Edgar Filing: NICE SYSTEMS LTD

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

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

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

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

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.

TABLE OF CONTENTS

PART I		Page

Item 1.	Identity of Directors, Senior Management and Advisers	1
Item 2.	Offer Statistics and Expected Timetable	1
Item 3.	Key Information	1
Item 4.	Information on the Company	22
Item 4A	Unresolved Staff Comments	44
Item 5.	Operating and Financial Review and Prospects	44
Item 6.	Directors, Senior Management and Employees	66
Item 7.	Major Shareholders and Related Party Transactions	81
Item 8.	Financial Information	83
Item 9.	The Offer and Listing	87
Item 10.	Additional Information	89
Item 11.	Quantitative and Qualitative Disclosures About Market Risk	108
Item 12.	Description of Securities Other than Equity Securities	110
PART II
Item 13.	Defaults, Dividend Arrearages and Delinquencies	111
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	111
Item 15.	Controls and Procedures	112
Item 16A.	Audit Committee Financial Expert.	112
Item 16B.	Code of Ethics	113
Item 16C.	Principal Accountant Fees and Services	113
Item 16D.	Exemptions from the Listing Standards for Audit Committees	114
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	114
Item 16F.	Change in Registrant’s Certifying Accountant	114
Item 16G.	Corporate Governance	114
PART III
Item 17.	Financial Statements	114
Item 18.	Financial Statements	114
Item 19.	Exhibits	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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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

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

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.

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.

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.

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.

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.

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.

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.

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%

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:

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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:

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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;

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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.

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Our office in Southampton, UK, which occupies approximately 23,428 square feet; and

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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

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.

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:

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Revenue recognition

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Allowance for doubtful accounts

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Inventory valuation

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Impairment of long-lived assets

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Taxes on income

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Contingencies

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Business combination

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Stock-based compensation

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Valuation of investment in marketable securities

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.

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.

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.

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.

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.

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

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	)

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.

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	)		-			-

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.

	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.

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.

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

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.

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.

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.

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.”

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.

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.

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.

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.

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.

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.

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.