax treaty in effect as of the date of this annual report, all of which are subject to change at any time, possibly with retroactive effect. It is also based in part on representations by The Bank of New York, the depositary for our ADSs, and assumes that each obligation under the Deposit Agreement between us and The Bank of New York and any related agreement will be performed in accordance with its terms.  This summary does not address all U.S. Federal income tax matters that may be relevant to a particular prospective holder or all tax considerations that may be relevant with respect to an investment in ADSs.
 
 
101
 
 
This summary does not address tax considerations applicable to a holder of an ADS that may be subject to special tax rules including, without limitation, the following:
 
 
·
dealers or traders in securities, currencies or notional principal contracts;
 
 
·
financial institutions;
 
 
·
insurance companies;
 
 
·
real estate investment trusts;
 
 
·
banks;
 
 
·
investors subject to the alternative minimum tax;
 
 
·
tax-exempt organizations;
 
 
·
regulated investment companies;
 
 
·
investors that actually or constructively own 10 percent or more of our voting shares;
 
 
·
investors that will hold the ADSs as part of a hedging or conversion transaction or as a position in a straddle or a part of a synthetic security or other integrated transaction for U.S. Federal income tax purposes;
 
 
·
investors that are treated as partnerships or other pass through entities for U.S. Federal income tax purposes and persons who hold the ADSs through partnerships or other pass through entities; and
 
 
·
investors whose functional currency is not the U.S. dollar.
 
This summary does not address the effect of any U.S. Federal taxation other than U.S. Federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation or the indirect effects on the holders of equity interests in a holder of an ADS.
 
You are urged to consult your own tax advisor regarding the foreign and U.S. Federal, state and local and other tax consequences of an investment in ADSs.
 
For purposes of this summary, a “U.S. holder” is a beneficial owner of ADSs that is, for U.S. Federal income tax purposes:
 
 
·
an individual who is a citizen or a resident of the United States;
 
 
102
 
 
 
·
a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any political subdivision thereof;
 
 
·
an estate whose income is subject to U.S. Federal income tax regardless of its source; or
 
 
·
a trust if:
 
 
(a)
a court within the United States is able to exercise primary supervision over administration of the trust; and
 
 
(b)
one or more United States persons have the authority to control all substantial decisions of the trust.
 
For purposes of this section, a “non-U.S. holder” is any holder who is not a U.S. holder.
 
In general, if you hold ADSs, you will be treated as the holder of the underlying shares represented by those ADSs for U.S. Federal income tax purposes.  Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.
 
The U.S. Treasury has expressed concerns that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. holders of ADSs.  Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate U.S. holders.  Accordingly, the analysis of the creditability of Israeli taxes and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. holders, each described below, could be affected by actions taken by parties to whom the ADSs are released.
 
U.S. Taxation of ADSs
 
Distributions
 
Subject to the discussion under “Passive Foreign Investment Companies” below, the gross amount of any distribution, including the amount of any Israeli taxes withheld from these distributions (see “Israeli Tax Considerations”), actually or constructively received by a U.S. holder with respect to ADSs will be taxable to the U.S. holder as a dividend to the extent of our current and accumulated earnings and profits as determined under U.S. Federal income tax principles.  The U.S. holder will not, except as provided by Section 245 of the Internal Revenue Code of 1986, as amended (the “Code”), be eligible for any dividends received deduction in respect of the dividend otherwise allowable to corporations.  Distributions in excess of earnings and profits will be non-taxable to the U.S. holder to the extent of, and will be applied against and reduce, the U.S. holder’s adjusted tax basis in the ADSs.  Distributions in excess of earnings and profits and such adjusted tax basis will generally be taxable to the U.S. holder as capital gain from the sale or exchange of property.  We do not maintain calculations of our earnings and profits under U.S. Federal income tax principles.  If we do not report to a U.S. holder the portion of a distribution that exceeds earnings and profits, the distribution will generally be taxable as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.  The amount of any distribution of property other than cash will be the fair market value of that property on the date of distribution.
 
 
103
 
 
Under the Code, certain dividends received by non-corporate U.S. holders will be subject to a maximum income tax rate of 15%.  This reduced income tax rate is only applicable to dividends paid by a “qualified foreign corporation” that is not a “passive foreign investment company” and only with respect to shares held by a qualified U.S. holder (i.e., a non-corporate holder) for a minimum holding period (generally 61 days during the 121-day period beginning 60 days before the ex-dividend date).  We should be considered a qualified foreign corporation because (i) we are eligible for the benefits of a comprehensive tax treaty between Israel and the U.S., which includes an exchange of information program, and (ii) the ADS is readily tradable on an established securities market in the U.S.  In addition, based on our current business plans, we do not expect to be classified as a “passive foreign investment company” (see “Passive Foreign Investment Companies” below).  Accordingly, dividends paid by us to individual U.S. holders on shares held for the minimum holding period should be eligible for the reduced income tax rate.  The reduced tax rate for qualified dividends is scheduled to expire on December 31, 2010, unless further extended by Congress.
 
The amount of any distribution paid in a currency other than U.S. dollars (a “foreign currency”) including the amount of any withholding tax thereon, will be included in the gross income of a U.S. holder in an amount equal to the U.S. dollar value of the foreign currencies calculated by reference to the exchange rate in effect on the date of receipt, regardless of whether the foreign currencies are converted into U.S. dollars.  If the foreign currencies are converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend.  If the foreign currencies received in the distribution are not converted into U.S. dollars on the date of receipt, a U.S. holder will have a basis in the foreign currencies equal to its U.S. dollar value on the date of receipt.  Any gain or loss on a subsequent conversion or other disposition of the foreign currencies will be treated as ordinary income or loss.
 
Dividends received by a U.S. holder with respect to ADSs will be treated as foreign source income for the purposes of calculating that holder’s foreign tax credit limitation.  Subject to certain conditions and limitations, any Israeli taxes withheld on dividends at the rate provided by the U.S.-Israel income tax treaty may be deducted from taxable income or credited against a U.S. holder’s U.S. Federal income tax liability.  The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to “passive” income and “general” income.  The rules relating to foreign tax credits and the timing thereof are complex. U.S. holders should consult their own tax advisors regarding the availability of a foreign tax credit under their particular situation.
 
Sale or Other Disposition of ADSs
 
If a U.S. holder sells or otherwise disposes of its ADSs, gain or loss will be recognized for U.S. Federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and such holder’s adjusted tax basis in the ADSs.  Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if the holder had held the ADSs for more than one year at the time of the sale or other disposition.  Long-term capital gains realized by individual U.S. holders generally are subject to a lower marginal U.S. Federal income tax rate (15% for the taxable year ending December 31, 2010) than ordinary income.  Under most circumstances, any gain that a holder recognizes on the sale or other disposition of ADSs will be U.S. source for purposes of the foreign tax credit limitation and any recognized losses will be allocated against U.S. source income.
 
 
104
 
 
If a U.S. holder receives foreign currency upon a sale or exchange of ADSs, gain or loss, if any, recognized on the subsequent sale, conversion or disposition of such foreign currency will be ordinary income or loss, and will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.  However, if such foreign currency is converted into U.S. dollars on the date received by the U.S. holder, the U.S. holder generally should not be required to recognize any gain or loss on such conversion.
 
Passive Foreign Investment Companies
 
For U.S. Federal income tax purposes, we will be considered a passive foreign investment company (“PFIC”) for any taxable year in which either 75% or more of our gross income is passive income, or at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income.  For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gain over losses from the disposition of assets which produce passive income.  If we were determined to be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply to U.S. holders owning ADSs.  Accordingly, U.S. holders are urged to consult their own tax advisors regarding the application of such rules.
 
If we are treated as a PFIC for any taxable year,
 
 
·
a U.S. holder would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ADSs ratably over its holding period for such ADSs,
 
 
·
the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year,
 
 
·
the amount allocated to the year of the dividend payment or disposition would be taxable as ordinary income, and
 
 
·
a U.S. holder would be required to make an annual return on IRS Form 8621 regarding distributions received and gain realized with respect to ADSs.
 
One method to avoid the aforementioned treatment is for a U.S. holder to make an election to treat us as a qualified electing fund.  A U.S. holder may make a qualified electing fund election only if we furnish the U.S. holder with certain tax information and we do not presently intend to prepare or provide this information.  Alternatively, another method to avoid the aforementioned treatment is for a U.S. holder to make a timely mark-to-market election in respect of its ADSs.  If a U.S. holder elects to mark-to-market its ADSs, any excess of the fair market value of the ADSs at the close of each tax year over the adjusted basis in such ADSs will generally be included in income.  If the fair market value of the ADSs had depreciated below the adjusted basis at the close of the tax year, the U.S. holder may generally deduct the excess of the adjusted basis of the ADSs over its fair market value at that time.  However, such deductions generally would be limited to the net mark-to-market gains, if any, that were included in income by such holder with respect to ADSs in prior years.  Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of ADSs with respect to which the mark-to-market election is made, is treated as ordinary income or loss.
 
 
105
 
 
Based on our estimated gross income, the average value of our gross assets and the nature of our business, we do not believe that we will be classified as a PFIC in the current taxable year.  Our status in any taxable year will depend on our assets and activities in each year and because this is a factual determination made annually at the end of each taxable year, there can be no assurance that we will not be considered a PFIC for any future taxable year.  If we were treated as a PFIC in any year during which a U.S. holder owns ADSs, certain adverse tax consequences could apply, as described above.  Given our current business plans, however, we do not expect that we will be classified as a PFIC in future years.
 
You are urged to consult your own tax advisor regarding the possibility of us being classified as a PFIC and the potential tax consequences arising from the ownership and disposition (directly or indirectly) of an interest in a PFIC.
 
Backup Withholding and Information Reporting
 
Payments of dividends with respect to ADSs and the proceeds from the sale, retirement, or other disposition of ADSs made by a U.S. paying agent or other U.S. intermediary will be reported to the IRS and to the U.S. holder as may be required under applicable U.S. Treasury regulations.  We, or an agent, a broker, or any paying agent, as the case may be, may be required to withhold tax, currently at the rate of 28% (the backup withholding tax), if a non-corporate U.S. holder that is not otherwise exempt fails to provide an accurate taxpayer identification number and comply with other IRS requirements concerning information reporting.  Certain U.S. holders (including, among others, corporations and tax-exempt organizations) are not subject to backup withholding.  Backup withholding is not an additional tax.  Any amount of backup withholding withheld may be used as a credit against your U.S. Federal income tax liability provided that the required information is furnished to the IRS.  U.S. holders should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining an exemption.
 
U.S. Federal Income Tax Consequences to Non-U.S. Holders
 
Sale, Exchange or Retirement of Securities
 
If you are a non-U.S. holder and you sell, exchange or redeem ADSs, you will generally not be subject to U.S. Federal income tax on any gain, unless one of the following applies:
 
 
·
the gain is connected with a trade or business that you conduct in the United States through an office or other fixed place of business, or
 
 
·
you are an individual, you are present in the United States for at least 183 days during the year in which you dispose of the ADSs and have a “tax home” in the United States, and certain other conditions are satisfied.
 
 
106
 
 
Backup Withholding and Information Reporting
 
Backup withholding and information reporting apply to non-U.S. holders as follows:
 
Information reporting and backup withholding may apply if you use the U.S. office of a broker or agent, and information reporting (but not backup withholding) may apply if you use the foreign office of a broker or agent that has certain connections to the United States.  You may be required to comply with applicable certification procedures to establish that you are not a U.S. holder in order to avoid the application of such information reporting and backup withholding requirements.  You should consult your tax advisor concerning the application of the information reporting and backup withholding rules.
 
Non-U.S. holders are urged to consult legal and tax advisors in the countries of their citizenship, residence and domicile to determine the possible tax consequences of holding and selling ADSs under the laws of their respective jurisdictions in light of their own particular circumstances.
 
Documents on Display
 
We are subject to certain of the information reporting requirements of the Securities and Exchange Act of 1934, as amended.  We, as a “foreign private issuer” are exempt from the rules and regulations under the Securities Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Securities Exchange Act, with respect to their purchase and sale of our shares.  In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Securities Exchange Act. NASDAQ rules generally require that companies send an annual report to shareholders prior to the annual general meeting.   We have an exception under the NASDAQ rules and follow the generally accepted business practice for companies in Israel. Specifically, we file annual reports on Form 20-F, which contain financial statements audited by an independent accounting firm, electronically with the SEC and post a copy on our website.  We will also furnish to the SEC quarterly reports on Form 6-K containing unaudited financial information after the end of each of the first three quarters.
 
You may read and copy any document we file with the SEC at its public reference facilities at, 100 F Street, N.E., Washington, D.C. 20549 and at the SEC’s regional offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511.  You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549.  The SEC also maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC.  The address of this web site is http://www.sec.gov.  Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.  In addition, our ADSs are quoted on the NASDAQ Global Select Market, so our reports and other information can be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
 
 
107
 
 
Item 11.
 
General
 
Market risks relating to our operations result primarily from weak economic conditions in the markets in which we sell our products and changes in interest rates and exchange rates.  To manage the volatility related to the latter exposure, we may enter into various derivative transactions. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in currency exchange rates.  It is our policy and practice to use derivative financial instruments only to manage exposures.  We do not use financial instruments for trading purposes and are not a party to any leveraged derivative.
 
Foreign Currency Risk
 
We conduct our business primarily in U.S. dollars but also in the currencies of the United Kingdom, Canada, the European Union and Israel as well as other currencies.  Thus, we are exposed to foreign exchange movements, primarily in UK, European and Israeli currencies.   We monitor foreign currency exposure and, from time to time, may use various instruments to preserve the value of sales transactions and commitments; however, this cannot assure our protection against risks of currency fluctuations. For more information regarding foreign currency related risks, please refer to “General Business Risks Relating to Our Business and Market,” on page 3. We use currency forward contracts together with currency options to hedge payments in NIS and to hedge forecasted Euro payments received from construction-type contract net. These transactions constitute a future cash flow hedge. As of December 31, 2009, we had outstanding forward contracts and currency options in the total amount of approximately $56 million. These transactions were for a nine month period.
 
The table below details the balance sheet exposure (i.e., the gap between assets and liabilities in a given currency) by currency and geography, as of December 31, 2009. All data in the table have been converted into U.S. dollar equivalents.
 
In U.S. dollars in millions:
  
   
U.S. Dollars
    
British Pound
    
Euro
    
New
Israeli Shekel
    
Swiss
Frank
    
Canadian Dollar
    
Hong
Kong
Dollar
    
Japanese Yen
    
Australian Dollar
    
Other currencies
    
Total
  
 Israel
     -       5.64       6.23       (23.49 )     0.11       0.13       (0.70 )     (0.18 )     0.45       0.89       (10.92 )
 European Union
     3.70       (4.34 )     10.08       -       (0.04 )     -       -       -       -       0.02       9.42  
 Switzerland
     0.51       0.54       0.35       -       -       0.02       -       -       -       -       1.42  
 United States of America
     -       -       1.86       -       -       0.41       -       2.07       0.23       -       4.57  
 Canada
     (0.50 )     -       -       -       -       -       -       -       -       -       (0.50 )
 Hong Kong
     0.01       -       -       -       -       -       -       -       -       0.08       0.09  
 Japan
     -       (0.28 )     -       -       -       -       -       -       -       -       (0.28 )
 Australia
     0.31       0.01       -       -       -       -       -       -       -       0.05       0.37  
      4.03       1.57       18.52       (23.49 )     0.07       0.56       (0.70 )     1.89       0.68       1.04       4.17  

 
108
 
Net Exposure:

   
NIS/USD
    
GBP/ USD
    
EUR/ USD
    
CHF/ USD
    
CAD/USD
    
HKD/USD
    
JPY/USD
    
AUD/USD
  
 Net Exposure
     (23.49 )     5.02       7.20       0.62       0.04       (0.69 )     1.89       0.99  
                                                                 
   
GBP/ EUR
    
GBP/ CHF
    
GBP/ JPY
    
GBP/ AUD
    
EUR/ CHF
    
CAD/ CHF
    
Other / Other
          
 Net Exposure
     10.95       0.54       (0.28 )     0.01       0.31       0.02       12.58          
 
The table below presents the fair value of firmly committed transactions for lease obligations denominated in currencies other than the functional currency:
 
In U.S. dollars in millions:

   
New Israel Shekel
    
Brazilian Real
    
Other currencies
    
Total
  
less than 1 year
     6.80       0.23       0.19       6.99  
1-3 years
     9.97       0.68       0.04       10.01  
3-5 years
     -       0.19       -       0.19  
Total
     16.77       1.10       0.23       17.00  

The fair value of derivative instruments and the notional amount of the hedged instruments are set forth in the table below:

In U.S. dollars in millions:
                  
   
Notional Amount
    
Fair Value
  
   
New Israeli Shekels
    
Euros
        
Zero-cost collar contracts to hedge payroll expenses
     28.20       -       0.19  
Forward contracts to hedge payroll expenses
     16.10       -       (0.08 )
Forward contracts to hedge construction-type contracts
     -       11.67       (0.18 )
      44.30       11.67       (0.07 )
 
Interest Rate Risk
 
Our exposure to market risk for changes in interest rates relates primarily to our investment in marketable securities and deposits. Our marketable securities portfolio is invested in investment-grade corporate bonds, U.S. federal agency securities and U.S. treasury bills and treasury notes. As of December 31, 2009, 64% of our portfolio was in such securities.
 
During Q1 2010 we invested approximately $15 million in Israeli Treasury bill dominated in NIS and for a one year period. In parallel we entered into a forward contract to hedge the currency fluctuations of the NIS against the US dollar.
 
 
109
 
 
The decline in interest rates due to the global credit crisis has a direct effect on our interest income and our ability to maintain our portfolio’s yield level in line with prior years. In a market environment of declining interest rates, we are likely to reinvest the redeemed proceeds from our called or matured marketable securities in lower yielding investments. Conversely, an increase in market interest rates could also have an adverse effect on the value of our investment portfolio, for example, by decreasing the fair values of the fixed income securities that comprise a substantial majority of our investment portfolio.
 
We invest in dollar deposits with U.S. banks, European banks and money market funds. As of December 31, 2009, 36% of our portfolio was in such deposits. Since these investments are for short periods, interest income is sensitive to changes in interest rates.  The fair value of our long and short term securities is based upon their market values as of December 31, 2009.
 
As of December 31, 2009, 9.6% of our portfolio was invested in Bank deposits in Israeli banks.
 
The average duration of the securities portfolio, as of December 31, 2009, is 2 years. The securities in our portfolio are rated at the least as A- according to Standard and Poor’s rating or A3, according to Moody’s rating. Securities representing 52% of the portfolio are rated as AAA; securities representing 24% of the portfolio are rated as AA; and securities representing 24% of the portfolio are rated as A.
 
The fair value of marketable securities, which are subject to risk of changes in interest rate, segregated by maturity dates:
 
In U.S. dollars in millions:
                                            
   
Amortized Cost
    
Estimated fair value
        
   
Up to 1 year
    
1-3 years
    
4-5 years
    
Total
    
Up to 1 year
    
1-3 years
    
4-5 years
    
Total
  
Corporate debentures
     56.16       146.14       3.00       205.30       57.04       148.48       3.05       208.57  
U.S. Government agency debentures
     1.51       42.53       -       44.04       1.54       42.38       -       43.92  
US treasuries
     10.01       -       30.11       40.12       10.04       -       30.92       40.96  
      67.68       188.67       33.11       289.46       68.62       190.86       33.96       293.45  
 
Other risks and uncertainties that could affect actual results and outcomes are described in Item 3, “Key Information—Risk Factors.”
 
Item 12.
 
American Depositary Shares and Receipts
 
Set forth below is a summary of certain provisions in relation to charges and other payments under the Deposit Agreement, as amended, among NICE, The Bank of New York as depositary (the "Depositary"), and the owners and holders from time to time of American Depositary Receipts or ADRs (or the Deposit Agreement). This summary is not complete and is qualified in its entirety by the Deposit Agreement, a form of which has been filed as Exhibit A to the registration statement on Form F-6 (Registration No. 333-13518) filed with the SEC on May 17, 2001.
 
 
110
 
 
Charges of Depositary
 
We will pay the fees, reasonable expenses and out-of-pocket charges of the Depositary and those of any registrar only in accordance with agreements in writing entered into between us and the Depositary from time to time. The following charges shall be incurred by any party depositing or withdrawing ordinary shares or by any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or deposited ordinary shares or a distribution of ADRs pursuant to the terms of the Deposit Agreement):
 
 
(1)
any applicable taxes and other governmental charges,
 
 
(2)
any applicable transfer or registration fees,
 
 
(3)
certain cable, telex and facsimile transmission charges as provided in the Deposit Agreement,
 
 
(4)
any expenses incurred in the conversion of foreign currency,
 
 
(5)
a fee of $5.00 or less per 100 ADSs (or a portion thereof) for the execution and delivery of ADRs and the surrender of ADRs, and
 
 
(6)
a fee for the distribution of proceeds of rights that the Depositary sells pursuant to the Deposit Agreement.
 
The Depositary may own and deal in our securities and in our ADRs.
 
Liability of Holders for Taxes, Duties or Other Charges
 
Any tax or other governmental charge with respect to ADRs or any deposited ordinary shares represented by any ADR shall be payable by the holder of such ADR to the Depositary. The Depositary may refuse to effect transfer of such ADR or any withdrawal of deposited ordinary shares represented by such ADR until such payment is made, and may withhold any dividends or other distributions or may sell for the account of the holder any part or all of the deposited ordinary shares represented by such ADR and may apply such dividends or distributions or the proceeds of any such sale in payment of any such tax or other governmental charge and the holder of such ADR shall remain liable for any deficiency.
 
PART II
 
Item 13.                      Defaults, Dividend Arrearages and Delinquencies.
 
None.
 
Item 14.                      Material Modifications to the Rights of Security Holders and Use of Proceeds.
 
None.
 
 
111
 
 
Item 15.                      Controls and Procedures.
 
Disclosure Controls and Procedures
 
An evaluation was performed under the supervision and with the participation of NICE’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of NICE’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that NICE’s disclosure controls and procedures were effective as of such date.
 
Management’s Annual Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective can only provide reasonable assurance with respect to financial statements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management assessed our internal control over financial reporting as of December 31, 2009. Our management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management has concluded that, as of December 31, 2009, our internal control over financial reporting is effective.
 
Attestation Report of the Independent Registered Public Accounting Firm
 
Our independent registered public accounting firm, Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global independently assessed the effectiveness of the company’s internal control over financial reporting and has issued an attestation report, which is included under Item 18 on page F-3 of this annual report.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 16A.                      Audit Committee Financial Expert.
 
Our board of directors has determined that Dan Falk meets the definition of an audit committee financial expert, as defined in Item 407 of Regulation S-K, and is independent under the applicable regulations.
 
 
112
 
 
Item 16B.                      Code of Ethics.
 
We have adopted a Code of Ethics that applies to our principal executive and financial officers, and that also applies to all of our employees. The Code of Ethics is publicly available on our website at www.nice.com. Written copies are available upon request. If we make any substantive amendments to the Code of Ethics or grant any waiver from a provision of this code to our chief executive officer, principal financial officer or corporate controller, we will either disclose the nature of such amendment or waiver on our website or in our annual report on Form 20-F.
       
        On November 25, 2009, our Internal Audit Committee and Board of Directors approved a waiver of the applicable provisions of our Code of Ethics, with respect to a potential conflict of interest of our Chief Executive Officer, Zeev Bregman, caused by his holding and exercise of stock options in subsidiaries of Comverse (which includes one of our direct competitors) and holding the underlying shares. In making their respective decisions, the Internal Audit Committee and Board of Directors determined that Mr. Bregman's interests in the success of NICE exceed the benefits which he may gain from these options and underlying shares.
 
Item 16C.                      Principal Accountant Fees and Services.
 

Fees Paid to Independent Auditors
 
Fees billed or expected to be billed by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, and other members of Ernst & Young Global for professional services for each of the last two fiscal years were as follows:
 
Services Rendered
  
2008 Fees
    
2009 Fees
  
Audit (1)
   $ 799,000       850,000  
Audit-related (2)
   $ 78,000       139,000  
Tax (3)
   $ 172,000       566,000  
Total
   $ 1,049,000       1,555,000  
 
 
(1)
 
Audit fees are for audit services for each of the years shown in this table, including fees associated with the annual audit for 2009 (including audit in accordance with section 404 of the Sarbanes-Oxley act) and certain procedures regarding our quarterly financial results submitted on Form 6-K, consultations on various accounting issues and performance of local statutory audits.

(2)
Audit-related fees relate to assurance and associated services that traditionally are performed by the independent auditor, including: accounting consultation and consultation concerning financial accounting, reporting standards and government approvals and due diligence investigations.

(3)
Tax fees are for professional services rendered by our auditors for tax compliance, tax advice on actual or contemplated transactions, tax consulting associated with international transfer prices and employee benefits.
   
 
 
113
 
 
Policies and Procedures
 
Our Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our external auditors - Kost, Forer, Gabbay & Kasierer, a Member of Ernst & Young Global. The policy, which is designed to assure that such services do not impair the independence of our auditors, requires pre-approval from the audit committee on an annual basis for the various audit and non-audit services that may be performed by our auditors. If a type of service, that is to be provided by our auditors, has not received such general pre-approval, it will require specific pre-approval by our audit committee. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by our audit committee. The policy prohibits retention of the independent auditors to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether proposed services are compatible with the independence of the public auditors.
 
Item 16D.                      Exemptions from the Listing Standards for Audit Committees.
 
Not applicable.
 
Item 16E.                      Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
 
                None.
 
Item 16F.                      Change in Registrant’s Certifying Accountant.
 
None.
 
Item 16G.                      Corporate Governance.
 
We follow the Companies Law, the relevant provisions of which are summarized in this annual report, rather than comply with the NASDAQ requirements relating to: (i) the quorum for shareholder meetings, as described in “Item 10 – Additional Information – Memorandum and Articles of Association – Meetings of Shareholders”; (ii) shareholder approval with respect to issuance of securities under equity based compensation plans, as described in “Item 10 – Additional Information – Memorandum and Articles of Association – Approval of Certain Transactions”; and (iii) sending annual reports to shareholders, as described in “Item 10 – Additional Information – Documents on Display.”
 
PART III

Item 17.                      Financial Statements.
 
Not Applicable.
 
Item 18.                      Financial Statements.
 
See pages F-1 through F-57 of this annual report attached hereto.
 
 
114
 
 
Item 19.
 
Exhibit No.
Description
1.1
Amended and Restated Memorandum of Association, as approved on December 21, 2006 (English translation) (filed as Exhibit 1.1 to NICE-Systems Ltd.’s Annual Report on Form 20-F filed with the SEC on June 13, 2007, and incorporated herein by reference).
1.2
Amended and Restated Articles of Association, as approved on December 21, 2006 (filed as Exhibit 1.2 to NICE-Systems Ltd.’s Annual Report on Form 20-F filed with the SEC on June 13, 2007, and incorporated herein by reference).
2.1
Form of Share Certificate (filed as Exhibit 4.1 to Amendment No. 1 to NICE-Systems Ltd.’s Registration Statement on Form F-1 (Registration No. 333-99640) filed with the SEC on December 29, 1995, and incorporated herein by reference).
2.2
Form of Deposit Agreement including Form of ADR Certificate (filed as Exhibit A to NICE-Systems Ltd.’s Registration Statement on Form F-6 (Registration No. 333-157371) filed with the SEC on February 17, 2009, and incorporated herein by reference).
4.1
Manufacturing Outsourcing Agreement dated January 21, 2002 by and among NICE-Systems Ltd. and Flextronics Israel Ltd. (filed as Exhibit 4.5 to NICE-Systems Ltd.’s Annual Report on Form 20-F filed with the SEC on June 26, 2003, and incorporated herein by reference).
4.2
Share Purchase Agreement, dated as of November 17, 2005, between certain shareholders of FAST Video Security AG and NICE-Systems Ltd. (filed as Exhibit 4.9 to NICE-Systems Ltd.’s Annual Report on Form 20-F filed with the SEC on May 17, 2006, and incorporated herein by reference).
4.3
Agreement and Plan of Merger, dated as of July 2, 2007, among Actimize Ltd., Nemo Acquisitions Ltd. and NICE-Systems Ltd. (filed as Exhibit 99.2 to NICE-Systems Ltd.’s Report on Form 6-K filed with the SEC on August 30, 2007, and incorporated herein by reference).
4.4
Share Purchase and Sale Agreement between NICE-Systems Ltd., certain subsidiaries of the NICE-Systems Ltd., and, Fortent, Inc. and certain subsidiaries of Fortent, Inc., dated as of August 31, 2009
4.5
Asset Purchase Agreement, dated as of November 22, 2009, among Orsus Solutions Limited and its wholly-owned subsidiaries and NICE-Systems Ltd. and certain of its wholly-owned subsidiaries.
4.6
NICE Systems Ltd. 2003 Stock Option Plan, as amended (filed as Exhibit 4.4 to NICE-System Ltd.’s Annual Report on Form 20-F (File No. 000-27466) filed with the SEC on April 6, 2009, and incorporated herein by reference).
4.7
NICE Systems Ltd. Amended and Restated 1999 Employee Stock Purchase Plan (filed as Exhibit 4 to NICE-System Ltd.’s Registration Statement on Form S-8 (Registration No. 333-111113) filed with the SEC on May 22, 2006, and incorporated herein by reference).
4.8
Actimize Ltd. 2003 Omnibus Stock Option and Restricted Stock Incentive Plan (filed as Exhibit 4.4 to NICE-System Ltd.’s Registration Statement on Form S-8 (Registration No. 333-145981) filed with the SEC on September 11, 2007, and incorporated herein by reference).
4.9
NICE Systems Ltd. 2008 Share Incentive Plan, as amended (filed as Exhibit 4.8 to NICE-System Ltd.’s Annual Report on Form 20-F (File No. 000-27466) filed with the SEC on April 6, 2009, and incorporated herein by reference).
4.10
Orsus Solutions Limited 2007 Incentive Option Plan, as amended.
8.1
List of significant subsidiaries.
12.1
Certification by the Chief Executive Officer of NICE-Systems Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act 2002.
12.2
Certification by the Chief Financial Officer of NICE-Systems Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1
Certification by the Chief Executive Officer of NICE-Systems Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2
Certification by the Chief Financial Officer of NICE-Systems Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1
Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global.

 
115
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
 
CONSOLIDATED FINANCIAL STATEMENTS
 
AS OF DECEMBER 31, 2009
 
IN U.S. DOLLARS
 
 
 
 
 
 
 
 
  Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel

Tel:  972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il
 

To the Shareholders and Board of Directors of

NICE SYSTEMS LTD.

We have audited the accompanying consolidated balance sheets of NICE Systems Ltd. ("the Company") and its subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2008 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
        As discussed in Note 2y, effective January 1, 2009, the Company adopted new guidance on accounting for business combinations.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2010 expressed an unqualified opinion thereon.
 
Tel-Aviv, Israel
KOST FORER GABBAY & KASIERER
March 31, 2010
A Member of Ernst & Young Global
 
 
F - 2
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

NICE SYSTEMS LTD.
 
We have audited NICE Systems Ltd.'s ("the Company") internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("the COSO criteria"). The Company's management is responsible for maintaining effective internal control over financial reporting included in the accompanying Management's Annual Report on internal control over financial reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and its subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2009 and our report dated March 31, 2010 expressed an unqualified opinion thereon.

Tel-Aviv, Israel
KOST FORER GABBAY & KASIERER
March 31, 2010
A Member of Ernst & Young Global
 
 
F - 3
 
 
 
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
 
   
December 31,
  
   
2008
    
2009
  
ASSETS
            
             
CURRENT ASSETS:
            
Cash and cash equivalents
   $ 144,376     $ 214,811  
Short-term bank deposits
     65,003       40,227  
Marketable securities
     121,069       68,623  
Trade receivables (net of allowance for doubtful accounts of $ 6,308 and $ 6,039 at December 31, 2008 and 2009, respectively)
     104,115       102,147  
Other receivables and prepaid expenses
     21,378       23,887  
Inventories
     13,235       14,445  
Deferred tax assets
     8,400       8,181  
                 
Total current assets
     477,576       472,321  
                 
LONG-TERM ASSETS:
                
Marketable securities
     170,923       224,828  
Other long-term assets
     20,216       29,314  
Property and equipment, net
     23,394       22,052  
Other intangible assets, net
     145,402       156,664  
Goodwill
     445,504       494,498  
                 
Total long-term assets
     805,439       927,356  
                 
Total assets
   $ 1,283,015     $ 1,399,677  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 4
 

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share data)
 
   
December 31,
  
   
2008
    
2009
  
LIABILITIES AND SHAREHOLDERS' EQUITY
            
             
CURRENT LIABILITIES:
            
Trade payables
   $ 23,060     $ 26,342  
Accrued expenses and other liabilities
     237,005       261,519  
                 
Total current liabilities
     260,065       287,861  
                 
LONG-TERM LIABILITIES:
                
Accrued severance pay
     19,928       22,979  
Deferred tax liabilities
     31,954       25,899  
Other long-term liabilities
     246       184  
                 
Total long-term liabilities
     52,128       49,062  
                 
COMMITMENTS AND CONTINGENT LIABILITIES
                
                 
SHAREHOLDERS' EQUITY:
                
Share capital-
                
Ordinary shares of NIS 1 par value:
                
Authorized: 125,000,000 shares at December 31, 2008 and 2009; Issued and outstanding: 60,667,712 and 61,958,508 shares at December 31, 2008 and 2009, respectively
     15,157       15,492  
Additional paid-in capital
     853,226       892,139  
Accumulated other comprehensive income (loss)
     (1,343 )     8,585  
Retained earnings
     103,782       146,538  
                 
Total shareholders' equity
     970,822       1,062,754  
                 
Total liabilities and shareholders' equity
   $ 1,283,015     $ 1,399,677  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 5
 
 

CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except per share data)
 
   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
Revenues:
                  
Products
   $ 316,888     $ 351,680     $ 281,783  
Services
     200,486       272,482       301,332  
                         
Total revenues
     517,374       624,162       583,115  
                         
Cost of revenues:
                        
Products
     89,373       95,861       88,030  
Services
     116,969       142,885       149,175  
                         
Total cost of revenues
     206,342       238,746       237,205  
                         
Gross profit
     311,032       385,416       345,910  
                         
Operating expenses:
                        
Research and development, net
     59,632       78,445       77,382  
Selling and marketing
     120,592       147,879       141,526  
General and administrative
     85,089       97,378       72,791  
Amortization of acquired intangibles
     9,175       14,493       16,012  
In-process research and development write-off
     3,710       -       -  
    Settlement and related expenses
     -       9,870       -  
                         
Total operating expenses
     278,198       348,065       307,711  
                         
Operating income
     32,834       37,351       38,199  
Financial income and other, net
     14,800       11,236       7,597  
                         
Income before taxes on income
     47,634       48,587       45,796  
Taxes on income
     10,254       9,480       3,040  
                         
Net income
   $ 37,380     $ 39,107     $ 42,756  
                         
Net earnings per share:
                        
                         
Basic
   $ 0.69     $ 0.65     $ 0.70  
                         
Diluted
   $ 0.67     $ 0.64     $ 0.68  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 6
 
 
 
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 
U.S. dollars in thousands


   
Share
capital
    
Additional
paid-in
capital
    
Accumulated other comprehensive income (loss)
    
Retained earnings
    
Total comprehensive income
    
Total
shareholders'
equity
  
                                     
Balance as of January 1, 2007
   $ 12,754     $ 522,866     $ 7,483     $ 26,471           $ 569,574  
                                               
Issuance of shares upon public offering, net
     1,283       179,546       -       -             180,829  
Issuance of shares of ESPP
     4       495       -       -             499  
Exercise of share options
     393       19,406       -       -             19,799  
Stock-based compensation
     -       23,666       -       -             23,666  
Tax benefit in respect of offering expenses
     -       10       -       -             10  
Excess tax benefit from share-based payment arrangements
     -       4,945       -       -             4,945  
Issuance of shares and options for the acquisition of Actimize
     365       60,272       -       -             60,637  
Restricted shares vesting in respect of Actimize acquisition
     2       44       -       -             46  
Uncertain tax position opening balance adjustment
     -       -       -       824             824  
Comprehensive income:
                                              
Foreign currency translation adjustments
     -       -       5,175       -     $ 5,175       5,175  
Unrealized gains on derivative instruments, net
     -       -       410       -       410       410  
Net income
     -       -       -       37,380       37,380       37,380  
                                                 
Total comprehensive income
                                   $ 42,965          
                                                 
Balance as of December 31, 2007
     14,801       811,250       13,068       64,675               903,794  
                                                 
Issuance of shares of ESPP
     5       526       -       -               531  
Exercise of share options
     290       14,430       -       -               14,720  
Stock-based compensation
     -       25,321       -       -               25,321  
Tax benefit in respect of offering expenses
     -       892       -       -               892  
Excess tax benefit from share-based payment arrangements
     -       638       -       -               638  
Restricted shares vesting in respect of Actimize acquisition
     61       169       -       -               230  
Comprehensive income:
                                                
Foreign currency translation adjustments
     -       -       (14,405 )     -     $ (14,405 )     (14,405 )
Unrealized gains on marketable securities, net
     -       -       1,432       -       1,432       1,432  
Unrealized losses on derivative instruments, net
     -       -       (1,438 )     -       (1,438 )     (1,438 )
Net income
     -       -       -       39,107       39,107       39,107  
                                                 
Total comprehensive income
                                   $ 24,696          
                                                 
Balance as of December 31, 2008
     15,157       853,226       (1,343 )     103,782               970,822  
                                                 

The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 7
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
 
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands

   
Share
capital
    
Additional
paid-in
capital
    
Accumulated other comprehensive income (loss)
    
Retained earnings
    
Total comprehensive income
    
Total
shareholders'
equity
  
                                     
Balance as of December 31, 2008
     15,157       853,226       (1,343 )     103,782             970,822  
                                               
Issuance of shares of ESPP
     5       370       -       -             375  
Exercise of share options
     303       19,267       -       -             19,570  
Stock-based compensation
     -       18,237       -       -             18,237  
Excess tax benefit from share-based payment arrangements
     -       969       -       -             969  
Restricted shares vesting in respect of Actimize acquisition
     27       70       -       -             97  
Comprehensive income:
                                              
Foreign currency translation adjustments
     -       -       7,415       -     $ 7,415       7,415  
Unrealized gains on marketable securities, net
     -       -       2,206       -       2,206       2,206  
Unrealized gains on derivative instruments, net
     -       -       307       -       307       307  
Net income
     -       -       -       42,756       42,756       42,756  
                                                 
Total comprehensive income
                                   $ 52,684          
                                                 
Balance as of December 31, 2009
   $ 15,492     $ 892,139     $ 8,585     $ 146,538             $ 1,062,754  

As of December 31, 2007, 2008 and 2009, accumulated other comprehensive income (loss) was comprised of unrealized gain (loss) on derivatives, net of tax, of $ 482, $(956) and $ (649), unrealized gains on marketable securities, net of tax, of $ 0, $ 1,432 and $ 3,638 and foreign currency translation adjustments of $ 12,586, $ (1,819) and $ 5,596.

The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 8
 

CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands

   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
Cash flows from operating activities:
                  
                   
Net income
   $ 37,380     $ 39,107     $ 42,756  
Adjustments required to reconcile net income to net cash provided by operating activities:
                        
Depreciation and amortization
     30,926       42,740       47,217  
Stock-based compensation
     23,666       25,321       18,237  
Excess tax benefit from share-based payment arrangements
     (4,945 )     (638 )     (969 )
In-process research and development write-off
     3,710       -       -  
    Accrued severance pay, net
     632       1,506       (1,534 )
Amortization of premium (accretion of discount) and accrued interest on marketable securities
     (252 )     1,504       1,656  
Loss (gain) on marketable securities
     257       4,924       (823 )
Deferred taxes, net
     (5,231 )     (5,554 )     (6,984 )
Decrease (increase) in trade receivables, net
     (15,224 )     (232 )     8,898  
Decrease (increase) in other receivables and prepaid expenses
     (9,623 )     80       (2,265 )
Decrease (increase) in inventories
     7,579       (935 )     (531 )
Increase (decrease) in trade payables
     (2,982 )     189       1,536  
Increase in accrued expenses and other liabilities
     51,933       28,057       12,039  
Other
     418       (359 )     453  
                         
Net cash provided by operating activities
     118,244       135,710       119,686  
                         
Cash flows from investing activities:
                        
                         
Purchase of property and equipment
     (10,947 )     (15,454 )     (8,851 )
Proceeds from sale of property and equipment
     58       20       70  
Investment in marketable securities
     (208,590 )     (231,057 )     (197,499 )
Proceeds from maturity of marketable securities
     170,945       64,725       140,396  
Proceeds from sale and call of marketable securities
     30,100       111,826       57,394  
Investment in short-term bank deposits
     (39,131 )     (64,448 )     (110,021 )
Proceeds from short-term bank deposits
     139       39,095       134,473  
Payment for the acquisition of Actimize (a)
     (210,540 )     (1,633 )     -  
Payment for the acquisition of Fortent (b)
     -       -       (72,700 )
Payment for other acquisitions
     (7,058 )     (20,046 )     (12,226 )
Capitalization of software development costs
     (962 )     (1,278 )     (1,315 )
Purchase of intangible assets
     -       (3,533 )     (1,000 )
Receipt upon the realization of investment in an affiliate
     -       964       -  
                         
Net cash used in investing activities
     (275,986 )     (120,819 )     (71,279 )

The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 9
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
 
   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
Cash flows from financing activities:
                  
                   
Proceeds from issuance of shares upon public offering, net
     180,934       -       -  
Proceeds from issuance of shares upon exercise of options and ESPP, net
     20,273       15,282       19,948  
Receipt of short-term bank loan
     120,000       -       -  
Repayment of short-term bank loan
     (120,000 )     -       -  
Excess tax benefit from share-based payment arrangements
     4,945       638       969  
                         
Net cash provided by financing activities
     206,152       15,920       20,917  
                         
Effect of exchange rate changes on cash
     844       (3,054 )     1,111  
                         
Increase in cash and cash equivalents
     49,254       27,757       70,435  
Cash and cash equivalents at the beginning of the year
     67,365       116,619       144,376  
                         
Cash and cash equivalents at the end of the year
   $ 116,619     $ 144,376     $ 214,811  
                         
Supplemental disclosure of cash flows activities:
                        
                         
Cash paid during the year for:
                        
                         
Income taxes
   $ 2,199     $ 2,499     $ 4,021  
                         
Interest
   $ 668     $ 52     $ 58  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 10
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
 
     
Year ended December 31,
  
     
2007
    
2008
    
2009
  
(a)
Payment for the acquisition of Actimize:
                  
                     
 
Estimated fair value of assets acquired and liabilities assumed at the acquisition date:
                  
                     
 
Working capital deficit (excluding cash and cash equivalents)
   $ (8,919 )   $ -     $ -  
 
Property and equipment
     622       -       -  
 
Severance pay fund
     324       -       -  
 
Long-term other receivables and prepaid expenses
     332       -       -  
 
In-process research and development
     3,710       -       -  
 
Other intangible assets
     71,300       -       -  
 
Goodwill
     219,543       -       -  
 
Long-term deferred tax liabilities
     (13,028 )     -       -  
 
Other long-term liabilities
     (854)       -       -  
                           
        273,030       -       -  
 
Add (less) - (accrued) acquisition costs
     (1,853 )     1,633       -  
 
Less - amount acquired by issuance of shares and options, net of issuance expenses
     (60,637 )     -       -  
                           
      $ 210,540     $ 1,633     $ -  
(b)
Payment for the acquisition of Fortent:
                        
                           
 
Estimated fair value of assets acquired and liabilities assumed at the acquisition date:
                        
                           
 
Working capital deficit (excluding cash and cash equivalents)
   $ -     $ -     $ (9,796 )
 
Property and equipment
     -       -       1,302  
 
Long-term other receivables and prepaid expenses
     -       -       536  
 
Long-term deferred tax assets
     -       -       5,746  
 
Other intangible assets
     -       -       35,000  
 
Goodwill
     -       -       40,212  
                           
        -       -       73,000  
 
Less  - accrued payment
     -       -       (300 )
                           
      $ -     $ -     $ 72,700  
                           
 
Tax benefit on offering expenses
   $ 10     $ 892     $ -  
                           
 
Accrued offering expenses
   $ 105     $ -     $ -  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
F - 11
 


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 1:-
GENERAL

 
a.
General:

 
NICE Systems Ltd. ("NICE" or "the Company") and subsidiaries (collectively - "the Group") is a leading global provider of advanced solutions that enable enterprises and security organizations to extract insight from interactions, transactions and surveillance to drive business performance and ensure safety and security. The Company's solutions enable companies and public organizations to capture, manage, analyze and impact unstructured interaction as well as transactional data, enabling such entities to comply with internal and governmental regulations, enhance business and operational performance and address security threats while increasing situational awareness. Unstructured content includes cross-channel analysis of phone calls, chat, instant messaging, and email interactions to contact centers, trading floors, branches, home agents and back offices, phone calls to emergency service providers and first responders, video captured by closed circuit cameras, radio communications between emergency services' and first responders' personnel, internet sessions, email and instant messaging and security management solutions for command and control centers. The Company's solutions include integrated, scalable, cross-channel recording platforms, cross-channel real-time analytics, software management applications. These solutions address critical business processes and risk management, compliance procedures and security needs of enterprises and security organizations. The Company's solutions facilitate faster decision-making and real-time analysis and actions, improving business and employee performance, reducing exposure to transactional risks related to financial crime (fraud detection and Anti Money Laundering or AML), operational risk and compliance activities, and enhancing security and public safety.

 
The enterprise customers span a variety of industries, such as financial services, telecommunications, healthcare, outsourcers, retail, media, travel, service providers, utilities and others. The Company's financial crime solutions primarily serve financial services organizations. The Company's security solutions are tailored to protect city centers transportation systems, critical infrastructure, enterprise campuses and more.

 
The Company's markets are located primarily in North America, Europe, the Middle East and Africa ("EMEA") and Asia Pacific ("APAC").

 
The Company depends on a limited number of contract manufacturers for producing its products. If any of these manufacturers become unable or unwilling to continue to manufacture or fail to meet the quality or delivery requirements needed to satisfy the Company's customers, it could result in the loss of sales, which could adversely affect the Company's results of operations and financial position.

 
The Company relies upon a number of independent distributors to market, sell and service its products in certain markets. If the Company is unable to effectively manage and maintain relationships with its distributors, or to enter into similar relationships with others, its ability to market and sell its products in these markets will be affected. In addition, a loss of a major distributor, or any event negatively affecting such distributor's financial condition, could cause a material adverse effect on the Company's results of operations and financial position.

 
As for major customer data, see Note 15c.
 
 
F - 12
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 1:-
GENERAL (Cont.)

 
b.
Acquisitions:

 
1.
Acquisition of Actimize Ltd.:

 
On August 30, 2007, the Company consummated an agreement to acquire all of the outstanding shares of Actimize Ltd. ("Actimize"), a leading provider of transactional risk management software for the financial services industry, for an aggregate consideration of $ 281,111. The total purchase price of Actimize was composed of the following:

Cash
   $ 217,224  
Shares *)
     53,217  
Options and Restricted Share Awards **)
     7,670  
Acquisition related transaction costs ***)
     3,000  
         
Total purchase price
   $ 281,111  

 
*)
Represents the fair value of 1,501,933 American Depositary Shares ("ADSs") of NICE issued to Actimize shareholders upon consummation of the acquisition, valued based on the market price of the securities a few days before and after the terms of the acquisition were agreed to and announced.

 
**)
Represents the fair value of the vested portion of 987,104 options and restricted shares of NICE granted upon consummation of the acquisition to the holders of partially vested options and restricted shares of Actimize originally granted under Actimize's 2003 Omnibus Stock Option and Restricted Stock Incentive Plan. The fair value of these options was determined using the Black-Scholes-Merton valuation model with the following assumptions: expected life of 0-4 years, risk-free interest rate of 4.85%-4.99%, expected volatility of 30.7%-35.8% and no dividend yield.

 
***)
Acquisition related transaction costs include investment banking fees, legal and accounting fees and other external costs directly related to the acquisition.

 
On August 29, 2007, to finance a portion of the cash consideration for the Actimize acquisition, the Company entered into an unsecured loan agreement and a letter of undertaking with a bank, which provide for a term loan of $ 120,000, originally repayable in one installment on February 29, 2008. The loan bore interest payable monthly, at an annual rate of LIBOR plus a margin of 0.45%. On September 28, 2007, the Company repaid the loan.

 
The acquisition of Actimize allows NICE to offer its customers and partners a more extensive product portfolio in the industries in which NICE operates. Actimize is a leading provider of software solutions for anti-money laundering, brokerage compliance, customer due diligence and fraud prevention. Built on a patented, scalable and extensible analytics platform, Actimize solutions enable financial institutions to increase their insight into real-time customer behavior and improve risk and compliance performance. By purchasing Actimize, the Company strategically strengthened its position as an enterprise wide analytics powerhouse and expanded its solution offering. The factors that resulted in recognition of goodwill in connection with the acquisition included the leverage for vertical markets and time to market benefits.
 
 
F - 13
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 1:-                 GENERAL (Cont.)

 
The acquisition was accounted for by the purchase method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of Actimize. The results of the Actimize operations have been included in the consolidated financial statements since August 30, 2007.

 
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:

Cash
   $ 8,081  
Marketable securities
     6,140  
Trade receivables
     4,503  
Short-term other receivables and prepaid expenses
     1,648  
Short-term deferred tax assets
     925  
Property and equipment
     622  
Severance pay fund
     324  
Long-term other receivables and prepaid expenses
     332  
Trade name
     1,680  
Core technology
     38,480  
In-process research and development
     3,710  
Customer relationships
     31,140  
Goodwill
     219,543  
         
Total assets acquired
     317,128  
         
Trade payables
     (1,729 )
Accrued expenses and other liabilities
     (18,403 )
Short-term deferred tax liabilities
     (2,003 )
Long-term deferred tax liabilities
     (13,028 )
Other long-term liabilities
     (854 )
         
Total liabilities assumed
     (36,017 )
         
Net assets acquired
   $ 281,111  

 
The $ 3,710 assigned to in-process research and development was written off at the acquisition.

 
Trade name, core technology and customer relationships in the amount of $ 71,300 are amortized at an annual weighted average rate of 19%.
 
 
F - 14
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 1:-
GENERAL (Cont.)

 
2.
Acquisition of Quality Plus Group Ltd.:

 
On April 8, 2008, the Company acquired certain assets, shares and business from Quality Plus Group Ltd., a UK-based value-added distributor of NICE's contact center solutions, and its affiliates ("QPC") for $ 12,587 in cash (including acquisition costs). The business acquired includes the sale, distribution, service, support, maintenance and development of workforce management solutions and associated services as conducted by QPC in the UK, Sweden and Australia. With the acquisition of QPC, the Company expanded its customer base and presence in the UK, Sweden and Australia and expanded and strengthened the Company's support organization in these regions. The acquisition was accounted for by the purchase method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of QPC. The results of the QPC operations have been included in the consolidated financial statements since April 8, 2008. The Company recorded customer relationships and goodwill in the amounts of $ 12,000 and $ 5,524, respectively.

 
3.
Acquisition of certain assets and liabilities of AVT Systems Limited:

 
On April 28, 2008, the Company completed the acquisition of certain assets of AVT Systems Limited ("AVT"), for $ 6,186 in cash (including acquisition costs). The business acquired includes the sale, distribution, service, maintenance and support of NICE voice recording solutions (hardware and software and associated services) in the United Kingdom. With the acquisition of AVT, the Company expanded its customer base and presence in the UK financial sector and expanded and strengthened the Company's support organization in the UK. The acquisition was accounted for by the purchase method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of AVT. The results of the AVT operations have been included in the consolidated financial statements since April 28, 2008. The Company recorded customer relationships and goodwill in the amounts of $ 3,838 and $ 3,478, respectively.

 
4.
Acquisition of Syfact:

 
On June 17, 2009, the Company completed the acquisition of Syfact, for $ 4,425 in cash. The acquired business provides innovative investigative case management solutions, best practice and technologies that simplify and enrich the most complex fraud, money laundering, customer due diligence and corporate security investigations. The acquisition was accounted for by the purchase method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of Syfact. The results of the Syfact operations have been included in the consolidated financial statements since June 15, 2009. The Company recorded customer relationships, technology and goodwill in the amounts of $ 2,361, $ 142 and $ 1,758, respectively.
 
 
F - 15
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 1:-
GENERAL (Cont.)

 
5.
Acquisition of Fortent:

 
On August 31, 2009, the Company completed the acquisition of all of the outstanding shares of certain subsidiaries of Fortent Inc. ("Fortent"), in consideration for $ 73,000 in cash. Fortent is a leading provider of analytics based Anti-Money Laundering and financial crime prevention software solutions for the financial services industry.

 
The acquisition of Fortent allows NICE to offer its customers and partners a more extensive product portfolio in the industries in which NICE operates. Fortent is a leading vendor known for its anti-money laundering deployments and expertise within the world's tier-one financial institutions and for its advanced statistical profiling analytics technology. The factors that resulted in recognition of goodwill in connection with the acquisition included the strength of the Company's position in the market and comprehensive integrated platform offering for risk and financial crime solution.

 
The acquisition was accounted for by the acquisition method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of Fortent. The results of the Fortent operations have been included in the consolidated financial statements since August 31, 2009.

 
Revenues of Fortent for the period since the acquisition date through December 31, 2009, which are included in the consolidated financial statements amounted to $ 5,249.

 
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:

Cash
   $ 144  
Trade receivables
     2,253  
Other receivables and prepaid expenses
     1,881  
Property and equipment
     1,302  
Long-term trade receivables
     536  
Long-term deferred tax assets, net
     5,746  
Trade name
     460  
Core technology
     14,300  
In-process research and development ("IPR&D")
     1,440  
Customer relationships
     18,800  
Goodwill
     40,212  
         
Total assets acquired
     87,074  
         
Trade payables
     (1,488 )
Accrued expenses and other liabilities
     (9,846 )
 Short-term deferred tax liabilities
     (2,596 )
         
Total liabilities assumed
     (13,930 )
         
Net assets acquired
   $ 73,144  

 
In performing the purchase price allocation, management considered, among other factors, analyses of historical financial performance, highest and best use of the acquired assets and estimates of future performance of Fortent's products. The fair value of intangible assets was based on market participant approach using an income approach.
 
 
F - 16
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 1:-
GENERAL (Cont.)

 
Trade name, core technology and customer relationships in the amount of $ 33,560 are amortized at an annual weighted average rate of 19%.

 
IPR&D in the amount of $ 1,440 represents incomplete research and development projects that had not reached technological feasibility and had no alternative future use as of the date of the acquisition.  Upon completion of development, the acquired IPR&D will be considered finite-lived asset and will be amortized accordingly.
 
 
6.
Acquisition of Hexagon:

 
On August 31, 2009, the Company acquired all of the outstanding shares of Hexagon System Engineering Ltd. ("Hexagon"), for $ 7,767 in cash. The acquired business provides cellular location tracking technology which enables law enforcement, internal security and intelligence agencies to fight crime and terror more effectively.

 
The acquisition was accounted for by the acquisition method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of Hexagon. The results of the Hexagon operations have been included in the consolidated financial statements since August 31, 2009. The Company recorded technology and goodwill in the amounts of $ 5,391 and $ 3,379, respectively.

 
Under the terms of the acquisition agreement, additional contingent consideration of up to $ 2,500 in cash will be paid to the selling shareholders of Hexagon based on services rendered to the Company by the selling shareholders over two years. In accordance with ASC 805, the contingent consideration was recorded as prepaid expenses to be recognized over the employment period rather than as part of the purchase price.

 
7.
Unaudited pro forma condensed results of operations:

 
The following represents the unaudited pro forma condensed results of operations for the years ended December 31, 2008 and 2009 assuming that the acquisitions of Fortent, Hexagon and Syfact occurred on January 1, 2008 and 2009. The pro forma information is not necessarily indicative of the results of operations, which actually would have occurred had the acquisitions been consummated on those dates, nor does it purport to represent the results of operations for future periods.

   
Year ended December 31,
    
Year ended December 31,
  
   
2008
    
2009
  
   
Unaudited
    
Unaudited
  
             
Revenues
   $ 656,509     $ 599,573  
                 
Net income
   $ 10,057     $ 23,088  
                 
Basic net earnings per share
   $ 0.17     $ 0.38  
                 
Diluted net earnings per share
   $ 0.16     $ 0.37  

 
8.
Acquisition costs related to all of the 2009 acquisitions for the year ended December 31, 2009 in the amount of $ 4,069 were included in general and administrative expenses.
 
 
F - 17
 

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES

 
The consolidated financial statements were prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP").

 
a.
Use of estimates:

 
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 
b.
Financial statements in United States dollars:

 
The currency of the primary economic environment in which the operations of NICE and certain subsidiaries are conducted is the U.S. dollar ("dollar"); thus, the dollar is the functional currency of NICE and certain subsidiaries.

 
NICE and certain subsidiaries' transactions and balances denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured to dollars in accordance with ASC 830, "Foreign Currency Matters" (formerly SFAS No. 52). All transaction gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statements of income as financial income or expenses, as appropriate.

 
For those subsidiaries whose functional currency has been determined to be their local currency, assets and liabilities are translated at year-end exchange rates and statement of income items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in shareholders' equity.

 
c.
Principles of consolidation:

 
Intercompany transactions and balances have been eliminated upon consolidation.

 
d.
Cash equivalents:

 
Cash equivalents are short-term unrestricted highly liquid investments that are readily convertible into cash, with original maturities of three months or less at acquisition.

 
e.
Short-term bank deposits:

 
Bank deposits with maturities of more than three months but less than one year are included in short-term bank deposits. Such short-term bank deposits are stated at cost.
 
 
F - 18
 

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
f.
Marketable securities:

 
The Company accounts for investments in debt securities in accordance with ASC 320, "Investments - Debt and Equity Securities" (formerly SFAS No. 115). Management determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such determinations at each balance sheet date.

 
In the third quarter of 2008, the Company reclassified its investments in marketable securities from the held to maturity category into the available-for-sale category.

 
Marketable securities classified as "available-for-sale" are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component of shareholders' equity in accumulated other comprehensive income (loss). Gains and losses are recognized when realized, on a specific identification basis, in the Company's consolidated statements of income.

 
Interest income resulting from investments in structured notes is accounted for under the provisions of ASC 320-10-35 (formerly EITF No. 96-12). Under ASC 320-10-35, the retrospective interest method is used for recognizing interest income.

 
On April 1, 2009, the Company adopted the updated guidance as codified in ASC 320-10-65 that changed the impairment and presentation model for its available for sale debt securities. Under the updated impairment model, an other-than-temporary impairment loss is recognized in earnings if the entity has the intent to sell the debt security, or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, if an entity does not expect to sell a debt security, it still needs to evaluate expected cash flows to be received and determines if a credit loss exists. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized currently in earnings. Amounts relating to factors other than credit losses are recorded in other comprehensive income (loss), net of taxes. The adoption of the updated guidance had no impact on the Company's consolidated financial position, results of operations or cash flows.

 
g.
Inventories:

 
Inventories are stated at the lower of cost or market value. The cost of raw materials is determined by the "average cost" method, and the cost of finished goods on the basis of costs charged by third party manufacturer. The cost of work-in-progress related to long-term contracts includes materials, subcontractors and other direct costs.

 
Inventory write-downs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, and discontinued products and for market prices lower than cost, if any. At the point of the loss recognition, a new lower cost basis for that inventory is established. In addition, the Company records a liability for firm non-cancelable and unconditional purchase commitments with contract manufacturers for quantities in excess of the Company's future demands forecast consistent with its valuation of excess and obsolete inventory. Inventory write-downs for 2007, 2008 and 2009 were $ 2,716, $ 130 and $ 1,586, respectively, and have been included in cost of revenues.
 
 
F - 19
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
h.
Property and equipment, net:

 
Property and equipment are stated at cost, net of accumulated depreciation.
 
 
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates:
 
   
%
  
       
Computers and peripheral equipment
     33  
Office furniture and equipment
     6 - 15  

 
Leasehold improvements are amortized by the straight-line method over the term of the lease (including option terms) or the estimated useful life of the improvements, whichever is shorter.

 
i.
Other intangible assets, net:

 
Intangible assets are amortized over their estimated useful lives using the straight-line method, at the following weighted average annual rates:

   
%
  
       
Capitalized software development costs (see m below)
     33  
Core technology
     18  
Trademarks
     22  
Customer relationships and distribution network
     14  

 
In connection with business combinations consummated through December 31, 2008, amounts assigned to intangible assets to be used in a particular research and development project that have not reached technological feasibility and have no alternative future use were charged to in process research and development write off at the acquisition date. Commencing January 1, 2009, acquired IPR&D is no longer being expensed on acquisition, but capitalized and assessed for impairment at least annually until the completion of development and afterward will be amortize over its useful life. No impairment loss was identified in 2009.

 
j.
Impairment of long-lived assets:

 
The Company's long-lived assets and identifiable intangibles that are subject to amortization are reviewed for impairment in accordance with ASC 360, "Property, Plant, and Equipment"  (formerly SFAS No. 144), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In 2007, 2008 and 2009, no impairment indicators have been identified.
 
 
F - 20
 

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
k.
Goodwill:

 
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350 (formerly SFAS No. 142), goodwill is not amortized, but rather is subject to an annual impairment test.

 
ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. The Company operates in four operating segments, and these segments comprise its reporting units. Fair value is determined using discounted cash flows. Significant estimates used in the fair value methodologies include estimates of future cash flows, future growth rates and the weighted average cost of capital of the reporting units. The Company performed annual impairment tests during the fourth quarter of 2007, 2008 and 2009 and did not identify any impairment losses.

 
l.
Revenue recognition:

 
The Company generates revenues from sales of products, which include hardware and software, software licensing, professional services and maintenance. Professional services include mainly installation, project management and training. The Company sells its products indirectly through a global network of distributors, system integrators and strategic partners, all of whom are considered end-users, and through its direct sales force.

 
Revenues from sales of product and software licensing are recognized when all criteria outlined in ASC 985-605, "Revenue Recognition" (formerly SOP No. 97-2 (as amended by SOP No. 98-9)), are met. Revenue from products and software licensing is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectability is probable.

 
Revenues from maintenance and professional services are recognized ratably over the contractual period or as services are performed, respectively.

 
In transactions where a customer's contractual terms include a provision for customer acceptance, revenues are recognized either when such acceptance has been obtained or as the acceptance provision has lapsed.

 
Revenues from multiple element arrangements are allocated to the different elements in the arrangement under the "residual method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists for all undelivered elements and no VSOE exists for the delivered elements. Under the residual method, at the outset of the arrangement with the customer, the Company defers revenue for the fair value of its undelivered elements (maintenance and professional services) and recognizes revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (products and software licenses) when the basic criteria in ASC 985-605 have been met. Any discount in the arrangement is allocated to the delivered element.
 
 
F - 21
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
The Company's policy for establishing VSOE of fair value of maintenance services is based on the price charged when the maintenance is renewed separately. Establishment of VSOE of fair value of installation and training services is based on the price charged when these elements are sold separately. VSOE of fair value of project management services is established based on a price per day which is similar to price per day charged for installation services.

 
Revenues from fixed price contracts that require significant customization, integration and installation are recognized based on ASC 605-35, "Construction-Type and Production-Type Contracts" (formerly SOP No. 81-1), using the percentage-of-completion method of accounting based on the ratio of costs related to contract performance incurred to date to the total estimated amount of such costs. The amount of revenue recognized is based on the total fees under the license agreement and the percentage of completion achieved. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contact. The revenues from such arrangements are allocated between license revenues and professional services revenues to reflect the portion of each revenue source separately. Revenues allocated to services are based on the VSOE of fair value of the services in the arrangement and revenues allocated to product are the residual amount.

 
The Company maintains a provision for product returns in accordance with ASC 605, "Revenue Recognition" (formerly SFAS No. 48). The provision is estimated based on the Company's past experience and is deducted from revenues. As of December 31, 2008 and 2009, the provision for product returns amounted to $ 2,833 and $ 2,610, respectively.

 
Deferred revenues include advances and payments received from customers, for which revenue has not yet been recognized.

 
m.
Research and development costs:

 
Research and development costs (net of grants) incurred in the process of software production before establishment of technological feasibility are charged to expenses as incurred. Costs of the production of a product master incurred subsequent to the establishment of technological feasibility are capitalized according to the principles set forth in ASC 985-20, "Software - Costs of Software to be Sold, Leased, or Marketed" (formerly SFAS No. 86). Based on the Company's product development process, technological feasibility is established upon completion of a detailed program design.

 
Costs incurred by the Company between completion of the detailed program design and the point at which the product is ready for general release, have been capitalized.

Capitalized software development costs are amortized commencing with general product release by the straight-line method over the estimated useful life of the software product.

 
n.
Income taxes:

 
The Company accounts for income taxes in accordance with ASC 740, "Income Taxes" (formerly SFAS No. 109). This topic prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.
 
 
F - 22
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
The Company implements a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative basis) likely to be realized upon ultimate settlement.

 
The Company classifies interest as financial expenses and penalties as general and administrative expenses.

 
o.
Government grants:

 
Non-royalty bearing grants from the Government of Israel for funding research and development projects are recognized at the time the Company is entitled to such grants on the basis of the related costs incurred and recorded as a deduction from research and development costs.

 
p.
Concentrations of credit risk:

 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term bank deposits, trade receivables, marketable securities and foreign currency derivative contracts.

 
The Company's cash and cash equivalents and short-term bank deposits are invested in deposits mainly in dollars with major international banks. Deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk.

 
The Company's trade receivables are derived from sales to customers located primarily in North America, EMEA and APAC. The Company performs ongoing credit evaluations of its customers and obtains letter of credit and bank guarantees for certain receivables. Additionally, the Company insures certain of its receivables with a credit insurance company. A general allowance for doubtful accounts is provided, based on the length of time the receivables are past due.

 
The Company's marketable securities include investment in corporate debentures and U.S. government debentures. The Company's investment policy limits the amount that the Company may invest in any one type of investment or issuer, thereby reducing credit risk concentrations. As a result of the last turmoil in capital markets, the Company has tightened its control and monitoring over its marketable securities portfolio in order to minimize potential risks stemming from current capital markets environment.

 
The Company entered into forward contracts and option strategies (together: "derivative instruments") intended to protect against the increase in value of forecasted non-dollar currency cash flows. The derivative instruments hedge a portion of the Company's non-dollar currency exposure (see w below and Note 11 below).
 
 
F - 23
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
q.
Severance pay:

 
The Company's liability for severance pay for its Israeli employees is calculated pursuant to Israel's Severance Pay Law based on the most recent monthly salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month's salary for each year of employment, or a portion thereof. The Company's liability is fully provided by monthly deposits with insurance policies and severance pay funds and by an accrual.

 
The deposited funds include profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel's Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies.

 
The Company's agreements with employees in Israel, joining the Company since May 1, 2009, are in accordance with section 14 of the Severance Pay Law, 1963, whereas, the Company's contributions for severance pay shall be instead of its severance liability. Upon contribution of the full amount of the employee's monthly salary, and release of the policy to the employee, no additional calculations shall be conducted between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the employee. Further, the related obligation and amounts deposits on behalf of such obligation are not stated on the balance sheet, as they are legally released from obligation to employees once the deposit amounts have been paid.

 
Severance pay expense for 2007, 2008 and 2009 amounted to $ 5,680, $ 7,822 and $ 7,709, respectively.

 
The Company has a 401(K) defined contribution plan covering certain employees in the U.S. All eligible employees may elect to contribute up to 6% of their eligible compensation, but generally not greater than $ 16.5 per year, (for certain employees over 50 years of age the maximum contribution is $ 22 per year) of their annual compensation to the plan through salary deferrals, subject to IRS limits. The Company matches 50% of employee contributions to the plan up to a limit of 6% of their eligible compensation. In the years 2007, 2008, and 2009, the Company recorded an expense for matching contributions in the amount of $ 1,769, $ 2,154 and $ 2,330, respectively.

 
r.
Basic and diluted net earnings per share:

 
Basic net earnings per share are computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings per share are computed based on the weighted average number of Ordinary shares outstanding during each year plus dilutive potential equivalent Ordinary shares considered outstanding during the year, in accordance with ASC 260, "Earnings Per Share" (formerly SFAS No. 128).

 
The weighted average number of shares related to outstanding anti-dilutive options and restricted shares excluded from the calculations of diluted net earnings per share was 1,817,895, 3,133,816 and 3,867,517 for the years 2007, 2008 and 2009, respectively.
 
 
F - 24
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
s.
Accounting for stock-based compensation:

 
The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation" (formerly SFAS No. 123 (R)), which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated income statements.

 
The Company recognizes compensation expenses for the value of its awards, which have graded vesting, based on the accelerated attribution method over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.

 
The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model and values restricted stock based on the market value of the underlying shares at the date of grant. This option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements. The expected term of options granted is based upon historical experience and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. Federal Reserve zero-coupon bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

 
t.
Fair value of financial instruments:

 
The Company adopted the provisions of ASC 820, "Fair Value Measurements and Disclosures" (formerly SFAS No. 157), effective January 1, 2008. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.

 
In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 
The hierarchy is broken down into three levels based on the inputs as follows:

 
●
Level 1 -
Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
 
 
●
Level 2 -
Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
 
 
F - 25
 

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
●
Level 3 -
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 
The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment and the investments are categorized as Level 3.

 
The Company's marketable securities trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency and accordingly are categorized as Level 2.

 
Foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

 
The following table presents assets and liabilities measured at fair value on a recurring basis at December 31, 2008 and 2009:

   
2008
  
   
Fair value measurements using input type
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
                         
Marketable securities:
                        
Corporate debentures
   $ -     $ 180,774     $ -     $ 180,774  
U.S. Treasuries
     -       88,530       -       88,530  
U.S. Government agency debentures
     -       18,688       -       18,688  
Structured notes
     -       4,000       -       4,000  
                                 
Total marketable securities
   $ -     $ 291,992     $ -     $ 291,992  
                                 
Derivative liabilities
   $ -     $ (1,357 )   $ -     $ (1,357 )

   
2009
  
   
Fair value measurements using input type
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
                         
Marketable securities:
                        
Corporate debentures
   $ -     $ 208,569     $ -     $ 208,569  
U.S. Treasuries
     -       40,959       -       40,959  
U.S. Government agency debentures
     -       43,923       -       43,923  
                                 
Total marketable securities
   $ -     $ 293,451     $ -     $ 293,451  
                                 
Derivative assets
   $ -     $ 187     $ -     $ 187  
                                 
Derivative liabilities
   $ -     $ (255 )   $ -     $ (255 )
 
 
F - 26
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
The carrying amounts of financial instruments carried at cost, including cash and cash equivalents, short-term bank deposits, trade receivables and trade payables approximate their fair value due to the short-term maturities of such instruments.

 
u.
Legal contingencies:

 
The Company is currently involved in various claims and legal proceedings. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss.

 
v.
Advertising expenses:

 
Advertising expenses are charged to expense as incurred. Advertising expenses for the years 2007, 2008 and 2009 were $ 6,479, $ 8,047 and $ 5,883, respectively.

 
w.
Derivatives and hedging activities:

 
The Company carries out transactions involving foreign currency exchange derivative financial instruments. The transactions are designed to hedge the Company's exposure in currencies other than the dollar. The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. If a derivative meets the definition of a hedge and is so designated, changes in the fair value of the derivative are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a derivative qualified and designated as a hedge is recognized in earnings. If a derivative does not meet the definition of a hedge, the changes in the fair value are included in earnings.

 
x.
Reclassification:

 
Certain amounts from prior years have been reclassified to conform to the current year's presentation. The reclassification had no effect on previously reported net income, shareholders' equity or cash flows.

 
y.
Adoption of New Accounting Standards:

 
In December 2007, the Financial Accounting Standards Board ("FASB") issued authoritative guidance on business combinations. The guidance significantly changes the accounting for business combinations, establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquire. The guidance also sets out requirements for recognition and measurement of the goodwill acquired in the business combination or a gain from a bargain purchase. Among the more significant changes, acquired in-process research and development will be capitalized and upon completion amortized over its useful life; acquisition costs will be expensed as incurred; restructuring costs will generally be expensed in periods after the acquisition date; contingent consideration will be recognized at fair value at the acquisition date with subsequent changes recognized in earnings, and reductions in deferred tax valuation allowance relating to a business acquisition will be recognized in earnings. In April 2009, the FASB issued an amendment to the revised business combination guidance regarding the accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This authoritative guidance on business combinations was adopted by the Company for business combinations for which the acquisition date is on or after January 1, 2009.
 
 
F - 27
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
See f above for the adoption of the updated guidance regarding recognition and presentation of other-than-temporary impairment on marketable securities.

 
See Note 11 for the adoption of the updated guidance of ASC 815 with respect to disclosure requirements regarding derivative instruments and hedging activities.

 
z.
Recently issued accounting pronouncements:

 
On July 1, 2009, the FASB issued the FASB Accounting Standards Codification ("the ASC"). The ASC became the single source of authoritative nongovernmental U.S. GAAP, superseding existing pronouncements issued by the FASB, the American Institute of Certified Public Accountants, the Emerging Issues Task Force and related literature. The ASC eliminates the previous U.S. GAAP hierarchy and establishes one level of authoritative U.S. GAAP. Rules and interpretive releases issued by the U.S. Securities and Exchange Commission ("SEC") under authority of federal securities law are also sources of the authoritative U.S. GAAP for SEC registrants. All other literature is considered non-authoritative. The codification is effective for interim and annual periods ending after September 15, 2009. Throughout the notes to the consolidated financial statements references that were previously made to former authoritative U.S. GAAP pronouncements have been changed to coincide with the appropriate ASC reference.

 
In May 2009, FASB issued ASC Topic No. 855, "Subsequent Events" ("FASB ASC No. 855").  FASB ASC No. 855 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Specifically, FASB ASC No. 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  FASB ASC No. 855 was effective for fiscal years and interim periods ended after June 15, 2009.  The adoption did not have a material effect on the Company's consolidated financial statements.

 
In October 2009, the FASB issued an update to ASC 985-605, "Software-Revenue Recognition" (originally issued as EITF 09-3). In accordance with the update to the ASC, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the scope of the software revenue recognition guidance. In addition, hardware components of a tangible product containing software component are always excluded from the software revenue guidance. The update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or retrospectively, for all periods presented.  The Company is currently evaluating the impact on its consolidated results of operations and financial condition.
 
 
F - 28
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
In October 2009, the FASB issued an update to ASC 605-25, "Revenue Recognition - Multiple-Element Arrangements", that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements to: (i) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;  (ii) require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have VSOE of selling price  or third-party evidence of selling price; (iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method and (iv) require expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance. The update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or retrospectively, for all periods presented. The Company is currently evaluating the impact on its consolidated results of operations and financial condition.


NOTE 3:-
MARKETABLE SECURITIES

 
a.
Available-for-sale marketable securities:

 
The following table summarizes amortized costs, gross unrealized gains and losses and estimated fair values of available-for-sale marketable securities as of December 31, 2008 and 2009:
   
Amortized cost
    
Gross unrealized gains
    
Gross unrealized losses
    
Estimated fair value
  
   
December 31,
    
December 31,
    
December 31,
    
December 31,
  
   
2008
    
2009
    
2008
    
2009
    
2008
    
2009
    
2008
    
2009
  
                                                 
Corporate debentures
   $ 180,705     $ 205,297     $ 1,691     $ 3,382     $ 1,622     $ 110     $ 180,774     $ 208,569  
U.S. Government agency debentures
     18,553       44,042       137       39       2       158       18,688       43,923  
U.S. Treasuries
     87,168       40,118       1,363       901       1       60       88,530       40,959  
Structured notes
     4,000       -       -       -       -       -       4,000       -  
                                                                 
    $ 290,426     $ 289,457     $ 3,191     $ 4,322     $ 1,625     $ 328     $ 291,992     $ 293,451  


The scheduled maturities of available-for-sale marketable securities as of December 31, 2009 were as follows:
   
Amortized
    
Estimated
  
   
cost
    
fair value
  
             
Due within one year
   $ 67,678     $ 68,623  
Due after one year through five years
     221,779       224,828  
                 
    $ 289,457     $ 293,451  

 
b.
Held-to-maturity marketable securities:

 
In the third quarter of 2008, due to market conditions and deterioration in the credit worthiness of issuers, the Company reclassified its investments in marketable securities from the held-to-maturity category into the available-for-sale category.
 
 
F - 29
 

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 4:-
OTHER RECEIVABLES AND PREPAID EXPENSES

   
December 31,
  
   
2008
    
2009
  
             
Government authorities
   $ 5,055     $ 6,340  
Interest receivable
     2,290       2,185  
Prepaid expenses
     9,465       11,813  
Other
     4,568       3,549  
                 
    $ 21,378     $ 23,887  


NOTE 5:-
INVENTORIES
   
December 31,
  
   
2008
    
2009
  
           
Raw materials
   $ 1,720     $ 2,354  
Work-in-progress
     1,843       2,244  
Finished goods
     9,672       9,847  
                 
    $ 13,235     $ 14,445  


NOTE 6:-
OTHER LONG-TERM ASSETS
   
December 31,
  
   
2008
    
2009
  
             
Investment in affiliates
   $ 236     $ 236  
Severance pay fund
     15,957       20,398  
Other receivables and prepaid expenses
     1,756       3,092  
Deferred tax assets
     2,267       5,588  
                 
    $ 20,216     $ 29,314  


NOTE 7:-
PROPERTY AND EQUIPMENT, NET
   
December 31,
  
   
2008
    
2009
  
             
Cost:
            
Computers and peripheral equipment
   $ 68,630     $ 65,550  
Office furniture and equipment
     15,593       14,422  
Leasehold improvements
     9,014       10,984  
                 
      93,237       90,956  
Accumulated depreciation:
                
Computers and peripheral equipment
     53,884       52,291  
Office furniture and equipment
     11,243       10,806  
Leasehold improvements
     4,716       5,807  
                 
      69,843       68,904  
                 
Depreciated cost
   $ 23,394     $ 22,052  
 
 
F - 30
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 7:-
PROPERTY AND EQUIPMENT, NET (Cont.)

 
Depreciation expense totaled $ 8,740, $ 10,260 and $ 11,570 for the years 2007, 2008 and 2009, respectively.
 
NOTE 8:-
OTHER INTANGIBLE ASSETS, NET

a.         Definite-lived other intangible assets:
 
   
December 31,
  
   
2008
    
2009
  
Original amounts:
            
Capitalized software development costs
   $ 8,927     $ 10,242  
Core technology
     103,487       124,748  
Trademarks
     8,397       8,876  
Customer relationships and distribution network
     101,836       125,320  
                 
      222,647       269,186  
Accumulated amortization:
                
Capitalized software development costs
     6,475       7,525  
Core technology
     40,234       59,131  
Trademarks
     4,688       6,207  
Customer relationships and distribution network
     25,848       41,092  
                 
      77,245       113,955  
                 
Other intangible assets, net
   $ 145,402     $ 155,231  

 
b.
Amortization expense amounted to $ 22,186, $ 32,480 and $ 35,647 for the years 2007, 2008 and 2009, respectively.
 
 
c.
Estimated amortization expense for the years ended (excluding amortization of capitalized software development costs):
 
December 31,
      
       
2010
   $ 39,943  
2011
     36,155  
2012
     32,069  
2013
     23,834  
2014
     12,020  
2015 and thereafter
     8,493  
         
    $ 152,514  

 
d.
Indefinite-lived intangible assets composed of IPR&D in the amounts of $ 0 and $ 1,433 as of December 31, 2008 and 2009, respectively.
 
 
F - 31
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 9:-
GOODWILL

 
The changes in the carrying amount of goodwill allocated to reportable segments as of December 31, 2008 and 2009 are as follows:


   
December 31, 2008
  
   
Americas
    
EMEA
    
APAC
    
Actimize
    
Total
  
                               
As of December 31, 2007
   $ 173,765     $ 47,469     $ 2,479     $ 219,543     $ 443,256  
                                         
Acquisitions
     -       8,944       58       -       9,002  
                                         
Functional currency translation adjustments
     (452 )     (5,746 )     (556 )     -       (6,754 )
                                         
As of December 31, 2008
   $ 173,313     $ 50,667     $ 1,981     $ 219,543     $ 445,504  


   
December 31, 2009
  
   
Americas
    
EMEA
    
APAC
    
Actimize
    
Total
  
                               
As of December 31, 2008
   $ 173,313     $ 50,667     $ 1,981     $ 219,543     $ 445,504  
                                         
Acquisitions
     -       3,379       -       41,970       45,349  
                                         
Functional currency translation adjustments
     305       2,805       616       (81 )     3,645  
                                         
As of December 31, 2009
   $ 173,618     $ 56,851     $ 2,597     $ 261,432     $ 494,498  


NOTE 10:-
ACCRUED EXPENSES AND OTHER LIABILITIES

   
December 31,
  
   
2008
    
2009
  
             
Employees and payroll accruals
   $ 42,699     $ 45,251  
Accrued expenses
     51,472       53,377  
Deferred revenues and advances from customers
     107,612       121,515  
Government authorities
     31,348       35,607  
Other
     3,874       5,769  
                 
    $ 237,005     $ 261,519  
 
 
F - 32
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 11:-
DERIVATIVE INSTRUMENTS

 
The Company's risk management strategy includes the use of derivative financial instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates.

 
ASC 815, "Derivatives and Hedging" (formerly SFAS No. 133), requires the Company to recognize all of its derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.

 
On January 1, 2009, the Company adopted the updated guidance of ASC 815 with respect to disclosure requirements (formerly SFAS No. 161, an amendment to SFAS No. 133) which changed the disclosure requirements for derivative instruments and hedging activities and require enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. 

 
The Company entered into derivative instrument arrangements to hedge a portion of anticipated new Israeli Shekel ("NIS") payroll payments and to hedge forecasted Euro payments received from construction-type contract net from Euro payments to sub-contractors. These derivative instruments are designated as cash flows hedges, as defined by ASC 815. The transactions to hedge salary payments and net receivables from construction-type contract are made on denominated amounts that are no more than forecasted cash flows for salaries and benefits and forecasted net receivables from construction-type contract according to the Company's budget and on the dates that the cash flows are expected to be paid or received. Therefore, those transactions are all effective and the results are recorded as payroll expenses or as revenues and cost of revenues, respectively, at the time that the hedged expense/income is recorded. The Company does not enter into derivative transactions for trading purposes.

 
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the line item associated with the hedged transaction in the period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in financial income/expense in the period of change.

   
Notional amount
    
Fair value
  
   
December 31,
    
December 31,
  
   
2008
    
2009
    
2008
    
2009
  
                         
Option contracts to hedge payroll expenses
   $ 25,000     $ 28,200     $ (370 )   $ 187  
Forward contracts to hedge payroll expenses
     30,500       16,100       (987 )     (77 )
Forward contracts to hedge construction-type contracts
     -       11,668       -       (178 )
                                 
    $ 55,500     $ 55,968     $ (1,357 )   $ (68 )
 
 
F - 33
 
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 11:-
DERIVATIVE INSTRUMENTS (Cont.)

 
The Company currently hedges its exposure to the variability in future cash flows for a maximum period of one year. At December 31, 2009, the Company expects to reclassify all of the net losses on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next twelve months.

 
The fair value of the Company's outstanding derivative instruments at December 31, 2008 and 2009 is summarized below:

     
Fair value of derivative instruments
  
     
December 31,
  
 
Balance sheet location
  
2008
    
2009
  
Derivative assets:
              
               
Foreign exchange option contracts
     $ 282     $ 262  
Foreign exchange forward contracts
       94       217  
                   
      $ 376     $ 479  
Derivative liabilities:
                  
                   
Foreign exchange option contracts
     $ (653 )   $ (75 )
Foreign exchange forward contracts
       (1,080 )     (472 )
                   
      $ (1,733 )   $ (547 )
                   
Derivative assets
Other receivables and prepaid expenses
   $ -     $ 187  
Derivative liabilities
Accrued expenses and other liabilities
   $ (1,357 )   $ (255 )


 
The effect of derivative instruments in cash flow hedging relationship on income and other comprehensive income for the years ended December 31, 2007, 2008 and 2009 is summarized below:

   
Amount of gain (loss) recognized in OCI on derivative (effective portion)
  
   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
Derivatives in cash flow hedging relationship:
                  
                   
Foreign exchange option contracts
   $ 93     $ (605 )   $ (169 )
Foreign exchange forward contracts
     (93 )     (3,126 )     2,441  
                         
    $ -     $ (3,731 )   $ 2,272  
 
 
F - 34
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 11:-
DERIVATIVE INSTRUMENTS (Cont.)

     
Amount of gain (loss) reclassified from OCI into income (expenses) (effective portion)
  
Derivative in cash flow
Statements of
  
Year ended December 31,
  
hedging relationship:
income line item
  
2007
    
2008
    
2009
  
                     
Foreign exchange option contracts
Cost of revenues and operating expenses
   $ (93 )   $ 246     $ 670  
Foreign exchange forward contracts
Cost of revenues and operating expenses
     503       2,047       (2,665 )
                           
      $ 410     $ 2,293     $ (1,995 )

 
The ineffective portion of the change in fair value of a cash flow hedge for the years ended December 31, 2007, 2008 and 2009 amounted to $ 0, $ 0 and $ 30, respectively.
 
NOTE 12:-
COMMITMENTS AND CONTINGENT LIABILITIES

 
a.
Lease commitments:

 
The Company leases office space, office equipment and various motor vehicles under operating leases.

 
1.
The Company's office space and office equipment are rented under several operating leases.

 
Future minimum lease commitments under non-cancelable operating leases for the years ended December 31, were as follows:

2010
   $ 15,552  
2011
     11,693  
2012
     8,747  
2013
     1,692  
2014
     1,523  
2015 and thereafter
     5,005  
         
    $ 44,212  

 
Rent expenses for the years 2007, 2008 and 2009 were approximately $ 10,531, $ 13,286 and $ 13,982, respectively.

 
2.
The Company leases its motor vehicles under cancelable operating lease agreements.
 
The minimum payment under these operating leases, upon cancellation of these lease agreements was $ 1,432 as of December 31, 2009.

 
Lease expenses for motor vehicles for the years 2007, 2008 and 2009 were $ 4,041, $ 5,387 and $ 5,249, respectively.
 
 
F - 35
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
 
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

 
b.
Other commitments:

 
The Company is obligated under certain agreements with its suppliers to purchase goods and under an agreement with its manufacturing subcontractor to purchase projected inventory and excess inventory. Non cancelable obligations, net of provisions, as of December 31, 2009, were $ 2,658. These obligations will be fulfilled during 2010.

c.         Legal proceedings:

 
1.
On October 19, 2004, CipherActive filed an action against the Company in the District Court of Tel Aviv, State of Israel. In this lawsuit, CipherActive claimed that under a development agreement with the Company, it was entitled to receive license fees in respect of certain software that it allegedly developed for the Company.

 
The parties submitted the matter to a binding arbitration. The arbitration agreement approved by the Court and in September 2009, the arbitrator awarded CipherActive damages in the amount of $ 188 (in original value) plus VAT and trial expenses.

 
2.
On September 3, 2008, Multi-Format, Inc. filed a lawsuit against Harrah's Entertainment, Inc. and NICE Systems, Inc, a wholly owned subsidiary of the Company, in the United States District Court for the District of New Jersey, alleging infringement of a U.S. patent and requesting damages.

 
The parties agreed to settle the litigation, and on June 18, 2009, the Court entered an order dismissing the case. On July 20, 2009, the parties executed a settlement agreement and thus, the matter is closed.

 
3.
On July 20, 2004, S.T.S. Software Systems Ltd. ("STS") filed a lawsuit in the U.S. District Court for the Southern District of New York charging Witness Systems, Inc. ("Witness") with infringement of VoIP patents in the U.S. The Court dismissed the claim and determined that Witness does not infringe the Company's patents.

 
On August 30, 2004, Witness filed a patent infringement action in the Federal Court for the Northern District of Georgia against NICE Systems, Inc.  and on January 19, 2006, Witness filed an additional patent infringement action in the Federal Court for the Northern District of Georgia against the Company and NICE Systems, Inc.

 
On May 10, 2006, NICE and NICE Systems, Inc. filed a new patent infringement lawsuit against Witness Systems, Inc. in the United States District Court for District of Delaware. This lawsuit went to trial before a jury on January 14, 2008. The jury deadlocked and on January 25, 2008 and a mistrial was declared. The Company filed a motion for a new trial date for the case.

 
On August 1, 2008, the Company and Verint Systems Inc. entered into an agreement to settle and dismiss all of the above patent disputes (which had been commenced with Witness Systems, Inc. prior to its acquisition by Verint).
 
 
F - 36
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
 
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

 
4.
On July 27, 2004, Dictaphone Corp. (which was acquired by the Company) filed an action against VoicePrint in the United States District Court for the Central District of California asserting the infringement by VoicePrint of two U.S patents. The Company subsequently acquired these patents from Dictaphone as part of its acquisition. The parties were unable to reach a settlement agreement and the Company decided to abandon this litigation.

 
5.
In December 2006, Calyon Corporate and Investment Bank ("Calyon") filed a suit against the Company in the District Court of Tel Aviv, demanding repayment of $ 648 plus accrued interest, in the total amount of $ 740. The Company deducted this amount in January 2004 from a payment transferred from an account of Thales maintained with Calyon to the Company's account, at the instruction of Thales, in connection with the acquisition of Thales Contact Solutions ("TCS") from Thales. The Company had notified TCS in 2004 that it had setoff such amount with respect to an overdue payment by TCS to the Company. The dispute was submitted to mediation, however the mediation process failed and the proceedings were returned to the District Court of Tel Aviv. This lawsuit is in its initial stages, preliminary hearings took place on September 3, 2009 and March 9, 2010 and the parties are to file their depositions.

 
6.
On March 9, 2007, Formatest AG filed a claim against NICE Switzerland AG, a wholly owned subsidiary of the Company, in the Cantonal Court of Zug, Switzerland. The claim was in the amount of approximately $ 1,600 (€ 1,187,793), plus interest at 5% per annum, and was made in connection with an agreement dated December 10, 2004 between FAST Video Security AG (now NICE Switzerland AG) and Formatest AG. On June 19, 2007, the Company and Formatest AG entered into an agreement settling all claims. The Company believes it is entitled to recover all or a substantial part of the settlement amount paid to Formatest AG (with the addition of legal costs), under the terms of indemnification provision contained in the sale and purchase agreement between the selling shareholders of FAST Video Security AG ("the Sellers") and the Company dated November 16, 2006 ("the Agreement"). On December 18, 2007, the Sellers issued a Notice of Arbitration in the Zurich Chamber of Commerce.

 
Prior to the commencement of the arbitration proceedings, the Company released to the Sellers a partial payment of $ 1,400 out of the escrow funds and paid to the Sellers the amount of $ 1,229.

 
On June 23, 2008, the Sellers filed their statement of claim, asking for payment of $ 1,600 (representing the balance of the escrow funds) plus additional amounts for interest, losses on the exchange rates and legal costs and expenses.

 
On April 30, 2009, the Company and the Sellers entered into a settlement agreement. Pursuant to the joint application of the Company and the Sellers, the arbitration proceedings were closed by a termination order dated June 8, 2009.
 
 
F - 37
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
 
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

 
7.
On September 16, 2009, Fair Isaac Corporation ("FICO") filed a claim in the United States District Court for the District of Delaware against Actimize Inc. and the Company, claiming that Actimize and the Company are infringing two U.S. patents.  These patents cover various aspects of fraud detection. FICO requested damages and an injunction. On December 17, 2009, the parties agreed to dismiss the Company from the action. On December 21, 2009, Actimize filed a response and counterclaims. On January 25, 2010, Actimize filed an amended response and counterclaims. The parties jointly submitted a proposed scheduling order to the court on January 12, 2010. The parties are currently engaged in fact discovery.
 
 
8.
Labor disputes:

 
On October 15, 2007, a former employee of Actimize Ltd., a wholly owned subsidiary of the Company, filed a claim with the Tel Aviv District Labor Court, seeking a declaration, that he is entitled to 0.5% of the outstanding share capital of Actimize Ltd. The preliminary stages of the claim ended and the parties submitted their testimonies by way of written affidavits. The hearing and cross-examination of the testimonies is scheduled to take place on June 16, 2010.

 
On August 19, 2009, a former employee of Nice Systems, Inc. sent Nice Systems, Inc. a letter alleging unlawful termination of employment on the grounds of discrimination.   The Company is in the process of assessing and responding to the letter.

 
On October 20, 2009, a former employee of IEX Corp. a wholly owned subsidiary of the Company filed a charge in the Chicago office of the Equal Employment Opportunity Commission against IEX Corp. and "NICE Systems Corp." alleging that the companies engaged in prohibited discrimination in terminating his employment. A response to the charge was filed, denying the allegations.

 
9.
Around December 31, 2008, NICE Systems, Inc. received a letter from Plant CML ("Plant"), a distributor of NICE Systems, Inc., asserting several indemnity claims against the Company.

 
To date, Plant has taken no further action and has made no further demands and, therefore, the Company does not consider this dispute as outstanding anymore.

 
10.
The Company is involved in various other legal proceedings arising in the normal course of its business. Based upon the advice of counsel, the Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

 
11.
On March 10, 2010, Nuvation Research Corporation ("Nuvation") filed a lawsuit against the Company with the Supreme Court of the State of New York. The lawsuit alleges, among others, that the Company breached a contract with Nuvation, defrauded Nuvation and taken advantage of it. Nuvation is claiming damages in a total amount of $ 7,000. The Company is in an initial stage of assessing the facts and merits of these claims.
 
 
F - 38
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 13:-
TAXES ON INCOME

 
a.
Israeli taxation:

 
1.
Corporate tax rates in Israel:

 
Taxable income of Israeli companies is subject to tax at the rate of 27% in 2008, 26% in 2009, 25% in 2010,  24% in 2011, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter.

 
2.
Tax benefits under the Israel Law for the Encouragement of Capital Investments, 1959 ("the Law"):

 
Various industrial projects of NICE and its Israeli subsidiary have been granted "Approved Enterprise" and "Privileged Enterprise" status, which provides certain benefits, including tax exemptions and reduced tax rates. Income not eligible for Approved Enterprise and Privileged Enterprise benefits is taxed at a regular rate.

 
In the event of distribution of dividends from the said tax-exempt income, the amount distributed will be subject to corporate tax at the rate ordinarily applicable to the Approved Enterprise's income. The tax-exempt income attributable to the "Approved Enterprise" programs mentioned above can be distributed to shareholders without subjecting the Company to taxes only upon the complete liquidation of NICE or its Israeli subsidiary. Tax-exempt income generated under the Company's Privileged Enterprise program will be subject to taxes upon dividend distribution or complete liquidation.
 
 
The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the Law and regulations published thereunder. Should the Company fail to meet such requirements in the future, income attributable to its Approved Enterprise and Privileged Enterprise programs could be subject to the statutory Israeli corporate tax rate and the Company could be required to refund a portion of the tax benefits already received, with respect to such programs. As of December 31, 2009, management believes that the Company is in compliance with all the conditions required by the Law.

 
The Company does not intend to distribute any amounts of its undistributed tax exempt income as dividends as it intends to reinvest its tax-exempt income within the Company. Accordingly, no deferred income taxes have been provided on income attributable to the Company's Approved or Privileged Enterprise programs as the undistributed tax exempt income is essentially permanent in duration.

 
As of December 31, 2009, approximately $ 189,300 is tax-exempt attributable to its various Approved and Privileged Enterprise programs. If such tax exempt income is distributed (other than in respect of the Approved Enterprise programs upon the complete liquidation of the Company), it would be taxed at the reduced corporate tax rate applicable to such profits (between 10%-25%) and an income tax liability of approximately $ 32,800 would be incurred as of December 31, 2009.

 
3.
Tax benefits under the Israeli Law for the Encouragement of Industry (Taxation), 1969:

 
NICE is an "Industrial Company" as defined by the above law and, as such, is entitled to certain tax benefits including accelerated depreciation, deduction of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes.
 
 
F - 39
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 13:-
TAXES ON INCOME (Cont.)

 
b.
Income taxes on non-Israeli subsidiaries:

 
Non-Israeli subsidiaries are taxed according to the tax laws in their respective country of residence. Neither Israeli income taxes, foreign withholding taxes nor deferred income taxes were provided in relation to undistributed earnings of the Company's foreign subsidiaries. This is because the Company intends to permanently reinvest undistributed earnings in the foreign subsidiaries in which those earnings arose. If these earnings were distributed to Israel in the form of dividends or otherwise, the Company would be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.

 
c.
Net operating loss carryforward:

 
As of December 31, 2009, the Company had tax loss carry-forwards totaling approximately $ 88,300 which can be carried forward and offset against taxable income with expiration dates ranging from 2009 and onwards. Approximately $ 61,100 of these carry-forward tax losses have no expiration date. The balance expires between 2010 and 2029.

 
Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses increasing taxes before utilization.

 
d.
Deferred tax assets and liabilities:

 
Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recorded for tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
   
December 31,
  
   
2008
    
2009
  
Deferred tax assets:
            
Net operating losses carryforward
   $ 11,890     $ 30,387  
Acquired intangibles
     5,340       3,749  
Share based payments
     4,977       6,977  
Other
     13,648       8,677  
                 
Deferred tax assets before valuation allowance
     35,855       49,790  
Valuation allowance
     (17,760 )     (18,316 )
                 
Deferred tax assets
     18,095       31,474  
                 
Deferred tax liabilities:
                
Acquired intangibles
     (39,382 )     (43,990 )
                 
Deferred tax liabilities, net
   $ (21,287 )   $ (12,516 )

 
The Company has provided valuation allowances in respect of certain deferred tax assets resulting from tax loss carry forwards and other reserves and allowances due to uncertainty concerning realization of these deferred tax assets.
 
 
F - 40
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 13:-
TAXES ON INCOME (Cont.)

 
e.
A reconciliation of the Company's effective tax rate to the statutory tax rate in Israel is as follows:

   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
                   
Income before taxes on income, as reported in the consolidated statements of income
   $ 47,634     $ 48,587     $ 45,796  
                         
Statutory tax rate in Israel
     29 %     27 %     26 %
Approved and Privileged Enterprise benefits *)
     (10.1 )%     (11.9 )%     (10.1 )%
Changes in valuation allowance
     (1.4 )%     6.2 %     0.1 %
Earnings taxed under foreign law
     (2.6 )%     1.4 %     (4.5 )%
Acquired in-process research and development
     2.3 %     -       -  
Other
     4.3 %     (3.2 )%     (4.9 )%
                         
Effective tax rate
     21.5 %     19.5 %     6.6 %
                         
*) Net earnings per Ordinary share - amounts of the benefit resulting from the "Approved and Privileged Enterprise" status
                        
Basic
   $ 0.09     $ 0.10     $ 0.08  
                         
Diluted
   $ 0.09     $ 0.09     $ 0.07  

 
f.
Income before taxes on income is comprised as follows:

   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
                   
Domestic
   $ 27,506     $ 36,000     $ 37,976  
Foreign
     20,128       12,587       7,820  
                         
    $ 47,634     $ 48,587     $ 45,796  

 
g.
Taxes on income are comprised as follows:
   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
Current
   $ 10,516     $ 14,290     $ 9,055  
Deferred
     (262 )     (4,810 )     (6,015 )
                         
    $ 10,254     $ 9,480     $ 3,040  
                         
Domestic
   $ 4,254     $ 4,646     $ 4,255  
Foreign
     6,000       4,834       (1,215 )
                         
    $ 10,254     $ 9,480     $ 3,040  
 
 
F - 41
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 13:-
TAXES ON INCOME (Cont.)

 
h.
Uncertain tax positions:

 
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:

   
December 31,
  
   
2008
    
2009
  
             
Uncertain tax positions, beginning of year
   $ 14,919     $ 25,456  
Increases in tax positions for prior years
     3,080       2,159  
Decreases in tax positions for prior years
     (391 )     (239 )
Increases in tax positions for current year
     7,848       8,140  
Settlements
     -       (3,620 )
                 
Uncertain tax positions, end of year
   $ 25,456     $ 31,896  

 
Unrecognized tax benefits included $ 31,077 of tax benefits, which if recognized, would reduce the Company's annual effective tax rate. The Company has further accrued $ 958 of accrued interest related to uncertain tax positions as of December 31, 2009.

 
As of December 31, 2009, the Company is subject to Israeli income tax audits for the tax years 2004 through 2009, to U.S. federal income tax audits for the tax years of 2003 through 2009 and to other income tax audits for the tax years of 2006 through 2009.
 
NOTE 14:-
SHAREHOLDERS' EQUITY

 
a.
The Ordinary shares of the Company are traded on the Tel-Aviv Stock Exchange and its ADS's are traded on NASDAQ.

 
In 2007, the Company completed a secondary public offering of its ADS's on NASDAQ. The Company issued 5,175,000 shares at a price of $ 35.02 per share before issuance expenses. Total net proceeds from the issuance amounted to approximately $ 180,829.

 
b.
Share option plans:

 
In 2003, the Company adopted the 2003 Stock Option Plan ("the 2003 Option Plan"). Under the 2003 Option Plan, employees and officers of the Company may be granted options to acquire Ordinary shares. The options to acquire Ordinary shares are granted at an exercise price of not less than the fair market value of the Ordinary shares on the grant date, subject to certain exceptions, which may be determined by the Company's Board of Directors. Generally, under the terms of the 2003 Option Plan, 25% of the stock options granted become exercisable on the first anniversary of the date of grant and 6.25% become exercisable once every quarter during the subsequent three years. Stock options expire six years after the date of grant.
 
 
F - 42
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 14:-
SHAREHOLDERS' EQUITY (Cont.)

 
Pursuant to the terms of the acquisition of Actimize Ltd. in August 2007, the Company assumed and replaced the stock options and restricted shares granted by Actimize. In 2003, Actimize adopted the 2003 Omnibus Stock Option and Restricted Stock Incentive Plan ("the 2003 Actimize Plan"). Under the 2003 Actimize Plan, the grantees could be granted options to acquire Actimize's Ordinary shares, restricted shares and shares. Incentive stock options to acquire Ordinary shares of Actimize were granted at an exercise price not less than the fair market value of the Ordinary shares of Actimize on the date of grant or as determined by Actimize's board of directors or by a committee thereof. In addition, the options were granted at an exercise price of not less than the par value of the Ordinary shares of Actimize.

 
Generally, under the terms of the 2003 Actimize Plan, 25% of the options granted become exercisable on the first anniversary of the date of grant and 6.25% become exercisable following the lapse of every consecutive quarter thereafter during the subsequent three years. Options generally expire ten years after the date of grant.

 
In June 2008, the Company adopted the 2008 Share Incentive Plan ("the 2008 Plan"), to provide incentives to employees, directors, consultants and/or contractors by rewarding performance and encouraging behavior that will improve the Company's profitability. Under the 2008 Plan, the Company's employees, directors, consultants and/or contractors may be granted any equity-related award, including any type of an option to acquire the Company's Ordinary shares and/or share appreciation right and/or share and/or restricted share and/or restricted share unit and/or other share unit and/or other share-based award and/or other right or benefit under the 2008 Plan (each an "Award"). The options to acquire Ordinary shares are granted at an exercise price of not less than the fair market value of the Ordinary shares on the date of the grant, subject to certain exceptions which may be determined by the Company's Board of Directors, including in some cases options granted with an exercise price of zero.

 
Generally, under the terms of the 2008 Plan, 25% of an Award granted become exercisable on the first anniversary of the date of grant and 6.25% become exercisable once every quarter during the subsequent three years. Specifically with respect to restricted share units, unless determined otherwise by the Board of Directors, 25% of the restricted share units granted become vested on each of the four consecutive annual anniversaries following the date of grant. Awards with a vesting period expire six years after the date of grant. The 2008 Plan provides that the maximum number of shares that may be subject to Awards granted under the 2008 Plan shall be an amount per calendar year, equal to 3.5% of the Company's issued and outstanding share capital as of December 31 of the preceding calendar year. Such amount is reset for each calendar year.
 
 
F - 43
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 14:-
SHAREHOLDERS' EQUITY (Cont.)

 
The fair value of the Company's stock options granted to employees and directors for the years ended December 31, 2007, 2008 and 2009 was estimated using the following assumptions:

   
2007
    
2008
    
2009
  
                   
Expected volatility
     32.5%-37.9 %     32.5%-39.8 %     42.6%-47.7 %
Weighted average volatility
     37.5 %     34.2 %     44.7 %
Risk free interest rate
     3.3%-4.6 %     1.7%-3.1 %     1.2%-2.1 %
Expected dividend
     0 %     0 %     0 %
Expected term (in years)
     2.5-3.7       2.5-3.7       2.5-3.7  

 
A summary of the Company's stock options activity and related information for the year ended December 31, 2009, is as follows:
 
   
Number of options
    
Weighted-average exercise price
    
Weighted- average remaining contractual term (in years)
    
Aggregate intrinsic value
  
                         
Outstanding at January 1, 2009 *)
     6,820,974     $ 26.33       4.3     $ 15,745  
Granted
     1,767,050     $ 27.66                  
Granted upon exchange**)
     576,454     $ 10.50                  
Exercised
     (1,164,465 )   $ 16.80                  
Forfeited
     (388,860 )   $ 28.40                  
Cancelled
     (62,533 )   $ 41.21                  
Cancelled upon exchange **)
     (1,757,204 )   $ 34.68                  
                                 
Outstanding at December 31, 2009
     5,791,416     $ 22.94       4.3     $ 48,387  
                                 
Exercisable at December 31, 2009
     2,276,901     $ 22.34       2.8     $ 20,882  
 
 
*)
On June 15, 2009, the Company repriced 1,020,400 outstanding options that were granted on September 2, 2008, from their previous exercise price of $ 30.25 to an exercise price of $ 22.53. The Company accounted for the re-pricing as a modification and recorded an additional compensation expense, in the amount of $ 2,082, which will be recognized over the remaining vesting period or immediately for vested options. During 2009, the Company recognized $ 1,150 out of the total additional compensation expenses related to this modification.

 
**)
On August 5, 2009, pursuant to a tender offer of June 23, 2009, the Company exchanged on a three-for-one basis 1,492,204 options at exercise prices above $ 30 into 311,454 options and 185,932 RSU's (at par value). The new awards vest in 25% annual increments over a four-year period and have a new six-year term. The Company accounted for the exchange of option as a modification and recorded total incremental costs in the amount of $ 4,684 out of which $ 884 were recorded during 2009.
 
 
F - 44
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 14:-
SHAREHOLDERS' EQUITY (Cont.)

 
On June 15, 2009, the Company's Board of Directors resolved to approve a privately negotiated transaction with certain executive officers, pursuant to which the Company exchanged 265,000 options granted in 2007 having an exercise price per share ranging between $ 34.00 and $ 39.00 with new options having an exercise price per share equal to $ 22.53. The new options will vest in 25% annual increments over a four-year period from the new grant date and will expire six years following the new grant date. The Company accounted for the exchange as a modification and recorded an additional compensation expense, in the amount of $ 1,140, which will be recognized over the new vesting period. During 2009, the Company recognized $ 307 out of the total additional compensation expenses related to this modification.

 
The weighted-average grant-date fair value of options granted during the years 2007, 2008 and 2009 was $ 11.8, $ 8.6 and $ 10.43, respectively.

 
The total intrinsic value of options exercised during the years 2007, 2008 and 2009 was $ 40,735, $ 16,818 and $ 13,457, respectively.

 
The options outstanding under the Company's Stock Option Plans as of December 31, 2009 have been separated into ranges of exercise price as follows:

                           
Weighted
  
     
Options
    
Weighted
          
Options
  
average
  
     
outstanding
    
average
    
Weighted
    
exercisable
  
exercise
  
     
as of
    
remaining
    
average
    
as of
  
price of
  
Ranges of
    
December 31,
    
contractual
    
exercise
    
December 31,
  
options
  
exercise price
    
2009
    
term
    
price
    
2009
  
exercisable
  
           
(Years)
      $           $  
                                 
$ 0.02       1,105       3.66       0.02       1,105     0.02  
$ 0.26       432,346       5.57       0.26       2,597     0.26  
$ 2.46-2.89       34,396       4.92       2.81       34,396     2.81  
$ 6.00-6.87       109,072       6.60       6.62       76,397     6.57  
$ 9.67-14.04       151,784       1.48       10.38       132,912     10.06  
$ 14.60-21.76       898,681       2.89       18.12       710,997     17.64  
$ 22.53-32.31       3,782,034       4.60       26.65       1,052,199     25.77  
$ 34.78-36.27       381,998       3.08       34.79       266,298     34.79  
                                           
          5,791,416       4.26       22.94       2,276,901     22.34  
 
 
A summary of the Company's Restricted Stock Awards ("RSA") activity and related information for the year ended December 31, 2009, is as follows:

   
Number of RSA
    
Weighted average exercise price
  
             
Outstanding at January 1, 2009
     186,064     $ 0.93  
Vested
     (107,376 )   $ 1.02  
Forfeited
     (1,587 )   $ 0.02  
                 
Outstanding at December 31, 2009
     77,101     $ 0.83  

 
As of December 31, 2009, there was approximately $ 23,668 and $ 2,924 of unrecognized compensation expense related to non-vested stock options and restricted stock awards, respectively, expected to be recognized over two years.
 
 
F - 45
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 14:-
SHAREHOLDERS' EQUITY (Cont.)

 
A summary of the Company's Restricted Stock Units ("RSU") activity and related information for the year ended December 31, 2009, is as follows:

   
Number of RSU
    
Weighted average exercise price
  
             
Outstanding at January 1, 2009
     6,500     $ 0.26  
Issued
     249,934     $ 0.26  
Exercised
     (1,625 )   $ 0.26  
Cancelled
     (2,500 )   $ 0.26  
Forfeited
     (9,933 )   $ 0.26  
                 
Outstanding at December 31, 2009
     242,376     $ 0.26  


 
c.
Employee Stock Purchase Plan:

 
Eligible employees under the Employee Stock Purchase Plan ("ESPP") can have between 2% to 10% of their earnings withheld, under certain limitations, to be used to purchase Ordinary shares. Commencing January 1, 2006, the price of Ordinary shares purchased under the ESPP is equal to 95% of the fair market value of the Ordinary shares.

 
During 2007, 2008 and 2009, employees purchased 16,041, 17,613 and 17,331 shares at average prices of $ 31.08, $ 30.14 and $ 21.59 per share, respectively.

 
d.
Dividends:

 
Dividends, if any, will be paid in NIS. Dividends paid to shareholders outside Israel may be converted to dollars on the basis of the exchange rate prevailing at the date of the conversion. The Company does not intend to pay cash dividends in the foreseeable future.
 
 
F - 46
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 15:-
REPORTABLE SEGMENTS, PRODUCT LINES AND MAJOR CUSTOMER DATA

 
a.
Reportable segments:

 
The Company operates under several reportable segments. The following tables present the financial information of the Company's reportable segments.
 
   
Year ended December 31, 2007
  
   
Americas
    
EMEA*)
    
APAC**)
    
Actimize
    
Not allocated
    
Total
  
                                     
Revenues
   $ 283,009     $ 149,913     $ 72,894     $ 11,558     $ -     $ 517,374  
                                                 
Gross profit (loss)
   $ 176,678     $ 98,184     $ 51,818     $ 4,110     $ (19,758 )   $ 311,032  
                                                 
Operating expenses
   $ 63,779     $ 34,272     $ 13,426     $ 20,127     $ 46,594     $ 278,198  
                                                 
Operating income (loss)
   $ 112,899     $ 63,912     $ 38,392     $ (16,017 )   $ (166,352 )   $ 32,834  


   
Year ended December 31, 2008
  
   
Americas
    
EMEA*)
    
APAC**)
    
Actimize
    
Not allocated
    
Total
  
                                     
Revenues
   $ 311,884     $ 170,097     $ 84,029     $ 58,152     $ -     $ 624,162  
                                                 
Gross profit (loss)
   $ 205,824     $ 111,496     $ 62,085     $ 28,946     $ (22,935 )   $ 385,416  
                                                 
Operating expenses
   $ 71,936     $ 34,366     $ 15,024     $ 50,456     $ 176,283     $ 348,065  
                                                 
Operating income (loss)
   $ 133,888     $ 77,130     $ 47,061     $ (21,510 )   $ (199,218 )   $ 37,351  


   
Year ended December 31, 2009
  
   
Americas
    
EMEA*)
    
APAC**)
    
Actimize
    
Not allocated
    
Total
  
                                     
Revenues
   $ 324,233     $ 123,597     $ 63,609     $ 71,676     $ -     $ 583,115  
                                                 
Gross profit (loss)
   $ 216,324     $ 74,730     $ 41,629     $ 34,808     $ (21,581 )   $ 345,910  
                                                 
Operating expenses
   $ 61,428     $ 18,498     $ 15,845     $ 50,541     $ 161,399     $ 307,711  
                                                 
Operating income (loss)
   $ 154,896     $ 56,232     $ 25,784     $ (15,733 )   $ (182,980 )   $ 38,199  

 
*)
Includes Europe, the Middle East (including Israel) and Africa.
 
**)
Includes Asia Pacific.
 
 
F - 47
 

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 15:-
REPORTABLE SEGMENTS, PRODUCT LINES AND MAJOR CUSTOMER DATA (Cont.)

 
The following presents long-lived assets of December 31, 2008 and December 31, 2009:

   
December 31,
  
   
2008
    
2009
  
             
Americas
   $ 241,739     $ 229,449  
EMEA
     88,167       95,393  
APAC
     3,608       4,048  
Actimize
     280,786       344,324  
                 
    $ 614,300     $ 673,214  

 
The Company is organized in three geographical regions (Americas, EMEA and APAC) and an additional separate business unit - Actimize. Each of the geographical regions and Actimize are overseen by their respective segment managers, who have sales and revenue responsibilities for their geographic areas. The segment managers report directly to the Chief Operating Decision Maker ("CODM") with respect to their operating results.

 
The Company's segments are engaged in business activities for which they earn revenues and incur expenses, their results are reviewed by the CODM and discrete financial information is available.

 
The geographical regions sell various products, which are segregated into two product lines: Enterprise Interaction Solutions and Public Safety and Security sector.  The third product line of the Company is the Operational Risk Management Solutions, which is sold by Actimize.

 
In 2010, the Company has started a process of changing its internal organization from a geographical area organization to operating-based segments.

 
b.
Product lines:

Total revenues from external customers on the basis of the Company's product lines are as follows:

   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
                   
Enterprise Interaction Solutions
   $ 382,893     $ 417,454     $ 363,576  
Public Safety And Security Sector
     122,923       148,556       147,863  
Risk and financial crime Solutions
     11,558       58,152       71,676  
                         
    $ 517,374     $ 624,162     $ 583,115  

 
c.
Major customer data as a percentage of total revenues:

   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
                   
Customer A
     13 %     13 %     *  

 
* Less than 10%
 
 
F - 48
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 16:-
SELECTED STATEMENTS OF INCOME DATA

 
a.
Research and development costs, net:
   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
                   
Total costs
   $ 63,271     $ 83,296     $ 82,463  
Less - grants and participations
     (2,677 )     (3,573 )     (3,766 )
Less - capitalization of software development costs
     (962 )     (1,278 )     (1,315 )
                         
    $ 59,632     $ 78,445     $ 77,382  

 
b.
Financial income and other, net:
   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
Financial income:
                  
Interest and amortization/accretion of premium/discount on marketable securities
   $ 10,875     $ 7,739     $ 9,076  
Realized gain on marketable securities
     5       3,054       984  
Interest
     5,499       4,809       1,962  
Foreign currency translation
     1,581       6,088       505  
                         
      17,960       21,690       12,527  
Financial expenses:
                        
Realized loss on marketable securities
     (262 )     (4,107 )     (1,062 )
Interest
     (668 )     (613 )     (705 )
Foreign currency translation
     (1,548 )     (4,568 )     (1,894 )
Other
     (658 )     (1,113 )     (1,154 )
                         
      (3,136 )     (10,401 )     (4,815 )
                         
Other expenses, net
     (24 )     (53 )     (115 )
                         
    $ 14,800     $ 11,236     $ 7,597  

 
c.
Net earnings per share:

 
The following table sets forth the computation of basic and diluted net earnings per share:

 
1.
Numerator:

   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
                   
Net income available to Ordinary shareholders
   $ 37,380     $ 39,107     $ 42,756  
 
 
F - 49
 
 
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 16:-
SELECTED STATEMENTS OF INCOME DATA (Cont.)

 
2.
Denominator (in thousands):
   
Year ended December 31,
  
   
2007
    
2008
    
2009
  
                   
Denominator for basic net earnings per share -
                  
Weighted average number of shares
     54,060       60,429       61,395  
Effect of dilutive securities:
                        
Add - Employee stock options and RSU
     1,984       1,038       1,095  
                         
Denominator for diluted net earnings per share - adjusted weighted average shares
     56,044       61,467       62,490  


NOTE 17:-
SUBSEQUENT EVENTS

 
In January 2010, the Company acquired certain assets and shares from Orsus, for approximately $ 2,000 subject to certain adjustments. Orsus' situator is a Situation Management software platform that enables situation planning, response and analysis for the security, safety and emergency markets.
 
 
F - 50
 
 
SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

  NICE-SYSTEMS LTD.  
       
 
By:
/s/ Zeev Bregman  
   
Zeev Bregman
  
    President and Chief Executive Officer  
       
 
Date:  March 31, 2010
 
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