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


FORM 20-F


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

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

For the fiscal year ended o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDEDDECEMBERDecember 31, 20062009


OR

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

OR


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

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

OR

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

Commission file number 0-27466


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

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

Israel
Israel
(Jurisdiction of incorporation or organization)

8 Hapnina Street, P.O. Box 690, Ra’anana 43107, Israel
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:
Securities registered or to be registered pursuant to Section 12(b)Title of the Act:Each Class
Name of Each Exchange
On Which Registered
 Name of Each Exchange
Title of Each ClassOn Which Registered
American Depositary Shares, each representing
NASDAQ Global Select Market
one Ordinary Share, par value one
New Israeli Shekel per share
Securities registered or to be registered pursuant to Section 12(g) of the Act:
NASDAQ Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:

None
(Title of Class)
None
(Title of Class)

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

None
(Title of Class)

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:

51,091,512


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.


x þYes                      oNo


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.


oYes                      x þNo

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:


x þYes                      oNo


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  oLarge accelerated filerx    Accelerated filero  Non-accelerated filero
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

Indicate


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:


oItem 17                      x oItem 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).


oYes                      x þNo

I 

PRELIMINARY NOTE

This annual report contains historical information and forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 with respect to NICE’s business, financial condition and results of operations.  The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “strategy,” “continue,” “goal” and “target” and similar expressions, as they relate to NICE or its management, are intended to identify forward-looking statements.  Such statements reflect the current views and assumptions of NICE with respect to future events and are subject to risks and uncertainties.  The forward-lookingf orward-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, one of which constitutes 16% of our revenues;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’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 4543 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. dollarsDollars, 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.

        All share and per share information in this annual report has been adjusted to give retroactive effect to

During May 2006, we effected a two-for-one split of our ordinary shares.  The split was effected by way of a 100% stock dividend, which had an ex-dividend date of May 31, 2006.

  Unless otherwise indicated, all ordinary share, option and per share amounts in this annual report have been adjusted to give retroactive effect to the stock split for all periods presented.
II 

TABLE OF CONTENTS

                                            PART IPage
 
PART I
Item 1.
Identity of Directors, Senior Management and Advisers
2 1
Item 2.
Offer Statistics and Expected Timetable
2 1
Item 3.
Key Information
2 1
Item 4.
Information on the Company
22
Item 4A
Unresolved Staff Comments
46 44
Item 5.
Operating and Financial Review and Prospects
46 44
Item 6.
Directors, Senior Management and Employees
70 66
Item 7.
Major Shareholders and Related Party Transactions
88 81
Item 8.
Financial Information
89 83
Item 9.
The Offer and Listing
94 87
Item 10.
Additional Information
97 89
Item 11.
Quantitative and Qualitative Disclosures About Market Risk
118 108
Item 12.
Description of Securities Other than Equity Securities
118 110
PART II
PART II
Item 13.
Defaults, Dividend Arrearages and Delinquencies
119 111
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
119 111
Item 15.
Controls and Procedures
119 112
Item 16A.
Audit Committee Financial ExpertExpert.
120 112
Item 16B.
Code of Ethics
120 113
Item 16C.
Principal Accountant Fees and Services
121 113
Item 16D.
Exemptions from the Listing Standards for Audit Committees
121 114
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
122 114
Item 16F.
Change in Registrant’s Certifying Accountant
114
PART IIIItem 16G.
Corporate Governance
114
PART III
Item 17.
Financial Statements
122 114
Item 18.
Financial Statements
122 114
Item 19.
Exhibits
123 115
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.
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 financialbalance sheets data as of December 31, 20052008 and 20062009 and the selected consolidated statements of income data for the years ended December 31, 2004, 20052007, 2008 and 20062009 have been derived from our audited consolidated financial statements.Consolidated Financial Statements. These financial statements have been prepared in accordance with United States generally accepted accounting principles, in the United States, or U.S. GAAP, and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The selected consolidated selected financialstatement of income data as of December 31, 2002, 20032005, and 20042006 and the selected consolidated balance sheet data for the years ended December 31, 20022005, 2006 and 20032007 have been derived from other consolidated financial statementsConsolidated Financial Statements not included in this annual report and have also been prepared in accordance with U.S. GAAP and audited by Kost, Forer, GabbayGab bay & 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 statementsConsolidated Financial Statements and notes thereto and other financial information included elsewhere in this annual report.

2

  
Year Ended December 31,
 
  
2005
  
2006
  
2007
  
2008
  
2009
 
  
(U.S. dollars in thousands, except per share data)
 
OPERATING DATA:
               
Revenues
               
     Products                                                       
 $206,355  $261,098  $316,888  $351,680  $281,783 
      Services                                                       
  104,755   148,546   200,486   272,482   301,332 
Total revenues                                                       
  311,110   409,644   517,374   624,162   583,115 
Cost of revenues
                    
      Products                                                       
  67,543   84,675   89,373   95,861   88,030 
      Services                                                       
  68,683   89,539   116,969   142,885   149,175 
Total cost of revenues                                                       
  136,226   174,214   206,342   238,746   237,205 
Gross profit
  174,884   235,430   311,032   385,416   345,910 
Operating expenses:
                    
Research and development, net
  30,896   44,880   59,632   78,445   77,382 
Selling and marketing                                                  
  72,829   95,190   120,592   147,879   141,526 
General and administrative                                                  
  37,742   60,463   85,089   97,378   72,791 
Amortization of acquired intangible assets
  1,331   4,918   9,175   14,493   16,012 
In process research and development write-off
  -   12,882   3,710   -   - 
Settlement and related expenses
  -   -   -   9,870   - 
Total operating expenses                                                         142,798   218,333   278,198   348,065   307,711 
Operating income                                                         32,086   17,097   32,834   37,351   38,199 
Financial income, net                                                       
  5,398   13,272   14,824   11,289   7,712 
Other income (expenses), net                                                       
  (13)  623   (24)  (53)  (115)
Income before taxes on income                                                         37,471   30,992   47,634   48,587   45,796 
Taxes on income                                                       
  902   8,591   10,254   9,480   3,040 
Net income                                                       
  36,569   22,401   37,380   39,107   42,756 
Net income
 $36,569  $22,401  $37,380  $39,107  $42,756 
                     
Basic earnings per share $0.95  $0.45  $0.69  $0.65  $0.70 
Weighted average number of shares used in
   computing basic earnings per share (in thousands)
       38,242     49,572     53,921   60,088   61,395 
Diluted earnings per share $0.89  $0.43  $0.67  $0.64  $0.68 
Weighted average number of shares used in
   computing diluted earnings per share (in thousands)
    41,292       52,002     55,926   61,268   62,490 
  
At December 31,
  
2005
  
2006
  
2007
  
2008
  
2009
 
  
BALANCE SHEET DATA:
              
Working capital                                                       
 $274,708  $111,800  $152,883  $217,511  $184,460 
Total assets                                                       
  617,250   784,344   1,192,334   1,283,015   1,399,677 
Total debt                                                       
  -   -   -   -   - 
Shareholders’ equity                                                       
  487,041   569,574   903,794   970,822   1,062,754 
1
Year Ended December 31,
2002
2003
2004
2005
2006
 (U.S. dollars in thousands, except per share data)
 
OPERATING DATA:            
Revenues  
     Products  $127,896 $168,055 $182,616 $206,355 $261,098 
     Services   27,445  56,203  70,027  104,755  148,546 
Total revenues   155,341  224,258  252,643  311,110  409,644 
Cost of revenues  
      Products   55,453  64,231  64,432  67,543  84,675 
      Services   26,054  42,084  49,876  68,683  89,539 
Total cost of revenues   81,507  106,315  114,308  136,226  174,214 
Gross profit   73,834  117,943  138,335  174,884  235,430 
Operating expenses:  
     Research and development, net   17,122  22,833  24,866  30,896  44,880 
     Selling and marketing   38,685  53,351  61,855  72,829  95,190 
     General and administrative   23,806  29,840  31,269  37,742  60,463 
     Amortization of acquired intangible assets   58  350  317  1,331  4,918 
     In process research and development write-off   -  -  -  -  12,882 
     Other special charges   29,092  7,082  -  -  - 
Total operating expenses   108,763  113,456  118,307  142,798  218,333 
Operating income (loss)   (34,929) 4,487  20,028  32,086  17,097 
Financial income, net   3,992  2,034  3,556  5,398  13,272 
Other income (expenses), net   (4,065) 292  54  (13) 623 
Income (loss) before taxes on income   (35,002) 6,813  23,638  37,471  30,992 
Taxes on income   350  1,205  2,319  902  8,591 
Net income (loss) from continuing operations.   (35,352) 5,608  21,319  36,569  22,401 
Net income from discontinuing operations   1,370  1,483  3,236  -  - 
Net income (loss)  $(33,982)$7,091 $24,555 $36,569 $22,401 
Basic earnings (loss) per share (1):  
Continuing operations  $(1.28)$0.18 $0.61 $0.95 $0.45 
Discontinued operations   0.05  0.04  0.09  -  - 
Net earnings (loss)  $(1.23)$0.22 $0.70 $0.95 $0.45 
Weighted average number of shares used in computing basic  
  earnings (loss) per share (in thousands)   27,590  32,076  34,994  38,242  49,572 
Diluted earnings (loss) per share (1):  
Continuing operations  $(1.28)$0.17 $0.57 $0.89 $0.43 
Discontinued operations   0.05  0.04  0.09  -  - 
Net earnings (loss)  $(1.23)$0.21 $0.66 $0.89 $0.43 
Weighted average number of shares used in computing diluted  
  earnings (loss) per share (in thousands)   27,590  33,562  37,406  41,292  52,002 

(1) During May 2006 we effected a two-for-one stock split of our ordinary shares. All ordinary shares, options and per share amounts have been adjusted to give retroactive effect to such stock split for all periods presented.

3

At December 31,
2002
2003
2004
2005
2006
 
BALANCE SHEET DATA:            
Working capital  $79,583 $56,174 $51,428 $274,708 $116,327 
Total assets   236,288  249,415  298,311  617,250  784,344 
Total debt   24  -  -  -  - 
Shareholders' equity   154,536  176,831  222,871  487,041  569,574 

4

Risk Factors

General Business Risks Relating to Our Business Portfolio and StructureMarket
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 m ake significant expenditures on research and development and

marketing. We cannot ensure that the market awareness or demand for our new products will grow as rapidly as we expect, or if at all, that we will successfully develop new products or introduce new applications for existing products, that such new products and applications will achieve market acceptance or that the introduction of new products or technological developments by others will not adversely impact the demand for our products.

The risk and financial crime market has emerged only in recent years and is highly competitive and fragmented. Our software solutions in this field compete with software developed internally by potential clients as well as software and other solutions offered by competitors.
The market for digital video products and applications (or Video Platforms and Applications), is highly competitive and fragmented and includes products offering a broad range of features and capacities. The merger of our competitors in this market could substantially influence our ability to be competitive. We compete with a number of large, established manufacturers of video recording systems and distributors of similar products, as well as new emerging competitors. The price per channel of digital recording systems has decreased throughout the market in recent years, primarily due to competitive pressures. We cannot assure you that the price per channel of digital recording systems will not continue to decrease or that our gross profit will not decrease as a result. Moreover, our penetration into this market may not experience the same growth rate as the entire company’s growth rate, which might have a material adverse effect on our earnings.
2
With respect to the public safety part of our business, our ability to succeed depends on our ability to develop an effective network of distributors, while facing pricing pressures and low barriers to entry. We face significant competition from other well-established competitors. Prices have decreased throughout the market in recent years, primarily due to competitive pressures. We cannot assure you that prices will not continue to decrease or that our gross profit will not decrease as a result. We believe that our ability to sell and distribute our Voice Platforms and Applications in the public safety market depends on the success of our marketing, distribution and product development initiatives. We cannot assure you that we will be successful in these initiatives.
The Voice-over-Internet-Protocol (or VoIP) contact center and trading market is highly competitive and we may be unable to compete successfully. The transition of contact centers and trading floors to VoIP platforms is continuing, and may allow one or more of our competitors to take a leadership position with respect to this technology. Strategic partners may change their vendor preference as a result or may develop embedded VoIP recording as part of the VoIP switch or networking infrastructure. Successful marketing of our products and services to our customers and partners will be critical to our ability to maintain growth. We cannot assure you that our products or existing partnerships will permit us to compete successfully.
With respect to our intelligence solutions, we may face increasing competition in all aspects of this business, which may result in price reductions. In addition, we may encounter strong competition from alliances formed or consolidation among our competitors, in an attempt to strengthen their offering. We cannot assure you that our products and services or alliances will permit us to compete successfully.
3
Conditions and changes in the local and global economic environments may adversely affect our business and financial results.
        Adverse economic conditions in markets in which we operate can harm our business. Global financial conditions during the past two years have been characterized by increased volatility and several financial institutions have either gone into bankruptcy or have had to be rescued by governmental authorities. These economic factors include diminished liquidity and tighter credit conditions, leading to decreased credit availability, as well as declines in economic growth and employment levels in almost all sectors, all of which result in lesser demand for our products and services. Although there are currently signs of improvement in the global economy, the recession may continue for an unknown period of time. Partly as a result, entire industries have faced and may be facing extreme contraction and even the prospect of collapse. The credit crisis could have a number of follow-on effects on our business, including a possible: (i) slow-down in our business, resulting from lower customer expenditure, inability of customers to pay for products and services, insolvency of customers or insolvency of key partners, (ii) negative impact on our liquidity, financial condition and share price, which may impact our abilit y 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 qua rterly 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 operat ions.
4
The markets in which we operate are characterized by rapid technological changes and frequent new products and service introductions. We may not be able to keep up with these rapid technological and other changes.

We operate in several markets, each characterized by rapidly changing technology, new product introductions and evolving industry standards. The introduction of products embodying new technology and the emergence of new industry standards can render existing products obsolete and unmarketable and can exert price pressures on existing products. We anticipate that aA number of existing and potential competitors will be introducingmight 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 safety and air traffic control segmentsprivate 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 technologiestech nologies may be slower than we anticipate. We cannot assure you 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 materialm aterial adverse effect on our business, financial condition and results of operations include industry specific factors; our ability to continuously develop, introduce and deliver commercially viable products, solutions and technologies; the market’s rate of acceptance of the product solutions and technologies we offer; and our ability to keep pace with market and technology changes and to compete successfully.

5

Our failure to adequately adapt to changes in the IT industry and the size of customers could negatively impact our future operating results.
Technological trends, such as the evaluation of virtualization technologies, the need for IT efficiency (converting IT costs from capital expenses to operating expenses) and the increased demand for business agility are all contributing to the move of cloud computing into the mainstream.  Cloud Computing means a form of computing in which dynamically scalable and often virtual resources are provided as a service over the Internet. A cloud solution has three distinct characteristics that differentiate it from traditional on-premise solutions.  It is sold on demand, typically by the minute or the hour, it is elastic - a user can have as much or as little of a solution as they want at any given time, and the solution is fully managed by the provider (the customer needs nothing but a personal computer and Internet access).
If enterprise customers embrace cloud computing and change the way they source business solutions, preferring hosted and cloud-based Software-as-a-Service (or SaaS), and if we are not able to adequately adapt and evolve our delivery options to include on-premise, hosted, cloud-based SaaS, or blended-hybrid deployment offerings, our business, financial condition and results of operations could be adversely affected. In addition, cloud computing, could also make it easier for new competitors (such as telecom carriers) to enter our markets due to lower up-front technology costs.
In addition, the economic climate has forced many organizations to reassess their contact center solutions’ infrastructure. For the contact center, the enterprise and the remote and mobile workforce, an all-in-one contact center platform may be a preferred alternative to a multi-point system, as it may result in a reduction in the Total Cost of Ownership (TCO) and the enablement of new cross systems business processes. Although we may benefit from this trend, at the same time, we are observing that there are infrastructure players, for the most part, telephony or switch vendors, that are looking to explore the opportunity to introduce a “contact center in a box” type of solution that will include features and functionality on top of the legacy Work Force Optimization (WFO) capabilities that NICE and other WFO vendors support. Sh ould this trend emerge, and in the event that we will not be able to create an integrated experience for our customers in the form of an integrated suite, we may be faced with a new type of competition, which could have a material adverse effect on our business, financial condition or results of operations.
Furthermore, some of our enterprise customers have increased in size, partly due to consolidation in the financial market. If our technology is not scalable enough to support these changes, it may have a material adverse affect on our business, financial condition and results of operation.
6

Risks associated with our distribution channels and key strategic partners, or our ability to develop such partnerships, may materially adversely affect our financial results.
We have agreements in place with many distributors, dealers and resellers to market and sell our products and services in addition to our direct sales force. We derive a significant percentage of our revenues from one of our distributor channels and new channels may, in the future, account for a significant percentage of our revenues. Our financial results could be materially adversely affected if our contracts with distribution channels or our other partners were terminated, if our relationship with our distribution channels or our other partners were to deteriorate or if the financial condition of our distribution channels or our other partners were to weaken. Moreover, our current distribution channels or our strategic partners may decide to enter into our markets in competition with us, which will likely result in the termination of our relationship and may lead to a significant reduction in sales through related channels.
A portion of our strategic partners are suppliers of telecommunication infrastructure equipment. If our competitors are able to penetrate our strategic relationships or if our strategic partners decide to end the relationship and expand their product offering to compete with us, this may result in a significant reduction of sales made by such strategic partners, as well as to customers who use such partners’ infrastructure or work in their environment.
We believe that developing marketing partnerships and strategic alliances is an important factor in our success in marketing our video platforms and applications and in penetrating new markets for such products. However, unlike our voice platforms and applications, we have only recently started to develop a number of strategic alliances for the marketing and distribution of our video platforms and applications. We cannot assure you that we will be able to develop such partnerships or strategic alliances on terms that are favorable to us, if at all. Failure to develop such arrangements that are satisfactory to us may limit our ability to successfully m arket and sell our video platforms and applications and may have a negative impact on our business and results of operations.
As our market opportunities change, our reliance on particular distribution channels or strategic partners may increase, which may negatively impact our gross margins. There can be no assurance that we will be successful in maintaining or expanding these channels or partnerships. If we are not successful, we may lose sales opportunities, customers and market share. In addition, some of our distribution channels or our strategic partners have developed and marketed IP-based products, software applications and storage products and services in competition with us and there can be no assurance that our distribution channels or our strategic partners will not further develop or market such products and services in the future.
Risks associated with the future plans of our largest global distribution channel may materially adversely affect our financial results.
Avaya, our largest global distribution channel, and one of the leading global providers of enterprise business communication platforms, and a leading provider of infrastructure for contact center operations, accounted for less than 10% of our revenues in 2009 and approximately 13% of our revenues in 2007 and 2008. Avaya has been communicating planned changes in its business model, including: (i) an expected release of an Avaya-branded Work Force Optimization (WFO) suite, and (ii) the shifting of its business model to a channel centric distribution model with a focus on indirect sales through Avaya’s business partners. Currently, Avaya continues to sell and support NICE products, however, it may focus on selling the Avaya-branded suite, which could be based on its relationship with our largest competitor or others, and may change the scope and nature of its relationship with us. In addition, we may be unsuccessful at maintaining or expanding our relationship with Avaya’s distribution channels. Avaya may further decide to directly compete with us by offering recording as a standard functionality in the telephony infrastructure systems (recording at the switch), which may have a substantial negative impact on our relationship with Avaya.
These changes may result in a significant reduction of our sales made through Avaya. Furthermore, we also sell our products, either directly or through our other distribution channels, to customers who use Avaya’s infrastructure or operate in Avaya’s environment, and therefore may experience a reduction in sales to these customers, which is broader than Avaya’s direct business with us.
We depend on a small number of significant customers.
        While we do not have a single customer that we regularly depend on, we do have a small number of significant customers in each sector of our business, which could be material to a particular sector of our business. The deferral or loss of a sale to such a customer, could have a material adverse affect on our business and operating results.

7
We face risks relating to large projects.
        Some of the customer projects for which we offer our security products, solutions and related services are growing in size, especially city center protection projects. The larger and more complex such projects are, the greater the risks associated with such projects. These risks may include our exposure to penalties and liabilities resulting from a breach of contract, our ability to fully integrate our products with third party products, a combination of various technologies and complex environments. In some of these projects we are highly depended upon subcontractors for various planning aspects, solution development, integration, delivery and the successful and timely completion of such projects. Also, we may be held liable for the failure of our subcontractors, from whom we may have no recourse. In addition, there may be more fluctuations in cash collection and revenue recognition with respect to such projects.
In order to successfully compete in all sectors of our business, including security projects awarded through a competitive bid, we may be required to commit to provide certain technologies and solutions which are under development or which we may have to develop, license from a third party, or acquire, specifically for that customer. This may result in technological difficulties that may prevent us from complying with our contractual obligations, exposing us to possible penalties and legal claims, and may affect the profitability of a project, which may have a negative impact on our business, financial condition and results of operations.
We face risks relating to government and governmental entities' contracts.
We sell our products and solutions to, among other customers, governments and governmental entities. These sales are subject to special risks, such as delays in funding, termination of contracts or sub-contracts at the convenience of the government, termination, reduction or modification of contracts or sub-contracts in the event of changes in the government’s policies or as a result of budgetary constraints, and increased or unexpected costs resulting in losses or reduced profits under fixed price contracts. Such occurrences have happened in the past and we cannot assure you that we will not experience problems in the future in our performance of such government contracts.
Operating globally exposes us to additional and unpredictable risks.
We sell our products and solutions throughout the world and intend to continue to increase our penetration of international markets. In 2007, 2008 and 2009, approximately 98% of our total sales were derived from sales to customers outside of Israel. A number of risks are inherent in international transactions. Our future results could be materially adversely affected by a variety of factors including changes in exchange rates, general economic conditions, regulatory requirements, tax structures or changes in tax laws or practices, and longer payment cycles in the countries in our geographic areas of operations. International sales and operations may be limited or disrupted by the imposition of governmental controls and regulations, export license requirements , political instability, trade restrictions, changes in tariffs and difficulties in managing international operations. We cannot assure you that one or more of these factors will not have a material adverse effect on our international operations and, consequently, on our business, financial condition and results of operations.
8
Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments. In particular, we may not succeed in making additional acquisitions or be effective in integrating such acquisitions.

As part of our growth strategy, we have made a number of acquisitions over the past few years, including four acquisitions in 2009 and the beginning of 2010 (see Item 5, “Operating and Financial Review and Prospects—Recent Acquisitions” in this annual report), and expect to continue to make acquisitions. We frequently evaluate the tactical or strategic opportunity available related to complementary businesses, products or technologies. The process of integrating an acquired company’s business into our operations and/or of investing in new technologies, may result in unforeseen operating difficulties and large expenditures and may absorb significant management attention that would otherwise be available for the ongoing development of our business. business, and which may result in the loss o f 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 or otherwise realize anticipatedand 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 acquire d 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 a cquisitions that we have identified as crucial to the implementation of our strategy. We may not be able to obtain the necessary regulatory approvals, including those of competition authorities and foreign investment authorities, in countries where we seek to consummate acquisitions. For those and other reasons, we may ultimately fail to consummate an acquisition, even if we announce that we plan to acquire a company.
In addition, if we consummate one or more significant acquisitions in which the consideration consists, in whole or in part, of ordinary shares or American Depositary Shares (ADSs), representing our ordinary shares, shareholders would suffer dilution of their interests in us. We have also invested in companies which can still be considered in the start-up or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose our entire initial investment in these companies.

Due to changes in the industry and market conditions, we could also be required to realign our resources and consider restructuring or other action, which could result in an impairment of goodwill.

9
We have expanded into new markets and may not be able to manage our expansion and anticipated growth effectively.

        We

Over the last few years we have established a sales management and service infrastructure in India by recruitingworldwide. In Asia and the Pacific (the APAC region), we recruited sales management sales and service personnel in order to bring about further growth in revenue in the Asia PacificAPAC market and have expanded our professional services group to include business consultants. Also, since 2002in the last couple of years, we have been expanding our presence in Europe (mainly in the United Kingdom) and in the Middle East and Africa (the EMEA region) through organic growth and through acquisitions. We have also expanded our acquisition of Thales Contact Solutions (or TCS)presence in the South American region and FAST Video Security.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 to warrant the investment.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.

6

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 servicessolutions 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 changes in management, sales force and technical personnel; expanded or differing competition resulting from entering the enterprise software market;market, increased need to expand our distribution network to include system integrators which could impact revenues and gross margins;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 upon outsourcers foron the manufacturesuccess of our key products. The failurerecording 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 manufacturersrevenues, and we anticipate that our recording solutions will continue to meet our quality or delivery requirements would likely haveaccount for a material adverse effect on our business, results of operations and financial condition.

        In 2002, we entered into a manufacturing agreement with Flextronics Israel Ltd., a subsidiary of Flextronics, a global electronics manufacturing services company. Under this agreement, Flextronics provides us with a comprehensive manufacturing solution that covers all aspects of the manufacturesignificant portion of our products from order receipt to product shipment, including purchasing, manufacturing, testing, configuration, and delivery services. This agreement covers all of our products. In connection with the acquisition of Dictaphone Corporation’s Communications Recordings Systems division (or CRS), we also have a manufacturing agreement with Bulova Technologies EMS LLC (Bulova), pursuant to which Bulova manufactures all ex-CRS products. As a result of these arrangements, we are now fully dependent on Flextronics and Bulova 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 and Bulova to consistently meet our quality or delivery requirements and we may experience production interruptions if any of Flextronics or Bulova 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 these manufacturers 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.

7

Undetected problems in our products could directly impair our financial results.

        If flawssales in the design, production, assembly or testing of our products (by us or our suppliers) were to occur, we could experience a rate of failure in our products that would result in substantial repair, replacement or service costs and potential liability and damage to our reputation. Therenext several years, however, there can be no assurance that our effortsthe recording market will continue to monitor, develop, modifygrow. Also, switch manufacturers, such as Avaya and implement appropriate test and manufacturing processes for our products will be sufficientCisco, have announced their intent to permit us to avoid a rate of failure in our products that results in substantial delays in shipment, significant repair or replacement costs or potential damage to our reputation, any ofoffer recording at the switch, which could 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 delaysa significant decline in making product shipments,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 andor results of operations.

In addition, somethe trend of our major suppliers use proprietary technologycustomers of enterprises moving from voice to other means of communication (such as e-mail, instant messaging and software code that could require significant redesign of our productschat) with the enterprise, may result in a reduction 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.

The European Union has issued directives relating to the sale in member countries of electrical and electronic equipment, including products sold by us. If our products fail to comply with these directives, we could be subject to penalties and sanctions that could materially adversely affect our business.

        A directive issued by the European Union on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or “RoHS,” came into effect on July 1, 2006. The RoHS directive lists a number of substances including, among others, lead, mercury, cadmium and hexavalent chromium, which must either be removed or reduced to within maximum permitted concentrations in any products containing electrical or electronic components that are sold within the European Union. Our products meet the requirements of the RoHS directive and we are making every effort in order to maintain compliance, without otherwise adversely affecting the quality and functionalities of our products.

8

        We, like other manufacturers, are dependent on our suppliers for certain components and sub-system modules to comply with these requirements, and we may be required to pay higher prices for components that comply with this directive. In addition, compliance with the RoHS directive may require us to undertake significant expenses with respect to the re-design of our products. We may not be able to pass these higher component costs or redesign costs on to our customers. We cannot be sure that we will be able to comply with these regulations on a cost effective basis or that a sufficient supply of compliant components will be available to us. Our inability or failure to comply with these regulations, including by reason of failure by our suppliers to comply with the directive, may restrict us for a period of time from conducting certain business in the European Union and could have a material adverse effect on our results of operations.

        A further directive on Waste Electrical and Electronic Equipment, or “WEEE,” approved by the European Union in 2003, promotes waste recovery with a view to reducing the quantity of waste for disposal and saving natural resources, in particular by reuse, recycling and recovery of waste electrical and electronic equipment. The WEEE directive covers all electrical and electronic equipment used by consumers and electronic equipment intended for professional use. The directive, which partly came into effect in August 2005, requires that all new electrical and electronic equipment put on the Community market be appropriately labeled regarding waste disposal and contains other obligations regarding the collection and recycling of waste electrical and electronic equipment. 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.

        The countries of the European Union, as a single marketdemand for our products, accounted in 2006 for approximately 20%voice recording platform and applications. Furthermore, if such trend continues, our customers may cease to record voice and switch to recording other means 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 couldcommunication. This may have a material adverse affect on our business, financial condition or results of operations.

If the pace of spending by the U.S. Department of Homeland Security and other government and security organizations is slower than anticipated, our security business will likely be adversely affected, perhaps materially.
The market for our security solutions in closed circuit television, or CCTV, continuous recording, public safety and law enforcement is highly dependent on the spending cycle and spending scope of the U.S. Department of Homeland Security, as well as local, state and municipal governments and security organizations in international markets. We cannot be sure that the spending cycle will materialize as we expect and that we will be positioned to benefit from the potential opportunities, especially in light of the current unfavorable economic and market conditions.
10
We face foreign exchange currency risks.
We are impacted by exchange rates and fluctuations thereof. We are likely to face risks from fluctuations in the value of the NIS, EUR, GBP and other currencies compared to the U.S. dollar, the functional currency in our financial statements. A significant portion of the expenses associated with our Israeli operations, including personnel and financial condition.

If we lose a major customer or support contract,facilities related expenses, are incurred in NIS, whereas most of our results of operations may suffer.

        We derivebusiness and revenues are generated mostly in U.S. dollars, but also in GBP, Euros and other currencies. In addition, a significant portion of our revenues from services, which include maintenance, project management, support and training. As a result, if we lose a major customer or if a support contract is delayed or cancelled, our revenues would be adversely affected. In addition, customers who have accounted for significant service revenues in the past may not generate revenues in future periods. Our failure to obtain new customers or additional orders from existing customers could also materially affect our results of operations.

9

Risksexpenses associated with our distribution channelsEuropean operations, are incurred in GBP and key strategic partnersEUR. If the value of the U.S. dollar decreases against the NIS, our earnings may materially adverselybe negatively impacted. In 2007 and 2008, the value of the U.S. dollar significantly decrease d 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.

        We have agreements For information on the market risks relating to foreign exchange, please see Item 11, “Quantitative and Qualitative Disclosures about Market Risk” 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 top distribution channel accounted for approximately 19%, 21% and 16% of our revenues in 2004, 2005 and 2006, respectively. 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. Additionally, our competitors’ ability to penetrate our strategic relationships, particularly our relationship with Avaya, our largest global distribution channel and one of the leading global providers of enterprise business communication platforms in voice, e-business and data, may result in a significant reduction of sales through that channel. Moreover, our current distribution channels or other 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.

        As our market opportunities change, our reliance on particular distribution channels or other partners may increase, which may negatively impact gross margins. There can be no assurance that we will be successful in maintaining or expanding these channels. If we are not successful, we may lose sales opportunities, customers and market share. In addition, some of our distribution channels or our other partners are suppliers of telecommunication infrastructure equipment. Some of our distribution channels or our other 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 other partners will not further develop or market such products and services in the future.

this annual report.

Our uneven sales patterns could significantly impact our quarterly 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.

10

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 also 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 digital video. As eachcommunications intelligence. Because a significant portion of our product typesoverhead 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 delive ry of our platforms and services have different gross margins, changesapplications is short, and therefore our backlog for such products is currently, and is expected to continue to be, small and substantially unrelated to the level of sales in subsequent periods. As a result, our results of operations for any quarter may not necessarily be indicative of results for any future period. Due to all of the foregoing factors, in some future quarters our sales or operating results may be below our forecasts and the expectations of public market analysts or investors.
11
Our quarterly results are likely to fluctuate, which could cause us to miss market expectations and as a result may impact the trading price of our ordinary shares.
The trading price of our ordinary shares has experienced significant volatility in the mixpast and may continue to do so in the future. Unfavorable changes, many of products soldwhich 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 period will have an impact, and perhaps a materialfurther impact on our gross profitquarter-to-quarter results and netbacklog.
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 that period.

the credit markets continues, it could adversely affect the liquidity of our investments, or the downgrading of the credit rating of our investments could cause us to recognize some loss. For information on the types of our investments, see Item 11, “Quantitative and Qualitative Disclosures About Market Risk” in this annual report.

12
Incorrect or improper use of our products or failure to properly provide professional services and maintenance services could result in negative publicity and legal liability.
Our products and solutions are complex and are deployed in a wide variety of network environments. The proper use of our software requires extensive training and, if our software products are not used correctly or as intended, inaccurate results may be produced. Our products may also be intentionally misused or abused by clients who use our products. The incorrect or improper use of our products or our failure to properly provide professional services and maintenance services, including installation, training, project management, product customizations and consulting to our clients may result in losses suffered by our clients, which could result in negative publicity and product liability or other legal claims against us.
We rely on software from third parties. If we lose the right to use that software, we would have to spend additional capital to redesign our key personnelexisting software or cannot recruit additional personnel,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 may suffer.

        If our growth continues,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 willwould be required to hirespend 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 integrate new employees. Recruiting and retaining qualified engineers and computer programmers to perform research and development and to commercializethe commercial release of our products as well as qualified personnelcould 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 marketoccur, we could experience a rate of failure in our products or solutions that would result in substantial repair, replacement or service costs and sell those products, are criticalpotential liability and damage to our success. As of December 31, 2006, approximately 25% of our employees were devoted to research and product development and approximately 26% were devoted to marketing and sales.reputation. There can be no assurance that weour efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products or solutions will be ablesufficient to successfully recruit and integrate new employees. There is often intense competitionpermit us to recruit highly skilled employeesavoid a rate of failure in the technology industry. We may also experience personnel changes asour 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 result of our move from multimedia recording equipment towards business performance solutions. An inability to attract and retain highly qualified employees may have anmaterial adverse effect on our abilitybusiness, results of operations and financial condition.
We may be subject to develop newclaims 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 enhancements for existing productsstandard 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 to successfully market such products,$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 which would likelyany individual claim or all claims in the aggregate will not exceed insurance polic y coverage limits. A significant liability claim against us could have a material adverse effect on our results of operations and financial position.
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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 success also depends, to a significant extent, upon the continued service of a number of key management, sales, marketingsoftware products are highly complex, and development employees, the loss of any of whomundetected software errors in our products could materially adversely affect our business,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.

Operating internationally exposes us 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 additional and unpredictable risks.

        We sellattract or retain clients.

Further, since our products throughoutare used for compliance recording and operational risk management functions that are often critical to our clients, the worldlicensing and intend to continue to increase our penetration of international markets. In 2003, 2004, 2005 and 2006, approximately 99%support of our total sales were derived from salesproducts makes us potentially subject to customers outside of Israel, and approximately 50%, 44%, 53% and 54%, respectively,product liability claims. In particular, some of our total sales were madecustomers, including financial institutions, may suffer significant damages as a result of a failure of our risk and financial crime solutions to customers in North America. 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,perform their functions. Although we attempt to limit any potential exposure through quality assurance programs, insurance 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. Wecontractual terms, we cannot assure you 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 succes sful assertion of one or more of these factors will notlarge product liability claims against us could have a material adverse effect on our internationalresults of operations and consequently, on our business, financial condition and results of operations.

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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 4463 U.S. patents and 2478 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 164121 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.

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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, (whichVerint America Inc. and Multi-Format, Inc.  (all of which have since been settled and dismissed) and Witness Systems, Inc. (described underFair Isaac Corporation  (see Item 8, “Financial Information–Information—Legal Proceedings” in this annual report). We believe that none of these allegations has merit. We cannot assure you, however, that we will be successful in defending against the claimspending claim that havehas been asserted or any other claims that may be asserted. We also cannot assure you that such claimsclaim 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 face potential product liability claims against us.

        Our products focus specifically on organizations’ business-critical operations. Weuse 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 are defective or that some function or malfunctionproducts. Such events could disrupt our operations and the sales of our products, causedwhich would negatively impact our revenues and cash flow.
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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 contributed to property, bodilylicense 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 consequential damages. 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 attemptmay from time to minimizetime 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 risk by incorporating provisions intomanufacturer 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 distributionproducts, we could lose time-sensitive customer orders and standard sales agreementshave significantly decreased quarterly revenues and e arnings, 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 designedused 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 m anners 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 exposuresuppliers are unable to potential claimsmeet our requirements in a timely manner, we cannot assure you that our inventory and alternative sources of liability. No assurancesupply would be sufficient to avoid a material interruption or delay in production and in availability of spare parts.
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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 givenno assurance that all claimswe will be barred by the contractual provisions limiting liability or that the provisions will be enforceable. We carry product liability insuranceable to successfully recruit and integrate new employees. There is often intense competition to recruit highly skilled employees in the amounttechnology industry. We may also experience personnel changes as a result of $25,000,000 per occurrenceour move from multimedia recording equipment towards business performance solutions. An inability to attract and $25,000,000 overall per annum. No assurance can be given that the amountretain 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 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 couldwhich would likely have a material adverse effect on our results of operations and financial position.

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If our advanced compliance recording solutions fail Our success also depends, to record our customers’ interactions, we may be subject to liability and our reputation may be harmed.

        Manya significant extent, upon the continued service 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 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.

We face risks relating to government contracts.

        We sell our products 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.

The markets in which we operate are highly competitive and we may be unable to compete successfully.

        The market for our products and related services, in general, is highly competitive. Additionally, some of our principal competitors such as Witness Systems, Inc. and Verint Systems, Inc. (who announced a proposed business combination in February 2007) may have significantly greater resources and larger customer bases than do we. We have seen evidence of deep price reductions by our competitors and expect to continue to see such behavior in the future, which, if we are required to match such discounting, will adversely affect our 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.

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        We are expanding the scope of our Voice Platforms and Applications to Enterprise Performance Management solutions, with a focus on analytic software solutions that are based on voice and data content analysis. The market for such content analysis applications is still in its early phases. Successful positioning of our products is a critical factor in our ability to maintain growth. Furthermore, new potential entrants from the traditional enterprise business intelligence and business analytics sector 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 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.

        With respect to the market for digital video products and applications (or Video Platforms and Applications), our Video Platforms and Applications are utilized by entities in the closed circuit television, or CCTV, security, gaming and retail industries to capture, store and analyze digital video and related data. The market for our Video Platforms and Applications is highly competitive and includes products offering a broad range of features and capacities. We compete with a number of large, established manufacturerskey management, sales, marketing and development employees, the loss of video recording systems and distributorsany 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 to the mid-low segment of the public safety market, while facing pricing pressures and low barriers to entry. We face significant competition from other well-established competitors, including CVDS Inc., VoicePrint Inc. and others. 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 contact center and trading market is highly competitive and we may be unable to compete successfully. The recent expansion of Voice-over-Internet-Protocol (or VoIP) into contact centers and trading floors may allow one or more of our competitors to take a leadership position with respect to this new 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.

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Adverse conditions in the information technology sector may lead to a decreased demand for our voice platforms and applications and may harmwhom could materially adversely affect our business, financial condition and results of operations.

        We are subject to the effects of general global, economic and market conditions. Our operating results may be materially adversely affected as a result of unfavorable economic conditions and reduced information technology spending, particularly in the product segments in which we compete. In particular, many enterprises, telecommunications carriers and service providers may reduce spending in connection with contact centers, and many financial institutions may reduce spending related to trading floors. Customer purchase decisions may be significantly affected by a variety of factors including trends in spending for information technology and enterprise software, market competition, and the viability or announcement of alternative technologies. If these industry-wide conditions exist, they may have a material adverse impact on our business, financial condition and results of operations.

We depend on the success of the NiceLog system and related products.

        The NiceLog system, our digital voice recording system, is a computer telephony integrated multi-channel voice recording and retrieval system. We are dependent on the success of the NiceLog system and related products to maintain profitability. In 2004, 2005 and 2006, approximately 78%, 78% and 63%, respectively, of our revenues were generated from sales of NiceLog systems and related products and we anticipate that such products will continue to account for a significant portion of our sales in the next several years. A significant decline in sales of NiceLog systems and related products, or a significant decrease in the profit margin on such products, could have a material adverse effect on our business, financial condition or results of operations.

We may be unable to develop strategic alliances and marketing partnerships for the global distribution of our video platforms and applications, which may limit our ability to successfully market and sell these products.

        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.

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We may be unable to commercialize new video content analysis applications.

        We are currently in the process of developing and commercializing new video content analysis applications that will enable real-time detection of security threats. The market for such video content analysis applications is still in an early phase. In addition, because this is a new opportunity for changing security procedures and represents a transition to proactive security management, we are not able to predict the pace at which security organizations will adopt this technology, if at all. Successful positioning of our products is a critical factor in our ability to maintain growth. New potential entrants to the market may decide to develop video content analysis capabilities and compete with us in this emerging opportunity. As a result, we expect to continue to make significant expenditures on marketing. We cannot assure you that a market for these products will develop as rapidly as we expect or at all, that we will successfully develop new products or introduce new applications for existing products, that new products or applications will meet market expectations and needs, that we will be successful in penetrating these markets and in marketing our products or that the introduction of new products or technological developments by others will not adversely impact the demand for our video content analysis applications.

If the pace of spending by the U.S. Department of Homeland Security is slower than anticipated, our security business will likely be adversely affected, perhaps materially.

        The market for our security solutions in 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.

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 U.S.,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.

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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 usour 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.
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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 stockshare price.

The Sarbanes-Oxley Act of 2002 imposes certain duties on us. Our efforts to comply with the requirements of Section 404, which applyfirst 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 regulatoryregulator y 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 common stock.

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 file.do business. From time to time, we are subject to income and other tax audits.audits, the timings of which are unpredictable. While we believe we comply with applicable income 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 affecteffect on our results of operationsoperat ions and financial condition.

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Risks relating to Israel

Our business may be impacted by inflation and NIS exchange rate fluctuations.

        Exchange rate fluctuations between the U.S. dollar and the NIS may negatively affect our earnings. A substantial majority of our revenues and a substantial portion of our expenses are denominated in U.S. dollars. However, a significant portion of the expenses associated with our Israeli operations, including personnel and facilities related expenses, are incurred in NIS. Consequently, inflation in Israel will have the effect of increasing the dollar cost of our operations in Israel, unless it is offset on a timely basis by a devaluation of the NIS relative to the U.S. dollar. In addition, if the value of the U.S. dollar decreases against the NIS, our earnings may be negatively impacted. In 2006, the U.S. dollar depreciated against the NIS by 8.2% while inflation decreased by only 0.1%, and from January 1, 2007 to May 31, 2007, the U.S. dollar depreciated against the NIS by an additional 4.5%. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation or appreciation of the NIS against the U.S. dollar or of the U.S. dollar against the NIS. If the U.S. dollar cost of our operations in Israel increases and if the current trend of depreciation of the U.S. dollar against the NIS continues, our dollar-measured results of operations will be adversely affected. In addition, exchange rate fluctuations in currency exchange rates in countries other than Israel where we operate and do business may also negatively affect our earnings.

We are subject to the political, economic and militarysecurity 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 militarysecurity 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, and in January 2006, Hamas, an Islamist movement responsible for many attacks, including missile strikes, against Israelis, won the majority of the seats in the Parliament of the Palestinian Authority. This development has further strained relations between Israel and the Palestinian Authority. Further, in the summer of 2006, Israel engaged in a war with Hezbollah, a Lebanese Islamist Shiite militia group, which involved thousands of missile strikes and disrupted most day-to-day civilian activity in northern Israel. ActsPalestinians. 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.

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Some of our officers and employees are currently obligated to perform annual military reserve duty and some were called to duty during the summer of 2006. Additionally, induty. In the event of a military conflict, including the ongoing conflict with the Palestinians, these persons could be required to serve in the military for extended periods of time. We cannot assess the full impact of these requirements on our workforce or business and we cannot predict the effect on us of any expansion or reduction of these obligations.

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Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.

Service of process upon our directors and officers, most of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, since the majority of our assets and most of our directors and officers are located outside the United States, any judgment obtained in the United States against us or these individuals or entities may not be collectible within the United States. Additionally, it may be difficult to enforce civil liabilities under U.S. federal securities law in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim.  In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim.&# 160; 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.

We depend on

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.

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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“Privileged Enterprise” following such amendment). The amendment applies to ApprovedAs of December 31, 2009, we have six Ap proved Enterprise programs in which the year of commencement of benefits under the law is 2004 or later, unless such programs received approval from the applicable government authority prior to December 31, 2004, in which case the provisions of the amendment will not apply. We have oneand four Privileged Enterprise programprograms, which isare covered by the amendment. WhilstWhile we believe that we meet the statutory conditions as set out in the amendment, there can be no assurance that the tax authorityauthorities in Israel will concur. Should thisit be determined that these Privileged Enterprise programprograms do not be considered to meet the statutory conditions, our provision for income taxes will increase materially.

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As a result of the amendment, tax-exempt income generated under the provisions of the amended law, will subject us to taxes upon dividend distribution or complete liquidation.

We do not intend to distribute any amounts of itsour 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–Company—Research and Development” in this annual report, for additional information about these programs of the OCS.

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–Information—Mergers and Acquisitions” in this annual report, for additional discussion about some anti-takeover effects of Israeli law.

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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.

Our operating results in one or more future periods may fluctuate significantly and may cause our share price to be volatile.

        The

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Future sales cycle for our products and services is variable, typically ranging between a few weeks to several months, and in some extreme cases it may take even longer, 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,ADSs 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, 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 audio and video 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. In such event, the market price of our ordinary sharesADSs.

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 be materially adversely affected.

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become freely tradable.
Item 4.                      Information on the Company.
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, NICENice 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–Prospects—Recent Acquisitions and Dispositions” in this annual report.

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Business Overview

           We are a leading global provider of advanced solutions that capture, manageenable enterprises and analyze unstructured multimedia content enablingsecurity 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 and behave proactively.while increasing situational awareness. Unstructured multimedia 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 contact centers, back officesemergency se rvice providers and branches,first responders, video captured by closed circuit television cameras, radio communications between emergency servicesservices’ and first responders’ personnel, internet sessions, email and instant messaging.messaging and security management solutions for command and control centers. Our solutions include integrated, scalable, multimediacross-channel recording platforms, cross-channel real-time analytics, software applications and related professional services.management applications. These solutions address critical business processes and risk management, compliance procedures and security needs of companiesenterprises and publicsecurity organizations. Our solutions facilitate faster decision-making and near real-time action,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 use our systems inspan a variety of enterprises,industries, such as financial services, health care,telecommuni cations, healthcare, outsourcers, retail, media, travel, service providers, telecommunicationsutilities and utilities.others. Our financial crime solutions primarily serve financial services organizations. Our security solutions are primarily focused on homeland securitytailored to protect city centers, transportation systems, critical infrastructure, enterprise campuses and first responder organizations, transportation organizations, government-related organizations and the private sector.more. Our solutions are deployed at over 24,000 customers, including over 8580 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–Prospects—Results of Operations.”

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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 manne r. Existing business intelligence and other IT solutions have addressed these growing challenges to some degree. However, institutions require improved solutions that not only provide better compliance and surveillance, but also more current, real-time information with increased operational visibility. Advanced compliance related solutions enable the reduction of the costs associated with ongoing compliance, improved customer service, while creating the required audit trail for regulatory purposes.

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        Increased focus on business productivity, operational performance and profitability. CompaniesIn 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 additionalnew customers andan d the maturation of many industries, it is increasingly important to acquire new customers and 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. These challenges have been heightened by the broad adoption of Voice-over-Internet-Protocol (VoIP) leading to an increased number of points of contact between companies and their customers, as well as the broad deployment of contact center solutions to remote locations.

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 enable quality monitoring, workforce managementaddress contact center operational efficiency, customer experience, sales and performance managementmarketing effectiveness, and adherence to better utilize their resources.

policies and regulations.

Companies have historically invested in business intelligence solutions and operational systems which rely on structured transactional data contained in Customer Relationship Management (CRM),CRM, Enterprise Resource Planning (ERP) and other related application databases in order to better utilize business intelligence.databases. Traditional business intelligence solutions unlock value contained in these structured data by describing what has happened in any given transaction, and then, by examining patterns incollecting 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 multimedia content that is generated by ongoing interactions with their customers, employees or partners.partners across the various available channels of interactions. Furthermore, many operational decisions can be greatly enhanced by providing near real-time insight in to both transactions and interactions. By employing software-based cross-channel analytics on unstructured multimedia 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.

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Risk and compliance departments are also facing growing pressure to optimize operations. This results in consolidation of activities across the enterprise and the adoption of more accurate financial crime and compliance tools that can reduce false alarms and the shift to enterprise wide investigation technologies to replace point solutions which were often developed in-house.
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Continued adoption of Internet Protocol adoption drivingand proliferation of multimediamulti-channel content. VoIP is emerging asIP has become the standard for enterprise communications and is being deployed widely. The increasing adoption of VoIPIP 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 offeruse email, Internetinstant 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 dramatically.substantially. As a result, many businesses are faced with the increasing challenge of better understandingunderstand ing the variety of unstructured multimediamulti-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.manner, in addition to the general trend of proliferation of security and surveillance sensors.

New securityIncrease 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 beginni ng 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 homeland security.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 threatsmore sophisticated and complex threats. Organizations are also facing vast amount s of sources and information, which make it more difficult to public safety‘connect the dots’ and homeland security.act efficiently. As a result of these global trends, these organizations face the growing 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.devices is growing. Emergency services and public organizations require increasingly sophisticated solutions to analyze this content in order to strengthen the measures they take for public safety and security.
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        Emerging needs for holistic situational awareness and event management in the security market.  The number and variety of physical security sensors is growing substantially, with public and private organizations deploying security systems, such as surveillance cameras and access control and intrusion detection sensors. Organizations, municipalities and governmental entities are struggling to eliminate the number of information silos created by deployment of redundant security systems. These silos limit the control room operators’ ability to gain a cohesive and unified picture of situations. The lack of unified solutions needundermines the ability to identify threats as they occurtake deci sive actions; furthermore, the lack of adequate tools for sharing information in real time between the various field security personnel, emergency forces and analyze video footage to identify suspicious objects or behavior more quicklylaw enforcement agencies, among others, can substantially prolong response time and effectively.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 varietyva riety of detection devices, such as closed circuit television.

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Increased urbanization raises rates of crime and risks of terror attacks. Increased urbanization in both developed and developing countries results in higher rates of various types of crime (such as robbery, theft, murder and other assaults) and greater fears of terror attacks in city centers and other metropolitan areas and systems (such as mass transit). These growing concerns are driving large-scale security projects in these areas, aiming at improving the security of the citizens. These large-scale projects include installation and implementation of wide-scale security systems, which better synchronize and correlate multimedia data sources in order to assist law enforcement officials to detect and prevent crimes and terror attacks and investigate quickly in order to apprehend the suspects.
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Our Strategy
The key elements of our strategy include the following:
Heightened regulatoryDrive 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,& #160; 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 requirementssoftware 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 high costlargest and broadest risk and financial crime solutions provider. The consolidation of dispute resolution. Regulatory pressures have increased for corporationsfinancial crime management, coupled with the industry’s evolution towards enterprise risk and public organizations worldwide, especiallycompliance syste ms, need to monitor all channels, growing regulatory pressure and focus on costs reduction and productivity improvement, all point in the wakesame 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 recent well-publicized accounting scandals. For example, regulationsthe industry and maintain our market leadership position.
Drive deployment of end-to-end security solutions. Following the acquisition of Orsus, we are now in a unique position to deliver a comprehensive solution that complements our proven Video Surveillance, Public safety and multimedia reconstruction capabilities, with an advanced security management solution that offers complete situational awareness. This end-to-end solution addresses market demand for a unified solution that eliminates information silos and enables security personnel to proactively mitigate risks through effective execution of optimal security operational procedures. We intend to leverage this broad solution portfolio to strengthen our market leadership and accelerate the penetration into transportation, critical facilities, government institutes and corporate facilities markets, while expanding the offering to our existing installed base.

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Drive deployment of our solutions through value-added services.Our customers face diverse business and deployment challenges. We continuously develop our professional service organization that helps our customers capture the full value from our solutions. We help our customers analyze their business issues and re-engineer critical processes to address their specific needs. These value-added services should allow us to accelerate the market penetration of our advanced solutions and expand our offering to our installed base.
Expand and leverage our existing customer base, strategic alliances and global infrastructure. With over 24,000 customers in more than 150 countries, including over 80 of the Fortune 100 companies, we believe there are abundant opportunities to up-sell and cross-sell within our existing customer base by increasing their use of the full breadth of our solutions and by migrating them to our next-generation portfolio. We also have strong strategic relationships with industry leaders such as Avaya Inc., Cisco, FIS, Honeywell International Inc., IBM, IPC Systems, Inc., Motorola, Inc. and Orange Business Services. We intend to continue to leverage these relationships and invest in nurturing new strategi c alliances to increase the Sarbanes-Oxley Actvalue of 2002our 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 pending financial guidelinesworld 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 International Financial Reporting Standards Board have heightened the complexitypast 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 corporate and governmental compliance. The hiring of additional finance and accounting employees and increased civil penalties and auditor expenses have raised the financial costs of both noncompliance and ongoing compliance. In addition, it continues to be important to be able to resolve certain 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, companies and public organizations require improved solutions that not only provide better compliance but also more current, near real-time information with increased operational visibility. These solutions need to reduce the costs associated with ongoing compliance, while creating the required audit trail for regulatory purposes.strategic vendors.

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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 manageact upon vast amounts of complex, unstructured multimedia content. cross-channel content in real-time.Our solutions recordcapture and store a wide variety of unstructured multimediacross-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 vastv ast 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.requirements and allows our security customers to create situational awareness, manage events and investigate them.

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End-to-end management and optimization of the contact center. We provide a wide set of integrated and modular toolssolutions that provide the enterprise with a comprehensive view of the contact center and powerful management capabilities. Our comprehensive solutionproduct 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;
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monitor and improve contact center business performance and customer satisfaction related processes;
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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
—   evaluate contact center agent performance;
—   identify training requirements and other necessary improvements;
—   allocate the appropriate workforce level and skills to optimize customer service; and
—   monitor and improve contact center operational and business performance.

Deriving insights utilizing proprietary multi-dimensional cross-channel analytic capabilities. We have developed advanced multi-dimensional cross-channel analytics and applicationsbusiness 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 attributes related to any particular voice or data interaction.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.interaction, as well as unstructured tex t. 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 footagecontent 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.

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Enterprise-wide risk management platform with dozens of specific compliance, fraud prevention and money laundering specific solutions.Our Strategy

The key elementsActimize solutions are based on a scalable, proprietary software platform and flexible applications that address hundreds of compliance, fraud and money-laundering scenarios. Used by a majority of the world’s largest financial institutions, including the world’s 10 largest banks, Actimize solutions monitor billions of transactions a day, analyzing high volumes of complex data on a real-time basis and enabling customers to detect anomalous transactions, generate alerts and facilitate corrective action.

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End-to-end security solutions. We integrated a suite of security management solutions that address organizations’ complete security needs –  from real-time threat detection and verification to post incident investigation and resolution. Many of the world’s largest and busiest airports, transportation centers and transit companies, as well as government agencies and first responders, use our strategy includesecurity 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 following:

Drive adoptionpublic safety sector, our solutions, experience and know-how are helping teams work smarter and fa ster – 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 next-generation analytics in bothend-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 security markets. We intendcoordinates the response actions ensuring that everyone in the operational chain knows what is happening and what to continuedo.
Products
Our offerings to the enterprise sector include a suite of business solutions that address the growing unmet needspecific 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 capture, managesocial media and analyze unstructured datatext 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 wide variety of businesshosted model, or via a managed service, and operational environments. Accordingly, we plan to continue to target these opportunities through focused sales and marketing 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 operationalcan be implemented stand-alone or fully integrated with CRM and business results. We will continue to leverageintelligence solutions.
Our financial crime (fraud detection and AML), operational risk and compliance solutions for financial institutions are built on the technology, operationalActimize core software platform, incorporating a graphical development interface and partnership synergies we derive from serving both the enterprisecase management dashboard with a real-time analytics detection engine. Our securities trading and the security markets.

Continue to expand our differentiated end-to-end contact center solution. With the increasing strategic importancebroker sales practices compliance applications identify high-risk activities by monitoring and complexity of the contact center, customers have a growing need for comprehensive management solutions. We believe our set of integratedcorrelating various data elements including transactions, accounts and modular tools for contact center management represents a differentiated solution for our customers. We intend to augment and expand our offering of end-to-end solutions to maintain our industry leadership position.

Drive deployment of our solutions through value-added services. Our customers face diverse business and deployment challenges. We have developed a unique 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 100 countries, including over 85 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 product portfolio and by migrating them to our next-generation solutions. We also have strong strategic relationships with industry leaders such as Avaya Inc., Etrali SA, Honeywell International Inc., IPC Systems, Inc., Motorola, Inc. and Siemens AG. We intend to continue to leverage those and additional relationships to increase the value of our solutions to our end customers. 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.

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Continue to pursue selective acquisitions. We have a successful acquisition history spanning six transactions over the past five years. We intend to continue augmenting our organic growth through additional acquisitions that broaden our product and technology portfolio, expand our presence in selected 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.

Products

        Our enterprise business solutions include recording, monitoring, quality management, workforce management and business performance management solutions, which are designed to capture interactions, analyze them and take action based on this analysis to drive enterprise performance. They also help protect businesses and customers against risks posed by lost or misinterpreted voice or data communicationstrader information, as well as captureinteractions and improve contactmarket 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 agent performancefraud, 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 customers’ experience.financing of terrorism by monitoring transactions against watch and sanction lists to identify the activities of known criminals. Our workforceAML applications include transaction monitoring and performancesuspicious 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 solutions assist enterprises in delivering high quality of serviceand investigation applications that are used by our clients to their customers by assuring that employees withaggregate, analyze and investigate risk related cases across the right skills interact with customers and that these interactions are measured against their objectives.

organization.

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      Our security solutions are comprised of voice platforms and applications, digital video platforms and applications, and lawful interception products. Our voice platforms and applications offering to the security market ranges in size and complexity from small, single-site single-recorder systems to large, multi-site, multi-recorder systems integrated with trunked radio and computer-aided dispatch systems. We provide emergency services and air traffic control organizations with a full range of recording features for voice, radio and trunked radio, including on-line access to hundreds of hours of recording for a quick response time, a choice of different types of archiving media, and a dubbing capability to edit calls on-line for courtroom presentations. The system enablesen ables 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).

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Solutions
ProductsMarkets Served
Purpose
NICE SmartCenterEnterpriseLeverages 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 RecordingEnterprise and SecurityRecords and analyzes 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
 
NiceUniverseEnterprise and SecurityEvaluates agent performance and raises the level of customer service in contact centers through advanced voice and desktop screen recording technologies
 
NiceLogEnterprise and SecurityProvides digital voice recording system, a computer telephony integrated multi-channel voice recording and retrieval system
 
NICE VoIP Capture UnitPerform eXpress (NPX)Enterprise and SecurityBuildsBrings the capabilities of Nice Perform into a single box, low TCO solution based on NiceLog technology to provide a complete solution to audio storage in VoIP telephonycommercial hardware for small businesses or small systems.
 
NICE Quality ManagementEnterpriseDelivers comprehensive tools for implementing a multifaceted quality program encompassing agents, supervisors, evaluators and managers, and the ability to improve the quality and effectiveness of customer interactions in contact centers
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NICE Interaction AnalyticsEnterpriseUtilizes 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 SolutionsEnterpriseA 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 FeedbackEnterpriseAdvanced 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 TotalViewWorkforce ManagementEnterprise and SecurityForecasts 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
 
PerformixPerformance ManagerEnterpriseMaps enterprise business objectives to group and individual goals. Tracksgoals; tracks and reports performance against these goals
 
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NICE SmartCenterNetwork Embedded LoggerEnterpriseLeverages the synergies of the combined capabilities ofOffers a Linux based VoIP Logger embedded in Cisco routers, suitable for branch recording with NICE Perform IEX TotalView and Performix on an open SOA-based framework
 
NICE Storage CenterEnterprise and SecurityProvides central storage option; integrates with various enterprise storage networks (SAN, NAS or DAS) for long term or medium term voice storage
 
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 management and storage

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NiceUniverse CompactEnterprise and SecurityProvides a competitively priced voice recording and quality management system for organizations that have a relatively small number of input channels and a cost-effective solution for small contact centers with centralized management and storage
 
Freedom Enterprise
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 Security
Provides recordingbatch processing to detect and analysisprevent the following types of customer interactions with contact center agentsfraud:
●  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
 
Freedom FTActimize 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 Security
Provides high-level fault-tolerant recordingidentify suspicious activities for customers and facilitate regulatory compliance processes.  The solutions monitor for the following:
●  Suspicious transactions
●  Know Your Customer and ongoing customer due diligence
●  Sanctions lists and terrorist financing matches
Actimize Brokerage
Compliance Suite
Enterprise - Financial Institutions 
 (securities), Government Regulatory Bodies
Packages and solutions that enable firms to effectively adhere to global regulatory requirements and organizational standards.  By monitoring a comprehensive range of financial products to prevent, detect, and deter non-compliant activities and improve risk and compliance performance in areas such as:
●  Institutional surveillance
●  Retail surveillance
●  Employee surveillance
●  MiFID compliance
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Actimize Enterprise
Risk Case Manager
Enterprise - Financial Institutions
(securities, insurance, banking),
Government Regulatory Bodies
A centralized platform for holistic case and alert management that enables an enterprise-wide approach to risk and compliance operations management. The solution consolidates information from any existing detection system into a single, user-friendly application for managing alerts, cases, investigations, regulatory reporting, financial losses, oversight, and more
 
Mirra IVEnterprise and SecurityProvides small recording system that is suited to simple recording applications in which it can record up to 3248 channels of voice traffic from a wide variety of analog and digital interfaces
 
NICE InformSecurityProvides 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 NetSecurityProvides a complete end-to-end solution for IP video security, including encoders, decoders and network video recorders
 
NiceVision ControlCenterSecurityProvides an advanced control room management and network-based digital video matrix
 
NiceVision ProSecurityProvides premium solution designed for high-end applications requiring high-frame rate and/or a large number of cameras in a campus environment
 
NiceVision HarmonyAnalyticsSecurityProvides mid-range digitala set of video recording solution designatedcontent analytics applications for sites accommodating a large numberautomated detection of cameras yet requiring a variety of frame rates per channel

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NiceVision AltoSecurityProvides mid-range digital video recording solutionthreats, safety and operational related events
 
NiceVision NVSATDigitalSecurityProvides small scalea portfolio of digital video recording solutionrecorders for different capacities and performance requirements
NiceVision SafeRouteSecurityProvides a solution for mobile video surveillance onboard public transport vehicles
NICE SituatorSecuritySolidifies data from desperate security systems to deliver common operational picture and rapid and collaborated response
 
FAST alpha SilverSecurityProvides high quality digital video monitoring and recording solution for large to mid-size applications
 
FAST alpha BlueSecurityProvides "all in one" solution for high quality video monitoring and recording for small to mid-size applications
 
NiceTrackSecurityProvides interception, delivery, monitoring, collection and advanced analysis of telecommunication interactions
Freedom rDTSecurityWorks with the Motorola or M/A-COM trunked radio system to record radio communications dynamically and capture trunked radio data

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NICE Perform is our flagship enterprise product. It is an integrated suite of solutions that offers innovative ways for organizations to generate insight from interactions to enhance performance. NICE Perform combines multiple data sources in a fully integrated architecture with a centralized data warehouse, allowing interoperability of many data sources to address a variety of business issues with a high level of accuracy. The data sources include word spotting, emotion detection, talk pattern analysis, customer surveys, Computer Telephony Integration (CTI) analysis, application activities and business data. With a set of advanced engines, NICE Perform provides multi-dimensional analytics of these data sources. State-of-the-art visualization techniques help enable analysts and executives to quickly and easily identify trends, deviations and situations requiring immediate action. While providing critical statistical data, NICE Perform goes beyond the scope of transactional analytics to help decision makers understand customer intent and market dynamics, identify current and future trends early enough for proactive management of challenges, opportunities and changes, and enhance corporate governance throughout the enterprise. NICE Perform also contains the contact center quality management capabilities of NiceUniverse. In addition, NICE Perform includes advanced online coaching capabilities that enable supervisors to coach the contact center agents in order to improve their skills and to empower them and cover matters as needed by different departments, such as marketing or order administration.

NiceUniverse, introduced in February 1998, is a comprehensive quality management solution used to evaluate contact center agent performance and to raise the level of customer service in contact centers through advanced voice and desktop screen recording technologies. The NiceUniverse system provides objective evaluation tools and helps identify training requirements for contact center agents, including near real-time monitoring for instant access to live customer interactions and enhanced reporting and administration features. NiceUniverse uses a CTI that integrates with automatic call distributions (ACDs) that enable NiceUniverse to monitor and record agent sessions (voice and screen) on a user-defined schedule and store them in compressed digital format. Sessions can be retrieved later by the reviewers from their network PCs or thin clients, and agent performance is graded using customized on-screen templates. From these templates and other data, NiceUniverse generates detailed reports, statistics and graphs to help identify training requirements and set relevant benchmarks for contact center agents.

NiceLog, our digital voice recording system, is a computer telephony integrated multi-channel voice recording and retrieval system. NiceLog is an open architecture system based on PC architecture and advanced audio compression technology that performs continuous, reliable recordings of up to thousands of analog and digital telephone lines, as well as radio channels, and enables simultaneous access by multiple users. NiceLog can be used either as a stand-alone unit or as part of a highly expandable and scaleable system comprised of several seamlessly integrated units. Each NiceLog unit can simultaneously record, monitor, archive and play back voice communications.

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NICE VoIP Capture Unit builds on our NiceLog technology to provide a complete solution to audio storage in VoIP telephony environments. The VoIP Capture Unit provides an IP-recording platform with a wide range of scaleable recording solutions that supports the leading telephony vendors. Our VoIP Capture Units are fully integrated with the NICE product portfolio, making all of our applications available for use over VoIP. NICE VoIP Loggers can serve alongside other logger types in a mixed VoIP/non-VoIP environment with the same familiar application software; users are unaware of the voice capture method being used. NICE VoIP Capture Unit’s active recording solutions integrate with leading vendors such as Avaya, offering centralized recording of distributed environments and other benefits.

IEX TotalView is our workforce management solution. It helps manage the level of customer service by matching the right resources with the demand in complex environments where customers interact through multiple channels, including telephone, email and web, and where different skills are required to address customer needs. TotalView forecasts customer interactions based on data it collects from systems such as switches, ACDs, email servers, etc. It generates detailed schedules based on these forecasts as well as on preferences entered by individual employees. TotalView measures real-time adherence to these schedules to allow operations managers to respond quickly to changes. TotalView generates detailed reports of customer interaction patterns and service levels and is used by many of our customers as their central reporting system for customer service.

Performix is a suite of performance management applications. It allows mapping strategic business goals to group and individual goals and managing to these goals. It collects data from enterprise systems, such as CRM, HR, work force management, quality management, etc., and from communication infrastructure, such as switches and ACDs, normalizes it and creates a central repository for such data. Performance manager maps corporate business goals to group and individual key performance indicators, or KPIs, it measures and reports actual performance against these KPIs. The development and evaluation management modules automate the processes of employee evaluation, individual training and personal development based on the KPIs.

NICE SmartCenter is a solution that drives performance in contact centers and the enterprise. NICE SmartCenter leverages the synergies of the combined capabilities of NICE Perform, IEX TotalView and Performix. It provides a holistic view of contact center operations and business insight into market and customer dynamics. These capabilities are unified within an open Service Oriented Architecture, or SOA, based framework, and are offered together with NICE’s structured service and implementation methodology. NICE is pioneering the use of SOA in its markets and has enhanced and adapted it to the specific environment of the contact center, providing improved sharing of information, business processes and investment protection.

NICE Storage Center, NiceLog’s central storage option, can integrate with various enterprise storage networks (SAN, NAS or DAS) for long-term or medium-term voice storage. Central storage sites can hold the entire voice recording from the organization’s different sites, helping to reduce management costs and redundancy. The retrieval process is fully automated.

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NiceCall Focus III is a voice recording system that records up to 48 input channels and provides up to 66,000 hours of on-line voice storage capacity (using NICE’s ACA compression) and supports a wide range of archiving devices for long-term storage options. NiceCall Focus III offers a wide range of connectivity to PABX and radio systems and is built on the core technology of Nice High Density Logger. NiceCall Focus III provides organizations that have a relatively small number of input channels, such as public safety agencies, with a competitively priced yet technologically advanced digital recording product that offers many of the connectivity and processing features of NiceLog. NiceCall Focus III is being targeted primarily at public safety facilities, including 911 emergency centers, and utilities, as well as small bank branches, financial trading sites, and contact centers.

NiceUniverse Compact is a new total recording and quality management solution for contact centers with up to 48 seats. NiceUniverse Compact integrates NICE’s market-leading interaction recording infrastructure with its highly successful quality management offering, creating a powerful, cost-effective recording and quality management application packaged as a unique single-box solution, easily installed and maintained with a remarkably low total cost of ownership. NiceUniverse Compact is being targeted primarily at small contact centers with up to 48 seats, as well as public safety facilities that require total recording and quality management solutions.

Freedom Enterprise combines state-of-the-art recording technology for full-time or selective recording with advanced tools for optimizing contact center performance in virtually any telephony environment, including circuit-switched telephony, VoIP and hybrid environments.

Freedom FT provides high-level fault-tolerant recording with a design that eliminates single points of failure and ensures that recordings are captured and accessible when required.

Mirra is a small recording system that is particularly suited to simple recording applications in which it can record up to 32 channels of voice traffic from a wide variety of analog and digital interfaces. Mirra has been designed to be simple to install, operate and maintain and has been sold to many local, city and state public safety organizations that have a single site operation. Digitized voice and associated data are stored on DVD disks that provide a robust and long-term archive medium. Mirra’s design avoids using an internal hard disk for the operating system and consequently it starts-up very rapidly and avoids the maintenance liabilities associated with hard disks.

NICE Inform is an information management solution that provides comprehensive management of multimedia interactions for security command and control centers. NICE Inform provides innovative capabilities for effectively managing multimedia incident information from various sources for faster incident reconstruction, greater insight and improved response. The broad array of capabilities of NICE Inform can be tailored to the specific needs of command and control centers for first responders and homeland security, transportation, government and private sector organizations, and deliver improved collaboration and operational efficiency to enhance safety and security. NICE Inform captures, manages and analyzes information from multimedia sources including audio, video, text and data. Furthermore, it provides a complete, unified, chronological, multimedia history of incidents to enable streamlining of information sharing, investigations and evidence delivery.

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NiceVision consists of NiceVision Pro, NiceVision Harmony, NiceVision Alto, NiceVision NVSAT, Nicevision Net and NiceVision ControlCenter. NiceVision is a state-of-the-art digital video and audio recording system that provides continuous CCTV, recording, archiving, and debriefing capabilities for, among others, central banks, Fortune 500 companies, transportation facilities, prisons and casinos.

NiceVision Net is an enterprise class, scalable IP video solution. It offers great flexibility, whether as an open solution to be fully integrated with a variety of third party edge devices and security management applications, or as a complete, end-to-end offering, as well as a superior level of reliability. Its high availability architecture, supported by unique features, such as patent pending “zero points of failure” encoder redundancy, ensures non-stop surveillance under any condition for mission critical applications.

NiceVision ControlCenter provides advanced real time event management and enhanced investigation tools, and is scalable to support large multi-user, multi-site environments. NiceVision ControlCenter seamlessly manages all other NiceVision solutions, enabling users to manage hybrid architectures with a smooth migration path to a full IP architecture.

NiceVision Pro is designed for high-end applications requiring high frame rate and/or a large number of cameras in a campus environment. Typical environments for the NiceVision Pro are airports, casinos and ground transportation facilities. The NiceVision Pro accommodates 96 video channels in a single box and can handle storage devices in the range of terabytes. There are two types of devices: disk based on-line storage (internal drives or external RAIDs) and tape-based off-line devices.

NiceVision Harmony is a mid-range digital video recording solution designated for sites accommodating a large number of cameras yet requiring a variety of frame rates per channel, from single frames per second to full frame rate, when required. Typical environments for the NiceVision Harmony are retail shops, certain bank facilities and corporate buildings. The NiceVision Harmony supports 64 video channels with a preset frame rate shared between groups of channels. The NiceVision Harmony can also support large storage devices like the NiceVision Pro.

NiceVision Alto is a mid-range product that is able to support eight to 32 video channels using variable frame rates and resolutions. Typical environments for the NiceVision Alto are distributed sites that require high image quality and adjustable level of service to meet different networking channels. The NiceVision Alto runs content analytics to support smart monitoring.

NiceVision NVSAT is a small scale unit that supports four to eight video channels. It is designed for distributed architectures, providing high image quality, level of service and content analytics.

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FAST alpha Silver is designed for applications requiring monitoring and recording of high video quality at high frame rate. The system supports distributed architecture over IP based networks, using encoders and digital video servers, and supports up to 64 digital video streams in a single server. Typical applications are ones that require high video quality, such as casinos, or distributed architecture, such as various transportation projects.

FAST alpha Blue is an “all in one” solution for monitoring and recording high quality video at varying frame rates. The system supports up to 32 channels in a single chassis and can be configured easily using a configuration wizard. The FAST alpha Blue is suitable for small to mid-size installations that require a “plug and play” solution for high quality video monitoring and recording.

NiceTrack is a product line that provides law enforcement agencies, internal security services and intelligence organizations with end-to-end solutions for the interception, delivery, monitoring, collection and advanced analysis of telecommunication interactions. This product line provides intelligence analysts with a broad intelligence perspective to ensure that crucial information is always delivered to decision makers and operational staff in near real-time. NiceTrack also features an open architecture design that offers government-related organizations the flexibility to build an effective intelligence platform customized and localized to suit specific operational requirements. NiceTrack, as a lawful interception solution, is fully compliant with the international standards defined by ETSI (under various European legislations) and TIA (under the CALEA legislation).

Freedom rDT works with the Motorola or M/A-COM trunked radio system to record radio communications dynamically and capture trunked radio data. It is a solution aimed at the emergency services market.

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Strategic Relationships

We have a dedicated sales organization for all of our products. In certain regions, most significantly, North America, a substantial part of our sales are made directly, while in other regions, most notably, Asia Pacific, sales are made through our distribution channels. In addition, we partner with leading companies to deliver and support our solutions. In the financial institutions market, we have established marketing, sales and support arrangements with leading suppliers of complementary products including BT Group PLC, Etrali and IPC. These companies market and distribute our products to their customers either as stand-alone solutions or as integrated parts of their own 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 SAS Institute Inc. and Siemens.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 distributionimplementation of our products with leading companies including Anixter International Inc., Diebold, Inc., Honeywell, Motorola, Siemens, Thales GroupNorthrop Grumman, PlantCML, Raytheon Company and Tyco International Ltd.

S iemens, 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 rendering theenabling our various regions in which we operate to be as self sufficient as possible.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 three regional support centers, the largest of which is in Denver, Colorado, with an additional support center in Richardson, Texas, to support our U.S. customers and partners as well as onein 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, and onea support center in Hong KongIndia to support APAC customers, dealers an d partners, and partners.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 as well as additional service engineers located in our offices in the United States, EMEA and APAC, 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, the term of which is usually one year after shipment. Longer warranty periods are applicable to sales in certain international and government markets. Extended warranty and service coverage is provided in certain instances and is usually made available to customers through our distributors on a contractual basis for an additional charge.malfunctions. Our customers may purchase a renewablerenew maintenance agreementagreements 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 first and second tierall tiers of service and support either directly using our support organization or indirectly through local companies working closely with the law enforcement agencies.

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Manufacturing and Source of Supplies

Our products are built in accordance with industry standard infrastructure and are PC compatible. The hardware elements in our products are based primarily on standard commercial off-the-shelf components and utilize proprietary in-house developed circuit cards and algorithms and digital processing techniques and software. In the fourth quarter of 2002, we started sellingWe also have “software only” solutions for use on standard servers.

We manufacture our products through subcontractors. Under a manufacturing agreement with Flextronics Israel Ltd. (or Flextronics)("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 configuration.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 Flextronic’sFlextronics’ large-scale purchasing power, and greater supply chain flexibility. In connection with the acquisition of Dictaphone Corporation’s Communications Recording Systems division (or CRS), we also have a manufacturing agreement with Bulova Technologies EMS LLC, pursuant to which Bulova manufactures all ex-CRS products. This manufacturing facility is located in the United States.


 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. 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 alla significant portion of our products, as well as the ISO 27001 and ISO 14001:2004 certifications.

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Research and Development

We believe that the development of new products and the enhancement of existing products are essential to our future success. Therefore, we intend to continue to devote substantial resources to research and new product development, and to continuously improve our systems and design processes in order to reduce the cost of our products. Our research and development efforts have been financed through our internal funds and programs sponsored through the Government of Israel and the European community. We believe our research and development effort has been an important factor in establishing and maintaining our competitive position. Gross expenditures on research and development in 2004, 20052007, 2008 and 20062009 were approximately $27.5$63.3 million, $33.4$83.3 million and $48.0$82.4 million, respectively, of which approximately $1.3approxi­mately $2.7 million, $1.7$3.6 million and $1.9$3.8 million, respectively, were derived from third-party funding, and $1.3$1.0 million, $0.8$1.3 million and $1.2 million, respectively, were capitalized software development costs.

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In 2006,2009, we were qualified to participate in eightnine 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. TheseSome of these programs include programs approved under certain Magnet consortiums andare members of  programs approved for companies with large research and development activities.activities and some of these programs are members of certain Magnet consortiums.  Accordingly, as opposed to the standard type of OCS grants (described below), the grants under these programs are not required to be repaid.b e repaid by way of royalties.  However, the restrictions of the Research and Development Law described below apply to these programs. In 2004, 20052007, 2008 and 2006,2009, we received a total of $0.8$2.0 million, $2.2$3.5 million and $1.9$3.6 million from the OCS programs, respectively, and we anticipate receiving approximately $0.3$0.5 million in 20072010 from these2009 programs.

We are eligible to receivepreviously 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 New Israeli Shekels, or NIS, linked to the U.S. dollar plus LIBOR interest. In 2004, 20052009 and 2006,2008 we received no such grants.  In 2007 we received grants and incurred noin 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 these programs, and currently we have no furthersuch program. Notwithstanding the termination of such royalty obligations, the restrictions of the Research and Development Law described below still apply to the OCS.

this program.

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The Research and Development Law generally requires that the product incorporating know-how developed under an OCS-funded program be manufactured in Israel. However, upon the approval of the OCS, some of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased, which increase might be up to 300% of the grant (depending on the portion of the total manufacturing volume that is performed outside of Israel). The OCS is also authorized to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. However, upon notification to the transfer outside of Israel of manufacturing which constitutes not more thanOCS, up to 10% of the totalgrant recipient’s approved Isra eli manufacturing volume, is subject to a notification to the OCS.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.

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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 partiesparty 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-howknow-ho w 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 otheroth er than any ability arising solely from serving as an officer or director of the company.  A person is presumed to have control if such person holds 50% or more of the means of control of a company.  “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer.  An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors.  Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares or ADSs will be required to notify the OCS that it has become an interested party and to sign an undertaking to comply with the Research and Development Law.

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           The funds available for OCS grants out of the annual budget of the State of Israel were reduced in recent years, and the Israeli authorities have indicated in the past that the government may further reduce or abolish OCS grants in the future.  Even if these grants are maintained, we cannot presently predict what would be the amounts of future grants, if any, that we might receive.

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    In 2006,the past we were selected to participate in the Sixth Framework Programme (FP6). FP6 is the European Community Framework Programme for Research, Technological Development and Demonstration, which funds and promotes research. In 2006, we received a total of $0.2 million as an advance for the 30 month period of the plan. FP6 will give us funding of approximately EUR 329,000 during this period. 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 4463 U.S. patents and 2478 patents issued in additional countries covering substantially the same technology as the U.S. patents. We have over 164121 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 developdevel op 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, (whichVerint America Inc. and Multi-Format, Inc. (all of which have since been settled and dismissed) and Witness Systems. We believe that none of these has merit.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 managementmanage ment 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™, 360° View™, Executive Connect®, Executive Insight™, Freedom®, Investigator®, Mirra®, Universe®,Interactions, Investigator, Last Message Replay, Mirra, My Universe™, NICE®, NiceCall®,Universe, NICE, NICE logo, NICE Analyzer, NiceCall, Focus™, NiceCLS™,NiceCall Focus, NiceCLS, NICE Learning™, eNiceLink™, NiceLog®, Playback Organizer™, Renaissance®, ScreenSense™, NiceScreen™,Inform, NICE Learning, NiceLog, NICE Perform, NiceScreen, NICE SmartCenter, NICE Storage Center™, NiceTrack™, NiceUniverse®, NiceVision®,Center, NiceTrack, NiceUniverse, NiceUniverse Compact, NiceVision, Harmony™, NiceVision Mobile™,Alto, NiceVision Pro™,Analytics, NiceVision NVSAT™,ControlCenter, NiceVision Alto™,Digital, NiceVision Harmony, NiceVision Mobile, NiceVision Net, NiceVision NVSAT, NiceVision Pro, Performix, Playback Organizer, Renaissance, Scenario Replay™, Tienna®, Wordnet®, NICE Perform®, NICE Inform™, NICE Analyzer™, Last Message Replay™, NiceUniverse Compact™, Customer Feedback™, Interaction Capture Unit™, Dispatcher Assessment™, Encorder™, Freedom Connect®, FAST®, FAST alpha Silver™, FAST alpha Blue™, Fast Video Security®, Alpha®, IEX®, TotalNet®, TotalView®, NICE SmartCenter™, NiceVision Analytics™, NiceVision ControlCenter™, NiceVision Digital™, NiceVision Net™Replay, ScreenSense, Tienna, TotalNet, TotalView, Universe and Performix Technologies™. Applications to register certain of these marks have been filed in certain countries, including Australia, Brazil, the European Union, Germany, Great Britain, Israel, Japan, Mexico, Argentina and the United States. Some of such applications have matured to registrations.

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Wordnet.
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Regulation

Israeli

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 2006, only a small portion of all2009, the vast majority of our sales waswere 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 towardtowards Israel. We may be unable to obtain permits for our defense products we could otherwise sell in particular countries in the future.

New

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/ecEC 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 certain other materials deemed to be hazardous,polybrominated diphenyl ethers, in amounts exceeding any relevant setcertain 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, includingin cluding 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 thist his 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.

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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.
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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., a subsidiary of Comverse Technology Inc., and Witness Systems Inc. In February 2007, Verint and Witness announced that they agreed to a business combination.

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 connectivityconnectiv ity 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 wel l 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.
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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 voice,multimedia sources (including voice), video, data, GIS and meta-data together give us an advantage over the competition. SomeSom e of our competitors in the public safety market include ASC Telecom, AudioSoft, CyberTech International, Redbox Recorders and Verint Systems (formerly Mercom) and Voiceprint. 

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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 VCS), Dallmeier, GE (formerly Visiowave), PelcoPelco) 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 Raytheon Company, Siemens,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, as well as being price competitive.

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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.Australia100%
NICE Systems Technologies Brasil LTDABrazil100%
NICE Systems Canada Ltd.Canada100%
Nice Systems S.A.R.L.France100%
Nice Germany GmbHGermany100%
NICE Systems GmbHGermany100%
NICE APAC Ltd.Hong Kong100%
NICE Systems KftHungary100%
Nice Interactive Solutions India Private Ltd.India100%
Nice Technologies Ltd.Ireland100%
Actimize Ltd.Israel100%
STS Software Systems (1993) Ltd.Israel100%
Actimize Japan KK LimitedJapan100%
Nice Japan Ltd.Japan100%
Fortent Japan KKJapan100%
IEX Corporation BVNetherlands100%
Nice Systems (Singapore) Pte. Ltd.Singapore100%
Nice Switzerland AGSwitzerland100%
Actimize UK LimitedUnited Kingdom100%
Fortent LimitedUnited Kingdom100%
NICE CTI Systems UK Ltd.United Kingdom100%
Racal Recorders Ltd.Actimize Inc.United KingdomStates100%
Fortent Americas, Inc.United States100%
IEX CorporationUnited States100%
Nice Systems Inc.United States100%
Nice Systems Latin America, Inc.United States100%
Nice Systems Inc.United States100%
IEX CorporationUnited States100%

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Property, Plants and Equipment

Our executive offices and engineering, research and development operations are located in Ra’anana, Israel, where we occupy approximately 140,000 square feet of space, pursuant to a lease expiring in 2010. The annual rent and maintenance fee for the facility is approximately $2.4 million linked to changes in the U.S. consumer price index. We also occupy additional office space in North Ra’anana, Israel, which is approximately 55,000 square feet, pursuant to a lease expiring on June 15, 2007. We are currently negotiating an extension of such lease to 2010. The annual rent and maintenance fee for this additional facility is approximately $1.2 million.

following facilities:


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


 —●Our North American headquarters in Rutherford, New Jersey, which occupy approximately 28,40036,700 square feet. We also have a warehouse facilitytwo additional offices in Lyndhurst, New Jersey,York, which occupiesoccupy approximately 6,00013,000 square feet;feet and 15,000 square feet, respectively;

 —●Our office in Denver, Colorado, which occupies approximately 30,775 square feet;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 50,58037,564 square feet.

 —●Our office in Southampton, UK, which occupies approximately 34,68023,428 square feet; and

 —●Our office in Hong Kong, which occupies approximately 9,506 square feet.

We believe that our existing facilities are adequate to meet our current and foreseeable needs.

Item 4A.                 Unresolved Staff Comments.
Item 4A.Unresolved Staff Comments

None.

Item 5.Operating and Financial Review and Prospects.

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 statementsConsolidated 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 on Form 20-F.

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annual report.

Overview
Overview

We are a leading global provider of advanced solutions that capture, manageenable enterprises and analyze unstructured multimedia content enablingsecurity 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 and behave proactively.while increasing situational awareness. Unstructured multimedia 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 contact centers and back offices,emergency service providers a nd first responders, video captured by closed circuit television cameras, radio communications between emergency servicesservices’ and first responders’ personnel, internet sessions, email and instant messaging.messaging and security management solutions for command and control centers. Our solutions include integrated, scalable, multimediacross-channel recording platforms, enhancedcross-channel real-time analytics, software applications and related professional services.management applications. These solutions address critical business processes and risk management, compliance procedures and security needs of companiesenterprises and publicsecurity organizations. Our solutions facilitate faster decision-making and near real-time action,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 use our systems inspan a variety of enterprises,industries, such as financial services, health care,telecommunications, healthca re, outsourcers, retail, media, travel, service providers, telecommunicationsutilities and utilities.others. Our financial crime solutions primarily serve financial services organizations. Our security solutions are primarily focused on homeland securitytailored to protect city centers, transportation systems, critical infrastructure, enterprise campuses and first responder organizations, transportation organizations, government related organizations and the private sector.more. Our solutions are deployed at over 24,000 customers, including over 8580 of the Fortune 100 companies.

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Our products are sold primarily through a global network of distributors, system integrators and strategic partners; a portion of product sales and most services are sold directly to end-users. One distributor accounted for less than 10% in 2009 and approximately 19%, 21%13% in 2007 and 16% of revenues in 2004, 2005 and 2006, respectively.

2008.

Recent Acquisitions and Dispositions

The following acquisitions were accounted for as purchases,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 operationsincome from the date of acquisition. The disposed business was accounted for as a discontinued operation as
On January 11, 2010, we completed the acquisition of the datecertain assets and liabilities of its disposition.

        In July 2006, we acquired all the outstanding sharesOrsus Solutions Limited and certain subsidiaries of IEX Corporation,Orsus (collectively, “Orsus”), a leading provider of workforce management, strategic planning and performance management solutions for the contact center market, for approximately $205 million in cash.Security Management Solutions. The acquisition of IEX allows us to offer our customers and partnerswas for a more extensive product portfolio in the industries in which we operate. IEX is a leading vendor in workforce management, strategic planning and performance management solutions for the contact center market. IEX provides a high-end centralized solution that compiles data seamlessly across the enterprise, enabling more accurate and effective forecasting, planning and scheduling. By purchasing IEX, we strategically expanded our market share both in geographical and vertical markets. The factors that contributed to the purchase price that resulted in recognitiontotal consideration of goodwill included synergies, the benefits of increased market share, strategic positioning value and time-to-market benefits.

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        In May 2006, we acquired substantially all of the assets of Performix Technologies Ltd., among the first to recognize the potential in the area of contact center performance management, an emerging trend in the contact center market, for approximately $13.9 million in cash, plus potential earn-outs based on performance milestones amounting to a maximum of an additional $3 million payable in 2007. The acquisition of Performix extends our solutions portfolio for the contact center market. The factors that contributed to the purchase price that resulted in recognition of goodwill included synergies, the benefits of increased market share vertically, strategic positioning value and time-to-market benefits.

        In January 2006, we acquired all the outstanding shares of FAST Video Security AG, a Switzerland-based developer of innovative video systems for security and surveillance purposes, for approximately $22 million in cash, plus earn-outssubject 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 on performance milestonesAnti-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 for 2006in cash. The business acquired includes the sale, distribution, service, maintenance and a potential maximumsupport of $5 million for 2008. The acquisition of FAST strengthens our positionNICE voice recording solutions (hardware and software and associated services) in the video security market with smart IP-basedUnited Kingdom. 
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       On April 8, 2008, we acquired certain assets, shares and business from Quality Plus Group Ltd., a UK-based value-added distributor of NICE’s contact center solutions, and technologies complementary to our existing digital video offerings. Additionally, it extends our presenceits 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 digital video security market by increasing our footprint in the EuropeanUK, Sweden and APAC markets with high quality distribution channels and partners, and with new prestigious customers. By purchasing FAST, we strategically expanded our market share both in geographical and vertical markets. The factors that contributed to the purchase price that resulted in recognition of goodwill included synergies, the benefits of increased market share, strategic positioning value and time-to-market benefits.

        In September 2005,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 assetschallenges of regulatory compliance, internal policy enforcement and assumed certain liabilitiesfraud prevention and money laundering. Under the terms of Hannamax Hi-Tech Pty. Ltd.the Agreement and Plan of Merger, dated July 2, 2007 (the “Merger Agreement”), the consideration paid for $2Actimize was approximately $281.1 million, approximately 80% of which was in cash plus earn-outsand approximately 20% of an additional $0.5 million paid inwhich was satisfied through the second quarterissuance of 2006 and an additional $0.5 million paid in the second quarter of 2007. Hannamax was our distributor in Australia and New Zealand. With the acquisition of Hannamax, we expect to further expand our customer base and presence in Australia and New Zealand and to further expand and strengthen our support organization in the region. The factors that contributed to the purchase price that resulted in recognition of goodwill included the benefits of increased market share geographically, the benefits of vertical integration and time-to-market benefits.

        In June 2005, we acquired the assets and assumed certain liabilities of Dictaphone Corporation’s Communications Recording Systems business (Dictaphone CRS) for approximately $38 million net after settlement. Dictaphone CRS provides liability and quality management systems for emergency services, critical facilities, contact centers and financial trading floors. In March 2006, the parties signed an amendment to the aforementioned asset purchase agreement, according to which a final adjustment has been made to the audited closing balance sheet, which reduced the purchase price under the asset purchase agreement by $2 million. In addition, the parties agreed that we are entitled to all previously undistributed interest and other investment income earned with respect to certain funds held in escrow. The acquisition of CRS expanded our customer base, presence in the U.S and Europe markets, and our network of distributors and partners. Additionally, it broadened our product offerings and global professional services team. By purchasing CRS, we strategically expanded our market share both in geographical and vertical markets. The factors that contributed to the purchase price that resulted in recognition of goodwill included synergies, the benefits of increased market share, strategic positioning value and time-to-market benefits.

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        In March 2004, we sold the assets and liabilities of our COMINT/DF military-related business to ELTA Systems Ltd. for $4 million. The assets and liabilities sold included the intellectual property, fixed assets, inventory and contracts related to the COMINT/DF product line, which included high performance spectral surveillance and direction finding systems that detect, identify, locate, monitor and record transmission sources. In 2004, the COMINT/DF business generated revenues of approximately $0.8 million and net income of approximately $3.2 million (including gain on disposition).

2005 Public Offering

        In December 2005, we completed a public offering on NASDAQ of 9,200,000 ADSs, representing 9,200,0001,501,933 of our ordinary shares at a public offeringbased on the market price of $23.125 per ADS, taking into account the two-for-one stock split discussed below. The proceedssecurities a few days before and after the terms of the offering, netacquisition were agreed upon and announced, and the fair value of underwriting discountthe vested portion of 987,104 options and other related expenses, amountedrestricted shares that were issued to approximately $201.7 million. 

Stock Split

        During May 2006,holders of Actimize options and restricted shares. Pursuant to the terms of the Merger Agreement, we effected a two-for-one split of our ordinary shares. The split was effectedassumed the stock options and restricted shares granted by way of a 100% stock dividend, which had an ex-dividend date of May 31, 2006. Shareholders of record at the close of business on May 30, 2006 received one additional ordinary share/ADR for each ordinary share/ADR held. Unless otherwise indicated, all ordinary share, optionActimize (for further information please see Item 6, “Directors, Senior Management and per share amountsEmployees” in this annual report have been adjustedreport). 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 give retroactive effectregister for resale the securities issued pursuant to the stock splitMerger Agreement, which we maintained effective for all periods presented.

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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 statementsConsolidated Financial Statements and those that are the most critical to aid in fully understanding and evaluating our reported results include the following:

 —●Revenue recognition
 —●Allowance for doubtful accounts
 —●Inventory valuation
 —●Impairment of long-lived assets
 —●Provision forTaxes on income taxes
 —●Contingencies
 —●Business combination
 —●Stock-based compensation

●Valuation of investment in marketable securities
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Revenue Recognition.  We derive our revenues primarily from two sources: product revenues, which include hardware and software sales; and service revenues, which include support and maintenance, installation, project management and training revenue.  Revenue related to sales of our products is generally recognized when persuasive evidence of an agreement exists, the product has been delivered and title and risk of loss have passed to the buyer, the sales price is fixed or determinable, and collectability is probable. Sales agreements with specific acceptance terms are not recognized as revenue until either the customer has confirmed that the product or service has been accepted or as the acceptance provision has lapsed.

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

For arrangements with multiple elements, we allocate revenue to each component of the arrangement using the residual value method based on vendor specific objective evidence (VSOE)("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.

        The Company’s

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).

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        The Company’s

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.

        The Company

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 identicalsimilar daily rates are VSOE of fair value for the project management services.

Revenues from fixed price contracts that require significant customization, integration and installation are recognized using the percentage-of-completion method of accounting based on the ratio of costs related to contract performance incurred to date to the total estimated amount of such costs. The amount of revenue recognized is based on the total license fees under the license agreement and the percentage of completion achieved. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contact. The revenues from such arrangements are allocated between license and professional services revenues to reflect the portion of each revenue source separately. Revenues allocated to services are based on the VSOE of fair value of the services in the arrangement and revenues allocated to license are the residual amount.
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To assess the probability of collection for revenue recognition, we have an established credit policy that determines by way of mathematical formulae based on the customers’ financial statements and payment history, 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 and allowances on product salesin 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 and allowances may need to be increased.

adjusted.

Allowance for Doubtful Accounts. Accounts.  We evaluate the collectability ofregularly review our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific allowance against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances 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.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.

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Impairment of Long-Lived Assets.  Our long-lived assets include property and equipment, investment in affiliates, goodwill and identifiable other intangible assets. The fair value of the investment in affiliates is dependent upon the performance of the companies in which we have invested. In assessing potential impairment of these investments, we consider this factor as well as the forecasted financial performance of the investees and other pertinent information. We record an investment impairment charge when we believeassets that the investment has experienced a decline in value that is other than temporary.

are subject to amortization. In assessing the recoverability of our goodwill, property and equipment goodwill 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 business and products.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 or goodwill are impaired. Any resulting impairment loss could have a material adverse impact on our financialfinanc ial position and results of operations.

 ASC 350 "Intangible – Goodwill and Other" (Formerly SFAS No. 142, “Goodwill and Other Intangible Assets,”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 business,reporting units, the useful lifeperiod over which cash flows will occur and determination of our weighted average cost of capital.capita l. 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 unitunit’s expected benefit from the acquisition. We evaluate our reporting units on an annual basis and, if required, reassign goodwill using a relative fair value allocation approach.

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We are required to assess the impairment of long-lived assets, tangible and intangible, other than goodwill, under ASC 360 "Property, Plant, and Equipment" (Formerly SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” on a periodic basis,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.

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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. AlthoughAl though we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is no assurance that the final tax outcome will not be different than those which are reflected in our historical income tax provisions and accruals.  Such differences could have a material effect on our income tax provision, net income and cash balances in the period in which such determination is made.

We implement a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (on a cumulative basis) likely to be realized upon ultimate settlement.
We recorded interest on late paid taxes as financial expenses and tax related penalties as general and administrative expenses.
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Contingencies.  From time to time, we are a defendant or plaintiff in various legal actions, which arise in the normal course of business. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful and considered analysis of each individual action together with our legal advisors. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. A change in the required reserves would affect our earnings in the period the changechang e is made.

Business Combination. In accordance withCombination. We adopted ASC 805 "Business Combination" (Formerly SFAS No. 141, “Business Combination,”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. We engage independent third-party appraisal firmsIn allocating the purchase price of acquired companies to assist us in determining the fair values oftangible and intangible assets acquired and liabilities assumed. Thisassumed, we developed the required assumptions underlying the valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.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;technol ogies; 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.

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Stock-based Compensation.Compensation. We account for stock-based compensation in accordance with the provisions of ASC 718 "Compensation - Stock Compensation" (Formerly SFAS No. 123(R), “Share-Based Payment.”123R). Under the fair value recognition provisions of SFAS No. 123(R),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. Determining the appropriate fair value model and calculatingWe estimate the fair value of stock-based awards, which includes estimatesstock 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 forfeiture ratesof our stock price over the term of the awards and expected terms,the estimated period of time that we expect employees to hold their stock options. Share-based compensation expense recognized in our consolidated statements of income was reduced for estimated forfeitures.

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Valuation of investments in marketable securities. On April 1, 2009, we adopted a new guidance that changed the impairment and presentation model for our available for sale debt securities. Under the amended impairment model, other-than-temporary impairment (OTTI) loss is recognized in earnings if the entity has the intent to sell the debt security, or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, if an entity does not expect to sell a debt security and it is not more likely than not that we will be required to sell, it still needs to evaluate if it expects to recover the entire costs basis of the impaired securities and determine if a credit loss exists. In t he 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 judgmentan entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
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Our marketable securities trades in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency and accordingly are categorized as Level 2.

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

The actual value at which such securities could materially impact our operating results.

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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, 2004, 20052007, 2008 and 20062009 expressed as a percentage of total revenues. Totals may not add up due to rounding.

2004
2005
2006
 
Revenues        
                  Products   72.3% 66.3% 63.7%
                  Services   27.7  33.7  36.3 
    100.0  100.0  100.0 
Cost of revenues  
                  Products*   35.3  32.7  32.4 
                  Services*   71.2  65.6  60.3 
    45.2  43.8  42.5 
   
Gross Profit   54.8  56.2  57.5 
   
Operating expenses  
                  Research and development, net   9.8  9.9  11.0 
                  Selling and marketing   24.5  23.4  23.2 
                  General and administrative   12.4  12.1  14.8 
                  Amortization of acquired Intangibles   0.1  0.4  1.2 
                  In process research and development write-off   0.0  0.0  3.1 
Total operating expenses   46.8  45.9  53.3 
   
Operating income (loss)   7.9  10.3  4.2 
Financial income, net   1.4  1.7  3.2 
Other income (expenses), net   0.0  0.0  0.2 
   
Income before taxes   9.4  12.0  7.6 
Taxes on income   0.9  0.3  2.1 
   
Net income from continuing operations   8.4  11.8  5.5 
Net income from discontinued operations   1.3  0.0  0.0 
Net income   9.7  11.8  5.5 

*

  2007  2008  2009 
Revenues         
Products                                                  61.2%  56.3%  48.3%
Services                                                  38.8   43.7   51.7 
   100.0   100.0   100.0 
Cost of revenues            
Products*                                                  28.2   27.3   31.2 
Services*                                                  58.3   52.4   49.5 
   39.9   38.3   40.7 
             
Gross Profit                                                                60.1   61.7   59.3 
             
Operating expenses            
Research and development, net  11.5   12.6   13.3 
Selling and marketing                                                 23.3   23.7   24.3 
General and administrative                                                 16.5   15.5   12.5 
Amortization of acquired Intangibles                                                 1.8   2.3   2.7 
In process research and development write-off  0.7   -   - 
Settlement and related expenses  -   1.6   - 
Total operating expenses                                                                53.8   55.7   52.8 
             
Operating income                                                                6.3   6.0   6.5 
Financial income, net                                                                2.9   1.8   1.3 
Other income, net                                                                -   -   - 
             
Income before taxes                                                                9.2   7.8   7.8 
Taxes on income                                                                2.0   1.5   0.5 
             
Net income                                                                7.2   6.3   7.3 
_______________________
(*) Respective revenues

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Comparison of Years Ended December 31, 20052008 and 2006

2009

Revenues
Revenues

Our total revenues rosedecreased by approximately 31.7%6.6% to $409.6$583.1 million in 20062009 from $311.1$624.2 million in 2005.2008. Revenues from sales to theof enterprise marketinteractions solutions were $300.9$363.6 million in 2006, an increase2009, a decrease of 26.8%12.9% from 2005, and2008, revenues from sales to the public safety and security marketsector were $108.7$147.8 million in 2006,2009, 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 47.4%23.3% from 2005.2008. The 12.9% decrease in revenues from the enterprise interactions solutions is mainly attributed to the macro-economic environment in 2009. Approximately 44% of the growth in risk management solutions revenue is attributable to increase in geographical area of EMEA, and approximately 39% of the growth in risk management solutions revenue is attributable to the inclusion of Fortent results for the first time in 2009 (starting September 1, 2009). The revenue from the public safety and security sector remained at the same level year over year.

  Years Ended December 31,       
  (U.S. dollars in millions)       
  2008  2009  
Dollar Change
  
Percentage Change
 
             
Product Revenues
 $351.7  $281.8   (69.9)  (19.9)
Service Revenues
  272.5   301.3   28.8   10.6 
Total Revenues
 $624.2  $583.1   (41.1)  (6.6)

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

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

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

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Financial Income, Net.  The decrease in financial income, net reflects lower average interest rates in 2009, as compared to 2008 and the impact of currencies exchange rate.
Taxes on Income. In 2009 taxes on income amounted to $3.0 million, as compared to $9.5 million in 2008. Our effective tax rate amounted to 6.6% in 2009 compared with 19.5% in 2008. The marked decrease in our effective tax rate in 2009 was mainly due to release of prior period provisions arising as a result of the unadjusted expiration of the statute of limitations for certain historic tax returns filed as well as the effects of a final settlement with a certain tax authority covering prior years.
The decline of the corporate tax rate in Israel from 27% in 2008 and 26% in 2009 had a minor impact on our effective tax rate. This is because the majority of our income earned in Israel benefits from the reduced tax rates applicable to us as a result of our Approved and Privileged Enterprise programs.
Further information with regard to our Approved and Privileged Enterprise programs can be found in Item 3, “Risk Factors” under the caption “Our results may be affected by the availability of government grants and tax benefits” and in Note 13 of our Consolidated Financial Statements under the caption “Taxes on Income.”
Subject to unpredictable effects of any future settlements with tax authorities, unadjusted expiration of the statute of limitations, future changes in law or accepted practice and effects of potential mergers and acquisitions, we expect our effective tax rate (which includes effects of FIN No. 48 which has been incorporated into ASC 740) to be approximately 18% in the coming years.
Net Income. Net income from continuing operations was $42.8 million in 2009, as compared to $39.1 million in 2008.  The increase in 2009 resulted primarily from a decrease in operating expenses compared to 2008 operating expenses that included, among other expenses, one-time settlement and related expenses, and taxes on income, partially offset by a lower gross margin.
Comparison of Years Ended December 31, 2007 and 2008
Revenues
Our total revenues increased by approximately 20.6% to $624.2 million in 2008 from $517.4 million in 2007. Revenues from sales of enterprise interactions solutions were $417.4 million in 2008, an increase of 9.0% from 2007, revenues from sales to the public safety and security sector were $148.6 million in 2008, an increase of 20.9% from 2007, and revenues from sales of risk and financial crime solutions were $58.2 million in 2008 compared to $11.6 in Actimize’s four month results included in 2007. Approximately 44% of the growth in revenues is attributable to the inclusion for the first time of thefull year results of IEX Corporation beginning on July 7, 2006, Performix Technologies Ltd. beginning on May 22, 2006, and FAST Video Security AG beginning on January 4, 2006 (collectively referred to below as the “2006 acquisitions”), as well as the inclusion of Dictaphone CRS results for a full yearActimize, compared with seven monthsActimize’s four month results included in 20052007 revenues. Actimize is a risk and the inclusion of Hannamax Hi-Tech Pty. Ltd. results for a full year compared to four months in 2005. Approximately 75%financial crime solutions company. The remai ning 56% of the growth is due to organic growth.

Years Ended December 31,
2005
2006
Dollar Change
Percentage Change
(U.S. dollars in millions)
 
Product Revenues  $206.4 $261.1 $54.7  26.5%
Service Revenues   104.7  148.5  43.8  41.8 
Total Revenues  $311.1 $409.6 $98.5  31.7 
growth in all our regions and the revenues from our acquisitions of QPC and AVT.
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  Years Ended December 31,       
  (U.S. dollars in millions)       
  2007  2008  
Dollar Change
  
Percentage Change
 
             
Product Revenues
 $316.9  $351.7  $34.8   11.0%
Service Revenues
  200.5   272.5   72.0   35.9 
Total Revenues
 $517.4  $624.2  $106.8   20.6%

Approximately 40%67% of the increase in product revenues is attributable to the inclusion of full year results for the first time of theActimize compared with Actimize’s four month results of the 2006 acquisitions.included in 2007 product revenues. The remainder of the growth is due to organic growth.

Approximately 17%32% of the increase in service revenues is attributable to the inclusion for the first time of the results of the 2006 acquisitions, the inclusion of Dictaphone CRSfull year results for a full yearActimize compared with seven monthsActimize’s four month results included in 2005 and the inclusion of Hannamax Hi-Tech Pty. Ltd. results for a full year compared to four months in 2005.2007 service revenues. The remaining 83%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 resulting from new productand focus on sales and higher installation and training revenues relating mainly to the increase in product sales to the enterprise market.

        Serviceof maintenance services. Most of our service revenues represented 36.3%approximately 44% of total revenues, as compared to approximately 33.7%39% in 2005. Although we typically generate lower profit margins on services than on products, our strategy is to continue to grow our global services business, which we believe increases the competitiveness of our product offerings, and, as a result, we expect services to represent a growing portion of total revenues in the future.

2007.

Revenues in 20062008 in the Americas, which include the United States, Canada and Central and South America, rose 47.8%19.6% to $241.3$347.4 million, as compared to $163.3$290.3 million in 2005.2007. Approximately 31% of the increase is attributable to the inclusion for the first time of the results of the 2006 acquisitions. The remaining 69% growth is due to an increase in our products revenue and higher post-contract service and maintenance revenue. Sales to Europe, Middle East and Africa (EMEA) rose 13.3% to $112.5 million in 2006, as compared to $99.3 million in 2005. Approximately 48% of the increase is attributable to the inclusion for the first time of the results of the 2006 acquisitions. The remaining 52% growth is due mainly to higher sales to the security market and higher services and maintenance revenues primarily related to the enterprise market. Sales to Asia-Pacific (APAC) increased 15.1% to $55.8 million in 2006, as compared to $48.5 million in 2005, Approximately 50%49% of the increase is attributable to the inclusion of Hannamax Hi-Tech Pty. Ltd.full year results for aActimize 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 i n 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 four months$73.0 million in 2005. The remaining 50% growth2007. Approximately 27% of the increase is due mainly to higher salesattributable to the securityinclusion of full year results for Actimize compared with Actimize’s four month results included in 2007. The remainder of the increase is attributable to a growth in product and service revenues in the enterprise market.

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57

Cost of Revenues

Years Ended December 31,
2005
2006
Dollar Change
Percentage Change
(U.S. dollars in millions)
 
Cost of Product Revenues  $67.5 $84.7 $17.2  25.5%
Cost of Service Revenues   68.7  89.5  20.8  30.3 
   
  Total Cost of Revenues  $136.2 $174.2 $38.0  27.9 
             
  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 was mainlyis mostly due to higher sales volume, amortization of intangible assets in the amount of $7.3$16.8 million in 20062008 compared to $1.3$11.8 million in 2005 and the adoption of SFAS No 123(R) for stock-based compensation in 20062007. The decrease in the amount of $0.3 million, which was partially offset by the lower cost of product resultingpercentage 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 38%57% of the increase on dollar base of the cost of services is attributable to the inclusion of full year results for the first time of theActimize compared with Actimize’s four month results of the 2006 acquisitions and approximately 6% of the increase is attributable to the adoption of SFAS No. 123(R) for stock-based compensation.included in 2007. The decrease as ain the percentage of cost of service from service revenues is due to a better utilization of the service organizationorganiz ation and a higher volume of service revenues.

Gross Profit

Years Ended December 31,
2005
2006
Dollar Change
Percentage Change
(U.S. dollars in millions)
 
Gross Profit on Product Revenues  $138.8 $176.4 $37.6  27.1%
  as a percentage of product revenues   67.3% 67.6%      
Gross Profit on Service Revenue   36.1  59.0  22.9  63.4 
  as a percentage of service revenues   34.4% 39.7%      
 
   Total Gross Profit  $174.9 $235.4 $60.5  34.6 
         as a percentage of total revenues   56.2% 57.5%      

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  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 primarily to higher sales volume and product cost reductions andas 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 andin conjunction with higher volume of service revenues.

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Operating Expenses

Years Ended December 31,
2005
2006
Dollar Change
Percentage Change
(U.S. dollars in millions)
 
Research and development, net  $30.9 $44.9 $14.0  45.3%
Selling and marketing   72.8  95.2  22.4  30.8 
General and administrative   37.7  60.5  22.8  60.5 
Amortization of acquired intangible assets   1.3  4.9  3.6  276.9 
In process research and development write-off   0.0  12.9  12.9  - 
  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 $48.0$83.3 million in 2006,2008, as compared to $33.4$63.3 million in 20052007 and represented 11.7%13.3% and 10.7%12.2% of revenues in 20062008 and 2005,2007, respectively. Approximately 69%41% of the increase in research and development, net is attributable to the inclusion of Actimize for the first timeentire 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 results ofNIS against the 2006 acquisitions and approximately 10% of the increase is attributable to the adoption of SFAS No 123(R) for stock-based compensation.U.S. dollar.

Capitalized software development costs were $1.2$1.3 million in 2006,2008, as compared to $0.8$1.0 million in 2005.2007. Amortization of capitalized software development costs included in cost of product revenues was $1.5were $0.8 million and $2.4$1.0 million in 20062008 and 2005,2007, 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 23.2%23.7% of total revenues in 2006,2008, as compared to 23.4%23.3% in 2005.2007. Approximately 43%49% of the increase is attributable to the inclusion of Actimize for the first timeentire year of the results of the 2006 acquisitions and2008 compared to the inclusion of Hannamax Hi-Tech Pty. Ltd. results for a full year compared toActimize in the last four months in 2005, approximately 15% of 2007, and the increasereminder is attributable to an additional investment in our sales force, including an increase in the adoptionnumber of SFAS No 123(R) for stock-based compensation..sales personnel.

General and Administrative Expenses.  General and administrative expenses represented 14.8%15.5% of total revenues in 2006,2008, as compared to 12.1%16.5% in 2005.2007. Approximately 15%26% of the increase is attributable to the inclusion of Actimize for the first timeentire 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 results ofNIS against the 2006 acquisitions, approximately 28% ofU.S. dollar and the increase is attributableneed to the adoption of SFAS No 123(R) for stock-based compensation.support our growing business.

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Amortization of acquired intangible assets. Amortization of acquired intangibles included in the operating expenses represent 1.2%2.3% and 0.4%1.8% of 2006our 2008 and 20052007 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 2006amortization related to the QPC and AVT acquisitions.

In process researchSettlement and development write-off  In process researchrelated expenses. Settlement and development write-off represent a one time write-offrelated expenses in the amount of IEX Corporation$9.9 million represents an agreement to settle and FAST Video Security AG In process R&D.dismiss patent disputes (see Item 8, “Financial Information—Legal Proceedings”).

Financial and Other Income

Years Ended December 31,
2005
2006
Dollar Change
Percentage Change
(U.S. dollars in millions)
 
Financial income, net  $5.4 $13.3 $7.9  146.3%
Other income (expense)   (0.0) 0.6  0.6  - 

  Years Ended December 31,       
  (U.S. dollars in millions)       
  2007  2008  
Dollar Change
  
Percentage Change
 
             
   Financial income, net                                                         $14.8  $11.3  $(3.5)  (23.6)%
   Other income, net                                                          -   0.1   0.1     
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Financial Income, Net.  The increasedecrease in financial income, net reflects a higher average cash balance and higher prevailinglower average interest rates in 2006,2008, as compared to 2005.2007 and loss of $4.9 million on marketable securities sold or impaired in 2008.

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Taxes on Income. 2006,Income. In 2008 taxes on income amounted to $8.6$9.5 million, as compared to $0.9$10.3 million in 2005.2007. Our effective tax rate amounted to 27.7%19.5% in 2006,2008 compared with 2.4%21.5% in 2005 and 9.8% in 2004. First time recognition of deferred tax assets in 2005 in the amount of $4.8 million was the principal cause of the low effective tax rate which arose in that year.2007. The increaseslight decrease in our effective tax rate in 2006 is2008 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 in-process research and development write-off related to our acquisition of IEX Corporation, which is a non-deductible expense fordeferred tax purposes.assets in certain jurisdictions.

The reduction of the corporate tax rate in Israel from 35% in 2004 to 34% in 2005 and 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 operating income earned in Israel benefits from the reduced tax rates applicable to us as a result of our Approved (or Privileged)and Privileged Enterprise programs.

Further information with regard to our Approved and Privileged Enterprise programs can be found in Item 3, – Risk Factors“Risk Factors” under the caption “We depend on“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.”

        Our effective tax rate was also affected in 2006 by a favorable geographic mix of where our profits are earned.

Subject to unpredictable effects of any future settlements with tax authorities, (or unadjusted expiration of the statute of limitations) and/limitations, future changes in law or accepted practice and effects of potential mergers orand acquisitions, we expect our effective tax rate (which includes effects of FIN No. 48) to be relativelyfairly stable in the region ofcoming years at around 20%.

Net Income from Continuing Operations.Net income from continuing operations was $22.4 million in 2006, as compared to $36.6 million in 2005. The decrease in 2006 resulted primarily from the write-off of acquired in-process research & development, adoption of SFAS No 123(R) for stock-based compensation and the increase in the amortization of acquired intangibles.

Comparison of Years Ended December 31, 2004 and 2005

Revenues

        Our total revenues rose approximately 23.1% to $311.1 million in 2005 from $252.6 million in 2004. Revenues from sales to the enterprise market were $237.4 million in 2005, an increase of 22.3% from 2004, and revenues from sales to the security market were $73.7 million in 2005, an increase of 26.0% from 2004. Approximately 37% of the growth in revenues was attributable to the inclusion for the first time of the results of Dictaphone CRS beginning on June 1, 2005 and Hannamax Hi-Tech Pty. Ltd. beginning on September 1, 2005. The remaining 63% growth was due to market share gains in these markets and market growth.

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Years Ended December 31,
2004
2005
Dollar Change
Percentage Change
(U.S. dollars in millions)
 
Product Revenues  $182.6 $206.4 $23.8  13.0%
Service Revenues   70.0  104.7  34.7  49.6 
Total Revenues  $252.6 $311.1 $58.5  23.2 

        The increase in product revenues was due primarily to higher sales to the enterprise and public safety and security markets.

        Approximately 50% of the increase in service revenues was due to an increase in our installed customer base resulting from new product sales, higher installation and training revenues relating mainly to the increase in product sales to the enterprise market. The remaining increase was attributable to the first time inclusion of the Dictaphone CRS service revenue beginning on June 1, 2005. The increase attributable to the acquisition of Dictaphone CRS resulted from the increase in volume of services sold. Service revenues represented 33.7% of total revenues, as compared to approximately 27.7% in 2004. Although we typically generate lower profit margins on services than on products, our strategy is to continue to grow our global services business, which we believe increases the competitiveness of our product offerings. As a result, we expect services to represent a growing portion of total revenues in the future.

        Revenues in 2005 in the Americas, which include the United States, Canada and Central and South America, rose 34.3% to $163.3 million, as compared to $121.6 million in 2004. Approximately 45% of the increase was attributable to the inclusion of the Dictaphone CRS revenues beginning on June 1, 2005. The remaining 55% increase was attributable to higher post-contract service and maintenance revenue. Sales to Europe, Middle East and Africa (EMEA) rose 6.5% to $99.3 million in 2005, as compared to $93.2 million in 2004. The increase was due mainly to higher sales to the security market and higher services and maintenance revenues primarily related to the enterprise market. Sales to Asia-Pacific (APAC) increased 28.3% to $48.5 million in 2005, as compared to $37.8 million in 2004, due mainly to higher sales to the enterprise market.

Cost of Revenues

Years Ended December 31,
2004
2005
Dollar Change
Percentage Change
(U.S. dollars in millions)
 
Cost of Product Revenues  $64.4 $67.5 $3.1  4.8%
Cost of Service Revenues   49.9  68.7  18.8  37.7 
   
  Total Cost of Revenues  $114.3 $136.2 $21.9  19.2 

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        Cost of product revenues increased slightly on a dollar basis while decreasing as a percentage of product revenues. The increase on a dollar basis was mainly due to the higher sales volume, which was partially offset by the lower cost of product resulting from 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. The decrease as a percentage of services is due to better utilization of the service organization and a higher volume of service revenues.

Gross Profit

Years Ended December 31,
2004
2005
Dollar Change
Percentage Change
(U.S. dollars in millions)
 
Gross Profit on Product Revenues  $118.2 $138.8 $20.6  17.4%
  as a percentage of product revenues   64.7% 67.3%      
Gross Profit on Service Revenue   20.1  36.1  16.0  79.6 
  as a percentage of service revenues   28.8% 34.4%      
   
   Total Gross Profit  $138.3 $174.9 $36.6  26.5 
         as a percentage of total revenues   54.8% 56.2%      

        The improvement in gross profit on product revenues was due primarily to higher sales volume, product cost reductions and a higher proportion of software in the product mix. The improvement in gross profit margin on service revenue reflected improved staff utilization and a higher volume of service revenues.

Operating Expenses

Years Ended December 31,
2004
2005
Dollar Change
Percentage Change
(U.S. dollars in millions)
 
Research and development, net  $24.9 $30.9 $6.0  24.1%
Selling and marketing   61.8  72.8  11.0  17.8 
General and administrative   31.3  37.7  6.4  20.4 
Amortization of acquired intangible assets   0.3  1.3  1.0  333.3 

Research and Development, Net. Research and development expenses, before capitalization of software development costs and government grants, increased to $33.4 million in 2005, as compared to $27.5 million in 2004 (an increase of 21%) and represented 10.7% and 10.9% of revenues in 2005 and 2004, respectively. The increase in these expenses was due mainly to an increase in research and development labor costs (research and development headcount increased by 22% during 2005). Approximately one third of the increase in research and development costs was due to the inclusion of Dictaphone CRS beginning on June 1, 2005. The increase in research and development activity is essential to support our growth strategy and to enable us to maintain our technological and business leadership in the industry.

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        Capitalized software development costs were $0.8 million in 2005, as compared to $1.3 million in 2004. Amortization of capitalized software development costs included in cost of product revenues was $2.4 million and $4.1 million in 2005 and 2004, respectively.

Selling and Marketing Expenses. Selling and marketing expenses represented 23.4% of total revenues in 2005, as compared to 24.5% in 2004.

General and Administrative Expenses. General and administrative expenses represented 12.1% of total revenues in 2005, as compared to 12.4% in 2004.

Financial Income

Years Ended December 31,
2004
2005
Dollar Change
Percentage Change
(U.S. dollars in millions)
 
Financial income, net  $3.6 $5.4 $1.8  50%
Other income (expense)   0.1  (0.0) (0.1)   

Financial Income, Net. The increase in financial income, net reflects a higher average cash balance and higher prevailing average interest rates in 2005, as compared to 2004.

Taxes on Income. In 2005, we recorded a provision for income taxes of $0.9 million (an effective tax rate of 2.4%), as compared to $2.3 million (an effective tax rate of 9.8%) in 2004. The decrease was primarily related to $4.8 million of net deferred tax assets, recognized for the first time. We were able to release a material portion of our valuation allowance, which had previously applied to our deferred tax assets, because of our belief that from 2006 to at least 2008 we would be able to earn sufficient taxable income in both Israel and the United States to realize a certain portion of those deferred tax assets.

Net Income from Continuing Operations. Net income from continuing operations was $36.6$39.1 million in 2005,2008, as compared to $21.3$37.4 million in 2004.2007.  The increase in 20052008 resulted primarily from the increase in revenues and an increase in the gross margin.

Net Income from Discontinued Operations. Net income from the discontinued operations of our COMINT/DF military-related business was $0 in 2005, as compared to approximately $3.2 million (including gain on disposition) in 2004.

Liquidity and Capital Resources

In recent years, we have financed our operations throughthe 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, 2006,2009, we had $296.1$548.5 million of cash and cash equivalents and short-term and long-term investments, as compared to $411.6$501.4 million at December 31, 20052008 and $165.9$398.2 million at December 31, 2004.

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2007.

Cash provided by operating activities of continuing operations was $87.6$119.7 million, $65.7$135.7 million and $44.3$118.2 million in 2006, 20052009, 2008 and 2004,2007, respectively. Net cash from operations in 20042009 consisted primarily of net income of $21.3$42.8 million and adjustments for non-cash activities including depreciation and amortization of $13.8$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 $13.0$8.0 million, which were partially offset by a decrease in trade payablesdeferred tax of $3.8$7.0 million. Net cash from operations in 20052008 consisted primarily of net income of $36.6$39.1 million and adjustments for non-cash activities including depreciation and amortization of $13.2$42.7 million, stock-based compensation of $25.3 million, an increase in accrued expenses and other liabilities of $27.3$28.1 million, and an increase in trade payablesloss on marketable securities sold or impaired of $5.8$4.9 million, which were partially offset by an increase in trade receivables of $11.5 million, an increase in inventories of $3.9 million and deferred tax of $4.8$5.6 million. Net cash from operations in 20062007 consisted primarily of net income of $22.4$37.4 million and adjustments for non-cash activities including depreciation and amortization of $21.9$30.9 million, stock-based compensation of $12.6$23.7 million, an in-process research and development write-off of $12.9$3.7 million, an increase in accrued expenses and other liabilities of $28.0 million, an increase in trade payable of $1.4$51.9 million, and a decrease in inventories of $5.4$7.6 million, which were partially offset by an excess tax benefit from share-based payments arrangements of $5.7$4.9 million, an increase in trade receivables of $6.8$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 $3.7$5.3 million.

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Net cash used in investing activities from continuing operations was $318.4$71.3 million, $64.3$120.9 million and $72.3$276.0 million in 2006, 20052009, 2008 and 20042007, respectively. In 2004,2009, net cash used in investing activities consisted primarily of investment in marketable securitiespayment for the acquisitions of $122.2Fortent and other acquisitions of $84.9 million and purchase of property and equipment of $6.7$8.9 million, which were partially offset by net proceeds from the maturityshort-term bank deposits of marketable securities of $17.7 million and proceeds from the sale and call of marketable securities of $41.3$24.5 million. In 2005,2008, net cash used in investing activities consisted primarily of net investment in marketable securities of $218.5$54.5 million, net investment in short-term bank deposits of $25.4 million, purchase of property and equipment of $6.1$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 consist ed 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 Dictaphone CRSActimize Ltd. of $39.7$210.5 million, a $5.0 million earn out payment with respect to FAST Security AG acquisition and payment for the acquisition of Hannamax Hi-Tech Pty. Ltd. of $1.9 million, which were partially offset by proceeds from the maturity of marketable securities of $190.7 million and proceeds from the sale and call of marketable securities of $9.6 million. In 2006, net cash used in investing activities consisted primarily of investment in marketable securities $217.7 million, purchase of property and equipment $8.1 million, payment forworking capital adjustment with respect to the acquisition of IEX Corporation of $203.2 million, payment for the acquisition of Performix Technologies Ltd. of $13.8 million and payment for the acquisition of FAST Video Security AG of $21.3 million, which were partially offset by proceeds from the maturity of marketable securities of $142.2 million and proceeds from the sale and call of marketable securities of $3.0$1.5 million.

Net cash provided by financing activities was $43.7$20.9 million, $227.0$15.9 million and $19.9$206.2 million in 2006, 20052009, 2008 and 2004,2007, respectively. In 2004, net cash provided from financing activities consisted of proceeds from the issuance of shares upon exercise of options and purchase of shares under the employee share purchase plan. In 2005, net cash provided from financing activities consisted of proceeds from the issuance of shares in our public offering of $201.7 million and proceeds from the issuance of shares upon exercise of options and purchase of shares under the employee share purchase plan of $25.3 million. In 2006,2009, 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 $39.0 million$20.3 millio n and an excess tax benefit from share-based payments agreements. Asagreements of December 31, 2006, we had authorized credit lines from banks in the amount of $260$4.9 million. As of December 31, 2006,2009, we had no outstanding borrowings under these credit lines; however, $6.2 millionnon-binding arrangements, for the rendering of the $260 million was utilized for bank guarantees. Any borrowing under these credit lines will be denominated in dollars and will bear interest at the rate of up to LIBOR + 0.45% per year. Any borrowing under three of these credit lines, having an aggregate borrowing limit of $211 million, would be secured byfrom banks against our marketable securities.

64

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 and available credit lines will be sufficient to finance our ongoing operations for the next twelve months. This belief takes into consideration the steps we have taken to limit certain customer-related risks through insuring a significant portion of our accounts receivable and achieving ISO 9000-2001 certification to help ensure the quality of our products and services, which in turn lowers our exposure to certain commercial risks.

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 for our recording platforms 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, developing insuch as the industry. The trend towardsevolvement of VoIP and the proliferation of voice over IP is leadingalternate communication channels to a greater requirement for VoIP recording capabilities in financial trading, contact centers, security related environments and telecommunications monitoring. The continued trend towards replacing analog video recording with digital video recording and the shift toward video over IP is leading to the need for network applications in the video recording area.

        We also see the continuation of a trend towards requirements for multimedia recording capabilities, in contact centers (voice, fax, email, chat screen), security (voice, radio, video, GIS, data) and telecommunications monitoring (voice, fax, internet) markets. We are beginning to see this same trend developing in the financial trading sector, and we expect some Homeland Security initiatives in areasvoice, such as border control, critical infrastructure securitychat, email, and first responder communications to require multimedia capture platforms as well.

social media. We also 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 for centralized branch recordingsystems.

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We believe that enhancing operational efficiency is especially critical to our customers, who continuously seek solutions that would help them reduce costs while maintaining or even improving customer service. In addition, our customers seek solutions that can improve their customer experience across channels of interaction and managed services.

        Wecan assist in cross and up-selling into their customer base.

Thus, we are seeing growing demand from our contact center customers to streamline their operationsoperational efficiency by deploying a more comprehensive set of our contact center solutions, such asin addition to recording. These include quality monitoring, analytics, work forceworkforce management, performance management, customer feedback, etc.

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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 knowledgeinsights that can be distributed via dashboards, reports and alerts to all relevant parties to improve performance.

        There is growing demand from our customers for software applications that will leverage the wealth of unstructured data captured by the recording platform to improve overall performance. In turn, as these enhanced software applications are being added, customers are considering our systems “mission critical.”

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. We see a trend towards more software applications
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 financial trading environmentprotection of people and assets. As a result, there is a growing demand for compliance monitoringmore comprehensive and disputeintegrated 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 to improve business performance.solution that combines radio, telephony, IP data, GIS, and video. We see similar trends happening in digital video recording. Wealso expect video content analysis applications to become increasingly important to building, campus, city center and infrastructure perimeter security, loss prevention in casinos, retail and warehousing,protection, as well as various homeland sec urity applications, mass transportation systems, campus perimeter security, applicationsand critical facilities, to enable proactive security management.

For more information on trends in our industry, please see Item 4, “Information on the Company–Company—Business Overview–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–Information—Risk Factors.”

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Contractual Obligations

Set forth below are our contractual obligations and other commercial commitments over the medium term as of December 31, 20062009 (in thousands of U.S. dollars):

 Payments Due by Period
Contractual ObligationsTotalLess than 1 year1- 3 years3-5 yearsMore than 5
years
Operating Leases20,350 9,768 7,689 2,893   
Unconditional Purchase Obligations6,700 6,700       
Total Contractual Cash Obligations27,050 16,468 7,689 2,893   
.
  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 CommitmentsTotal Amounts
Committed		Less than 1 year1- 3 years3-5 yearsMore than 5 years
Standby Letters of Credit2,000 2,000       
Guarantees - continuing operations4,162 2,427 565 518 652 
Total Commercial Commitments6,162 4,427 565 518 652 

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     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

        Effective

                           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 cap italized 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, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), using the modified prospective transition method. Under that transition method, compensation cost recognized in the year ended December 31, 2006, includes: (a) compensation cost for all share-based payments granted prior2009.
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See Note 2(f) to but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.

        We recognize compensation expensesItem 18 financial statements for the value of our awards, which have graded vesting, based on the accelerated attribution method over the requisite service period of eachadoption of the awards, netupdated guidance regarding recognition and presentation of estimated forfeitures. Estimated forfeitures are basedother-than-temporary impairment on actual historical pre-vesting forfeitures.

        As a result of adopting SFAS No. 123(R) on January 1, 2006, our income before taxes on income and net incomemarketable securities.


See Note 11 to Item 18 financial statements for the year ended December 31, 2006, is approximately $12,571 thousands and $10,424 thousands lower, respectively, than if we had continued to account for stock-based compensation under APB 25. Basic and diluted net earnings per share for the year ended December 31, 2006 are $0.21 and $0.20 lower, respectively, than if we had continued to account for stock-based compensation under APB 25.

        We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing model. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements. The expected term of options granted is derived from the outputadoption of the option valuation modelupdated guidance of ASC 815 with respect to disclosure requirements regarding derivative instruments and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. Federal Reserve zero-coupon bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

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hedging activities.

Recently Issued Accounting Pronouncements

        In June 2006,

 On July 1, 2009, the Financial Accounting Standards Board (“FASB”("FASB") issued Interpretationthe 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. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”855 "Subsequent Events" ("FASB ASC No. 855").  FIN 48 creates a single modelFASB ASC No. 855 is intended to address uncertainty in tax positions. FIN 48 clarifies theestablish general standards of accounting for income taxes by prescribingand disclosure of events that occur after the minimumbalance 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 threshold a tax position is required to meet before being recognizedor disclosure in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, intereststatements, the circumstances under which an ent ity should recognize events or transactions occurring after the balance sheet date in its financial statements, and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from Financial Accounting Standards Board Statementthe disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  FASB ASC No. 5, “Accounting for Contingencies.” FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more-likely-than-not to be sustained). FIN 48 applies to all tax positions related to income taxes subject to Financial Accounting Standards Board SFAS No. 109, “Accounting for Income Taxes.” This includes tax positions considered to be “routine” as well as those with a high degree of uncertainty. Derecognition of a tax position that855 was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of the implementation of FIN 48, we increased our retained earnings as of January 1, 2007 by approximately $800,000.

        In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management believes this standard willended after June 15, 2009.  The adoption did not have a material effect on ourthe Company’s consolidated financial statements.


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In February 2007,October 2009, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsan 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 Financial Liabilities,” which permits companiesnon-software components that function together to choose to measure certain financial instruments and other items at fair value thatdeliver the tangible product’s essential functionality are not currently required to be measured at fair value. SFAS No. 159excluded 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 NovemberJune 15, 2007. We will adopt SFAS No. 159 no later than January 1, 2008. We2010, or retrospectively, for all periods presented.  The Company is currently evaluating the impact on its consolidated results of oper ations 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 not yet determinedVSOE of selling price  or third-party evidence of selling price; (iii) eliminate the effect thatuse of the adoptionresidual method and require an entity to allocate revenue using the relative selling price method and (iv) require expanded disclosures of SFAS No. 159 will havequalitative and quantitative information reg arding 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 ouror 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 statements.

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condition.
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Item 6.                 Directors, Senior Management and Employees.
Item 6.Directors, Senior Management and Employees.

Directors and Senior Management

The following table sets forth, as of June 13, 2007,March 24, 2010, the name, age and position of each of our directors and executive officers:

NameAgePosition
Name
 Age
Position
Ron Gutler(1)(2)
4952
Chairman of the Board of Directors
Joseph Atsmon(1)(3)
5862
Vice-Chairman of the Board of Directors
Rimon Ben-Shaoul(2)
6265
Director
Yoseph Dauber(2)(3)
7173
Director
Dan Falk(1)(2)(3)(4)
6265
Director
John Hughes(2)
5558
Director
David Kostman
Yocheved Dvir(1)(3)(4)
4257
Director
Dr. Leora Meridor(1)(3)(4)
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
59Director
Haim Shani50Chief Executive Officer
Dr. Shlomo Shamir60President
Israel Livnat56
Corporate Vice President & President, Security Group
Ran Oz(5)
David Sosna
4041
Chief Executive Officer, Actimize Ltd.
Dafna Gruber
45
Corporate Vice President and Chief Financial Officer
Dafna Gruber(6)42Corporate Vice President and Chief Financial Officer
Yechiam Cohen
5053
Corporate Vice President, General Counsel and Corporate Secretary
Eran Porat4447Corporate Vice President, Finance
Eran Liron
3942
Corporate Vice President, Business Development
Zvi Baum
Dan Yalon
5138
Corporate Vice President, Strategy & President, Enterprise Interaction SolutionsStrategic Alliance
Debra May
Yochai Rozenblat
5148President, IEX Corporation
Eran Gorev42
President and Chief Executive Officer, NICE Systems Inc.Americas
Tamir Ginat
Shlomi Cohen
4445
President of EMEA
Doron Ben SiraBen-Sira
4850
President Niceof NICE APAC
Koby Huberman49Strategic Adviser(7)

 ___________________________
(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–Employees—Board Practices–Practices— Outside Directors.”

(5)     Departing Corporate Vice
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 FinancialExecutive Officer (See below).
(6)     Incoming Corporate Viceon 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 FinancialMarketing Officer (See below).
(7)     Corporate Vice President, Strategic Alliances and Business Development through December 31, 2006 (see below).

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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.

        As previously disclosed, Dafna Gruber will be joining NICE as Corporate Vice President and Chief Financial Officer. Ran Oz, our departing Corporate Vice President and Chief Financial Officer, has agreed to remain with us to ensure a smooth transition of his responsibilities to Ms. Gruber and is performing the function of CFO at the time of the filing of this annual report. Ms. Gruber is expected to assume the CFO responsibilities during the second quarter of 2007.

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Ron Gutler has served as one of our directors since May 2001 and Chairman of the Board since May 2002. Mr. Gutler is currently the Chairman of G.J.E. 121 Promoting Investment Ltd., a real estate investment company, a director of Psagot Ofek-Fund Management and Eshel Shekel Bonds Ltd. and 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 globalglob al 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.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. and Vocaltec Communications Ltd. From 1995 tountil 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 Vice PresidentVP for Business Development.business development. Prior to that, he served as President of various of its military communications divisions. Mr. Atsmon holds a Bachelor’s degree in Electrical Engineering from the Technion–Technion – Israel Institute of Technology.

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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 Chief Executive OfficerCEO of Koonras Technologies Ltd., a technology investment company controlled by Poalim InvestmentsS.P.G. Ltd., a large Israeli holding company. Mr. Ben-Shaoul also serves as Chairman of Nipson Digital Printing Systems PLC andserved as a director of Dor Chemicals Ltd., MIND C.T.I. Ltd., BVR Systems Ltd., Cimatron Ltd. and several private companies. In addition, he is the President and Chief Executive OfficerCEO of Polar Communications Ltd., which manages media and communications investments. Between 1997 and 2001, Mr. Ben-Shaoul was the President and Chief Executive OfficerCEO 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 ElectronicsElectronic s Industries Ltd., Scitex Corporation Ltd., and various other companies within the Clal group.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 Chief Executive Officerand CEO of Clal Insurance Company Ltd. and a director of Clal Insurance Company Ltd.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 AvivTel-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, heMr. Dauber was Deputy Chairman of the Board of Management and jointJoint Managing Director of Bank Hapoalim and was responsible for the commercial division of the bank. BetweenFrom 1994 and 1996 and untilto June 2002, Mr. Dauber served as Chairman of Poalim American Express and 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 Vice Chairman of the Israel Maritime Bank Ltd. Heand from 2003 to 2008 he served as a director of Bank Hapoalim. Mr. Dauber currently serves as a director of Bank Hapoalim. He also serves as a director of Clal Insurance Holding Ltd., Lodzia Rotex Ltd., Pachmas Industries Ltd., Vocaltec Communications Ltd., Orbit/FR Inc.Micromedic Ltd., Orbit Alchut Technologies Ltd., Delek Group Ltd. and Afcon Industries Ltd.Chair man of KCPS Manof Fund. Mr. Dauber holds a Bachelor’s degree in Economics and Statistics from the Hebrew University in Jerusalem and a MastersMaster’s degree in Law from Bar Ilan University.

Dan Falk has served as one of our statutory outside directors since January 2002. Mr. Falk also serves as a director of Orbotech Ltd., Attunity Ltd., Orad Hi Tech Systems Ltd. (Chairman), Netafim Ltd., Plastopil Ltd., Nova Measuring Instruments Ltd., ClickSoftware Technologies Ltd., Dmatek Ltd., Jacada Ltd., Poalim Ventures 1 Ltd. and Ormat Technology Inc.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, in Jerusalem. Mr. Falk qualifies as an outside director under Israeli law.

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John Hugheshas 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, and Executiveas well as Non-Executive Deputy Chairman of Parity Group plc. He is also a directorplc and Non-Executive Director of Barco N.V., an equipment manufacturer in Belgium. From June 1st, 2007, he will also commence serving as a director of Spectris plc, a London FTSE listed entity.Chloride Group plc. From December 2000 to July 2004, he held senior executive positions at Thales Group, most recently as Executive Vice President and Chief Executive OfficerCEO of all civil activities for the group.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. Hugh es 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.

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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& #8217;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 January 2000.2001, with the exception of a short period between June 2007 and July 2008. Mr. Kostman is currently Chairman and CEO of Nanoosh LLC, a Managing Director inrestaurant operating company, and serves on the investment banking divisionboard of Lehman Brothers Inc. where he is responsible for its Global Internet Investment Banking Group. Prior to rejoining Lehman Brothers in Augustdirectors of The Selling Source, LLC. From 2006 Mr. Kostman served as the Chief Executive Officer of Delta Galil USA Inc., a subsidiary of Delta Galil Industries Ltd., a NASDAQ-listed apparel manufacturer from April 2005 until July 2006. From April 2003 to April 2005, he was Chief Operating Officer of Delta Galil USA. From 2000 to 2002 he was the Chief Operating Officer of VerticalNet, Inc., a NASDAQ-listed software company. Prior thereto,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., which he joined in 1994.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, France.INSEAD.

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Dr. Leora (Rubin) MeridorZeev Bregman joined NICE in September 2009 and has served as one of our directorsPresident and Chief Executive Officer since January 2002. Since 2001, Dr. Meridor has been a financial and business consultant.November 2009. From 2001 to 2005, she2007, Mr. Bregman served as ChairChief Executive Officer of Bezeq InternationalComverse Inc. From 1987 to 2001, he served in various R&D, sales, marketing, and Walla Telecommunication. From 2001 to 2004, Dr. Meridor served as Chair of Poalim Capital Markets. From 1996 to 2000, she served as Seniormanagement positions within Comverse, including Vice President Head of the CreditEMEA division, Vice President and Risk Management Division of the First International Bank of Israel. From 1983 to 1996, Dr. Meridor held various positions in the Bank of Israel, the last of which was Head of the Research Department. Dr. Meridor is a director of Teva Pharmaceutical Industries Ltd., Isrotel Ltd., G.J.E. 121 Promoting Investment Ltd., Gilat Satellite Networks Ltd., Alrov Israel Ltd.Messaging division, and the Company for Retrieving Holocaust Survivors’ Assets. She has held various teaching positions with the Hebrew University in Jerusalem andChief Operating Officer. Mr. Bregman holds a Bachelor’s degree in Mathematics and Physics,Computer Science from Tel-Aviv University, a Master’sMaster's degree in MathematicsComputer Science from Tel-Aviv University and a DoctoralMaster's degree in EconomicsBusiness Administration from the Hebrewa joint program of Kellog University in Jerusalem. She qualifies as an outside director under Israeli law.and Tel Aviv University.

Haim ShaniUdi Ziv has served as ourPresident of the Enterprise Products Group and Chief ExecutiveProduct Officer since January 2001. He also served as our President from January2009. From 2001 to April 2005 and asuntil 2007, Mr. Ziv held several senior executive positions with SAP AG, a director from January 2001 to September 2005. From 1998 to 2000, he served asleading 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 Israeli officeresearch and development of Applied Materials Inc., where he headed the process diagnosticSAP Portal product. Prior to joining SAP, Mr. Ziv was one of the original members, and control business group formed following the acquisitionhead of global research & development, of Top Tier Software, a leading enterprise portal company (acquired by Applied MaterialsSAP in 2001). Mr. Ziv holds a Bachelor of Opal Ltd. and Orbot Instruments, Ltd. Prior thereto, Mr. Shani held various management positions at Orbotech Ltd. From 1995 to 1998, heScience degree in Computer Engineering from the Technion – Israel Institute of Technology.
Israel Livnat has served as Corporate Vice President of Marketing and Business Development, from 1993 to 1995, he served as President of Orbotech’s subsidiary in Asia Pacific, based in Hong Kong, and from 1992 to 1993, he served as President of Orbotech Europe, based in Brussels. From 1982 to 1992, Mr. Shani held various management positions at Scitex Corporation and IBM Israel. Mr. Shani holds a Bachelor’s degree in Industrial and Management engineering from the Technion–Israel Institute of Technology and a Master’s degree in Business Administration from INSEAD, France.

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Dr. Shlomo Shamir has served as our President since March 2005. From April 2001 to April 2005, he served as President and Chief Executive Officer of NICE Systems Inc., our wholly owned subsidiary and corporate headquarters in North America. From 2000 to April 2001, Dr. Shamir served as President and Chief Executive Officer of CreoScitex America, Inc. From 1997 to 2000, he served as President and Chief Executive Officer of Scitex America Corp. and from 1994 to 1997, he served as Scitex Ltd.‘s Corporate Vice President of Operations. Prior to 1994, Dr. Shamir served in the Israel Defense Force (IDF) where he attained the rank of Brigadier General. Dr. Shamir built and led the planning division in the IDF headquarters and served as Israel’s military attaché to Germany. He holds a Bachelor’s degree in physics from the Technion–Israel Institute of Technology and Master’s and Doctoral degrees in Engineering and Economic Systems from Stanford University, California.

Israel Livnat has served as our Corporate Vice President & 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 was headingheaded a division in the Israeli Aircraft Industries Ltd., leading the development of the Arrow weapons system. Before that he was VPVice President Engineering in the same division in the Israeli Aircraft Industries, and director for hardware engineering inat 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 B.ScBachelor of Science degree in Electrical Engineering from the Technion–Technion – Israel Institute of Technology,Technolog y, and an Executive MBA from Stanford University California.University. He was awarded the prestigious Israeli Industry Prize in 2004.

Ran OzDavid Sosna is the Chief Executive Officer and a co-founder of Actimize Ltd., a NICE company. Mr. Sosna joined the NICE management team in 2007, when Actimize was acquired by NICE. Prior to serving as CEO of Actimize, Mr. Sosna served as its Executive Vice President of New Business Development. Before Actimize, Mr. Sosna founded Gilon Information Systems, which grew into Israel’s largest business intelligence company. Mr. Sosna holds a Bachelor’s degree in Industrial Engineering and Management, from Ben-Gurion University.
Dafna Gruber has served as our Corporate Vice President and Chief Financial Officer since September 2004. As described above, Mr. Oz agreed to continue to perform the function of CFO of NICE until Dafna Gruber assumes the CFO responsibilities. Since February 2007, Mr. Oz also serves as Deputy CEO and Chief Financial Officer of BEZEQ The Israel Telecommunications Corp. Ltd. Mr. Oz also serves as a director of several private companies. From 2001 to 2004, Mr. Oz worked for Ceragon Networks Ltd., an international fixed wireless company, where he was Chief Financial Officer. From 1995 to 2001, he worked for Jacada Ltd., an international software company, where he held a variety of positions in finance and operations, most recently as General Manager of the parent company and Corporate Chief Financial Officer. Mr. Oz is a certified public accountant and holds a Bachelor’s degree in Accounting and Economics and a Master’s degree in Business Administration and economics from the Hebrew University in Jerusalem.

Dafna Gruber is expected to assume the responsibilities of our Corporate Vice President and Chief Financial Officer during the second quarter of 2007, as described above.June 2007. From 2001 until the second quarter ofMay 2007, she served as the Chief Financial Officer of Alvarion Ltd., a NASDAQ-listed company that provides innovative wireless network solutions. From 1997 to 2001, Ms. Gruber was the Chief Financial Officer of BreezeCOM Ltd., which was merged with Floware Wireless Systems Ltd. to create Alvarion, prior to which she was the controller of BreezeCOM from 1996 to 1997. From 1993 to 1996, Ms. Gruber was a Controllercontroller at Lannet Data Communications Ltd., subsequently acquired by Lucent Technologies Inc.  Ms. Gruber is a certified public accountant and holds a Bachelor’s degree in Accounting and Economics from Tel Aviv University.

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Yechiam Cohen has served as our Corporate Vice President, General Counsel and Corporate Secretary since 2005. From 1996 to 2004, he served as General Counsel of Amdocs, a leading provider of billing and CRM software solutions to the telecommunications industry. Before joining Amdocs, Mr. Cohen was a partner in the Tel Aviv law firm of Dan Cohen, Spigelman & Company. From 1987 to 1990, he was an associate with the New York law firm of Dornbush, Mensch, Mandelstam and Schaeffer. Mr. Cohen served as a law clerk to Justice Beijski of the Supreme Court of Israel in Jerusalem. He holds a Bachelor’s degree from the Hebrew University School of Law and is admitted to practice law in Israel and New York.

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Eran Porat has served as our Corporate Vice President, Finance since 2004. From March 2000 to 2004, he served as our Corporate Controller. From 1997 to February 2000, Mr. Porat served as Corporate Controller of Tecnomatix Technologies Ltd. From 1996 to 1997, he served as Corporate Controller of Nechushtan Elevators Ltd. Mr. Porat is a certified public accountant and holds a Bachelor’s degree in economics and accounting from Tel Aviv University.

Eran Liron has served as our Corporate Vice President, Business Development since February 2006. From 2004 to 2006, he served as Director of Corporate Development at Mercury Interactive Corporation, a software company, and prior thereto he held several business development positions at Mercury Interactive. Before joining Mercury, Mr. Liron served in several marketing roles at software startups and at Tower Semiconductor. Mr. Liron holds a Bachelor of Science degree from the Technion-IsraelTechnion – Israel Institute of Technology and a doctorateDoctorate in Business from the Stanford Graduate School of Business in California.

Zvi BaumDan Yalon has served as our Corporate Vice PresidentVP Strategy and President, Enterprise Interaction SolutionsStrategic Alliances since April 2005. He previously served inNovember 2007. From 2003 to 2007, Mr. Yalon held several business development positions at Amdocs Ltd., the positionslast of General Manager of the Product Division, Director of Product Management in the EIS Division and Corporate Vice President of Marketing. Before joining us in January 2002, Mr. Baum servedwhich was as the Managing DirectorHead of Call Vision Israel Ltd.,Strategy and New Business Initiatives, where he established the company’s strategic planning and execution capabilities, translating corporate vision and strategic planning into actionable growth initiatives. From 2000 to 2003, Mr. Yalon was a company that specialized in the development of advanced web-based quality monitoring solutions for call centers. Prior thereto, he served as the Vice President of International Salesstrategy consultant with U.S.-based firm Monitor Company and Marketing at STS Software Systems, which developed recording solutions and was acquired by us at the end of 1999. From 1987 to 1998,with Israeli firm P.O.C Management Consulting. Mr. Baum worked for a number of American and European companies in several areas, including technical management, marketing and channel management. Mr. BaumYalon holds a Bachelor’s degree in Engineering from the Technion–Israel Institute of TechnologyLaw and a Master’sBachelor’s degree in Computer Science and a Master’s degree in Business Administration,management, both from the Hebrew University of California in Los Angeles.Jerusalem.

Debra May has served since July 2003 as President of IEX Corporation, which was acquired by us in July 2006. From the founding of IEX in 1988 until 2003, she served as Vice President of the Contact Center division of IEX. Prior to that, she held technical and management positions at Texas Instruments Inc., Datapoint Inc. and Teknekron Infoswitch Corporation. Ms. May holds Bachelor’s and Master’s degrees in Computer Science from Southern Illinois University.Yochai Rozenblat

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Eran Gorev has served as the President and Chief Executive Officer of NICE Systems Inc.our American division since March 2005. From 2002September 2009. Prior to 2004,his current position, Mr. GorevRozenblat was President of the Enterprise Group in the Americas. From 2003 to 2007, Mr. Rozenblat served as our Vice President of Sales, responsible for North America – Major Clientsand from 2007 his responsibilities also extended to South America. Before joining NICE in 2004, Mr. Rozenblat led the Enterprise Sales Team at Clarify, the CRM division atof Amdocs. From 2000 to 2002, he served as Corporate Vice President and Head of Worldwide Sales at Amdocs. Prior thereto, Mr. Gorev held various marketing and sales management positions in the information technology industry. Mr. Gorev holdsRozenblat has a Bachelor’s degree in Law from Tel Aviv University and a joint Master’s degree in Business Administration from the Kellogg School of Management of Northwestern University and the Leon Recanati Graduate School of Business Administration of Tel Aviv University.

Tamir Ginat has served as President of EMEA since July 2005. From 2000 to 2003, Mr. Ginat served as the General Manager of NICE UK and in 2003 was promoted to Vice President Sales, U.K. & Ireland, a position he held until June 2005. Prior thereto, Mr. Ginat held various sales positions in our company and before joining us in 1995, he served for five years within the International Marketing Department of ISCAR. Mr. Ginat holds a Bachelor’s degree in Economics and Business from Haifa University and a Master’s degree in Business Administration from Heriot Watt University.

Doron Ben-Sira has served as President of NICE APAC Ltd. since May 2002. Prior thereto,to that, he was the vice president of the assembly division of Orbotech Asia Pacific, responsible for all electronic assembly solutions sold to Asian customers.Pacific. From 1996 to 1998, Mr. Ben-Sira was the Eastern European regional director for Cisco Systems and also served as the Eastern European and Middle Eastern channel director for that company.Cisco. Mr. Ben-Sira also held management positions in Siemens Data Communication (Germany) and in Mashov Computers (Israel). HeMr. Ben-Sira holds a Bachelor’s degree in Economics and Management and a Master’s degree in Business Administration, both from Tel Aviv University.

Koby Huberman Shlomi Cohen has served as onePresident of our Corporate Vice Presidents from January 2000NICE EMEA since March 1, 2010. From 2007 to December 2006, most recently2010, Mr. Cohen served as Corporatethe head of the BBA Global Sales Division of Nokia Siemens Networks (located in Germany), where he ran a worldwide operation. Prior to that, he was the Senior Vice President Business DevelopmentSales for the Carrier Ethernet and Strategic Planning. Since January 1, 2007 and untilfor the endATM switches technology in the Worldwide Fixed Networks Division of 2007, Mr. Huberman is servingSiemens Communications. Before joining Siemens, he acted as a strategic adviser to NICE. Mr. Huberman has also recently founded and is the CEO of Strategic Landscapes Ltd., an Israeli-based executive strategic consulting company. From 1998 to January 2000, Mr. Huberman served assenior Vice President Sales for BATM Advanced Technologies. Mr. Cohen has a Bachelor’s of Marketing for the Enterprise Internetworking Systems GroupScience degree in Aeronautics Engineering from Technion – Israel Institute of Lucent Technologies Ltd. and, from 1995 to 1998, he was Vice President of Global Marketing and Business Development for Lannet Data Communications Ltd., which was acquired by Lucent in 1998. Prior thereto, Mr. Huberman was the Managing Director of ServiceSoft Europe, a pan-European vendor of artificial intelligence and knowledge-based software for call center and customer service applications. Mr. Huberman serves voluntarily as chairman and board member of several non-profit organizations in the field of education and civil society community development. Mr. Huberman holds an Executive Master in Philosophy from Tel-Aviv UniversityTechnology and a Bachelor’sMaster’s degree in Economics and Business Administration, from the Leon Recanati Graduate School of Business Administration of Tel AvivBar Ilan University.

There are no family relationships between any of the directors or executive officers named above.

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Compensation
Compensation

        The aggregate compensation paid to or accrued on behalf of all our directors and executive officers as a group 21of 22 persons during 20062009 consisted of approximately $ 4.7$7,685,623 million in salary, fees, bonus, commissions and directors’ fees and approximately $0.1$376,927 million in amounts set aside or accrued to provide pension, retirement or similar benefits, but excluding amounts we expended for automobiles made available to our officers, expenses (including business travel, professional and business association dues and expenses) reimbursed to our officers and other fringe benefits commonly reimbursed or paid by companies in Israel.

        At

During 2009, our 2006 annual general meetingofficers and directors received, in the aggregate, options and restricted share units with respect to 1,132,667 ordinary shares under our equity based compensation plans.  These options and restricted share units have a weighted average price of shareholders,$24.79 and the options will expire six years after the date the options were granted. For information regarding our option exchange program, see " – Share Ownership – Option Exchanges and Price Adjustment."
        Pursuant to the requirements of the Israeli Companies Law, 5759–1999, or the Companies Law, remuneration of our directors generally requires shareholder approval. Compensation and reimbursement for outside directors (as described below) is statuto­rily determined pursuant to the Companies Law.  Effective as of July 29, 2008, our shareholders approved the payment to each of our directors, including outside directors, of an annual fee of NIS 90,000 (equivalent to approximately $22,823) and a meeting attendance fee of NIS 3,250 (equivalent to approximately $824), including for meetings of committees of the board of directors.  Our directors are als o entitled to an annual grant of options to purchase 5,000 of our ordinary shares and our Chairman of the Board is entitled to each of our non-executive directors (excluding statutory Outside Directors) and thean annual grant of options to purchase 15,000 ordinary shares to our Chairman of the Board, to be granted on the date of eachour annual general meeting from 2006 through 2010. The exercise price per share ofduring each calendar year until and including the options will be equal to the closing price per share of ordinary shares on the NASDAQ Stock Market on the trading day immediately preceding the applicable date of grant.2010 annual general meeting. These options will fully vest following the lapse of twelve (12) months from the applicable date of grant and will expire onare granted under the sixth anniversary of the applicable date of grant. They will be subject to the terms of ourNice-Systems Ltd. 2003 Stock Option Plan.

        During 2006, our officers and directors received, in the aggregate, options to purchase up to 580,000 ordinary shares under our 2003 Stock Option Plan. These options have an average exercise price of $25.89 and will expire six years after the date the options were granted.

        Compensation and reimbursement for Outside Directors (as described below) is statutorily determined pursuant to the Israeli Companies Law, 5759–1999, or the Companies Law.  The statutory rates for Outside Directors are approximately NIS 47,100 per annum and approximately NIS 1,800 per meeting. We pay each of our directors who is not an Outside Director an annual fee of $15,000 and a meeting attendance fee of $600, including for meetings of committees of the board of directors. We pay each member of our audit committee, excluding Outside Directors, an additional annual fee of $2,500. In addition, commencing January 1, 2007,effective as of July 29, 2008, our Chairman of the Board receives a special annual fee in the amount of $25,000.NIS 180,000 (equivalent to approximately $45,647). Effective as of May 1, 2009, our Board resolved to voluntarily reduce the aforementioned fees paid to the directors and the Chairman of the Board’s special annual fee by 8%, until determined otherwise by the Board.

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Board Practices

Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Companies Law, relating to such matters as outside directors, the audit committee, the internal auditor and approvals of interested party transactions.  These matters are in addition to the ongoing listing conditions of the NASDAQ and other relevant provisions of U.S. securities laws.  Under the NASDAQ rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable NASDAQ requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. For further information see “Item 16G – Corporate Governance.”
General Board Practices
Our articles of association provide that the number of directors serving on the board shall be not less than three but shall not exceed thirteen. Our directors, other than outside directors, are elected at the annual shareholders meeting to serve until the next annual meeting or until their earlier death, resignation, bankruptcy, incapacity or removal by an extraordinary resolution of the general shareholders meeting. Directors may be re-elected at each annual shareholders meeting. The board may appoint additional directors (whether to fill a vacancy or create new directorships) to serve until the next annual shareholders meeting, provided, however, that the board shall have no obligation to fill any vacancy unless the number of directors is less than three.

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The board may, subject to the provisions of the Companies Law, appoint a committee of the board and delegate to such committee all or any of the powers of the board, as it deems appropriate. Notwithstanding the foregoing, the board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. The board has appointed an internal audit committee, as required under the Companies Law, that has threefour members, an audit committee that currently has four members and a compensation committee that has fourfive members. We do not have, nor do our subsidiaries have, any directors’ service contracts granting to the directors any benefits upon termination of their employment.

Outside Directors

Under the Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel are required to appoint at least two “outside” directors.

To qualify as an outside director, an individual or his or her relative, partner, employer or any entity under his or her control, may not have as of the date of appointment as an outside director, and may not have had during the previous two years, any affiliation with the company, with any entity controlling the company on the date of the appointment or with any entity whose controlling shareholder, on the date of the appointment or during the previous two years, is the company or an entity controlling the company. In general, the term “affiliation” includes:

—an employment relationship;
—a business or professional relationship maintained on a regular basis;
—control; and
—service as an office holder.

•      an employment relationship;
•      a business or professional relationship maintained on a regular basis;
•      control; and
•      service as an office holder.
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No person may serve as an outside director if the person’s position or other activities create, or may create, a conflict of interest with the person’s responsibilities as an outside director or may otherwise interfere with the person’s ability to serve as an outside director.

Outside directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:

—·the majority of shares voted at the meeting shall include at least one-third of the shares of non-controlling shareholders present at the meeting and voting on the matter (without taking into account the votes of the abstaining shareholders); or
—·the total number of shares of non-controlling shareholders voted against the election of the outside directors does not exceed one percent of the aggregate voting rights in the company.

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The term of an outside director is three years and may be extended for an additional term of three years. Thereafter, he or she may be reelected by our shareholders for additional periods of up to three years each only if the audit committee and the board of directors confirm that, in light of the outside director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period is beneficial to the company.  Each committee of a company’s board of directors which is empowered to exercise any of the board’s powers is required to include at least one outside director.

        Our outside directors were

Mr. Dan Falk was elected for a secondthird term as an outside director and Ms. Yocheved Dvir was elected as an outside director for the first time at our Annual General Meeting held on October 19, 2004.December 24, 2007, and their election became effective as of January 1, 2008.  An outside director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, from the company.

In accordance with such regulations, at our 2008 annual general meeting of shareholders, our shareholders approved that our outside directors are to receive compensation equal to that paid to the other members of the board of directors. For further information, please see Item 6, “Directors, Senior Management and Employees—Compensation” in th is annual report.

Financial and Accounting Expertise

Pursuant to new provisions of the Companies Law effective from April 2006, our board of directors has determined that at least one member of our board of directors must be an “accounting and financial expert.”  The Companies Law requires that all outside directors must be “professionally qualified.” Under the NASDAQ rules, each member of our audit committee must be financially literate and at least one of the members must have experience or background that results in such member’s financial sophistication.  Our board of directors has determined that Dan Falk is an “accounting and financial expert” for purposes of the Companies Law and is financially sophisticated for purposes of the NASDAQ rules.  See also Item 16A, “Audit Committee Financial Expert” in this annual report.

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Independent Directors

Under the rules of the NASDAQ Global Select Market, a majority of our directors are required to be “independent” as defined in NASDAQ’s rules.  All of our directors satisfy the respective independence requirements of NASDAQ.

Audit Committee

The NASDAQ rules also require that the audit committee of a listed company must be composed of at least three directors, each of whom is (i) independent; (ii) does not receive any compensation (except for board fees) from the company; (iii) is not an affiliated person of the company or any subsidiary; and (iv) has not participated in the preparation of the company’s (or a current subsidiary’s) financial statements during the past three years. All of the current members of our audit committee (presently comprised of Joseph Atsmon (Chairman), Ron Gutler, Dan Falk and Leora Meridor)Yocheved Dvir) meet the NASDAQ standards described above.

Our audit committee has adopted a charter specifying the committee’s purpose and outlining its duties and responsibilities which include, among other things: (i) appointing, retaining and compensating the company’s independent auditor, subject to shareholder approval, and (ii) pre-approving all services of the independent auditor. The audit committee must review and approve all related party transactions. Our audit committee is also authorized to act as our “qualified legal compliance committee.” As such, our audit committee will be responsible for investigating reports made by attorneys appearing and practicing before the SEC in representing us, of perceived material violations of U.S. federal or state securities laws, breaches of fiduciary duty or similar material violations of U.S. law by us or any of our agents.

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ag ents.

We believe we currently meet the applicable NASDAQ requirements and we intend to continue to take all actions as may be necessary for us to maintain our compliance with applicable NASDAQ requirements.

Internal Audit Committee

The Companies Law requires public companies to appoint an internal audit committee. The role of the internal audit committee under the Companies Law is to examine flaws in the management of the company’s business in consultation with the internal auditors and the independent accountants, and to propose remedial measures to the board. The internal audit committee also reviews interested party transactions for approval as required by law. Under the Companies Law, an internal audit committee must consist of at least three directors, including all of the outside directors. The chairman of the board of directors, any director employed by or otherwise providing services to the company on a regular basis, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the internal audit committee. All of the current members of our internal audit committee (presently comprised of Leora Meridor (Chairperson)Joseph Dauber (Chairman), Joseph Atsmon, Dan Falk and Joseph Dauber)Yocheved Dvir) meet these qualifications.


Internal Auditor

Under the Companies Law, the board of directors must appoint an internal auditor, proposed by the internal audit committee. The role of the internal auditor is to examine, among other matters, whether the company’s activities comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. We have appointed an internal auditor in accordance with the requirements of the Companies Law.

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Compensation Committee

As required by NASDAQ rules, our compensation committee approves the compensation of our executive officers.  The compensation of our chief executive officer also requires the approval of our board of directors under the Companies Law. The compensation committee is also authorized to approve the grant of stock options and other securities to eligible grantees under our benefit plans pursuant to guidelines adopted by our board of directors. However, grants of stock options and other securities to our executive officers also require approval of our board of directors.  The current members of this committee, each of whom satisfies the respective independence requirements of NASDAQ, are Messrs.Dan Falk who is the chairman,(chairman), Rimon Ben Shaoul, Joseph Dauber, Ron Gutler and John Hughes.

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Nominations Committee

As required by NASDAQ rules, our nominations committee recommends candidates for election to our board of directors pursuant to a written charter.  The current members of this committee, all of whom are independent directors, are Ron Gutler and Dan Falk.

Employees

At December 31, 2006,2009, we had approximately 1,7792,596 employees worldwide, which represented an increase of 25.6%8% from year-end 2005.

2008.

The following table sets forth the number of our full-time employees at the end of each of the last three fiscal years as well as the main category of activity and geographic location of such employees:

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  At December 31, 
Category of Activity
 
2007
  
2008
  
2009
 
          
Operations
  116   105   101 
Customer Support
  724   852   966 
Sales & Marketing
  450   492   530 
Research & Development
  564   597   638 
General & Administrative
  318   358   361 
Total 
  2,172   2,404   2,596 
             
Geographic Location
            
Israel
  923   1,014   1,086 
Americas
  811   864   942 
Europe
  301   355   373 
Asia Pacific
  137   171   195 
Total 
  2,172   2,404   2,596 
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At December 31,
Category of Activity
2004
2005
2006
 
Operations   86  105  104 
Customer Support   316  466  620 
Sales & Marketing   261  327  389 
Research & Development   273  361  427 
General & Administrative   131  157  239 
Total   1,067  1,416  1,779 
   
Geographic Location
   
Israel   518  625  692 
North America   339  526  722 
Europe   179  195  269 
Asia Pacific   31  70  96 
Total   1,067  1,416  1,779 

We also utilize temporary employees in various activities. On average, we employed approximately 1618 temporary employees and obtained services from 78 contractor employees401 consultants (not included in the numbers set forth above) during 2006.

2009.

Our future success will depend in part upon our ability to attract and retain highly skilled and qualified personnel. Although competition for such personnel in Israel is generally intense, we believe that adequate personnel resources are currently available in Israel to meet our requirements.

We are not a party to any collective bargaining agreement with our employees or with any labor organization. However, we are subject to certain labor related statutes, and to certain provisions of collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including(includ­ing the Industrialists’ Association of Israel) that are applicable to our Israeli employeesemploy­ees by order of the Israeli Ministry of Labor and Welfare. These statutes and provisions principally concern the length of the work day and the work week, minimum wages for workers, insurance for work-related accidents, determination of severance pay and other conditions of employment. Furthermore, pursuant to such provisions, the wages of most of our Israeli employees are automaticallyautomatical ly adjusted based on changes in the Israeli consumer price index, or CPI. The amount and frequency of these adjustments are modified from time to time.

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Israeli law generally requires the payment by employers in Israel of severance pay upon the death of an employee, his retirement or upon termination of employment by the employer without due cause. We currently fund our ongoing severance obligations in Israel by making monthly payments to approved severance funds or insurance policies. Please see Note 2(r)2Q to our consolidated financial statements.Consolidated Financial Statements. In addition, according to the National Insurance Law, Israeli employers and employees are required to pay predetermined sums to the National Insurance Institute, an organization similar to the U.S. Social Security Administration. These contributions entitle the employees to benefits in periods of unemployment, work injury, maternity leave, disability, reserve military service and bankruptcy or winding-up of the employer. Since January 1, 1995, such amount also includesinclude s payments for national health insurance. The payments to the National Insurance Institute are equal to approximately 16.25%17% of an employee’s wages (up to a certain cap as determined from time to time by law), of which the employee contributes approximately 66% and the employer contributes approximately 34%.

In addition to our severance obligations for employees located in Israel, we pay severance benefits to our employees located elsewhere in accordance with the local laws and practices of the countries in which they are employed.
Employment Agreements

We have employment agreements with our officers. Pursuant to these employmentemploy­ment agreements, each party may terminate the employment for no cause by giving a 30, 60 or 90 day prior written notice (six months in the case of certain senior employees)officers). In addition, we may terminate such agreement for cause with no prior notice. The agreements generally include non-competition and non-disclosure provisions, although the enforceability of non-competition provisions in employment agreements under Israeli law is very limited.

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Share Ownership

As of April 30, 2007,March 12, 2010, our directors and executive officers beneficially owned an aggregate of 406,710421,725 ordinary shares, or approximately 0.8%0.68% of our outstanding ordinary shares. This figure includes 41,945 unvested restricted shares which amount includesas well as options to purchase 405,930 ordinary shares that were vested on such date or that were scheduled to vest within the following 60 days. The options have an average exercise price of $17.56$26.02 per share and expire between 20082010 and 2013.2016. The restricted shares are granted at par value of the ordinary shares. No individual director or executive officer beneficially owns 1% or more of our outstanding ordinary shares.

The following is a description of each of our option plans, including the amount of options currently outstanding and the weighted average exercise price.

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1995

2003 Stock Option Plan

In 1995,December 2003, we adopted the NICE-Systems Ltd. 19952003 Employee Stock Option Plan, or 19952003 Plan, to attract, motivate and retain talented employees by rewarding performance and encouraging behavior that will improve our profitability. Under the 19952003 Plan, our employees, officers and officersdirectors may be granted options to acquire our ordinary shares. The options to acquire ordinary shares are granted at an exercise price of not less than the fair market value of the ordinary shares on the date of the grant, subject to certain exceptions which may be determined by our board of directors.  We have registered, through the filing of registration statements on Form S-8 with the SEC under the Securities Act of 1933, 12,000,0008,962,112 ADSs for issuance under the 19952003 Plan.

        Under

Generally, under the terms of the 19952003 Plan, 25% of each stock option granted becomes exercisable on each of the first, second, third and fourth anniversaries of the date of grant so long as the grantee is, subject to certain exceptions, employed by us at the date the stock option becomes exercisable. As of February 15, 2000, our board of directors adopted a resolution amending the exercise terms of the 1995 Plan whereby 25% of the stock options granted become exercisable on the first anniversary of the date of grant and 6.25% becomes exercisable once every quarter during the subsequent three years. Stock options expire six years after the date of grant. Stock options are non-transferable except upon the death of the grantee. When applicable,For information regarding options granted under the options are held by,2003 Plan to our directors, please see Item 6, “Directors, Senior Management and registeredEmployees – Compensation” in this annual report.
Pursuant to the nameTax Reform and in order to comply with the provisions of a trustee for a period of two years after the date of grant in accordance with Section 102 of the Israeli Income Tax Ordinance, or the Tax Ordinance.

on January 5, 2004, our board of directors adopted an addendum to our share option plan with respect to options granted as of December 2, 2003, to grantees who are residents of Israel (the “Addendum”). The Addendum does not add to nor modify our share option plan in respect of grantees that are not residents of Israel. On December 19, 2003, the board of directors resolved to elect the “Capital Gains Route” (as defined in Section 102(b)(2) of the Tax Ordinance) for the grant of options to Israeli grantees. Generally, subject to the fulfillment of the provisionsprovi sions of Section 102 of the Tax Ordinance, under the Capital Gains Route gains realized from the sale of shares issued upon exercise of options will generallymostly be taxed at a rate of only 25% and notpartially at the marginal income tax rate applicable to the grantee (up to 48%)46% in 2009). In general, all options granted to Israeli grantees, shares issued upon exercise of such options and any bonus shares issued with respect to such shares will be held in trust for the benefit of the grantee for at least a period equal to the shorter of 30 months from the date of grant or two years from the end of the tax year in which the options are granted.  Following an amendment to the Tax Ordinance which came into effect on January 1, 2006, the aforementioned trust period for options granted on or after January 1, 2006 is 24 months from the date of grant. The options may not be released from the trust prior to the payment of the grantee’s tax liabilities. In the event the requirements of Section 102 for the allocationalloca tion of options according to the Capital Gains Route are not met, the applicable marginal income tax rates will apply.

        The 1995 Plan is generally administered by our compensation committee, which determines the grantees under the 1995 Plan and the number of options to be granted. As of April 30, 2007, options to purchase 243,103 ordinary shares were outstanding under the 1995 Plan at a weighted average exercise price of $6.31.

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1997 Executive Share Option Plan

        In 1996, we adopted the NICE-Systems Ltd. 1997 Executive Share Option Plan, or 1997 Plan, to provide an incentive to our officers and to our directors who are also officers by enabling them to share in the future growth of our business. We have registered, through the filing of registration statements on Form S-8 with SEC under the Securities Act, 4,000,000 ADSs for issuance under the 1997 Plan.

        Under the terms of the 1997 Plan, stock options will be exercisable during a 60-day period ending four years after grant. Notwithstanding the foregoing, if our year-end earnings per share shall reach certain defined targets, 40% of such stock options shall become exercisable; if earnings per share shall reach certain higher defined targets, an additional 30% of such stock options shall become exercisable; and if earnings per share shall reach certain higher defined targets, an additional 30% of such stock options shall become exercisable, provided that with respect to all of the above-referenced periods, our operating profit shall not be less than 10% of revenues and earnings per share shall exclude any non-recurring expenses related to mergers and acquisitions. Notwithstanding the foregoing, none of the stock options shall be exercisable before the expiration of two years from the date of issuance. When applicable, the options are held by, and registered in the name of, a trustee for a period of two years after the date of grant in accordance with Section 102 of the Israeli Income Tax Ordinance.

        The 1997 Plan is generally administered by our compensation committee, which determines the grantees under the 1997 Plan and the number of options to be granted. As of April 30, 2007, there were no outstanding options to purchase ordinary shares under the 1997 Plan. All of the outstanding options under this plan have expired.

2001 Stock Option Plan

        In 2001, we adopted the NICE-Systems Ltd. 2001 Stock Option Plan, or 2001 Plan, for the purpose of providing an incentive to certain employees, directors, officers and consultants in order to further the advancement our business. The options to acquire our ordinary shares are granted at an exercise price equal to the closing price of our ADSs as quoted on the NASDAQ Global Select Market on the most recent date prior to the date of the resolution of our board of directors to grant the option for which the price was quoted. We have registered, through the filing of a registration statement on Form S-8 with SEC under the Securities Act, 8,400,000 ADSs for issuance under the 2001 Plan.

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        Unless otherwise determined by our board of directors as of the date of grant, stock options expire six years after the date of grant. Stock options are non-transferable except upon the death of the grantee. When applicable, the options are held by, and registered in the name of, a trustee for a period of two years after the date of grant in accordance with Section 102 of the Israeli Income Tax Ordinance.

        The 2001 Plan is generally administered by our compensation committee, which determines the grantees under the 2001 Plan and the number of options to be granted. As of April 30, 2007, options to purchase 66,520 ordinary shares were fully vested and exercisable under the 2001 Plan at a weighted average exercise price of $6.05.

2003 Stock Option Plan

        In December 2003, we adopted the NICE-Systems Ltd. 2003 Employee Stock Option Plan, or 2003 Plan, to attract, motivate and retain talented employees by rewarding performance and encouraging behavior that will improve our profitability. Under the 2003 Plan, our employees, officers and directors may be granted options to acquire our ordinary shares. The options to acquire ordinary shares are granted at an exercise price of not less than the fair market value of the ordinary shares on the date of the grant, subject to certain exceptions which may be determined by our board of directors. We have registered, through the filing of registration statements on Form S-8 with SEC under the Securities Act of 1933, 7,062,112 ADSs for issuance under the 2003 Plan.

        Under the terms of the 2003 Plan, 25% of the stock options granted become exercisable on the first anniversary of the date of grant and 6.25% becomes exercisable once every quarter during the subsequent three years. Stock options expire six years after the date of grant. Stock options are non-transferable except upon the death of the grantee.

        Pursuant to the Tax Reform and in order to comply with the provisions of Section 102 of the Ordinance, on January 5, 2004 our board of directors adopted an addendum to our share option plan with respect to options granted as of December 2, 2003 to grantees who are residents of Israel (the “Addendum”). The Addendum does not add to nor modify our share option plan in respect of grantees that are not residents of Israel. On December 19, 2003 the board of directors resolved to elect the “Capital Gains Route” (as defined in Section 102(b)(2) of the Ordinance) for the grant of options to Israeli grantees, which is described above under “1995 Stock Option Plan.”

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The 2003 Plan provides that the number of ordinary shares reserved for issuance thereunder shall increase each year commencing in 2004 by the lesser of (x) 600,000 ordinary shares or (y) two percent (2%) of the total number of outstanding ordinary shares as of December 31st31 of the immediately preceding calendar year. On September 28, 2005, our shareholders approved the transfer of ordinary shares reserved for issuance under our ESPP (as defined below) to the 2003 Plan.  According to such shareholders’ resolution, 400,0001,437,888 ordinary shares remain reservedremained registered under the ESPP at such time, and the balance of 1,062,1123,062,112 ordinary shares were transferred to the 2003 Plan. The ESPP provides forPlan, of which 1,062,112 ordinary shares were transferred immediately and an annual addition ofadditional 500,000 ordinary shares that were added annually to the pool of ordinary shares. Those additional shares will bewere transferred to the 2003 Plan each year until calendar year 2009. In addition, on December 21, 2006, our shareholders approved an increase in the number of ordinary shares reserved for issuance under the 2003 Plan by 1,300,000 shares.

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The 2003 Plan is generally administered by our compensation committee, which determines the grantees under the 2003 Plan and the number of options to be granted. As of April 30, 2007,March 5, 2010, options to purchase 6,450,3061,731,094 ordinary shares were outstanding under the 2003 Plan at a weighted average exercise price of $23.43.

$24.32.

1999 Amended and Restated Employee Stock Purchase Plan

In 1999, we adopted the NICE-Systems Ltd. 1999 Employee Stock Purchase Plan, or ESPP, in order to provide an incentive to our employees and the employees of our subsidiaries by providing them with an opportunity to purchase our ordinary shares through accumulated payroll deductions, and thereby enable such persons to share in the future growth of our business. We amended the ESPP in December 2003 and in December 2005. We have registered, through the filing of a registration statementstatements on Form S-8 with the SEC under the Securities Act, 1,437,8881,737,888 ADSs for issuance under the ESPP.  FollowingFor information on the resolutiontransfer of our shareholders of September 28, 2005, to transfer 1,062,112 ordinary shares fromreserved for issuance under the ESPP to the 2003 Plan, 437,888 ADSs remain registered for issuanceplease see the description under the ESPP.

caption “2003 Stock Option Plan” above.

Under the terms of the ESPP, eligible employees (generally, all our employees and the employees of our eligible subsidiaries who are not directors or controlling shareholders) may, on January 1 and July 1 of each year in which the ESPP is in effect, elect to become participants in the ESPP for that six-month period by filing an agreement with us arranging for payroll deductions of between 2% and 10% of such employee’s compensation for the relevant period. An employee’s election to purchase ordinary shares under the ESPP is subject to his or her right to withdraw from the ESPP prior to exercise, six months after the offering date. The option update price per ordinary share under the ESPP is 95% of the closing sales price of one ADR as quoted on NASDAQ on the semi-annual purchase date.

        For information

Actimize Ltd. 2003 Omnibus Stock Option and Restricted Stock Incentive Plan
Pursuant to the terms of the acquisition of Actimize Ltd. in August 2007, we assumed and replaced the stock options and restricted shares granted by Actimize.
In 2003, Actimize adopted the 2003 Omnibus Stock Option and Restricted Stock Incentive Plan, or the 2003 Actimize Plan, to afford an incentive to employees, officers, office holders, directors, subcontractors and consultants of Actimize or any subsidiary of Actimize, to acquire a proprietary interest in Actimize, to increase their efforts on behalf of Actimize and to provide the success of Actimize’s business. Under the 2003 Actimize Plan, the grantees could be granted options to acquire Actimize’s ordinary shares, restricted shares and shares. Incentive stock options to acquire ordinary shares of Actimize were granted at an exercise price not less than the fair market value of the ordinary shares of Actimize on the transferdate of grant or as determined by Actimize’s board of directors or by a committee thereof. In addition , the options were granted at an exercise price of not less than the par value of the ordinary shares reservedof Actimize.
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In September 2007, we registered, through the filing of a registration statement on Form S-8 with the SEC under the Securities Act, an aggregate of 987,104 ADSs, which are comprised of (i) 564,225 ADSs subject to issuance upon the exercise of stock options outstanding under the 2003 Actimize Plan and (ii) 422,879 ADSs representing restricted ordinary shares issued in lieu of restricted shares issued under the 2003 Actimize Plan.
Generally, under the terms of the 2003 Actimize Plan, 25% of the options granted become exercisable on the first anniversary of the date of grant and 6.25% become exercisable following the lapse of every consecutive quarter thereafter during the subsequent three years. Options generally expire ten years after the date of grant. Options are non-transferable except upon the death of the grantee. When applicable, the options are held by, and registered in the name of, a trustee for a period of two years after the date of grant in accordance with Section 102 of the Israeli Income Tax Ordinance.
As of March 5, 2010, options to purchase 251,475 ordinary shares of NICE were outstanding and 74,526 restricted shares were issued under the 2003 Actimize Plan at a weighted average exercise price of $9.90 and $0.16, respectively. No additional grants are being made under this plan following the acquisition of Actimize.
2008 Share Incentive Plan
In June 2008, we adopted the NICE-Systems Ltd. 2008 Share Incentive Plan, or 2008 Plan, to provide incentives to employees, directors, consultants and/or contractors by rewarding performance and encouraging behavior that will improve our profitability. Under the 2008 Plan, our employees, directors, consultants and/or contractors may be granted any equity-related award, including any type of an option to acquire our ordinary shares and/or share appreciation right and/or share and/or restricted share and/or restricted share unit and/or other share unit and/or other share-based award and/or other right or benefit under the Plan (each an “Award”). The options to acquire ordinary shares are granted at an exercise price of not less than the fair market value of the ordinary shares on the date of the grant, subject to certain exc eptions which may be determined by our board of directors, including in some cases options granted with an exercise price of zero. We have registered, through the filing of registration statements on Form S-8 with the SEC under the Securities Act of 1933, 4,000,000 ADSs for issuance under the ESPP2008 Plan.
Generally, under the terms of the 2008 Plan, 25% of an Award granted becomes exercisable on the first anniversary of the date of grant and 6.25% becomes exercisable once every quarter during the subsequent three years. Specifically with respect to restricted share units, unless determined otherwise by the board of directors, 25% of the restricted share units granted becomes vested on each of the four consecutive annual anniversaries following the date of grant. Awards with a vesting period expire six years after the date of grant. Awards are non-transferable except by will or the laws of descent and distribution.
Our board of directors adopted an addendum to the 2008 Plan for Awards granted to grantees who are residents of Israel (the “Addendum”). On June 16, 2008, our board of directors resolved to elect the “Capital Gains Route” (as defined in Section 102(b)(2) of the Tax Ordinance) for the grant of Awards to Israeli grantees, which is described above under “1995 Stock Option Plan.” The U.S. addendum of the 2008 Plan provides only for non-qualified stock options for purposes of U.S. tax laws.
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        The 2008 Plan provides that the number of shares that may be subject to Awards granted under the 2008 Plan shall be an amount per calendar year, equal to 3.5% of our issued and outstanding share capital as of December 31 of the preceding calendar year. Such amount is reset for each calendar year. By setting this target, our board of directors took into account the need for current employee retention and retention of future employees.
                The 2008 Plan is generally administered by our board of directors and compensation committee, which determines the grantees under the 2008 Plan and the number of Awards to be granted. As of March 5, 2010, options and restricted share units to purchase 3,692,078 ordinary shares were outstanding under the 2008 Plan at a weighted average exercise price of $21.83.
Orsus Solutions Limited 2007 Incentive Option Plan
In 2007, Orsus adopted the 2007 Incentive Option Plan that was further amended by Orsus on January 10, 2010 (the “2007 Orsus Plan”), to afford an incentive to employees, office holders and service providers of Orsus and its subsidiaries. Under the 2007 Orsus Plan, the grantees could be granted options to acquire Orsus’ ordinary A shares, restricted ordinary A shares or restricted ordinary A share units.
Pursuant to the terms of the Orsus acquisition agreement, we assumed and converted the outstanding stock options and restricted share units granted by Orsus under the Orsus 2007 Plan, into stock options to purchase ordinary shares of NICE or restricted share units of NICE, pursuant to a set formula (the “Assumed Awards”). The Assumed Awards include (i) options or restricted share units granted to certain key employees of Orsus or its subsidiaries (the “Key Employee Awards”); and (ii) retention options granted to certain employees of Orsus or its subsidiaries (the “Retention Options”). Under the terms of the 2007 Orsus Plan and the acquisition agreement, 50% of the Key Employee Awards granted become exercisable and vest after a period of twelve months of continuous employment with NICE (or its applic able subsidiary) commencing on January 11, 2010 and the remaining 50% become exercisable following the lapse of 6 months thereafter. In addition, if employment of a key employee is terminated by us without cause or if such key employee terminates his employment as a result of a reduction in compensation or a demotion in his position agreed to by the key employee at the closing of the Orsus acquisition, such key employee’s Options shall become vested immediately. The Retention Options vest over a course of four years as follows: (i) 25% vest and become exercisable at the lapse of 12-month period of continuous employment with NICE (or its applicable subsidiary) commencing on January 11, 2010, and (ii) the balance thereof vests on a quarterly basis during the 36 months period thereafter, such that 6.25% vest and become exercisable at the lapse of each quarter of continuous employment with NICE (or its applicable subsidiary). Options generally expire ten years after the date of grant and restricted share u nits generally expire seven years after the date of grant. Options are non-transferable except upon the death of the grantee. When applicable, the options are held by, and registered in the name of, a trustee for a period of two years after the date of grant in accordance with Section 102 of the Israeli Income Tax Ordinance.
As of March 5, 2010, options and restricted share units to purchase 59,675 ordinary shares of NICE were outstanding under the 2007 Orsus Plan, comprised of 35,000 ordinary shares underlying the Retention Options at an exercise price per share of $30.78; and 24,675 ordinary shares underlying the Key Employee Awards at an exercise price per share equal to the par value of the ordinary shares of NICE.
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Option Exchanges and Price Adjustment
On June 23, 2009, we commenced a tender offer to offer eligible employees in Israel, Hong Kong, the United States and the United Kingdom, excluding our directors, CEO and certain other executive officers, the opportunity to tender options granted before September 1, 2008 under the 2003 Plan please seeor the description2003 Actimize Plan (almost all of which had an exercise price per share above $34.00), in exchange for restricted share units (RSUs) or options (depending on the employee’s country of residence) with a per share exercise price or per share purchase price equal to the par value of our ordinary shares, or NIS 1.00 (approximately $0.25). The exchange was on a one-for-three basis, meaning that eligible employees electing to participate received a new RSU or option with respect to one share for every three shares subject to the options tend ered for exchange. The new awards vest in 25% annual increments over a four-year period starting from August 5, 2009 and have a new six-year term. Options surrendered in the exchange were cancelled.  On August 5, 2009, the expiration date of the exchange offer, we accepted for exchange eligible options to purchase an aggregate of 1,492,204 ordinary shares that had been granted under the caption “2003 Stock Option Plan” above.

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2003 Plan and the 2003 Actimize Plan, and granted, under the 2008 Plan, new options to purchase 311,454 ordinary shares, and new RSUs representing 185,932 ordinary shares, in exchange for the eligible options tendered and accepted pursuant to the exchange offer.
On June 15, 2009, our board of directors approved the reduction of the exercise price per share of our options to acquire ordinary shares granted on September 2, 2008 under the 2008 Plan held by eligible employees, including certain of our executive officers, based in Israel, Hong Kong, the United States, and the United Kingdom. The exercise price per share of these options was originally $30.25 per share, and was reduced to $22.53 per share, which was the closing price of our ADSs on the NASDAQ Global Select Market on June 15, 2009. Other than the exercise price, no other terms of these options were modified. The aggregate number of our ordinary shares that are subject to the options that have been repriced is 1,020,400.
In addition, on June 15, 2009 our board of directors approved an option exchange with three of our executive officers, in which such executive officers exchanged options to purchase an aggregate of 265,000 ordinary shares, issued in 2007 under the 2003 Plan and having an exercise price between $34.00 and $39.00 per share, for new options to be issued under the 2008 Plan with a per share exercise price equal to $22.53 per share, which was the closing price of our ADSs on the NASDAQ Global Select Market on June 15, 2009. The new options issued in this exchange vest in four equal annual installments (or as nearly as possible) following the new grant date and will expire six years following the new grant date.
Item 7.                      
Item 7.Major Shareholders and Related Party Transactions.

Major Shareholders and Related Party Transactions

.

Major Shareholders
The following table sets forth certain information with respect to the beneficial ownership of our ordinary shares as of the dates stated below,March 23, 2010, with respect to each person known to us to be the beneficial owner of 5% or more of our outstanding ordinary shares.  None of our major shareholders has any different voting rights than any other shareholder.

As of May 9, 2007
As of May 16, 2006
As of June 29, 2005(1)
Name and Address
Number
Percent(2)
Number
Percent(3)
Number
Percent
 
FMR Corp.              
82 Devonshire Street  
Boston, MA 02109 and  
Fidelity International Limited  
P.O. Box H.M. 670  
Hamilton, Bermuda   7,480,565(4) 14.4% 6,147,416(5) 12.5% -  - 
   
Massachusetts  
Financial Services Company  
and affiliates  
500 Boylston St.  
Boston, MA 02116   4,496,259(6) 8.7% 4,286,114(7) 8.7% -  - 
shareholder
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Name and AddressNumber of Shares
Percent of Shares Beneficially Owned (1)
Migdal Insurance and Financial Holdings Ltd.
4 Efal Street, P.O. Box 3063
Petach Tikva 49512, Israel
3,338,606(2)
5.3%
 (1)
The shareholders listed in this table did not publicly report holdings of 5% or more at the time of filing of our 2004 20-F on June 29, 2005.Phoenix Holding Ltd. and Excellence Investments Ltd.(3)
3,479,696 (4)
5.6%

 
Psagot Investment House Ltd.(2)3,529,680 (5) 5.7%
___________
(1)Based upon 51,903,83962,462,051 ordinary shares issued and outstanding on May 9, 2007.March 23, 2010.

(2)
(3)
Based upon 49,296,202Of which: (i) 3,076,633 ordinary shares issuedare held for members of the public through, among others, provident funds, mutual funds, pension funds and outstanding on May 16, 2006.

(4)Basedinsurance policies, which are managed by subsidiaries of Migdal Insurance and Financing Holdings Ltd., according to the following segmentation: 1,802,504 ordinary shares are held by profit participating life assurance accounts; 1,062,016 ordinary shares are held by provident funds and companies that manage provident funds and 210,458 ordinary shares are held by companies for the management of funds for joint investments in trusteeship, each of which subsidiaries operates under independent management and makes independent voting and investment decisions, an d (ii) 212,113 are beneficially held for Migdal Insurance and Financing Holdings Ltd. own account (Nostro account). This information is based upon a Form 13F13G for the period ended MarchDecember 31, 2007,2009, filed by FMR Corp.Migdal Insurance and Financing Holdings Ltd. with the SEC on May 15, 2007, and a Form 13F for the period ended March 31, 2007, filed by Fidelity International Limited with the SEC on May 15, 2007.February 16, 2010.

(5)(3)Based upon information provided to us by FMR Corp.The Phoenix Holding Ltd. ("Phoenix") and Fidelity International Limited asExcellence Investments Ltd. ("Excellence") on March 1, 2010. Based on public information, we believe that Phoenix and Excellence are controlled by the Delek Group and Mr. Yitzhak Tshuva.

(4)
Of which: (i) 3,471,196 ordinary shares are held for members of May 10, 2006.the public through, among others, provident funds, pension funds and mutual funds, which are managed by subsidiaries of Excellence or Phoenix, according to the following segmentation: 815,028 ordinary shares are held by provident funds and pension funds of Excellence; 294,328 ordinary shares are held by mutual funds of Excellence; 1,335,688 ordinary shares are held by other investment vehicles of Excellence; 153,855 ordinary shares are held by provident funds and pension funds of Phoenix; and 872,297 ordinary shares are held by profit participating life assurance accounts of Phoenix, and (ii) 8,500 are beneficially held for Phoenix's own account (Nostro account). This information is based upon information pr ovided to us by Phoenix and Excellence.

(5)
(6)
BasedThese securities are held for members of the public through, among others, portfolio accounts, provident funds and mutual funds, which are managed by subsidiaries of Psagot Investment House Ltd., according to the following segmentation: 138,810 ordinary shares are held by Psagot Mutual Funds Ltd., 1,862,670 ordinary shares are held by Psagot Provident Funds Ltd., 506,236 ordinary shares are held by Psagot Exchange Traded Notes Ltd., and 1,021,964 ordinary shares are held by Psagot Securities Ltd. This information is based upon a Form 13F13G for the period ended MarchDecember 31, 2007,2009, filed by Massachusetts Financial Services CompanyPsagot Investment House Lt d. with the SEC on May 9, 2007.March 28, 2010. Ron Gutler, our Chaiman of the Board, serves as a director of Psagot Securities Ltd. and Psagot Investment House Ltd., but does not hold shares in either of these entities.

(7)Based upon information provided to us by MFS Investment Management as of February 20, 2006.

As of May 23, 2007,March 17, 2010, we had approximately 8070 ADS holders of record in the United States, holding approximately 76%57% of our outstanding ordinary shares, as reported by The Bank of New York, the depositary for our ADSs.

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        As of March 31, 2007, Columbia Wanger Asset Management, L.P. held 2,252,981, or 4.3%, of our ordinary shares. This information is based upon a Form 13F, filed by Columbia Wanger with the SEC on May 14, 2007. As of January 10, 2007, Columbia Wanger held 2,742,400, or 5.3%, of our ordinary shares, according to a Schedule 13G, filed by Columbia Wanger with the SEC on that date.

As of December 31, 2005, Bank Hapoalim funds11, 2008, Migdal Insurance and Financing Holdings Ltd. held 925,918,2,944,307, or 3.8%4.8%, of our ordinary shares.  This information is based upon a Schedule 13G/A filed by Bank HapoalimMigdal Insurance and Financing Holdings Ltd. with the SEC on February 14, 2006, with respect to the aggregate holdings of various of its affiliated mutual funds and provident funds.that date. As of November 11, 2005, Bank Hapoalim informed us that itDecember 3, 2008, Migdal Insurance and Financing Holdings Ltd. held 967,981.75,3,068,603, or approximately 5%5.1%, of our ordinary shares.

shares, according to a Schedule 13G filed by Migdal Insurance and Financing Holdings Ltd. with the SEC on that date.

As of June 9, 2005, Bank LeumiDecember 31, 2008, Massachusetts Financial Services Company held 875,174,336,918, or 4.6%0.6%, of our ordinary shares. This information is based upon a report provided to usForm 13G/A, filed by Bank Leumi pursuant to Israeli lawMassachusetts Financial Services Company with respect to the aggregate holdings of various of its affiliated mutual funds and provident funds.SEC on February 9, 2009. As of MarchDecember 31, 2004, Bank Leumi reported that it2007, Massachusetts Financial Services Company held 1,271,000,3,040,862, or 7.3%5.2%, of our ordinary shares. The method usedshares, according to compute holdings under Israeli law does not necessarily beara Schedule 13G/A filed by Massachusetts Financial Services Company with the same result as the method used to compute beneficial ownership under SEC rules and regulations.

        Between April 28, 2004 and June 2, 2005, Thales S.A. sold 762,025ordinary shares. Consequently, Thales SA now holds less than 5%on February 8, 2008.

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As of February 13, 2008, FMR LLC (formerly FMR Corp.) held 1,585,074, or 2.7%, of our ordinary shares.  This information is based upon the information contained in an amendment toa Schedule 13D13G filed by FMR LLC with the SEC on June 3, 2005that date.  As of December 12, 2007, FMR LLC held 4,120,994, or 6.9%, of our ordinary shares, according to a Schedule 13G filed by Thales SA.

FMR LLC with the SEC on that date.

To our knowledge, we are not directly or indirectly owned or controlled by another corporation or by any foreign government and there are no arrangements that might result in a change in control of our company.

Related Party Transactions
None.           

None.

Item 8.                      Financial Information.
Item 8.Financial Information.

Consolidated Statements and Other Financial Information

See Item 18, "Financial“Financial Statements."

”

Legal Proceedings

We are not involved in any legal proceedings that we believe, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operation, except as noted below.

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Fair Isaac Patent Infringement Lawsuit
On September 16, 2009 Fair Isaac Corporation (FICO) filed a claim in the United States District Court for the District of Delaware against Actimize Inc., a wholly owned subsidiary of ours, and NICE, claiming that Actimize and NICE are infringing two U.S. patents.  These patents cover various aspects of fraud detection. FICO requested damages and an injunction. On December 17, 2009, the parties agreed to dismiss NICE from the action. On December 21, 2009, Actimize filed a response and counterclaims. On January 25, 2010, Actimize filed an amended response and counterclaims. The parties jointly submitted a proposed scheduling order to the court on January 12, 2010. The parties are currently engaged in fact discovery.
Multi-Format Patent Infringement Lawsuit
On September 3, 2008, Multi-Format, Inc. filed a lawsuit against Harrah’s Entertainment, Inc. and Nice Systems Inc., a wholly owned subsidiary of ours, in the United States District Court for the District of New Jersey, alleging infringement of a U.S. patent and requesting damages. The patent purports to cover a PC-based system for monitoring and sorting representative images from video cameras, for security or other monitoring purposes. The parties agreed to settle this lawsuit, and on June 18, 2009, the court gave an order dismissing the case. On July 20, 2009, the parties executed a settlement agreement which ended this dispute.
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Witness Patent Infringement Lawsuits
On August 1, 2008, NICE and Verint Systems Inc. entered into an agreement to settle and dismiss all patent disputes between the parties (which had been commenced with Witness Systems, Inc. prior to its acquisition by Verint). The following is a list of the litigations that were formally terminated by the applicable court following the execution of the settlement agreement:
·
Patent infringement lawsuit filed on July 20, 2004, by S.T.S. Software Systems Ltd. ("STS"), a wholly owned subsidiary of ours, in the U.S. District Court for the Southern District of New York, charging Witness Systems, Inc. ("Witness") with infringement of VoIP patents in the U.S.  The Court dismissed the claim and determined that Witness does not infringe the Company’s patents.
·
Patent infringement action filed on August 30, 2004, by Witness in the Federal Court for the Northern District of Georgia against NICE Systems, Inc. An additional patent infringement action was filed by Witness on January 19, 2006, in the Federal Court for the Northern District of Georgia against NICE and NICE Systems, Inc.
·
New Patent infringement lawsuit filed on May 10, 2006, by NICE and NICE Systems, Inc. against Witness in the United States District Court for District of Delaware.
CipherActive Lawsuit

On October 19, 2004, CipherActive filed an action against us in the District Court of Tel Aviv. In this lawsuit, CipherActive claims that under a development agreement with us, it is entitled to receive license fees in respect of certain software that it allegedly developed for us and which has been embedded in one of our products. Both parties to this litigation agreed to submit the matter to binding arbitration. The arbitration agreement approved by the Court determined that our liability would not exceed $600,000 plus interest and expenses. In September 2009, the arbitrator awarded CipherActive claims that it is entitled to license feesdamages in an amount of $600,000, in addition to the amount of $100,000 already paid toCipherActive by us in respect of such license fees. In our statement of defense we claim that the software developed by CipherActive under the agreement has not been successful in the market, is no longer embedded in our product$187,982 (in original value) plus VAT and therefore, CipherActive is not entitled to any additional license fees. On February 1, 2007 a preliminary hearing took place, during which we suggested that the parties submit the dispute to mediation. Although the court approved the mediation, the parties failed to find an appropriate mediator. In a pretrial hearing that took place on May 27, 2007, the court accepted CipherActive’s request to allow additional time for negotiations between the parties. An additional pretrial hearing has been set for July 8, 2007.

Witness Patent Infringement Lawsuits

        On July 20, 2004, STS Software System Ltd., or STS, a wholly owned subsidiary of ours, brought a lawsuit against Witness Systems, Inc. asserting that Witness Systems is infringing three U.S. patents of STS relating to voice over internet protocol, or VoIP. STS claims that Witness Systems infringes the VoIP patents by marketing and selling products that incorporate methods of detecting, monitoring and recording information – all fully protected by the patents. STS is seeking a permanent injunction to prevent Witness Systems from making, using, offering to sell or selling any product in the United States that infringes these patents. In response, Witness Systems is asserting that the patents are invalid and not infringed. With our consent, STS moved the court on January 3, 2007 to join NICE-Systems Ltd. as a plaintiff in the litigation. The case, which is pending in the U.S. District Court for the Northern District of Georgia, is in discovery.

        On August 30, 2004, Witness Systems filed a lawsuit in the United States District Court for the Northern District of Georgia against Nice Systems Inc., a wholly owned subsidiary of ours. Witness Systems is alleging infringement of two U.S. patents entitled “Method and Apparatus for Simultaneously Monitoring Computer User Screen and Telephone Activity from a Remote Location” and is seeking unspecified damages and injunctive relief. On February 24, 2005, Witness Systems filed a similar action in the Northern District of Georgia against NICE-Systems Ltd., alleging infringement of the same two patents. The two actions were consolidated in April 2005. We have denied infringing these patents and are vigorously defending against Witness Systems’ claims. In addition, we have asserted our right to be indemnified for losses arising out of the claims of infringement in this litigation pursuant to an agreement between NICE-Systems Ltd. and Netopia, Inc., our vendor. The case is currently in discovery and no trial date has been set.

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        On January 19, 2006, Witness Systems filed a new patent infringement action in the United States District Court for the Northern District of Georgia against NICE-Systems Ltd. and Nice Systems Inc., alleging infringement of a U.S. patent relating to technology to extract particular information from recorded telephone conversations. This technology is used as an option with a NICE product called NicePerform. Witness Systems is requesting unspecified damages and a permanent injunction to prevent any sale of allegedly infringing products. We have denied all material allegations and are asserting a number of defenses. We believe that the claims are without merit and intend to vigorously defend against them. The case is currently in discovery.

        On May 10, 2006, NICE-Systems, Ltd. and its wholly owned subsidiary, NICE Systems, Inc. filed a new lawsuit against Witness Systems, Inc. in the United States District Court for District of Delaware claiming that Witness Systems is infringing ten U.S. patents. These patents cover various aspects of recording customer interaction communications and traditional logging including event triggered call and screen recording, “cradle-to-grave” recording of customer calls, traditional TDM loggers, off-site storage of calls, and multi-stage telephone data logging. In this lawsuit, we claim that Witness Systems infringes our patents by marketing and selling products that use methods, products and systems which we believe are protected by our patents. The Witness products we have accused of infringing our patents include Impact 360®, ContactStore®, eQuality ContactStore®, ContactStore for Communication Manager®, eQuality ContactStore for Communication Manager® and Eyretel’s MediaStore®. We are seeking a permanent injunction to prevent Witness Systems from making, using, or offering to sell or selling any product in the United States which infringes these patents.  In addition, we are seeking damages for Witness Systems’ past willful infringement of these patents. The case is in discovery and a trial is scheduled to begin on January 15, 2008.

        On December 28, 2006, NICE-Systems Ltd. and Nice Systems, Inc. filed an action against Witness Systems, Inc., seeking a declaration from the court that a certain patent, which is closely related to the patent aforementioned with respect to the lawsuit filed by Witness Systems on January 19, 2006, is invalid and not infringed. The case is in its very early stages and discovery has not yet begun.

Origin Dispute

        NICE is currently in dispute with Origin Data Realisation Limited relating to the terms of a license of software and other matters.   The dispute was submitted to mediation and a settlement dialogue is ongoing. To date, no formal legal proceedings have been instituted by either side.

Dictaphone Corp. v. Mercom Systems, Inc.

        On July 28, 2004, Dictaphone Corp. filed an action against Mercom Systems, Inc. in the United States District Court for the Southern District of New York asserting that Mercom Systems is infringing two U.S. patents, which we subsequently acquired from Dictaphone. Pursuant to the terms of our agreement with Dictaphone, we succeeded to the right to enforce these patents and to control this litigation. In response, Mercom Systems is asserting that the patents are invalid and not infringed, including alleging that our previous defense of an action by Dictaphone against us in which we challenged the validity of one of the patents at issue in this action, estopped us from making the claim of infringement. Mercom Systems and NICE reached a settlement whereby Mercom Systems paid NICE a total of $700,000.

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expenses.

Dictaphone Corp. v. VoicePrint.

On July 27, 2004, Dictaphone Corp. filed an action against VoicePrint in the United States District Court for the Central District of California asserting the infringement by VoicePrint of the same patents as those asserted in the Mercom Systems lawsuit, which we subsequently acquired from Dictaphone. This lawsuit has been settled in principle. The documentation forparties were unable to reach a settlement agreement and we decided to abandon this settlement continues to be negotiated and is expected to be completed and signed shortly.

lawsuit.

Calyon Dispute

In December 2006, Calyon Corporate and Investment Bank filed a suit against us in the District Court of Tel Aviv, demanding repayment of $648,144 plus accrued interest, for a total amount of $740,395.  We had deducted this amount in January 2004 from a payment transferred from an account of Thales maintained with Calyon to our account, at the instruction of Thales, in connection with our acquisition of TCS from Thales.Thales Contact Solutions ("TCS"). We had notified TCS in 2004 that we had setoffset off such amount with respect to an overdue payment by TCS to us. We believe that we hadThe dispute was submitted to mediation, however the legal rightmediation process failed and the proceedings were returned to make the deduction at the time and therefore intend to vigorously defend against such claim.District Court of Tel Aviv. This lawsuit is still in its initial stages.

stages, preliminary hearings took place on September 3, 2009 and March 9, 2010 and the parties are to file their depositions.

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Formatest Dispute

On March 9, 2007, Formatest AG filed a claim against NICE Switzerland AG, a wholly owned subsidiary of ours, in the Cantonal Court of Zug, Switzerland.  The claim iswas in the amount of EUR 1,187,793 (plus interest at 5% per annum) and iswas made in connection with an agreement dated December 10, 2004 between FAST Video Security AG (now NICE Switzerland AG) and Formatest AG.  We expect to be entitled to recover a substantial part of any liability owed byOn June 19, 2007, NICE Switzerland AG toand Formatest AG underentered into an agreement settling all claims.
On December 18, 2007, the termsselling shareholders of an indemnification provision contained in the sale and purchase agreement relating to the acquisition of the shares in FAST Video Security AG although(the “Sellers”) issued a Notice of Arbitration in the Zurich Chamber of Commerce, claiming that NICE should pay them an amount of $1,228,766 (plus late payment interest of 5% from July 2007), which is the remaining unpaid portion of the first earn out payment under the Agreement, release $3,000,000 (plus accrued interest) from the escrow account pursuant to the Agreement. Prior to the commencement of the arbitration proceedings, we released to the Sellers a partial payment of $1,400,000 out of the escrow funds and paid to the Sellers the amount of $1,228,767.
On June 23, 2008, the Sellers filed their statement of claim, asking for payments of $1,600,000 (representing the balance of the escrow funds) plus additional amounts for interest, losses on the exchange rate and legal costs and expenses.
On April 30, 2009, NICE and the Sellers entered into a settlement agreement. Pursuant to the joint application of NICE and the Sellers, the arbitration proceedings were closed by a termination order dated June 8, 2009.
Discrimination in Employment Disputes
On August 19, 2009, a former employee of Nice Systems, Inc. sent Nice Systems, Inc. a letter alleging unlawful termination of employment on the grounds of discrimination.  The letter asserted that this former employee had been injured by this unlawful termination, but did not request payment of a specific amount of money.  We are in the process of assessing and responding to the letter.
On October 20, 2009, a former employee of IEX Corp., a wholly-owned subsidiary of ours, filed a charge in the Chicago office of the Equal Employment Opportunity Commission against IEX Corp. and “NICE Systems Corp.” alleging that the companies engaged in prohibited discrimination in terminating his employment. A response to the charge was filed, denying the allegations.
Actimize Former Employee Dispute
On October 15, 2007, a former employee of Actimize Ltd., a wholly owned subsidiary of ours, filed a claim with the Tel Aviv District Labor Court, seeking a declaration that he is entitled to 0.5% of the outstanding share capital of Actimize Ltd. In its statement of defense, Actimize Ltd. claimed that once the former employee chose not to exercise his vested options upon termination of his employment with the company, such options expired. In addition, Actimize Ltd. claimed that the former employee’s options deteriorated in value due to his decision not to exercise his right to re-price such options during his employment term. The preliminary stages of the claim ended and the parties submitted their testimonies by way of written affidavits. The hearing and cross-examination of the testimonies is scheduled to take place on June 16 , 2010.
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Nuvation Dispute
On March 10, 2010, Nuvation Research Corporation filed a lawsuit against us with the Supreme Court of the State of New York. The lawsuit alleges, among others, that we breached a contract with Nuvation and defrauded Nuvation. Nuvation is claiming damages in a total amount of $7 million.
Plant Dispute
Around December 31, 2008, Nice Systems Inc. received a letter from Plant CML, a distributor of Nice Systems Inc., asserting several indemnity claims against the company. The claims arise out of the Commonwealth of Massachusetts’ claim against Verizon relating to numerous alleged problems associated with our products used by the Commonwealth. Nice Systems Inc. sold our products to Plant pursuant to a Reseller Agreement between the parties dated December 2005, and Plant, in turn, resold the products to Verizon, who in turn sold the overall system to the saleCommonwealth. To date, Plant CML has taken no further action and purchase agreement who are obliged to pay such indemnification contest any such liability. NICEhas made no further demands and, Formatest AG have started to discuss a potential settlement of the dispute.

therefore, we do not consider this dispute as outstanding anymore.

Dividends

Since our initial public offering and listing on the NASDAQ National Market (now The NASDAQ Global Select Market) in 1996, we have not declared or paid cash dividends on our ordinary shares.shares or ADSs.  We intend to retain our earnings for future growth and therefore do not anticipate paying any cash dividends in the foreseeable future.

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Significant Changes

        On January 3, 2007, we announced Under Israeli law, dividends may be paid only out of profits and other surplus (as defined in the law) as of our most recent financial statements or as accrued over a period of two years, whichever is higher, provided that Dafna Gruberthere is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations as they come due. Payment of future dividends, if any, will be joining NICEat the discretion of our board of directors and will depend on various factors, su ch as Corporate Vice Presidentour statutory profits, financial condition, operating results and Chief Financial Officer. Ran Oz, our departing Corporate Vice Presidentcurrent and Chief Financial Officer, has agreed to remainanticipated cash needs. In the event cash dividends are declared by us, we may pay such dividends in Israeli currency. Under current Israeli regulations, any cash dividend in Israeli currency paid in respect of ordinary shares purchased by non-residents of Israel with us to ensure a smooth transitionnon-Israeli currency may be freely repatriated in such non-Israeli currency, at the rate of his responsibilities to Ms. Gruber and is performing the function of CFOexchange prevailing at the time of the filing of this annual report. Ms. Gruber is expected to assume the CFO responsibilities during the second quarter of 2007.

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conversion.
Significant Changes
None.
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Item 9.
The Offer and Listing.

Trading in the ADSs

Our American Depositary Shares, or ADSs, have been quoted on the NASDAQ Stock Market under the symbol “NICEV” from our initial public offering in January 1996 until April 7, 1999, and thereafter under the symbol “NICE.”  Prior to that time, there was no public market for our ordinary shares in the United States. Each ADS represents one ordinary share. The following table sets forth, for the periods indicated, the high and low reported market (sale) prices for our ADSs, as adjusted for our two-for-one stock split in May 2006.

ADSs
High
Low
 
Annual      
 
         2002  $8.52 $3.32 
         2003   12.93  3.97 
         2004   15.88  8.70 
         2005   25.05  14.65 
         2006   33.41  21.55 
   
Quarterly 2005  
   
         First Quarter  $17.73 $14.65 
         Second Quarter   19.98  14.92 
         Third Quarter   24.17  19.50 
         Fourth Quarter   25.05  20.21 
   
Quarterly 2006  
   
         First Quarter  $27.57 $22.97 
         Second Quarter   28.90  21.55 
         Third Quarter   28.50  23.50 
         Fourth Quarter   33.41  27.30 
ADSs.

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Quarterly 2007      
   
         First Quarter  $37.00 $29.81 
   
Monthly  
   
         November 2006  $33.41 $28.85 
         December 2006   33.09  30.31 
         January 2007   33.76  29.81 
         February 2007   37.00  31.46 
         March 2007   35.71  32.53 
         April 2007   38.46  33.60 
         May 2007   40.10  35.25 
         June 2007 (through June 12)   38.42  35.62 
 
ADSs
 
 High  
Low
 
Annual
     
      
2005
$25.05  $14.65 
2006
 33.41   21.55 
2007
 40.95   29.04 
2008
 35.87   16.11 
2009
 33.42   18.04 
        
Quarterly 2008
       
        
First Quarter
$34.75  $24.90 
Second Quarter
 35.87   27.75 
Third Quarter
 31.57   24.65 
Fourth Quarter
 27.45   16.11 
        
Quarterly 2009
       
        
First Quarter
$25.79  $18.04 
Second Quarter
 27.18   21.19 
Third Quarter
 32.29   21.79 
Fourth Quarter
 33.42   27.50 

Quarterly 2010
First Quarter

Monthly
     
      
September 2009                                                                                           
$32.29  $28.75 
October 2009                                                                                           
 33.42   29.33 
November 2009                                                                                           
 30.88   27.50 
December 2009                                                                                           
 31.84   29.68 
January 2010                                                                                           
 34.30   28.99 
February 2010                                                                                           
 31.44   28.22 
March 2010 (through March 30)                                                                                           
 33.97   30.14 
        On June 12, 2007,March 30, 2010, the last reported price of our ADSs was $35.7$32.00 per ADS.

The Bank of New York is the depositary for our ADSs. Its address is 101 Barclay Street, New York, New York 10286.

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Trading in the Ordinary Shares


Our ordinary shares have been listed on the Tel-Aviv Stock Exchange, or TASE, since 1991. Our ordinary shares are not listed on any other stock exchange and have not been publicly traded outside Israel (other than through ADSs as noted above). The table below sets forth the high and low reported market (sale) prices of our ordinary shares (in NIS and dollars) on the TASE, as adjusted for our two-for-one stock split in May 2006.TASE. The translation into dollars is based on the daily representative rate of exchange published by the Bank of Israel.

Ordinary Shares
High
Low
NIS
$
NIS
$
 
Annual          
   
         2002   38.50  8.61  15.85  3.28 
         2003   56.90  12.94  18.70  3.91 
         2004   71.85  16.23  39.21  8.64 
         2005   116.00  25.22  64.25  14.59 
         2006   142.50  33.16  102.00  22.48 

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Ordinary Shares
High
Low
NIS
$
NIS
$
 
Quarterly 2005          
   
         First Quarter   76.70  17.69  64.25  14.59 
         Second Quarter   89.05  19.84  65.80  15.05 
         Third Quarter   107.40  23.99  89.25  19.45 
         Fourth Quarter   116.00  25.22  94.50  20.43 
   
Quarterly 2006  
   
         First Quarter   128.25  27.33  104.05  22.48 
         Second Quarter   129.00  29.02  102.00  22.70 
         Third Quarter   125.20  28.33  103.20  23.52 
         Fourth Quarter   142.50  33.16  117.00  27.25 
   
Quarterly 2007  
   
         First Quarter   151.60  36.24  126.90  29.94 
   
Monthly  
   
         November 2006   142.50  33.04  124.30  29.02 
         December 2006   140.10  33.16  127.70  30.22 
         January 2007   142.10  33.63  126.90  29.94 
         February 2007   151.60  36.24  132.10  31.05 
         March 2007   150.00  35.89  136.50  32.43 
         April 2007   155.30  38.69  141.60  34.08 
         May 2007   162.00  40.76  142.00  35.66 
         June 2007 (through June 12)   155.30  38.08  149.50  35.62 

  
Ordinary Shares
 
  
High
  
Low
 
  
NIS
   $   NIS   $ 
Annual             
              
2005
  116.00   25.22   64.25   14.59 
2006
  142.50   33.16   102.00   22.48 
2007
  162.30   41.04   117.50   29.94 
2008
  133.80   35.54   63.00   16.72 
2009
  125.00   33.70   74.05   18.18 
                 
Quarterly 2008                
                 
First Quarter
  133.80   34.69   91.11   26.98 
Second Quarter
  119.40   35.51   98.36   27.82 
Third Quarter
  112.40   32.02   84.00   23.86 
Fourth Quarter
  95.50   25.28   63.00   17.52 
                 
Quarterly 2009                
                 
First Quarter 
  107.10   25.52   74.05   18.18 
Second Quarter
  112.40   26.99   84.99   21.45 
Third Quarter
  120.80   32.31   86.00   21.70 
Fourth Quarter
  125.00   33.70   105.20   27.74 
                 
Quarterly 2010                
                 
First Quarter
                
  
Monthly
 
                 
September 2009
  120.80   32.21   106.00   27.92 
October 2009
  125.00   33.70   110.20   29.26 
November 2009
  116.90   30.83   105.20   27.74 
December 2009
  121.90   32.10   112.70   29.88 
January 2010
  124.80   33.89   107.00   28.73 
February 2010
  120.00   31.70   107.10   28.70 
March 2010 (through March 28)
  129.70   34.66   115.20   30.57 
As of June 12, 2007,March 28, 2010, the last reported price of our ordinary shares on the TASE was NIS 150.60119.60 (or $35.97)$31.89) per share.

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Item 10.                      Additional Information
Item 10.Additional Information.

.

Memorandum and Articles of Association

Organization and Register

We are a company limited by shares organized in the State of Israel under the Israeli Companies Law. We are registered with the Registrar of Companies of the State of Israel and have been assigned company number 52-0036872.

        In our annual general meeting of shareholders held on December 21, 2006, we increased our authorized share capital to 125 million ordinary shares and amended our memorandum and articles of association accordingly.

Objects and Purposes

Our objects and purposes include a wide variety of business purposes, including all kinds of research, development, manufacture, distribution, service and maintenance of products in all fields of technology and engineering and to engage in any other kind of business or commercial activity. Our objects and purposes are set forth in detail in Section 2 of our memorandum of association.

Directors

Our articles of association provide that the number of directors serving on the board shall be not less than three but shall not exceed thirteen, including two outside directors. Our directors, other than outside directors, are elected at the annual shareholders meeting to serve until the next annual meeting or until their earlier death, resignation, bankruptcy, incapacity or removal by resolution of the general shareholders meeting. Directors may be re-elected at each annual shareholders meeting. The board may appoint additional directors (whether to fill a vacancy or create new directorship) to serve until the next annual shareholders meeting, provided, however, that the board shall have no obligation to fill any vacancy unless the number of directors is less than three. Our officers serve at the discretion of the board.

The board of directors may meet and adjourn its meetings according to the Company’s needs but at least once every three months.  A meeting of the board may be called at the request of any director. The quorum required for a meeting of the board consists of a majority of directors who are lawfully entitled to participate in the meeting and vote thereon. The adoption of a resolution by the board requires approval by a simple majority of the directors present at a meeting in which such resolution is proposed. In lieu of a board meeting, a resolution may be adopted if all of the directors lawfully entitled to vote thereon consent not to convene a meeting.

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Subject to the Companies law, the board may appoint a committee of the board and delegate to such committee all or any of the powers of the board, as it deems appropriate. Under the Companies Law the board of directors must appoint an internal audit committee, comprised of at least three directors and including both of the outside directors. The function of the internal audit committee is to review irregularities in the management of the Company’s business and recommend remedial measures. The committee is also required, under the Companies Law to approve certain related party transactions. Notwithstanding the foregoing, the board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. The board has appointed an internal audit committee which has three members, an audit committee whichw hich has four members and a compensation committee which has four members. For more information on the Company’s committees, please see Item 6, “Directors, Senior Management and Employees–Employees—Board Practices” in this annual report.

Fiduciary Duties of Officers

The Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company.  An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty.  The duty of loyalty includes avoiding any conflict of interest between the office holder’s position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder.

Approval of Certain Transactions

Under the Companies Law, all arrangements as to compensation of office holders who are not directors, or controlling parties, require approval of the board of directors.  Similarly, adoption and amendment of equity based compensation plans require approval of the board of directors. Arrangements regarding the compensation of directors also require internal audit committee and shareholder approval.

 Although NASDAQ rules generally require shareholder approval when an equity based compensation plan is established or materially amended, as a foreign company we follow the aforementioned requirements of the Companies Law.

The Companies Law requires that an office holder of the company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company.  In addition, if the transaction is an extraordinary transaction as defined under Israeli law, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents,grandpar­ents, descendants, spouse’s descendants and the spouses of any of the foregoing.  In addition, the office holder must also disclose any interest held by any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction other than in the ordinary course of business, otherwise than on market terms, or that is likely to have a material impact on the company’s profitability, assets or liabilities.

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In the case of a transaction which is not an extraordinary transaction, after the office holder complies with the above disclosure requirement, only board approval is required unless the articles of association of the company provide otherwise. The transaction must not be adverse to the company’s interest.  Furthermore, if the transaction is an extraordinary transaction, then, in addition to any approval stipulated by the articles of association, it also must be approved by the company’s audit committee and then by the board of directors, and, under certain circumstances, by a meeting of the shareholders of the company.  An office holder who has a personal interest in a transaction that is considered at a meeting of the board of directors or the audit committee generally may not be present at the deliberationsdelibe rations or vote on this matter. If a majority of the directors has a personal interest in an extraordinary transaction with the Company, shareholder approval of the transaction is required.


The Companies Law applies the same disclosure requirements to a controlling shareholdershare­holder of a public company, which includes a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. ExtraordinaryExtraor­dinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of compensation of a controlling shareholder who is an office holder, require the approval of the audit committee, the board of directors and the shareholders of the company by simple majority, provided that either such majority vote must include at least one-third of the shareholders who have no personal interest in the transaction and are present at the meeting (without taking into account the votes of the abstaining shareholders), or that the total shareholdings of those who have no personal interest in the transaction who vote against the transaction represent no more than one percent of the voting rights in the company.

In addition, under the Companies Law, a private placement of securities requires approval by the board of directors and the shareholders of the company if it will cause a person to become a controlling shareholder or if:

—     the securities issued amount to twenty percent or more of the company’s outstanding voting rights before the issuance;

—     some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and

—     the transaction will increase the relative holdings of a shareholder that holds five percent or more of the company’s outstanding share capital or voting rights or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the company’s outstanding share capital or voting rights.

·the securities issued amount to twenty percent or more of the company’s outstanding voting rights before the issuance;
·some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and
·the transaction will increase the relative holdings of a shareholder that holds five percent or more of the company’s outstanding share capital or voting rights or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the company’s outstanding share capital or voting rights.
According to the Company’s Articles of Association certain resolutions, such as resolutions regarding mergers, and windings up, require approval of the holders of 75% of the shares represented at the meeting and voting thereon.

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Duties of Shareholders

Under the Companies Law, a shareholder has a duty to act in good faith towards the Company and other shareholders and to refrain from abusing his or her power in the company including, among other things, voting in a general meeting of shareholders on the following matters:

—·any amendment to the articles of association;
—·an increase of the company'scompany’s authorized share capital;
—·a merger; or
—·approval of interested party transactions which require shareholder approval.

In addition, any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company’s articles of association, has the power to appoint or prevent the appointment of an office holder in the company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty but provides that a breach of his duty is tantamount to a breach of fiduciary duty of an officer of the Company.

Exemption, Insurance and Indemnification of Directors and Officers

Exemption of Office Holders

           Under the Companies Law, an Israeli company may not exempt an office holder from liability for breach of his duty of loyalty, but may exempt in advance an office holder from liability to the company, in whole or in part, for a breach of his duty of care (except in connection with distributions), provided the articles of association of the company allow it to do so.  Our articles of associationdo not allow us to do so.

Office Holder Insurance

Our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders with respect to:

—·a breach of his duty of care to us or to another person,
—·a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable grounds to assume that his act would not prejudice our interests, or
—·a financial liability imposed upon him in favor of another person concerning an act performed by him in his capacity as an office holder.

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Indemnification of Office Holders

 Our articles of association provide that we may indemnify an office holder against:

—·a financial liability imposed on or incurred by an office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court concerning an act performed in his capacity as an office holder. Such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that the undertaking is limited to types of events which our board of directors deems to be foreseeable in light of our actual operations at the time of the undertaking and limited to an amount or criterion determined by our board of directors to be reasonable under the circumstances, and further provided that such events and amounts or criterion are set forth in the undertaking to indemnify, and provided that the total amount of indemnification for all persons we have agreed to indemnify in such circumstances does not exceed, in the aggregate twenty-five percent (25%) of our shareholders’ equity at the time of the actual indemnification;

—·reasonable litigation expenses, including attorney’s fees, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; and

—·reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged to him by a court, in proceedings instituted against him by or on our behalf or by another person, or in a criminal charge from which he was acquitted, or a criminal charge in which he was convicted for a criminal offense that does not require proof of intent, in each case relating to an act performed in his capacity as an office holder.

We have undertaken to indemnify our directors and officers pursuant to applicable law. We have obtained directorsdirectors' and officersofficers' liability insurance for the benefit of our directors and officers.

Limitations on Exemption, Insurance and Indemnification

The Companies Law provides that a company may not exempt or indemnify an office holder, or enter into an insurance contract, which would provide coverage for any monetary liability incurred as a result of any of the following:

—·a breach by the office holder of his duty of loyalty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;

—·a breach by the office holder of his duty of care if the breach was done intentionally or recklessly;

—·any act or omission done with the intent to derive an illegal personal benefit; or

—·any fine levied against the office holder.

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Required Approvals

In addition, under the Companies Law, any exemption of, indemnification of, or procurement of insurance coverage for, our office holders must be approved by our audit committee and our board of directors and, if the beneficiary is a director, by our shareholders.  We have obtained such approvals for the procurement of liability insurance covering our officers and directors and for the grant of indemnification letters to our officers and directors.

Rights of Ordinary Shares

Our Ordinary Shares confer upon our shareholders the right to receive notices of, and to attend, shareholder meetings, the right to one vote per Ordinary Share at all shareholders’ meetings for all purposes, and to share equally, on a per share basis, in such dividends as may be declared by our Boardboard of Directors;directors; and upon liquidation or dissolution, the right to participate in the distribution of any surplus assets of the Company legally available for distribution to shareholders after payment of all debts and other liabilities of the Company.  All Ordinary Shares rankpari passu in all respects with each other.  Our Boardboard of Directorsdirectors may, from time to time, make such calls as it may think fit upon a shareholder in respect of any sum unpaid in respect of shares held by such shareholder which is not payable at a fixed time, and each shareholder shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments).

Meetings of Shareholders

An annual general meeting of our shareholders shall be held once in every calendar year at such time and at such place either within or without the State of Israel as may be determined by our Boardboard of Directors.

directors.

Our Boardboard of Directorsdirectors may, whenever it thinks fit, convene a special general meeting at such time and place, within or without the State of Israel, as may be determined by the Boardboard of Directors.directors. Special general meetings may also be convened upon requisition in accordance with the Companies Law.

The quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 25% of the outstanding voting shares, unless otherwise required by applicable rules.  Although NASDAQ generally requires a quorum of 33-1/3%, we have an exception under the NASDAQ rules and follow the generally accepted business practice for companies in Israel, which have a quorum requirement of 25%. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the chairman may designate with the consent of a majority of the voting power represented at the meeting and voting on the matter adjourned.  At such reconvened meeting the required quorum consists of any twotw o members present in person or by proxy.

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Mergers and Acquisitions

A merger of the Company shall require the approval of the holders of a majority of seventy five percent (75%) of the voting power represented at the annual or special general meeting in person or by proxy or by written ballot, as shall be permitted, and voting thereon in accordance with the provisions of the Companies Law. Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger.  In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.

The Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company.  An acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder in the company.  These requirements do not apply if the acquisition (i) occurs in the context of a private placement by the company that received shareholder approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company.  The tender offer must be extended to all shareholders, but the offerer is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are tendered by shareholders.  The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offerer and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.

If as a result of an acquisition of shares the acquirer will hold more than 90% of a company’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares.  If as a result of a full tender offer the acquirer would own more than 95% of the outstanding shares, then all the shares that the acquirer offered to purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within three months following the consummation of a full tender offer.  If as a result of a full tender offer the acquirer would own 95% or less of the outstanding shares, then the acquirer may not acquire shares that will cause his shareholding to exceed 90% of the outstanding shares.

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Material Contracts

Actimize Ltd. Acquisition
IEX Corporation Acquisition

        InOn 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 2006,2, 2007 (the “Merger Agreement”), the consideration paid for Actimize was approximately $281 million, approximately 80% of which was in cash and approximately 20% of which was satisfied through the issuance of 1,501,933 of our ordinary shares based on the market price of the securities a few days before and after the terms of the acquisition were agreed upon and announced. Pursuant to the terms of the Merger Agreement, we assumed the stock options and restrict ed shares granted by Actimize (for further information please see Item 6, “Directors, Senior Management and Employees” in this annual report). On August 29, 2007, we entered into an unsecured loan agreement and a letter of undertaking with Bank Hapoalim B.M., which provided for a term loan of $120 million to finance a portion of the cash consideration for the Actimize transaction. The loan was repaid in one installment on September 28, 2007. On September 12, 2007, as required by the Merger Agreement, we filed a registration statement with the U.S. Securities and Exchange Commission to register for resale the securities issued pursuant to a share purchase agreement,the Merger Agreement, which we acquired all the outstanding shares of IEX Corporation, a worldwide provider of contact center workforce management, strategic planning and performance management solutions for the contact center market,maintained effective for approximately $205 million in cash.

FAST Video Security AGsix months.

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Fortent Acquisition

On January 4, 2006, pursuant to a share purchase agreement,August 31, 2009, we acquired allcompleted the outstanding sharesacquisition of FAST Video Security AG, a Switzerland-based developer of innovative video systems for security and surveillance purposes, for approximately $22 million in cash, plus earn-outs based on performance milestones of approximately $6.2 million for 2006 and a potential maximum of $5 million for 2008.

Dictaphone Acquisition

        On June 1, 2005, we consummated an agreement to acquire the assets and assume certain liabilities of Dictaphone’s Communications Recording Systems (CRS) business for approximately $38 million net after settlement. Dictaphone’s CRS business isFortent, a leading provider of liability and quality management systems for first responders, critical facilities, contact centersanalytics based Anti-Money Laundering and financial trading floors.

        Amongcrime prevention software solutions for the assets we acquired infinancial services industry. Fortent became part of Actimize, with the transaction are all of Dictaphone’s rights to receive any damage award or other economic benefit with respect to a violation of anyFortent team becoming an integral part of the rights related toActimize team. The acquisition was for a total consideration of approximately $73 million. Fortent is known for its anti-money laundering deployments and expertise within the intellectual propertyworld's tier-one financial institutions and for its advanced statistical profiling analytics technology.

Orsus Acquisition
On January 11, 2010, we completed the acquisition of Dictaphone’s CRS business arising prior to the closingOrsus, a leading provider of the transaction.

Security Management Solutions. The parties have signed an amendment to the aforementioned asset purchase agreement with Dictaphone, according to whichacquisition was for a final adjustment has been made to the audited closing balance sheet, which reduced the purchase price under the asset purchase agreement by $2 million. In addition, the parties agreed, that we are entitled to all previously undistributed interest and other investment income earned with respecttotal consideration of approximately $22 million, subject to certain funds held in escrow.

adjustments. Orsus` flagship solution, Situator, provides a framework for fusing data silos from disparate security and safety systems as well as multiple command and control centers, into a single, holistic operational view and automating security procedures.

Exchange Controls

Holders of ADSs are able to convert dividends and liquidation distributions into freely repatriable non-Israeli currencies at the rate of exchange prevailing at the time of repatriation, pursuant to regulations issued under the Currency Control Law, 5738–1978, provided that Israeli income tax has been withheld by us with respect to amounts that are being repatriated to the extent applicable or an exemption has been obtained.

Our ADSs may be freely held and traded pursuant to the General Permit and the Currency Control Law. The ownership or voting of ADSs by non-residents of Israel, except with respect to citizens of countries that are in a state of war with Israel, are not restricted in any way by the our memorandum of association or articles of association or by the laws of the State of Israel.

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Taxation

The following is a discussion of Israeli and United States tax consequences material to our shareholders.  The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations.

Holders of our ADSs should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ADSs, including, in particular, the effect of any foreign, state or local taxes.

Israeli Tax Considerations

The following is a summary of the principal tax laws applicable to companies in Israel, with special reference to their effect on us. The following also contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares or ADSs.  This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law.  To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.  The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.

General Corporate Tax Structure

Generally, Israeli companies are subject to Corporate Tax on taxable income at the rate of 31%26% for the 20062009 tax year and 25% for the 2010 tax year. Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), which came into effect on January 1, 2006,2009, the corporate tax rate is scheduled to decrease as follows: 29%24% for the 20072011 tax year, 27%23% for the 20082012 tax year, 26%22% for the 20092012 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and 25%18% for the 20102016 tax year and thereafter. Israeli companies are generally subject to capital gains tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003.2003, and such tax rate is scheduled to be equal to the corporate tax rate for future tax years.  However , the effective tax rate payable by a company that derives income from an Approved or Privileged Enterprise may be considerably less.

Following a Temporary Order, which came into effect on January 1, 2009 and expired at the end of one year, an Israeli corporation could elect a 5% rate of corporate tax (instead of 25%) for dividend distributions received in 2009 from a foreign subsidiary, which is used in Israel either in 2009 or within one year after actual receipt of the dividend, whichever is later. The 5% tax rate is subject to various conditions, which include conditions with regard to the identity of the corporation that distributes the dividends, the source of the dividend, the nature of the use of the dividend income, and the period during which the dividend income will be used in Israel.
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Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959,

as amended.

We derive and expect to continue to derive significant tax benefits in Israel relating to our “Approved and Privileged Enterprise” programs, pursuant to the Law for Encouragement of Capital Investments, 1959, or the Investments Law. To be eligible for these tax benefits, we must continue to meet certain conditions, including making certain specified investments in fixed assets. In the event of a failure to comply with these conditions, the benefits may be canceled and we may be required to refund the amount of the benefits, in whole or in part, including interest and certain inflation adjustments. As of December 31, 2006,2009 we believe that we are in compliance with all the conditions required by the law.

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        Income from two

Full details regarding our Approved and Privileged Enterprises may be found in Note 13(a)(2) of our “Approved Enterprises” is exempt from income tax for two years. Following this two-year period, income from the “Approved Enterprise” will be subject to corporate tax at a reduced rate of 10-25% (based on the percentage of foreign ownership in each taxable year) for the following eight years. Income from our other two “Approved Enterprises” is tax exempt for four years. Following this four-year period, income from these “Approved Enterprises” will be subject to corporate tax at a reduced rate of 10-25% (based on the percentage of foreign ownership in each taxable year) for the following six years.

Consolidated Financial Statements.

Other than by way of our complete liquidation, if we distribute dividends from the income of these fourour “Approved Enterprises” which was exempted from taxes pursuant to our “Approved Enterprise” benefits, we will be taxed as if the exempt income was subject to the regular reduced corporate tax rate arising under our “Approved Enterprise” programs. We intend to reinvest the total amount of our tax-exempt income and not to distribute this income to shareholders.

        Income from sources other than the “Approved Enterprise” during the period of benefits will be taxable at regular corporate tax rates.

        On April 1, 2005, an amendment to the Investments Law 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). The amendment will apply to Approved Enterprise programs in which the year of commencement of benefits under the law is 2004 or later, unless such programs received approval from the applicable government authority prior to December 31, 2004 in which case the provisions of the amendment will not apply.

        The Company elected for 2006 to be the commencement year for its first Privileged Enterprise program under the amended law. This plan brings the total number of “Approved and Privileged Enterprises” to five.

        As a result of the amendment, tax-exemptTax-exempt income generated under the provisions of the amended law,our Privileged Enterprises, will subject the Company to taxes upon dividend distribution or complete liquidation.

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

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Income from sources other than the “Approved or Privileged Enterprises” during the period of benefits will be taxable at regular corporate tax rates.
Tax Benefits and Grants for Research and Development

Israeli tax law allows, under specified conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred.  These expenses must relate to scientific research and development projects and must be approved by the relevant Israeli government ministry, determined by the field of research, and the research and development must be for the promotion of the company and carried out by or on behalf of the company seeking such deduction. However, the amount of such deductible expenses shall be reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects.  Expenditures not so approved are deductible over a three-year period.

Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969

Under the Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”), Industrial Companies (as defined below) are entitled to the following tax benefits, among others:

 —·deductions over an eight-year period for purchases of know-how and patents;

 —·deductions over a three-year period of expenses involved with the issuance and listing of shares on a stock market;

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 —·the right to elect, under specified conditions, to file a consolidated tax return with other related Israeli Industrial Companies; and

 —·accelerated depreciation rates on equipment and buildings.

Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.  Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it.  An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity. We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law.  No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.

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Special Provisions Relating to Taxation Under Inflationary Conditions

        The Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law, represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex. Until December 31, 2001

In 2009, we measured our Israeli taxable income in accordance with this law, but from January 1, 2002 we have elected to measure our Israeli taxable income in relation to changes in the U.S. dollar/NIS exchange rate rather than the Israeli inflation index. We were permitted to make such a change pursuant to regulations published by the Israeli Minister of Finance, which provide the conditions for so doing. A company that elects to measure its results for tax purposes based on the U.S. dollar/NIS exchange rate cannot change that election for a period of three years following the election. We believe that we meet and will continue to meet, the necessary conditions and as such, will continue to measure our results for tax purposes based on the U.S. dollar/NIS exchange rate.

Israeli Transfer Pricing Regulations
On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into force (the “Transfer Pricing Regulations”). Section 85A of the Tax Ordinance and the Transfer Pricing Regulations generally require that all cross-border transactions carried out between related parties will be conducted on an arm’s length principle basis and will be taxed accordingly.  As the Transfer Pricing Regulations are broadly similar to transfer pricing regimes already in place in other jurisdictions in which we operate outside of Israel, we do not expect the Transfer Pricing Regulations to have a material impact on the Company.
Capital Gains Tax on Sales of Our Ordinary Shares

Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain, which is equivalent to the increase of the relevant asset’s purchase price, which is attributable to the increase in the Israeli consumer price index, or a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capitalcapit al gain over the inflationary surplus.

The following discussion refers to the sale of our ordinary shares. However, the same tax treatment would apply to the sale of our ADSs.

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Taxation of Israeli Residents

As of January 1, 2006, the tax rate generally applicable to the capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale (i.e., such shareholder holds directly or indirectly, including jointly with others, at least 10% of any means of control in the company) the tax rate will be 25%. Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of listed shares, unless such companiescompan ies were not subject to the Adjustments Law (or certain regulations) as of August 10, 2005, in which case the applicable tax rate is 25%. However, different tax rates may apply to dealers in securities and shareholders who acquired their shares prior to an initial public offering.

The tax basis of our shares acquired prior to January 1, 2003, will generally be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.

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Taxation of Non-Israeli Residents

Non-Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the TASE provided such gains did not derive from a permanent establishment of such shareholders in Israel. Non-Israeli residents are also exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock market outside of Israel, provided such shareholders did not acquire their shares prior to the issuer’s initial public offering and(in which case a partial exemption may be available), that the gains did not derive from a permanent establishment of such shareholders in Israel and that such shareholders are not subject to the Inflationary Adjustments Law.Israel. However, non-Israeli corporations will not be entitled to such exemption if an Israeli residentresidents (i) hashave a controlling interest of 25% or more in suchsuc h non-Israeli corporation, or (ii) isare the beneficiarybeneficiaries of or isare entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

In addition, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) and who holds ordinary shares as a capital asset is also exempt from Israeli capital gains tax under the U.S.-Israel Tax Treaty unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel. If the above conditions are not met, the U.S. resident would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the gain would be treated as foreign source income for United States foreign tax credit purposes and such U.S. resident would be permitted to claim a credit for such taxes against the United States income tax imposed on such sale, exchange or disposition, subject to the limitations under the United States federal income tax laws applicable to foreign tax credits.

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Taxation of Dividends Paid on our Ordinary Shares

The following discussion refers to dividends paid on our ordinary shares. However, the same tax treatment would apply to dividends paid on our ADSs.

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Taxation of Israeli Residents

Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, other than bonus shares (share dividends) or stock dividends, which is withheld at the source at the rate of 20%, or 25% for a shareholder that is considered a significant shareholder at any time during the 12-month period preceding such distribution. A different rate may apply to dividends paid on shares deriving from the exercise of stock options or other equity based awards granted as compensation to our employees or officers. Dividends paid from income derived from our Approved Enterprise (or aor Privileged Enterprise)Enterprises are subject to withholding at the rate of 15%, although we cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability.

Taxation of Non-Israeli Residents

Non-residents of Israel, both companies and individuals, are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, at the aforementioned rates applicable to Israeli residents, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence.

Under the U.S.-Israel Treaty, the maximum Israeli withholding tax on dividends paid by us is 25%. Dividends of an Israeli company distributed from income of an Approved Enterprise (or Privileged Enterprise) are subject to a 15% withholding tax under the U.S.-Israel Tax Treaty. The U.S.-Israel Tax Treaty further provides for a 12.5% Israeli dividend withholding tax on dividends paid by an Israeli company to a United States corporation owning at least 10% or more of such Israeli company’s issued voting power for, in general, the part of the tax year which precedes the date of payment of the dividend and the entire preceding tax year, provided such United States corporation meets certain limitations concerning the amount of its dividend and interest income.year. The lower 12.5% rate applies only to dividends from income not derived from an Approved Enterprise (or Privileged Enterprise) in the applicable period and does not apply if the company has more than 25%2 5% of its gross income derived from certain types of passive income.  Residents of the United States generally will have withholding tax in Israel deducted at source. They may be entitled to a credit or deduction for United States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.

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A non-resident of Israel who has dividend income derived from or accrued in Israel, from which tax was withheld at source, is generally exempt from the duty to file tax returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer.

U.S. Federal Income Tax Considerations

The following is a summary of certainthe material U.S. Federal income tax consequences that apply to U.S. holders who hold ADSs as capital assets for tax purposes. This summary is based on U.S. Federal income tax laws, regulations, rulings and decisions and the U.S.-Israel income tax treaty in effect as of the date of this annual report, all of which are subject to change at any time, possibly with retroactive effect. It is also based in part on representations by The Bank of New York, the depositary for our ADSs, and assumes that each obligation under the Deposit Agreement between us and The Bank of New York and any related agreement will be performed in accordance with its terms.  This summary does not address all U.S. Federal income tax matters that may be relevant to a particular prospective holder or all tax considerations thattha t may be relevant with respect to an investment in ADSs.

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This summary does not address tax considerations applicable to a holder of an ADS that may be subject to special tax rules including, without limitation, the following:

 —·dealers or traders in securities, currencies or notional principal contracts;

 —·financial institutions;

 —·insurance companies;

 —·real estate investment trusts;

 —·banks;

 —·investors subject to the alternative minimum tax;

 —·tax-exempt organizations;

 —·regulated investment companies;

 —·investors that actually or constructively own 10 percent or more of our voting shares;

 —·investors that will hold the ADSs as part of a hedging or conversion transaction or as a position in a straddle or a part of a synthetic security or other integrated transaction for U.S. Federal income tax purposes;

 —·investors that are treated as partnerships or other pass through entities for U.S. Federal income tax purposes and persons who hold the ADSs through partnerships or other pass through entities; and

 —·investors whose functional currency is not the U.S. dollar.

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This summary does not address the effect of any U.S. Federal taxation other than U.S. Federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation or the indirect effects on the holders of equity interests in a holder of an ADS.

You are urged to consult your own tax advisorsadvisor regarding the foreign and U.S. Federal, state and local and other tax consequences of an investment in ADSs.

For purposes of this summary, a “U.S. holder” is a beneficial owner of ADSs that is, for U.S. Federal income tax purposes:

 —·an individual who is a citizen or a resident of the United States;

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 —·a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any political subdivision thereof;

 —·an estate whose income is subject to U.S. Federal income tax regardless of its source; or

 —·a trust if:

 (a)a court within the United States is able to exercise primary supervision over administration of the trust; and

 (b)one or more United States persons have the authority to control all substantial decisions of the trust.

For purposes of this section, a “non-U.S. holder” is any holder who is not a U.S. holder

holder.

In general, if you hold ADSs, you will be treated as the holder of the underlying shares represented by those ADSs for U.S. Federal income tax purposes.  Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.

The U.S. Treasury has expressed concerns that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. holders of ADSs.  Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate U.S. holders.  Accordingly, the analysis of the creditability of Israeli taxes and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. holders, each described below, could be affected by actions taken by parties to whom the ADSs are released.

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U.S. Taxation of ADSs

Distributions

Subject to the discussion under “Passive Foreign Investment Companies” below, the gross amount of any distribution, including the amount of any Israeli taxes withheld from these distributions (see “Israeli Tax Considerations”), actually or constructively received by a U.S. holder with respect to ADSs will be taxable to the U.S. holder as a dividend to the extent of our current and accumulated earnings and profits as determined under U.S. Federal income tax principles.  The U.S. holder will not, except as provided by Section 245 of the Internal Revenue Code of 1986, as amended (the “Code”), be eligible for any dividends received deduction in respect of the dividend otherwise allowable to corporations.  Distributions in excess of earnings and profits will be non-taxable to the U.S. holder to the extent of, and will be applied against and reduce, the U.S. holder’s adjusted tax basis in the ADSs.  Distributions in excess of earnings and profits and such adjusted tax basis will generally be taxable to the U.S. holder as capital gain from the sale or exchange of property.  We do not maintain calculations of our earnings and profits under U.S. Federal income tax principles.  If we do not report to a U.S. holder the portion of a distribution that exceeds earnings and profits, the distribution will generally be taxable as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.  The amount of any distribution of property other than cash will be the fair market value of that property on the date of distribution.

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Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “2003 Act”) enacted on May 28, 2003, as amended by the Tax Increase Prevention and Reconciliation Act of 2005, enacted on May 17, 2006,Code, certain dividends received by non-corporate U.S. holders after December 31, 2002, will be subject to a maximum income tax rate of 15%.  This reduced income tax rate is only applicable to dividends paid by a “qualified foreign corporation” that is not a “passive foreign investment company” and only with respect to shares held by a qualified U.S. holder (i.e., a non-corporate holder) for a minimum holding period (generally 61 days during the 121-day period beginning 60 days before the ex-dividend date).  We should be considered a qualified foreign corporation because (i) we are eligible for the benefits of a comprehensive tax treaty between Israel and the U.S., which includes an exchange of information program, and (ii) the ADS is readily tradable on an established securities market in the U.S. &# 160;In addition, based on our current business plans, we do not expect to be classified as a “passive foreign investment company” (see “Passive Foreign Investment Companies” below).  Accordingly, dividends paid by us to individual U.S. holders on shares held for the minimum holding period should be eligible for the reduced income tax rate.  The reduced tax rate for qualified dividends is scheduled to expire on December 31, 2010, unless further extended by Congress.

The amount of any distribution paid in a currency other than U.S. dollars (a “foreign currency”) including the amount of any withholding tax thereon, will be included in the gross income of a U.S. holder in an amount equal to the U.S. dollar value of the foreign currencies calculated by reference to the exchange rate in effect on the date of receipt, regardless of whether the foreign currencies are converted into U.S. dollars.  If the foreign currencies are converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend.  If the foreign currencies received in the distribution are not converted into U.S. dollars on the date of receipt, a U.S. holder will have a basis in the foreign currencies equal to its U.S. dollar value on the date of receipt.  Any gain or loss on a subsequent conversion or other disposition of the foreign currencies will be treated as ordinary income or loss.

Dividends received by a U.S. holder with respect to ADSs will be treated as foreign source income for the purposes of calculating that holder’s foreign tax credit limitation.  Subject to certain conditions and limitations, any Israeli taxes withheld on dividends at the rate provided by the U.S.-Israel income tax treaty may be deducted from taxable income or credited against a U.S. holder’s U.S. Federal income tax liability.  The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific classes of“passive” income and “general” income.  The rules relating to foreign tax credits and the timing thereof are complex. U.S. holders should consult their own tax advisors regarding the availability of a foreign tax credit under their particularparti cular situation. Under the 2003 Act, the amount of the qualified dividend income paid by us to a U.S. holder that is subject to the reduced dividend income tax rate and that is taken into account for purposes of calculating the U.S. holder’s U.S. foreign tax credit limitation must be reduced by the “rate differential portion” of such dividend. Each qualified U.S. holder is urged to consult its own tax advisor regarding the possible applicability of the reduced rate under the 2003 Act and the related restrictions and special rules.

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Sale or Other Disposition of ADSs

If a U.S. holder sells or otherwise disposes of its ADSs, gain or loss will be recognized for U.S. Federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and such holder’s adjusted tax basis in the ADSs.  Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if the holder had held the ADSs for more than one year at the time of the sale or other disposition.  Long-term capital gains realized by individual U.S. holders generally are subject to a lower marginal U.S. Federal income tax rate (15% for the taxable year ending December 31, 2010) than ordinary income.  Under most circumstances , any gain that a holder recognizes on the sale or other disposition of ADSs will be U.S. source for purposes of the foreign tax credit limitation;limitation and any recognized losses recognized will be allocated against U.S. source income.

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If a U.S. holder receives foreign currency upon a sale or exchange of ADSs, gain or loss, if any, recognized on the subsequent sale, conversion or disposition of such foreign currency will be ordinary income or loss, and will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.  However, if such foreign currency is converted into U.S. dollars on the date received by the U.S. holder, the U.S. holder generally should not be required to recognize any gain or loss on such conversion.

Passive Foreign Investment Companies

For U.S. Federal income tax purposes, we will be considered a passive foreign investment company (“PFIC”) for any taxable year in which either 75% or more of our gross income is passive income, or at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income.  For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gain over losses from the disposition of assets which produce passive income.  If we were determined to be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply to U.S. holders owning ADSs.  Accordingly, U.S. holders are urged to consult their own tax advisors regarding the application of such rules.

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If we are treated as a PFIC for any taxable year,

 —·a U.S. holder would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ADSs ratably over its holding period for such ADSs,

 —·the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year,

 —·gain recognized upon the dispositionamount allocated to the year of ADSsthe dividend payment or disposition would be taxable as ordinary income, and

 —·a U.S. holder would be required to make an annual return on IRS Form 8621 regarding distributions received and gain realized with respect to ADSs.

One method to avoid the aforementioned treatment is for a U.S. holder to make an election to treat us as a qualified electing fund.  A U.S. holder may make a qualified electing fund election only if we furnish the U.S. holder with certain tax information and we do not presently intend to prepare or provide this information.  Alternatively, another method to avoid the aforementioned treatment is for a U.S. holder to make a timely mark-to-market election in respect of its ADSs.  If a U.S. holder elects to mark-to-market its ADSs, any excess of the fair market value of the ADSs at the close of each tax year over the adjusted basis in such ADSs will generally be included in income.  If the fair market value of the ADSs had depreciated below the adjusted basis at the close of the tax year, the U.S. holderh older may generally deduct the excess of the adjusted basis of the ADSs over its fair market value at that time.  However, such deductions generally would be limited to the net mark-to-market gains, if any, that were included in income by such holder with respect to ADSs in prior years.  Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of ADSs with respect to which the mark-to-market election is made, is treated as ordinary income or loss.

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Based on our estimated gross income, the average value of our gross assets and the nature of our business, we do not believe that we will be classified as a PFIC in the current taxable year.  Our status in any taxable year will depend on our assets and activities in each year and because this is a factual determination made annually at the end of each taxable year, there can be no assurance that we will not be considered a PFIC for any future taxable year.  If we were treated as a PFIC in any year during which a U.S. holder owns ADSs, certain adverse tax consequences could apply, as described above.  Given our current business plans, however, we do not expect that we will be classified as a PFIC in future years.

You are urged to consult your own tax advisor regarding the possibility of us being classified as a PFIC and the potential tax consequences arising from the ownership and disposition (directly or indirectly) of an interest in a PFIC.

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Backup Withholding and Information Reporting

Payments of dividends with respect to ADSs and the proceeds from the sale, retirement, or other disposition of ADSs made by a U.S. paying agent or other U.S. intermediary will be reported to the IRS and to the U.S. holder as may be required under applicable U.S. Treasury regulations.  We, or an agent, a broker, or any paying agent, as the case may be, may be required to withhold tax, currently at the rate of 28% (the backup withholding tax), if a non-corporate U.S. holder that is not otherwise exempt fails to provide an accurate taxpayer identification number and comply with other IRS requirements concerning information reporting.  Certain U.S. holders (including, among others, corporations and tax-exempt organizations) are not subject to backup withholding.  Backup withholding is not an additional tax.&# 160; Any amount of backup withholding withheld may be used as a credit against your U.S. Federal income tax liability provided that the required information is furnished to the IRS.  U.S. holders should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining an exemption.

U.S. Federal Income Tax Consequences to Non-U.S. Holders

Sale, Exchange or Retirement of Securities

If you are a non-U.S. holder and you sell, exchange or redeem ADSs, you will generally not be subject to U.S. Federal income tax on any gain, unless one of the following applies:

 —·the gain is connected with a trade or business that you conduct in the United States through an office or other fixed place of business, or

 —·
you are an individual, you are present in the United States for at least 183 days during the year in which you dispose of the ADSs and have a “tax home” in the United States, and certain other conditions are satisfied.

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Backup Withholding and Information Reporting

        United States rules concerning

Backup withholding and information reporting and backup withholding are described above. These rules apply to non-U.S. holders as follows:

Information reporting and backup withholding may apply if you use the U.S. office of a broker or agent, and information reporting (but not backup withholding) may apply if you use the foreign office of a broker or agent that has certain connections to the United States.  You may be required to comply with applicable certification procedures to establish that you are not a U.S. holder in order to avoid the application of such information reporting and backup withholding requirements.  You should consult your tax advisor concerning the application of the information reporting and backup withholding rules.

Non-U.S. holders are urged to consult legal and tax advisors in the countries of their citizenship, residence and domicile to determine the possible tax consequences of holding and selling ADSs under the laws of their respective jurisdictions in light of their own particular circumstances.

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Documents on Display

We are subject to certain of the information reporting requirements of the Securities and Exchange Act of 1934, as amended.  We, as a “foreign private issuer” are exempt from the rules and regulations under the Securities Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Securities Exchange Act, with respect to their purchase and sale of our shares.  In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Securities Exchange Act. NASDAQ rules generally require that companies send an annual reportrep ort to shareholders prior to the annual general meeting.   We have an exception under the NASDAQ rules and follow the generally accepted business practice for companies in Israel. Specifically, we file annual reports on Form 20-F, which contain financial statements audited by an independent accounting firm, electronically with the SEC and post a copy on our website.  We will also furnish to the SEC quarterly reports on Form 6-K containing unaudited financial information after the end of each of the first three quarters.

You may read and copy any document we file with the SEC at its public reference facilities at, 100 F Street, N.E., Washington, D.C. 20549 and at the SEC’s regional offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511.  You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549.  The SEC also maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC.  The address of this web site is http://www.sec.gov.  Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.  In addition, our ADSs are quoted on the NASDAQNASD AQ Global Select Market, so our reports and other information can be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.

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Item 11.
Quantitative and Qualitative Disclosures About Market Risk.

General

Market risks relating to our operations result primarily from weak economic conditions in the markets in which we sell our products and changes in interest rates and exchange rates.  To manage the volatility related to the latter exposure, we may enter into various derivative transactions. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in currency exchange rates.  It is our policy and practice to use derivative financial instruments only to manage exposures.  We do not use financial instruments for trading purposes and are not a party to any leveraged derivative.

Foreign Currency Risk. Risk
We conduct our business primarily in U.S. dollars but also in the currencies of the United Kingdom, Canada, the European Union and Israel as well as other currencies.  Thus, we are exposed to foreign exchange movements, primarily in UK, European and IsraelIsraeli currencies.   We monitor foreign currency exposure and, from time to time, may use various instruments to preserve the value of sales transactions and commitments,commitments; however, this cannot assure our protection against risks of currency fluctuations. For more information regarding foreign currency related risks, please refer to “Risks relating“General Business Risks Relating to Israel”,Our Business and Market,” on page 18.

3. We use currency forward contracts together with cu rrency options to hedge payments in NIS and to hedge forecasted Euro payments received from construction-type contract net. These transactions constitute a future cash flow hedge. As of December 31, 2009, we had outstanding forward contracts and currency options in the total amount of approximately $56 million. These transactions were for a nine month period.

The table below details the balance sheet exposure (i.e., the gap between assets and liabilities in a given currency) by currency and geography, as of December 31, 2009. All data in the table have been converted into U.S. dollar equivalents.
In U.S. dollars in millions: 
  U.S. Dollars  British Pound  Euro  
New
Israeli Shekel
  
Swiss
Frank
  Canadian Dollar  
Hong
Kong
Dollar
  Japanese Yen  Australian Dollar  Other currencies  Total 
 Israel  -   5.64   6.23   (23.49)  0.11   0.13   (0.70)  (0.18)  0.45   0.89   (10.92)
 European Union  3.70   (4.34)  10.08   -   (0.04)  -   -   -   -   0.02   9.42 
 Switzerland  0.51   0.54   0.35   -   -   0.02   -   -   -   -   1.42 
 United States of America  -   -   1.86   -   -   0.41   -   2.07   0.23   -   4.57 
 Canada  (0.50)  -   -   -   -   -   -   -   -   -   (0.50)
 Hong Kong  0.01   -   -   -   -   -   -   -   -   0.08   0.09 
 Japan  -   (0.28)  -   -   -   -   -   -   -   -   (0.28)
 Australia  0.31   0.01   -   -   -   -   -   -   -   0.05   0.37 
   4.03   1.57   18.52   (23.49)  0.07   0.56   (0.70)  1.89   0.68   1.04   4.17 

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Net Exposure:

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

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

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

In U.S. dollars in millions:         
  Notional Amount  Fair Value 
  New Israeli Shekels  Euros    
Zero-cost collar contracts to hedge payroll expenses  28.20   -   0.19 
Forward contracts to hedge payroll expenses  16.10   -   (0.08)
Forward contracts to hedge construction-type contracts
  -   11.67   (0.18)
   44.30   11.67   (0.07)
Interest Rate Risk.
Our exposure to market risk for changes in interest rates relates primarily to our investment in marketable securities and deposits. Our marketable securities portfolio is invested in investment-grade corporate bonds, U.S. federal agency securities and U.S. treasury bills and treasury notes. As of December 31, 2009, 64% of our portfolio was in such securities.
During Q1 2010 we invested approximately $15 million in Israeli Treasury bill dominated in NIS and for a one year period. In parallel we entered into a forward contract to hedge the currency fluctuations of the NIS against the US dollar.
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The decline in interest rates due to the global credit crisis has a direct effect on our interest income and our ability to maintain our portfolio’s yield level in line with prior years. In a market environment of declining interest rates, we are likely to reinvest the redeemed proceeds from our called or matured marketable securities in lower yielding investments. Conversely, an increase in market interest rates could also have an adverse effect on the value of our investment portfolio, for example, by decreasing the fair values of the fixed income securities that comprise a substantial majority of our investment portfolio.
We invest in investment-grade U.S. corporate bonds and dollar deposits with FDIC-insured US banks. At least 80%U.S. banks, European banks and money market funds. As of December 31, 2009, 36% of our securities investments areportfolio was in corporate and US government agency bonds.such deposits. Since these investments carry fixed interest rates and since our policy and practice is to hold these investments to maturity,are for short periods, interest income over the holding period is not sensitive to changes in interest rates.  Up to 20%The fair value of our investment portfolio may be made in investment grade Callable Range Accrual Notes whose principallong and short term securities is guaranteed. based upon their market values as of December 31, 2009.
As of December 31, 2006, 3.9%2009, 9.6% of our investment portfolio was invested in such Notes. Bank deposits in Israeli banks.
The Notesaverage duration of the securities portfolio, as of December 31, 2009, is 2 years. The securities in our portfolio are rated at the least as A- according to Standard and Poor’s rating or A3, according to Moody’s rating. Securities representing 52% of the portfolio are rated as AAA; securities representing 24% of the portfolio are rated as AA; and securities representing 24% of the portfolio are rated as A.
The fair value of marketable securities, which are subject to risk of changes in interest rate, liquidity and price risks. Since our policy is to hold these investments tosegregated by maturity or until called, the interest income from these notes will not be effected by changes in their market value or to liquidity risk. However, a significant increase in prevailing interest rates may effect whether or not interest income is received for a particular period. As of December 31 2006, 9% of our investment portfolio is invested in auction rate securities. Because our policy is to hold these investments until their interest reset date, we face potential capital losses if interest in the markets rises dramatically during the holding period (up to 28 days).

dates:

In U.S. dollars in millions:                      
  Amortized Cost  Estimated fair value    
  Up to 1 year  1-3 years  4-5 years  Total  Up to 1 year  1-3 years  4-5 years  Total 
Corporate debentures  56.16   146.14   3.00   205.30   57.04   148.48   3.05   208.57 
U.S. Government agency debentures  1.51   42.53   -   44.04   1.54   42.38   -   43.92 
US treasuries  10.01   -   30.11   40.12   10.04   -   30.92   40.96 
   67.68   188.67   33.11   289.46   68.62   190.86   33.96   293.45 
Other risks and uncertainties that could affect actual results and outcomes are described in Item 3, “Key Information–Information—Risk Factors.”

Item 12.
Description of Securities Other than Equity Securities.

        Not Applicable.

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American Depositary Shares and Receipts
Set forth below is a summary of certain provisions in relation to charges and other payments under the Deposit Agreement, as amended, among NICE, The Bank of New York as depositary (the "Depositary"), and the owners and holders from time to time of American Depositary Receipts or ADRs (or the Deposit Agreement). This summary is not complete and is qualified in its entirety by the Deposit Agreement, a form of which has been filed as Exhibit A to the registration statement on Form F-6 (Registration No. 333-13518) filed with the SEC on May 17, 2001.
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PART II

Charges of Depositary
We will pay the fees, reasonable expenses and out-of-pocket charges of the Depositary and those of any registrar only in accordance with agreements in writing entered into between us and the Depositary from time to time. The following charges shall be incurred by any party depositing or withdrawing ordinary shares or by any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or deposited ordinary shares or a distribution of ADRs pursuant to the terms of the Deposit Agreement):
Item 13.(1)Defaults, Dividend Arrearagesany applicable taxes and Delinquencies.other governmental charges,

        None.

Item 14.(2)Material Modificationsany applicable transfer or registration fees,
(3)certain cable, telex and facsimile transmission charges as provided in the Deposit Agreement,
(4)any expenses incurred in the conversion of foreign currency,
(5)a fee of $5.00 or less per 100 ADSs (or a portion thereof) for the execution and delivery of ADRs and the surrender of ADRs, and
(6)a fee for the distribution of proceeds of rights that the Depositary sells pursuant to the Rights of Security Holders and Use of Proceeds.Deposit Agreement.

The Depositary may own and deal in our securities and in our ADRs.
Liability of Holders for Taxes, Duties or Other Charges
Any tax or other governmental charge with respect to ADRs or any deposited ordinary shares represented by any ADR shall be payable by the holder of such ADR to the Depositary. The Depositary may refuse to effect transfer of such ADR or any withdrawal of deposited ordinary shares represented by such ADR until such payment is made, and may withhold any dividends or other distributions or may sell for the account of the holder any part or all of the deposited ordinary shares represented by such ADR and may apply such dividends or distributions or the proceeds of any such sale in payment of any such tax or other governmental charge and the holder of such ADR shall remain liable for any deficiency.
PART II
Item 13.                      Defaults, Dividend Arrearages and Delinquencies.
None.

Item 14.                      Material Modifications to the Rights of Security Holders and Use of Proceeds.
None.
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Item 15.                      Controls and Procedures.
Item 15.Controls and Procedures.

Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of NICE’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of NICE’s disclosure controls and procedures (as defined in RulesRule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that NICE’s disclosure controls and procedures were effective as of such date.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-15(f)15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective can only provide reasonable assurance with respect to financial statements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed our internal control over financial reporting as of December 31, 2006.2009. Our management based its assessment on criteria established in Internal Control–Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management has concluded that, as of December 31, 2006,2009, our internal control over financial reporting is effective.

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        Our management has excluded IEX Corporation from its assessment of internal control over financial reporting as of December 31, 2006, because ownership was acquired by us during 2006. IEX is included in the 2006 consolidated financial statements of the company since July 7, 2006 and constitutes approximately 29% of our consolidated total assets and approximately 5% of our total revenues, as of, and for the year ended, December 31, 2006.

Attestation Report of the Independent Registered Public Accounting Firm

Our independent registered public accounting firm, Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global audited management’s assessment and independently assessed the effectiveness of the company’s internal control over financial reporting. Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global,reporting and has issued an attestation report, concurring with management’s assessment, which is included under Item 18 on page F-3 F-4 of this annual report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

Item 16A.                      Audit Committee Financial Expert.
Item 16A.
Audit Committee Financial Expert.

Our board of directors has determined that Dan Falk meets the definition of an audit committee financial expert, as defined in Item 401407 of Regulation S-K, and is independent under the applicable regulations.

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Item 16B.                      Code of Ethics.
Item 16B.
Code of Ethics.

We have adopted a Code of Ethics forthat applies to our principal executive and financial officers, and that also applies to all of our employees. The Code of Ethics is publicly available on our website at www.nice.com. Written copies are available upon request. If we make any substantive amendments to the Code of Ethics or grant any waiver from a provision of this code to our chief executive officer, principal financial officer or corporate controller, we will either disclose the nature of such amendment or waiver on our website.

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Item 16C.Principal Accountant Fees and Services.
website or in our annual report on Form 20-F.
        On November 25, 2009, our Internal Audit Committee and Board of Directors approved a waiver of the applicable provisions of our Code of Ethics, with respect to a potential conflict of interest of our Chief Executive Officer, Zeev Bregman, caused by his holding and exercise of stock options in subsidiaries of Comverse (which includes one of our direct competitors) and holding the underlying shares. In making their respective decisions, the Internal Audit Committee and Board of Directors determined that Mr. Bregman's interests in the success of NICE exceed the benefits which he may gain from these options and underlying shares.
Item 16C.                      Principal Accountant Fees and Services.

Fees Paid to Independent Auditors

Fees billed or expected to be billed by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, and other members of Ernst & Young Global for professional services for each of the last two fiscal years were as follows:

Services Rendered
2005 Fees
2006 Fees
 
Audit (1)  $620,000 $921,000 
Audit-related (2)   224,000  219,000 
Tax (3)   112,000  410,000 
Total  $956,000 $1,550,000 

Services Rendered 2008 Fees  2009 Fees 
Audit (1) $799,000   850,000 
Audit-related (2) $78,000   139,000 
Tax (3) $172,000   566,000 
Total $1,049,000   1,555,000 
(1)
Audit fees are for audit services for each of the years shown in this table, including fees associated with the annual audit for 20062009 (including audit in accordance with section 404 of the Sarbanes-Oxley act) and certain procedures regarding our quarterly financial results submitted on Form 6-K, consultations on various accounting issues and performance of local statutory audits.

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

(3)Tax fees are for professional services rendered by our auditors for tax compliance, tax advice on actual or contemplated transactions, tax consulting associated with international transfer prices and employee benefits.

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Policies and Procedures

Our Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our external auditors –- Kost, Forer, Gabbay & Kasierer, a Member of Ernst & Young.Young Global. The policy, which is designed to assure that such services do not impair the independence of our auditors, requires pre-approval from the audit committee on an annual basis for the various audit and non-audit services that may be performed by our auditors. If a type of service, that is to be provided by our auditors, has not received such general pre-approval, it will require specific pre-approval by our audit committee. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by our audit committee. The policy prohibits retention of the independent auditors to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether proposed services are compatible with the independence of the public auditors.

Item 16D.                      Exemptions from the Listing Standards for Audit Committees
.
Item 16D.
Exemptions from the Listing Standards for Audit Committees.

Not applicable.

121

Item 16E.                      Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

         In 2006, neither we nor our affiliates purchased any of our own shares.

Equity Securities by the Issuer and Affiliated Purchasers.

                None.
Item 16F.                      Change in Registrant’s Certifying Accountant.
None.
Item 16G.                      Corporate Governance.
We follow the Companies Law, the relevant provisions of which are summarized in this annual report, rather than comply with the NASDAQ requirements relating to: (i) the quorum for shareholder meetings, as described in “Item 10 – Additional Information – Memorandum and Articles of Association – Meetings of Shareholders”; (ii) shareholder approval with respect to issuance of securities under equity based compensation plans, as described in “Item 10 – Additional Information – Memorandum and Articles of Association – Approval of Certain Transactions”; and (iii) sending annual reports to shareholders, as described in “Item 10 – Additional Information – Documents on Display.”
PART III

Item 17.                      Financial Statements.
Item 17.
Financial Statements.

Not Applicable.

Item 18.                      Financial Statements.
Item 18.
Financial Statements.

See pages F-1 through F-51F-57 of this annual report attached hereto.

122

114
Item 19.
Exhibits.

Exhibit No.
Description

1.1Amended and Restated Memorandum of Association, as approved on December 21, 2006 (English translation) (filed as Exhibit 1.1 to NICE-Systems Ltd.’s Annual Report on Form 20-F filed with the SEC on June 13, 2007, and incorporated herein by reference).

1.2Amended and Restated Articles of Association, as approved on December 21, 2006.2006 (filed as Exhibit 1.2 to NICE-Systems Ltd.’s Annual Report on Form 20-F filed with the SEC on June 13, 2007, and incorporated herein by reference).

2.1Form of Share Certificate (filed as Exhibit 4.1 to Amendment No. 1 to NICE-Systems Ltd.'s’s Registration Statement on Form F-1 (Registration No. 333-99640) filed with the CommissionSEC on December 29, 1995, and incorporated herein by reference).

2.2Form of Deposit Agreement including Form of ADR Certificate (filed as Exhibit A to NICE-Systems Ltd.'s’s Registration Statement on Form F-6 (Registration No. 333-13518)333-157371) filed with the CommissionSEC on MayFebruary 17, 2001,2009, and incorporated herein by reference).

4.54.1Manufacturing Outsourcing Agreement dated January 21, 2002 by and among NICE-Systems Ltd. and Flextronics Israel Ltd. (filed as Exhibit 4.5 to NICE-Systems Ltd.'s’s Annual Report on Form 20-F filed with the CommissionSEC on June 26, 2003, and incorporated herein by reference).

4.7Asset Purchase and Sale Agreement, dated as of April 11, 2005, between Dictaphone Corporation and NICE Systems Inc. (filed as Exhibit 4.8 to NICE-Systems Ltd.'s Annual Report on Form 20-F filed with the Commission on June 29, 2005, and incorporated herein by reference).

4.8Amendment No. 1, dated as of May 31, 2005, to the Asset Purchase and Sale Agreement, dated as of April 11, 2005, between Dictaphone Corporation and NICE Systems Inc. (filed as Exhibit 4.9 to NICE-Systems Ltd.'s Annual Report on Form 20-F filed with the Commission on June 29, 2005, and incorporated herein by reference).

4.94.2Share Purchase Agreement, dated as of November 17, 2005, between certain shareholders of FAST Video Security AG and NICE-Systems Ltd. (filed as Exhibit 4.9 to NICE-Systems Ltd.'s’s Annual Report on Form 20-F filed with the CommissionSEC on May 17, 2006, and incorporated herein by reference).

4.104.3Share Purchase Agreement and Plan of Merger, dated as of April 27, 2006, between IEX CorporationJuly 2, 2007, among Actimize Ltd., Nemo Acquisitions Ltd. and NICE-Systems Ltd. (filed as Exhibit 4.1099.2 to NICE-Systems Ltd.'s’s Report on Form 6-K filed with the SEC on August 30, 2007, and incorporated herein by reference).
4.4Share Purchase and Sale Agreement between NICE-Systems Ltd., certain subsidiaries of the NICE-Systems Ltd., and, Fortent, Inc. and certain subsidiaries of Fortent, Inc., dated as of August 31, 2009
4.5Asset Purchase Agreement, dated as of November 22, 2009, among Orsus Solutions Limited and its wholly-owned subsidiaries and NICE-Systems Ltd. and certain of its wholly-owned subsidiaries.
4.6NICE Systems Ltd. 2003 Stock Option Plan, as amended (filed as Exhibit 4.4 to NICE-System Ltd.’s Annual Report on Form 20-F (File No. 000-27466) filed with the CommissionSEC on April 6, 2009, and incorporated herein by reference).
4.7
NICE Systems Ltd. Amended and Restated 1999 Employee Stock Purchase Plan (filed as Exhibit 4 to NICE-System Ltd.’s Registration Statement on Form S-8 (Registration No. 333-111113) filed with the SEC on May 17,22, 2006, and incorporated herein by reference).

4.114.8Amendment No. 2, dated as of March 27, 2006, to the Asset PurchaseActimize Ltd. 2003 Omnibus Stock Option and Sale Agreement, dated as of April 11, 2005, between DictaphoneCorporation and NICE-Systems Inc.Restricted Stock Incentive Plan (filed as Exhibit 4.114.4 to NICE-SystemsNICE-System Ltd.'s Annual Report’s Registration Statement on Form 20-FS-8 (Registration No. 333-145981) filed with the CommissionSEC on May 17, 2006,September 11, 2007, and incorporated herein by reference).

4.9NICE Systems Ltd. 2008 Share Incentive Plan, as amended (filed as Exhibit 4.8 to NICE-System Ltd.’s Annual Report on Form 20-F (File No. 000-27466) filed with the SEC on April 6, 2009, and incorporated herein by reference).
4.10Orsus Solutions Limited 2007 Incentive Option Plan, as amended.
8.1List of significant subsidiaries.

10.1Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global.

12.1Certification by the Chief Executive Officer of NICE-Systems Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act 2002.

123

12.2Certification by the Chief Financial Officer of NICE-Systems Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

13.1Certification by the Chief Executive Officer of NICE-Systems Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

13.2Certification by the Chief Financial Officer of NICE-Systems Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global.

124

115

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006

2009

IN U.S. DOLLARS


INDEX
Page
Reports of Independent Registered Public Accounting Firm
F-2 - F-4– F-3
 
Consolidated Balance Sheets
F-5F-4 - F-6F-5
 
Consolidated Statements of Income
F-7F-6
 
Statements of Changes in Shareholders' Equity
F-7 - F-8
 
Consolidated Statements of Cash Flows
F-9 - F-12F-11
 
Notes to Consolidated Financial Statements
F-13F-12 - F-51F-50

 nKost Forer Gabbay & KasierernPhone: 972-3-6232525
3 Aminadav St.
Tel-Aviv 67067, Israel

Tel:  972 (3)6232525
Fax: 972-3-5622555972 (3)5622555
www.ey.com/il

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Shareholders and Board of Directors of


NICE SYSTEMS LTD.



We have audited the accompanying consolidated balance sheets of NICE Systems Ltd. ("the Company") and its subsidiaries (“the Company”) as of December 31, 20052008 and 2006,2009, and the related consolidated statements of income, shareholders’changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2006.2009. These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 20052008 and 2006,2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006,2009, in conformity with accounting principlesU.S. generally accepted in the United States.

accounting principles.

        As discussed in Note 2 to the consolidated financial statements, in 20062y, effective January 1, 2009, the Company adopted Statement Financial Accounting Standards Board No. 123 (revised 2004) “Share-Based Payment”.

new guidance on accounting for business combinations.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’sCompany's internal control over financial reporting as of December 31, 2006,2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 12, 2007March 31, 2010 expressed an unqualified opinion thereon.

Tel-Aviv, Israel/s/ KOST, FORER, GABBAY & KASIERER
———————————————————
KOST FORER GABBAY & KASIERER
June 12, 2007March 31, 2010A Member of Ernst & Young Global

-

F - 2 -

nKost Forer Gabbay & KasierernPhone: 972-3-6232525
3 Aminadav St.
Tel-Aviv 67067, Israel		Fax: 972-3-5622555

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Shareholders and Board of Directors of


NICE SYSTEMS LTD.

We have audited management’s assessment, which is contained in Part II, Item 15 of this annual report on form 20-F under the heading “Management’s Annual Report on Internal Control Over Financial Reporting”, that NICE Systems Ltd. (“'s ("the Company”Company") maintained effective internal control over financial reporting as of December 31, 2006,2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“("the COSO criteria”criteria"). The Company’sCompany's management is responsible for maintaining effective internal control over financial reporting and for its assessment ofincluded in the effectiveness ofaccompanying Management's Annual Report on internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.


A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors ofo f the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        As indicated in Part II, Item 15 of this annual report on form 20-F under the heading “Management’s Annual Report on Internal Control Over Financial Reporting”, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal control over financial reporting of IEX corporation Inc (“IEX”) because it was acquired during 2006. IEX is included in the 2006 consolidated financial statements of the Company since July 7, 2006 and constituted approximately 29% of total assets as of December 31, 2006 and 5% of total revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of IEX.

- F - 3 -

nKost Forer Gabbay & KasierernPhone: 972-3-6232525
3 Aminadav St.
Tel-Aviv 67067, Israel		Fax: 972-3-5622555

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006,2009, based on the COSO criteria.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and its subsidiaries as of December 31, 20052008 and 2006,2009, and the related consolidated statements of income, shareholders’changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 20062009 and our report dated June 12, 2007March 31, 2010 expressed an unqualified opinion thereon.


Tel-Aviv, Israel/s/ KOST, FORER, GABBAY & KASIERER
———————————————————
KOST FORER GABBAY & KASIERER
June 12, 2007March 31, 2010A Member of Ernst & Young Global

-

F - 4 -

3
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)

December 31,
2005
2006
 
    ASSETS      
   
CURRENT ASSETS:  
  Cash and cash equivalents  $254,956 $67,365 
  Short-term bank deposits   102  130 
  Marketable securities   36,159  92,859 
  Trade receivables (net of allowance for doubtful accounts  
    of $ 2,214 and $ 1,951 at December 31, 2005 and 2006, respectively)   66,153  81,312 
  Other receivables and prepaid expenses   9,544  11,399 
  Inventories   23,172  18,619 
  Deferred tax assets   3,360  14,478 
   
Total current assets   393,446  286,162 
   
LONG-TERM ASSETS:  
  Marketable securities   120,342  135,810 
  Investment in affiliates   1,200  1,200 
  Severance pay fund   7,907  9,998 
  Other receivables and prepaid expenses   648  832 
  Deferred tax assets   4,976  2,917 
  Property and equipment, net   14,888  15,813 
  Other intangible assets, net   23,990  111,182 
  Goodwill   49,853  220,430 
   
Total long-term assets   223,804  498,182 
   
Total assets  $617,250 $784,344 

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

-

F - 5 -

4

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)

December 31,
2005
2006
 
    LIABILITIES AND SHAREHOLDERS' EQUITY      
   
CURRENT LIABILITIES:  
  Trade payables  $18,194 $22,845 
  Accrued expenses and other liabilities   100,544  146,990 
   
Total current liabilities   118,738  169,835 
   
LONG-TERM LIABILITIES:  
  Accrued severance pay   8,901  11,743 
  Deferred tax liabilities   2,493  33,130 
  Other long-term liabilities   77  62 
   
Total long-term liabilities   11,471  44,935 
   
COMMITMENTS AND CONTINGENT LIABILITIES  
   
SHAREHOLDERS' EQUITY:  
  Share capital-  
    Ordinary shares of NIS 1 par value:  
      Authorized: 75,000,000 and 125,000,000 at December 31, 2005  
      and 2006, respectively; Issued and outstanding:
      48,275,286 and 51,091,512 shares
       at December 31, 2005 and 2006, respectively;		   6,772  12,754 
  Additional paid-in capital   473,203  522,866 
  Accumulated other comprehensive income   2,996  7,483 
  Retained earnings   4,070  26,471 
   
Total shareholders' equity   487,041  569,574 
   
Total liabilities and shareholders' equity  $617,250 $784,344 

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

-

F - 6 -

5
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

Year ended December 31,
2004
2005
2006
 
Revenues:        
  Products  $182,616 $206,355 $261,098 
  Services   70,027  104,755  148,546 
   
Total revenues   252,643  311,110  409,644 
   
Cost of revenues:  
  Products   64,432  67,543  84,675 
  Services   49,876  68,683  89,539 
   
Total cost of revenues   114,308  136,226  174,214 
   
Gross profit   138,335  174,884  235,430 
   
Operating expenses:  
   Research and development, net   24,866  30,896  44,880 
   Selling and marketing   61,855  72,829  95,190 
   General and administrative   31,269  37,742  60,463 
   Amortization of acquired intangibles   317  1,331  4,918 
   In process research and development write-off   -  -  12,882 
   
Total operating expenses   118,307  142,798  218,333 
   
Operating income   20,028  32,086  17,097 
Financial income, net   3,556  5,398  13,272 
Other income (expenses), net   54  (13) 623 
   
Income before taxes on income   23,638  37,471  30,992 
Taxes on income   2,319  902  8,591 
   
Net income from continuing operations   21,319  36,569  22,401 
Net income from discontinued operation   3,236  -  - 
   
Net income  $24,555 $36,569 $22,401 
   
Net earnings per share:  
  Basic:  
  Continuing operations  $0.61 $0.95 $0.45 
  Discontinued operation   0.09  -  - 
   
   Basic net earnings per share  $0.70 $0.95 $0.45 
   
  Diluted:  
  Continuing operations  $0.57 $0.89 $0.43 
  Discontinued operation   0.09  -  - 
   
   Diluted net earnings per share  $0.66 $0.89 $0.43 

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

-

F - 7 -

6
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NICE SYSTEMS LTD. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands
U.S. dollars in thousands

Share
capital
Additional
paid-in
capital
Accumulated other
comprehensive
income
Retained earnings
(accumulated
deficit)
Total comprehensive
income
Total
shareholders'
equity
 
 Balance as of January 1, 2004  $5,142 $224,855 $3,888 $(57,054)   $176,831 
   Issuance of shares of ESPP   31  2,234           2,265 
   Exercise of share options   291  17,311           17,602 
   Comprehensive income:  
     Foreign currency translation adjustments   -  -  1,617  - $1,617  1,617 
     Unrealized gains on derivative instruments, net   -  -  1  -  1  1 
     Net income   -  -  -  24,555  24,555  24,555 
    
 Total comprehensive income              $26,173    
 Balance as of December 31, 2004   5,464  244,400  5,506  (32,499)    222,871 
   Issuance of shares upon public offering, net   1,003  201,377  -  -     202,380 
   Issuance of shares of ESPP   37  4,285  -  -     4,322 
   Exercise of share options   268  21,640  -  -     21,908 
   Tax Benefit in respect of exercised options   -  1,501  -  -     1,501 
   Comprehensive income:  
     Foreign currency translation adjustments   -  -  (2,493) - $(2,493) (2,493)
     Unrealized losses on derivative instruments, net   -  -  (17) -  (17) (17)
     Net income   -  -  -  36,569  36,569  36,569 
   
 Total comprehensive income              $34,059    
 Balance as of December 31, 2005   6,772  473,203  2,996  4,070     487,041 
   Issuance of shares of ESPP   2  227  -  -     229 
   Exercise of share options   510  37,187     -     37,697 
   Stock-based compensation   -  12,571     -     12,571 
   Adjustment to tax benefit in respect of offering expenses   -  (585)    -     (585)
   Excess tax benefit from share based payment arrangements   -  5,733     -     5,733 
   Stock split effected as stock dividend   5,470  (5,470)    -     - 
   Comprehensive income:  
     Foreign currency translation adjustments   -  -  4,463  - $4,463  4,463 
     Unrealized losses on derivative instruments, net   -  -  24  -  24  24 
     Net income   -  -  -  22,401  22,401  22,401 
 
 Total comprehensive income              $26,888    
 Balance as of December 31, 2006  $12,754 $522,866 $7,483 $26,471    $569,574 
   
 Accumulated unrealized gains on derivative instruments        $72          
 Accumulated foreign currency translation adjustments         7,411          
Accumulated other comprehensive income as of December 31, 2006        $7,483          

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

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

-

F - 8 -

7
NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands

Year ended December 31,
2004
2005
2006
 
Cash flows from operating activities:        
   
  Net income  $24,555 $36,569 $22,401 
  Less: net income from discontinued operation   (3,236) -  - 
   
  Net income from continuing operations   21,319  36,569  22,401 
  Adjustments required to reconcile net income from continuing operations to net cash  
    provided by operating activities from continuing operations:  
    Depreciation and amortization   13,793  13,152  21,919 
    Stock-based compensation   -  -  12,571 
    Excess tax benefit from share-based payments arrangements   -  -  (5,733)
    Tax benefit from exercised options   -  1,501  - 
    In-process research and development write-off   -  -  12,882 
    Accrued severance pay, net   37  187  751 
    Amortization of premium (accretion of discount) and accrued interest on  
      held-to-maturity marketable securities   1,205  812  278 
    Deferred taxes, net   -  (4,841) (3,707)
    Increase in trade receivables   (585) (11,488) (6,772)
    Decrease (increase) in other receivables and prepaid expenses   (654) 566  (1,897)
    Decrease (increase) in inventories   (122) (3,930) 5,376 
    Increase (decrease) in trade payables   (3,761) 5,782  1,435 
    Increase in accrued expenses and other liabilities   13,043  27,339  27,991 
    Other   (7) 54  80 
   
Net cash provided by operating activities from continuing operations   44,268  65,703  87,575 
Net cash provided by operating activities from discontinued operation   750  -  - 
   
Net cash provided by operating activities   45,018  65,703  87,575 
  
Share
capital
  
Additional
paid-in
capital
  Accumulated other comprehensive income (loss)  Retained earnings  Total comprehensive income  
Total
shareholders'
equity
 
                   
Balance as of December 31, 2008  15,157   853,226   (1,343)  103,782      970,822 
                        
Issuance of shares of ESPP  5   370   -   -      375 
Exercise of share options  303   19,267   -   -      19,570 
Stock-based compensation  -   18,237   -   -      18,237 
Excess tax benefit from share-based payment arrangements  -   969   -   -      969 
Restricted shares vesting in respect of Actimize acquisition  27   70   -   -      97 
Comprehensive income:                       
Foreign currency translation adjustments  -   -   7,415   -  $7,415   7,415 
Unrealized gains on marketable securities, net  -   -   2,206   -   2,206   2,206 
Unrealized gains on derivative instruments, net  -   -   307   -   307   307 
Net income  -   -   -   42,756   42,756   42,756 
                         
Total comprehensive income                 $52,684     
                         
Balance as of December 31, 2009 $15,492  $892,139  $8,585  $146,538      $1,062,754 

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

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

-

F - 9 -

8

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
U.S. dollars in thousands

Year ended December 31,
2004
2005
2006
 
Cash flows from investing activities:        
   
  Purchase of property and equipment   (6,701) (6,128) (8,111)
  Proceeds from sale of property and equipment   89  66  76 
  Investment in marketable securities   (122,192) (218,472) (217,655)
  Proceeds from maturity of marketable securities   17,710  190,682  142,209 
  Proceeds from sale and call of held-to-maturity marketable securities   41,345  9,630  3,000 
  Investment in short-term bank deposits   (129) (39) (117)
  Proceeds from short-term bank deposits   149  108  99 
  Refund (payment) for the acquisition of certain assets and liabilities of Dictaphone CRS  
    division (a)   -  (39,724) 2,000 
  Payment for the acquisition of certain assets and liabilities of Hannamax Hi-Tech Pty.  
    Ltd. (b)   -  (1,889) (500)
  Payment for the acquisition of FAST (c)   -  -  (21,320)
  Payment for the acquisition of Performix (d)   -  -  (13,800)
  Payment for the acquisition of IEX (e)   -  -  (203,162)
  Decrease in accrued acquisition costs   (75) -  (15)
  Payments and proceeds in respect of TCS acquisition   (1,236) 2,531  - 
  Capitalization of software development costs   (1,305) (806) (1,225)
  Deferred acquisition costs   -  (256) - 
  Other   -  -  83 
   
Net cash used in investing activities from continuing operations   (72,345) (64,297) (318,438)
Net cash provided by investing activities from discontinued operation   4,136  -  - 
   
Net cash used in investing activities   (68,209) (64,297) (318,438)
   
Cash flows from financing activities:  
   
  Proceeds from issuance of shares upon public offering, net   -  201,724  - 
  Proceeds from issuance of shares upon exercise of options and ESPP   19,867  25,259  38,987 
  Excess tax benefit from share-based payments arrangements   -  -  5,733 
  Decrease in accrued offering expenses   -  -  (273)
  Decrease in short-term bank credit assumed in the acquisition of FAST   -  -  (785)
   
Net cash provided by financing activities   19,867  226,983  43,662 
   
Effect of exchange rate changes on cash   44  (12) (390)
   
Increase (decrease) in cash and cash equivalents   (3,280) 228,377  (187,591)
Cash and cash equivalents at the beginning of the year   29,859  26,579  254,956 
   
Cash and cash equivalents at the end of the year  $26,579 $254,956 $67,365 
   
Supplemental disclosure of cash flows activities:  
   
  Cash paid during the year for:  
   
    Income taxes  $598 $389 $1,407 
  Year ended December 31, 
  2007  2008  2009 
Cash flows from operating activities:         
          
Net income $37,380  $39,107  $42,756 
Adjustments required to reconcile net income to net cash provided by operating activities:            
Depreciation and amortization  30,926   42,740   47,217 
Stock-based compensation  23,666   25,321   18,237 
Excess tax benefit from share-based payment arrangements  (4,945)  (638)  (969)
In-process research and development write-off  3,710   -   - 
    Accrued severance pay, net  632   1,506   (1,534)
Amortization of premium (accretion of discount) and accrued interest on marketable securities  (252)  1,504   1,656 
Loss (gain) on marketable securities  257   4,924   (823)
Deferred taxes, net  (5,231)  (5,554)  (6,984)
Decrease (increase) in trade receivables, net  (15,224)  (232)  8,898 
Decrease (increase) in other receivables and prepaid expenses  (9,623)  80   (2,265)
Decrease (increase) in inventories  7,579   (935)  (531)
Increase (decrease) in trade payables  (2,982)  189   1,536 
Increase in accrued expenses and other liabilities  51,933   28,057   12,039 
Other  418   (359)  453 
             
Net cash provided by operating activities  118,244   135,710   119,686 
             
Cash flows from investing activities:            
             
Purchase of property and equipment  (10,947)  (15,454)  (8,851)
Proceeds from sale of property and equipment  58   20   70 
Investment in marketable securities  (208,590)  (231,057)  (197,499)
Proceeds from maturity of marketable securities  170,945   64,725   140,396 
Proceeds from sale and call of marketable securities  30,100   111,826   57,394 
Investment in short-term bank deposits  (39,131)  (64,448)  (110,021)
Proceeds from short-term bank deposits  139   39,095   134,473 
Payment for the acquisition of Actimize (a)  (210,540)  (1,633)  - 
Payment for the acquisition of Fortent (b)  -   -   (72,700)
Payment for other acquisitions  (7,058)  (20,046)  (12,226)
Capitalization of software development costs  (962)  (1,278)  (1,315)
Purchase of intangible assets  -   (3,533)  (1,000)
Receipt upon the realization of investment in an affiliate  -   964   - 
             
Net cash used in investing activities  (275,986)  (120,819)  (71,279)

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

-

F - 10 -

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

Year ended December 31,
2004
2005
2006
 
(a)    Payment for the acquisition of certain assets and        
           liabilities of Dictaphone CRS division:           
   
        Fair value of assets acquired and liabilities assumed at the acquisition date:  
   
        Working capital deficit (excluding cash and cash equivalents)     $(913) (3,000)
        Property and equipment      202  - 
        Other Intangible assets      15,400  - 
        Goodwill      25,311  1,000 
   
           40,000  - 
        Less - accrued acquisition costs      (276) - 
   
                                                                                                          $39,724 $(2,000)
(b)    Payment for the acquisition of certain assets and liabilities of Hannamax  
           Hi-Tech Pty. Ltd.  
   
        Estimated fair value of assets acquired and liabilities assumed at the  
          acquisition date:  
   
        Working capital deficit (excluding cash and cash equivalents)     $(50)$- 
        Property and equipment      10  - 
        Other intangible assets      930  - 
        Goodwill      1,159  500 
        Other long-term liabilities      (38) - 
   
           2,011  - 
        Less - accrued acquisition costs      (122) - 
   
          $1,889 $500 
   
(c)    Payment for the acquisition of FAST:  
   
        Estimated fair value of assets acquired and liabilities assumed at the  
           acquisition date:  
   
        Working capital deficit (excluding cash and cash equivalents)        $(5)
        Property and equipment         256 
        In-process research and development         212 
        Other intangible assets         11,753 
        Goodwill         17,042 
        Long-term deferred tax liability         (1,449)
   
                                                                                                             27,809 
        Less - decrease in prepaid acquisition costs         (256)
        Less - accrued acquisition costs         (6,233)
   
             $21,320 

- F - 11 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands

Year ended December 31,
2004
2005
2006
 
(d)    Payment for the acquisition of Performix:        
   
         Estimated fair value of assets acquired and liabilities assumed at the  
            acquisition date:  
         Working capital deficit (excluding cash and cash equivalents)        $(2,800)
         Property and equipment         360 
         Other intangible assets         8,060 
         Goodwill         8,292 
         Long-term deferred tax liability         (24)
   
              13,888 
         Less - accrued acquisition costs         (88)
   
             $13,800 
   
(e)    Payment for the acquisition of IEX:  
   
         Estimated fair value of assets acquired and liabilities assumed at the  
            acquisition date:  
   
         Working capital deficit (excluding cash and cash equivalents)        $1,687 
         Property and equipment         315 
         In-process research and development         12,670 
         Other intangible assets         78,170 
         Goodwill         140,900 
         Long-term deferred tax liabilities         (28,909)
   
              204,833 
         Less - accrued acquisition costs         (1,671)
   
             $203,162 
   
(f)    Non-cash activities:  
 
         Adjustment of goodwill in respect of discontinued operation sale  $(250)$- $- 
   
         Tax benefit on offering expenses  $- $1,002 $(585)
   
         Accrued offering expenses  $- $346 $- 

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

-

F - 1210
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
   Year ended December 31, 
   2007  2008  2009 
(a)Payment for the acquisition of Actimize:         
           
 Estimated fair value of assets acquired and liabilities assumed at the acquisition date:         
           
 Working capital deficit (excluding cash and cash equivalents) $(8,919) $-  $- 
 Property and equipment  622   -   - 
 Severance pay fund  324   -   - 
 Long-term other receivables and prepaid expenses  332   -   - 
 In-process research and development  3,710   -   - 
 Other intangible assets  71,300   -   - 
 Goodwill  219,543   -   - 
 Long-term deferred tax liabilities  (13,028)  -   - 
 Other long-term liabilities  (854)   -   - 
              
    273,030   -   - 
 Add (less) - (accrued) acquisition costs  (1,853)  1,633   - 
 Less - amount acquired by issuance of shares and options, net of issuance expenses  (60,637)  -   - 
              
   $210,540  $1,633  $- 
(b)Payment for the acquisition of Fortent:            
              
 Estimated fair value of assets acquired and liabilities assumed at the acquisition date:            
              
 Working capital deficit (excluding cash and cash equivalents) $-  $-  $(9,796)
 Property and equipment  -   -   1,302 
 Long-term other receivables and prepaid expenses  -   -   536 
 Long-term deferred tax assets  -   -   5,746 
 Other intangible assets  -   -   35,000 
 Goodwill  -   -   40,212 
              
    -   -   73,000 
 Less  - accrued payment  -   -   (300)
              
   $-  $-  $72,700 
              
 Tax benefit on offering expenses $10  $892  $- 
              
 Accrued offering expenses $105  $-  $- 

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

11

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIESNOTE 1:-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)GENERAL

NOTE 1:–GENERAL

 a.General:

 
NICE Systems Ltd. (“NICE”("NICE" or "the Company") and subsidiaries (collectively – “the Company”- "the Group") develop, marketis a leading global provider of advanced solutions that enable enterprises and supportsecurity organizations to extract insight from interactions, transactions and surveillance to drive business performance and ensure safety and security. The Company's solutions enable companies and public organizations to capture, manage, analyze and impact unstructured interaction as well as transactional data, enabling such entities to comply with internal and governmental regulations, enhance business and operational performance and address security threats while increasing situational awareness. Unstructured content includes cross-channel analysis of phone calls, chat, instant messaging, and email interactions to cont act centers, trading floors, branches, home agents and back offices, phone calls to emergency service providers and first responders, video captured by closed circuit cameras, radio communications between emergency services' and first responders' personnel, internet sessions, email and instant messaging and security management solutions for command and control centers. The Company's solutions include integrated, scalable, multimedia digitalcross-channel recording platforms, enhancedcross-channel real-time analytics, software applications and related professional services.management applications. These solutions captureaddress critical business processes and analyze unstructured (non-transaction) datarisk management, compliance procedures and convert it forsecurity needs of enterprises and security organizations. The Company's solutions facilitate faster decision-making and real-time analysis and actions, improving business and employee performance, reducing exposure to transactional risks related to financial crime (fraud detection and Anti Money Laundering or AML), operationa l risk and compliance activities, and enhancing security performance management applications. The Company’s solutions capture multiple forms of interaction, including voice, fax, email, web chat, radio, and video transmissions over wire line, wireless, packet telephony, terrestrial trunk radio and data networks.public safety.

 The Company’s products are based on two typesenterprise customers span a variety of recording platforms – audioindustries, such as financial services, telecommunications, healthcare, outsourcers, retail, media, travel, service providers, utilities and video.others. The Company’sCompany's financial crime solutions primarily serve financial services organizations. The Company's security solutions are offeredtailored to various vertical markets in two major sectors: (1) the Enterprise Interaction Solutions Sector – contactprotect city centers transportation systems, critical infrastructure, enterprise campuses and trading floors and (2) the Public Safety and Security Sector – safety organizations, transportation, corporate security, gaming and correctional facilities and government and intelligence agencies.more.

 The Company’s 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.

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

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

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

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

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

 b.Acquisitions:

 1.Acquisition of Dictaphone’s Communications Recording Systems (“CRS”)Actimize Ltd.:

 On June 1, 2005,August 30, 2007, the Company consummated an agreement to acquire all of the assets and assume certain liabilitiesoutstanding shares of Dictaphone’s Communications Recording Systems (“CRS”Actimize Ltd. ("Actimize") business for $ 40,000 (including acquisition costs). Dictaphone’s CRS business is, a leading provider of liability and qualitytransactional risk management systemssoftware for first responders, critical facilities, contact centers andthe financial trading floors.services industry, for an aggregate consideration of $ 281,111. The total purchase price of Actimize was composed of the following:

- F - 13 -

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

NICE SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS*)
U.S. dollars in thousands (except shareRepresents the fair value of 1,501,933 American Depositary Shares ("ADSs") of NICE issued to Actimize shareholders upon consummation of the acquisition, valued based on the market price of the securities a few days before and per share data)after the terms of the acquisition were agreed to and announced.

NOTE 1:–**)GENERAL (Cont.)Represents the fair value of the vested portion of 987,104 options and restricted shares of NICE granted upon consummation of the acquisition to the holders of partially vested options and restricted shares of Actimize originally granted under Actimize's 2003 Omnibus Stock Option and Restricted Stock Incentive Plan. The fair value of these options was determined using the Black-Scholes-Merton valuation model with the following assumptions: expected life of 0-4 years, risk-free interest rate of 4.85%-4.99%, expected volatility of 30.7%-35.8% and no dividend yield.

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

 On March 27, 2006,August 29, 2007, to finance a portion of the cash consideration for the Actimize acquisition, the Company entered into an unsecured loan agreement and Dictaphone agreed to amend the CRS’s purchase agreement, according toa letter of undertaking with a bank, which Dictaphone paid toprovide for a term loan of $ 120,000, originally repayable in one installment on February 29, 2008. The loan bore interest payable monthly, at an annual rate of LIBOR plus a margin of 0.45%. On September 28, 2007, the Company $ 2,000 as a final adjustment torepaid the purchase price under the purchase agreement.loan.

 The acquisition of CRS expanded the Company’s customer base, presenceActimize allows NICE to offer its customers and partners a more extensive product portfolio in the U.Sindustries in which NICE operates. Actimize is a leading provider of software solutions for anti-money laundering, brokerage compliance, customer due diligence and Europe markets,fraud prevention. Built on a patented, scalable and its network of distributorsextensible analytics platform, Actimize solutions enable financial institutions to increase their insight into real-time customer behavior and partners. Additionally, the Company broadened its product offeringsimprove risk and global professional services team.

compliance performance. By purchasing CRS,Actimize, the Company strategically strengthened its position as an enterprise wide analytics powerhouse and expanded its market share both in geographical and vertical markets.solution offering. The factors that contributed to the purchase price that resulted in recognition of goodwill in connection with the acquisition included synergies, the benefits of increasedleverage for vertical markets and time to market share, strategic positioning value and time-to-market benefits.
F - 13
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 1:-                 GENERAL (Cont.)

 The acquisition was accounted for by the purchase method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of CRS.Actimize. The results of the CRS’sActimize operations have been included in the consolidated financial statements since June 1, 2005 (“the closing date”).August 30, 2007.

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

Trade receivables  $6,561 
Other receivables and prepaid expenses   25 
Inventories   7,426 
Property and equipment   198 
Trademarks   400 
Core technology   4,900 
Distribution network   10,100 
Goodwill   26,311 
   
Total assets acquired   55,921 
   
Trade payables   (569)
Accrued expenses and other liabilities   (17,352)
   
Total liabilities assumed   (17,921)
   
Net assets acquired  $38,000 
Cash $8,081 
Marketable securities  6,140 
Trade receivables  4,503 
Short-term other receivables and prepaid expenses  1,648 
Short-term deferred tax assets  925 
Property and equipment  622 
Severance pay fund  324 
Long-term other receivables and prepaid expenses  332 
Trade name  1,680 
Core technology  38,480 
In-process research and development  3,710 
Customer relationships  31,140 
Goodwill  219,543 
     
Total assets acquired  317,128 
     
Trade payables  (1,729)
Accrued expenses and other liabilities  (18,403)
Short-term deferred tax liabilities  (2,003)
Long-term deferred tax liabilities  (13,028)
Other long-term liabilities  (854)
     
Total liabilities assumed  (36,017)
     
Net assets acquired $281,111 

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

Trade name, core technology and distribution networkcustomer relationships in the amount of $ 15,40071,300 are amortized using the straight-line method at an annual weighted average rate of 19.5%19%.

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F - 14 -

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 1:-–GENERAL (Cont.)

In connection with Dictaphone’s patent infringement claim against the Company (filed in June 2000), the Company reached a settlement agreement with Dictaphone (in December 2003) and agreed to dismiss all claims and counterclaims. In connection with the settlement agreement, each of the companies granted the other a perpetual license to certain of their respective patents including the disputed patents. Because the rights were restrictive in terms of transferability, enforceability and the right to sublicense by the grantee, the Company determined that the rights obtained and granted were of equivalent and insignificant value and, therefore, no separate amounts were recorded in the business combination in accordance with Emerging Issues Task Force (“EITF”) 04-01 “Accounting for Preexisting Relationship between the parties to a Business combination”.

 2.Acquisition of Hannamax Hi-Tech Pty. Ltd, (“Hannamax”)Quality Plus Group Ltd.:

 On September 1, 2005,April 8, 2008, the Company consummated an agreement to acquire theacquired certain assets, shares and assume certain liabilitiesbusiness from Quality Plus Group Ltd., a UK-based value-added distributor of Hannamax Hi-Tech Pty. Ltd, (“Hannamax”NICE's contact center solutions, and its affiliates ("QPC") business for $ 2,01112,587 in cash (including acquisition costs), with potential earn out cash payment. The business acquired includes the sale, distribution, service, support, maintenance and development of up to $ 1,000 based on certain financial performance criteria covering 2005 through 2006. In the second quarter of 2006, the Company paid additional considerationworkforce management solutions and associated services as conducted by QPC in the amount of $ 500 due to meeting the performance criteria relating to year 2005. Accordingly, the Company recorded additional goodwill in the amount of $ 500.

In the second quarter of 2007, the Company paid an additional consideration in the amount of $ 500 in respect of Hannamax acquisition, due to meeting the performance criteria specified in the acquisition agreement relating to year 2006. Accordingly, the Company recorded additional goodwill in the amount of $ 500 in the second quarter of 2007.

Hannamax is NICE’s distributor in AustraliaUK, Sweden and New Zealand markets.Australia. With the acquisition of Hannamax,QPC, the Company expects to expandexpanded its customer base and presence in the UK, Sweden and Australia and New Zealandexpanded and to expand and strengthenstrengthened the Company’sCompany's support organization in the region.

The factors that contributed to the purchase price that resulted in recognition of goodwill included: the benefits of increased market share geographically, the benefits of vertical integration and time-to-market benefits.

these regions. The acquisition was accounted for by the purchase method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of Hannamax.QPC. The results of Hannamax’sthe QPC operations have been included in the consolidatedconsolida ted financial statements since September 1, 2005 (“the closing date”).

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NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except shareApril 8, 2008. The Company recorded customer relationships and per share data)

NOTE 1:–GENERAL (Cont.)

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

Trade receivables  $332 
Other receivables and prepaid expenses   16 
Inventories   318 
Property and equipment   10 
Customer relationships   930 
Goodwill   1,659 
   
Total assets acquired   3,265 
   
Trade payables   (91)
Accrued expenses and other liabilities   (625)
Other long-term liability   (38)
   
Total liabilities assumed   (754)
   
Net assets acquired  $2,511 

Customer relationshipsgoodwill in the amountamounts of $ 930 are amortized using the straight-line method at an annual rate of 10%.12,000 and $ 5,524, respectively.

 3.Acquisition of FAST Video Security AG (“FAST”):certain assets and liabilities of AVT Systems Limited:

 On January 4, 2006,April 28, 2008, the Company consummated an agreement to acquire allcompleted the acquisition of the outstanding sharescertain assets of FAST, a Switzerland-based developer of innovative video systems for security and surveillance purposes. Under the agreement, the Company acquired FASTAVT Systems Limited ("AVT"), for $ 21,6506,186 in cash (including acquisition costs), with potential earn out based on performance milestones amounting to a maximum. The business acquired includes the sale, distribution, service, maintenance and support of $ 12,000 payable overNICE voice recording solutions (hardware and software and associated services) in the next three years.

DuringUnited Kingdom. With the fourth quarteracquisition of 2006AVT, the Company estimated that an additional consideration for earn out in the amount of approximately $ 6,200 will be paid by the Company on account of 2006 earn out; accordingly, the Company recorded additional goodwill in this amount.

The acquisition of FAST strengthens the Company’s position in the video security market with smart IP-based solutionsexpanded its customer base and technologies complementary to the Company’s existing digital video offerings. Additionally, the Company extends its presence in the digital video security market by increasing its footprintUK financial sector and expanded and strengthened the Company's support organization in Europe and APAC markets with high quality distribution channels and partners, and with new prestigious customers.

By purchasing FAST, the Company strategically expanded its market share both in geographical and vertical markets. The factors that contributed to the purchase price that resulted in recognition of goodwill included synergies, the benefits of increased market share, strategic positioning value and time-to-market benefits.

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NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 1:–GENERAL (Cont.)

UK. The acquisition was accounted for by the purchase method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of FAST.AVT. The results of FAST’sthe AVT operations have been included in the consolidated financial statements since January 4, 2006 (“the closing date”).

Should any contingent payment be made under the agreementApril 28, 2008. The Company recorded customer relationships and goodwill in the future, the additional consideration, when determinable, will increase the purchase price and accordingly additional goodwill will be recorded.

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

Cash  $38 
Trade receivables   1,869 
Other receivables and prepaid expenses   975 
Inventories   296 
Property and equipment   256 
Trademarks   484 
Core technology   9,869 
In-process research and development   212 
Customer relationships   1,400 
Goodwill   17,042 
   
Total assets acquired   32,441 
   
Short-term bank credit   (785)
Trade payables   (1,568)
Accrued expenses and other liabilities   (792)
Long-term deferred tax liability   (1,449)
   
Total liabilities assumed   (4,594)
   
Net assets acquired  $27,847 

The $ 212 assigned to in-process research and development was written off at the acquisition date in accordance with FASB Interpretation (“FIN”) No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method”.

Trademarks, core technology and customer relationships in the amountamounts of $  11,753 are amortized using the straight-line method at an annual weighted average rate of 20%.;3,838 and $ 3,478, respectively.

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NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 1:–GENERAL (Cont.)

 4.Acquisition of Performix:Syfact:

 On May 22, 2006,June 17, 2009, the Company consummated an agreement to acquire all ofcompleted the outstanding shares of Performix Software Limited and to acquire the assets and assume certain liabilities of Performix Holdings Inc. and its subsidiaries (collectively “Performix”). Under the agreement, the Company acquired Performix for a total purchase price of $ 13,910 in cash (including acquisition costs). The purchase price may increase by up to an additional $ 3,150 based on certain performance criteria for the twelve month period ending July 1, 2007.

Performix was among the first to recognize the potential in the area of contact center performance management (CCPM), an emerging trend in the contact center market. The acquisition of Performix extends NICE’sSyfact, for $ 4,425 in cash. The acquired business provides innovative investigative case management solutions, portfolio forbest practice and technologies that simplify and enrich the contact center market.

The factors that contributed to the purchase price that resulted in recognition of goodwill included synergies, the benefits of increased market share vertically, strategic positioning valuemost complex fraud, money laundering, customer due diligence and time-to-market benefits.

corporate security investigations. The acquisition was accounted for by the purchase method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of Performix.Syfact. The results of Performix’sthe Syfact operations have been included in the consolidated financial statements since May 22, 2006 (“the closing date”).

Should any contingent payment be made under the agreementJune 15, 2009. The Company recorded customer relationships, technology and goodwill in the future, the additional consideration, when determinable, will increase the purchase priceamounts of $ 2,361, $ 142 and accordingly additional goodwill will be recorded.$ 1,758, respectively.

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

Cash  $22 
Trade receivables   724 
Other receivables and prepaid expenses   325 
Property and equipment   360 
Trade name   580 
Core technology   5,790 
Customer relationships and distribution network   1,690 
Goodwill   8,292 
   
Total assets acquired   17,783 
   
Trade payables   (1,328)
Accrued expenses and other liabilities   (2,521)
Long-term deferred tax liability   (24)
   
Total liabilities assumed   (3,873)
   
Net assets acquired  $13,910 

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F - 18 -

15
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 1:-–GENERAL (Cont.)

Trade name, core technology, customer relationships and distribution network in the amount of $ 8,060 are amortized using the straight-line method at an annual weighted average rate of 26%.

 5.Acquisition of IEX:Fortent:

 On July 7, 2006,August 31, 2009, the Company consummated an agreement to acquirecompleted the acquisition of all of the outstanding shares of IEX Corporation (“IEX”certain subsidiaries of Fortent Inc. ("Fortent"), in consideration for $ 73,000 in cash. Fortent is a worldwideleading provider of contact center workforce management solutions. Underanalytics based Anti-Money Laundering and financial crime prevention software solutions for the agreement, the Company acquired the shares of IEX, a wholly owned subsidiary of Tekelec, for approximately $ 204,900 in cash (including acquisition costs).financial services industry.

 The acquisition of IEXFortent allows NICE to offer its customers and partners a more extensive product portfolio in the industries in which NICE operates. IEXFortent is a leading vendor in workforce management, strategic planningknown for its anti-money laundering deployments and performance management solutionsexpertise within the world's tier-one financial institutions and for the contact center market. IEX provides a high-end centralized solution that compiles data seamlessly across the enterprise, enabling more accurate and effective forecasting, planning and scheduling.

By purchasing IEX, the Company strategically expanded its market share both in geographical and vertical markets.advanced statistical profiling analytics technology. The factors that contributed to the purchase price that resulted in recognition of goodwill in connection with the acquisition included synergies, the benefitsstrength of increasedthe Company's position in the market share, strategic positioning value and time-to-market benefits.comprehensive integrated platform offering for risk and financial crime solution.

 The acquisition was accounted for by the purchaseacquisition method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of IEX.Fortent. The results of the IEXFortent operations have been included in the consolidated financial statements since July 7, 2006 (“the closing date”).August 31, 2009.

- F - 19 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollarsRevenues of Fortent for the period since the acquisition date through December 31, 2009, which are included in thousands (except share and per share data)the consolidated financial statements amounted to $ 5,249.

NOTE 1:- GENERAL (Cont.)

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

Cash  $67 
Trade receivables   7,364 
Other receivables and prepaid expenses   346 
Inventories   1,016 
Short-term deferred tax assets   9,007 
Property and equipment   315 
Trade name   4,090 
Core technology   35,060 
In-process research and development   12,670 
Customer relationships   39,020 
Goodwill   140,900 
   
Total assets acquired   249,855 
   
Trade payables   (292)
Accrued expenses and other liabilities   (12,838)
Short-term deferred tax liabilities   (2,916)
Long-term deferred tax liabilities   (28,909)
   
Total liabilities assumed   (44,955)
   
Net assets acquired  $204,900 
Cash $144 
Trade receivables  2,253 
Other receivables and prepaid expenses  1,881 
Property and equipment  1,302 
Long-term trade receivables  536 
Long-term deferred tax assets, net  5,746 
Trade name  460 
Core technology  14,300 
In-process research and development ("IPR&D")  1,440 
Customer relationships  18,800 
Goodwill  40,212 
     
Total assets acquired  87,074 
     
Trade payables  (1,488)
Accrued expenses and other liabilities  (9,846)
 Short-term deferred tax liabilities  (2,596)
     
Total liabilities assumed  (13,930)
     
Net assets acquired $73,144 

 In performing the purchase price allocation, management considered, among other factors, analyses of historical financial performance, highest and best use of the acquired assets and estimates of future performance of Fortent's products. The $ 12,670 assigned to in-process research and developmentfair value of intangible assets was written off at the acquisition date in accordance with FASB Interpretation (“FIN”) No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method”.based on market participant approach using an income approach.
F - 16
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

 Trade name, core technology and customer relationships in the amount of $ 78,17033,560 are amortized using the straight-line method at an annual weighted average rate of 12%19%. Amortization expense for the above-mentioned intangible assets for the five years ending December 31, 2011 is estimated to be $ 45,512.

- F - 20 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollarsIPR&D in thousands (except sharethe amount of $ 1,440 represents incomplete research and per share data)development projects that had not reached technological feasibility and had no alternative future use as of the date of the acquisition.  Upon completion of development, the acquired IPR&D will be considered finite-lived asset and will be amortized accordingly.

NOTE1:–GENERAL (Cont.)

 6.Acquisition of Hexagon:

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

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

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

7.Unaudited pro-formapro forma condensed results of operations:

 The following represents the unaudited pro-formapro forma condensed results of operations for the years ended December 31, 20052008 and 2006,2009 assuming that the acquisitions of CRS, Hannamax, FAST, PerformixFortent, Hexagon and IEXSyfact occurred on January 1, 20052008 and 2006, respectively.2009. The pro-formapro forma information is not necessarily indicative of the results of operations, which actually would have occurred had the acquisitions been consummated on thatthose dates, nor does it purport to represent the results of operations for future periods.

Year ended December 31,
2005
2006
Unaudited
 
Revenues  $401,651 $447,915 
   
Net income  $21,011 $38,473 
   
Basic net earnings per share  $0.55 $0.78 
   
Diluted net earnings per share  $0.51 $0.73 
  Year ended December 31,  Year ended December 31, 
  2008  2009 
  Unaudited  Unaudited 
       
Revenues $656,509  $599,573 
         
Net income $10,057  $23,088 
         
Basic net earnings per share $0.17  $0.38 
         
Diluted net earnings per share $0.16  $0.37 

 c.8.Disposal by saleAcquisition costs related to all of the COMINT/DF operation:

In 2003,2009 acquisitions for the Company reached a definitive agreement to sell the assets and liabilities of its COMINT/DF military-related business to ELTA Systems Ltd. for $ 4,000 in cash. On Marchyear ended December 31, 2004, the Company completed the sale of the COMINT/DF operation. The COMINT/DF business was treated as a discontinued operation2009 in the financial statements.amount of $ 4,069 were included in general and administrative expenses.

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F - 21 -

17

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:-–SIGNIFICANT ACCOUNTING POLICIES

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

 a.Use of estimates:

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

 b.Financial statements in United States dollars:

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

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

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

 c.Principles of consolidation:

 Intercompany transactions and balances have been eliminated upon consolidation.

 d.Cash equivalents:

 The Company considersCash equivalents are short-term unrestricted highly liquid investments that are readily convertible into cash, purchased with original maturities of three months or less to be cash equivalents.at acquisition.

 e.Short-term bank deposits:

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

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F - 22 -

18

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:-–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 f.Marketable securities:

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

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

Marketable securities classified as held-to-maturity"available-for-sale" are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component of shareholders' equity in accumulated other comprehensive income (loss). Gains and losses are recognized when realized, on a specific identification basis, in the Company has the positive intent and ability to hold the securities to maturity and are stated at amortized cost. The costCompany's consolidated statements of held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, accretion, decline in value judged to be other than temporary, and interest are included in financial income or expenses, as appropriate.income.

 Interest income resulting from investments in structured notes that are classified as held to maturity is accounted for under the provisionprovisions of ASC 320-10-35 (formerly EITF No. 96-12, “Recognition of Interest Income and Balance Sheet Classification of Structured Notes”96-12). Under Emerging Issues Task Force (“EITF”) No. 96-12,ASC 320-10-35, the retrospective interest method is used for recognizing interest income.

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

 g.Inventories:

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

 Inventory provisionswrite-downs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, and discontinued products and for market prices lower than cost.cost, if any. At the point of the loss recognition, a new lower cost basis for that inventory is established. In addition, the Company records a liability for firm non-cancelable and unconditional purchase commitments with contract manufacturers for quantities in excess of the Company's future demands forecast consistent with its valuation of excess and obsolete inventory. Inventory provisionswrite-downs for 2004, 20052007, 2008 and 20062009 were $ 2,822,2,716, $ 4,646130 and $ 5,095,1,586, respectively, and have been included in cost of revenues.

h.Investment in affiliates:

The investments in affiliated companies are stated at cost, since the Company does not have the ability to exercise significant influence over operating and financial policies of those investees.

The Company’s investment in affiliates is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.

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F - 23 -

19
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:-–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 i.h.Property and equipment, net:

 Property and equipment are stated at cost, net of accumulated depreciation.

 Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates:

%
Computers and peripheral equipment33
Office furniture and equipment6 - 15
Motor vehicles15

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

 j.i.Other intangible assets, net:

 
Intangible assets are amortized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”.

Amortization is calculated using the straight-line method, over the estimated useful lives at the following weighted average annual rates:

Weighted average %
Capitalized software development costs (see n)m below)33
Core technology1718
TrademarksTrademarks22
DistributionCustomer relationships and distribution network11
Maintenance contracts1433

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

j.Impairment of long-lived assets:

 The Company’sCompany's long-lived assets and certain identifiable intangibles that are subject to amortization are reviewed for impairment in accordance with ASC 360, "Property, Plant, and Equipment"  (formerly SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”144), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In 2006,2007, 2008 and 2009, no impairment indicators have been identified.

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F - 24 -

20

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:-–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 l.k.Goodwill:

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

 SFAS No. 142ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired, rather than amortized as previous accounting standards required.impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. The Company operates in four operating segments, and these segments comprise its reporting units. Fair value is determined using discounted cash flows and market capitalization.flows. Significant estimates used in the fair value methodologies include estimates of future cash flows, future growth rates and the weighted average cost of capital of the reporting unit.units. The Company performed annual impairment tests during the fourth quarter of 2004, 20052007, 2008 and 20062009 and did not identify any impairment losses.

 m.l.Revenue recognition:

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

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

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

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

 With regard toRevenues from multiple element arrangements involving multiple elements, the Company applies Statement of Position No. 98-9, “Modification of SOP No. 97-2, Software Revenue Recognition with Respect to Certain Transactions” (“SOP No. 98-9”). According to SOP No. 98-9, revenues should beare allocated to the different elements in the arrangement under the “residual method”"residual method" when Vendor Specific Objective Evidence (“VSOE”("VSOE") of fair value exists for all undelivered elements and no VSOE exists for the delivered elements. Under the residual method, at the outset of the arrangement with the customer, the Company defers revenue for the fair value of its undelivered elements (maintenance and professional services) and recognizes revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (products and software licenses) when the basic criteria in SOP No. 97-2ASC 985-605 have been met. Any discount in the arrangement is allocated to the delivered element.

-

F - 25 -

21
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:-–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 The Company’sCompany's policy for establishing VSOE of fair value of maintenance services is based on the price charged when the maintenance is sold separately i.e. based on the renewal activity for the installed base of the Company.renewed separately. Establishment of VSOE of fair value of installation and training services is based on the price charged when these elements are sold separately. VSOE of fair value to theof project management services is established based on a price per day which is identicalsimilar to price per day charged for installation services.

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

 The Company maintains a provision for product returns in accordance with ASC 605, "Revenue Recognition" (formerly SFAS No. 48, “Revenue Recognition When Right of Return Exists”48). The provision is estimated based on the Company’sCompany's past experience and is deducted from revenues. Trade receivables asAs of December 31, 20052008 and 2006, are presented net of2009, the provision for product returns in the amounts ofamounted to $ 1,1552,833 and $ 1,9752,610, respectively.

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

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

 n.m.Research and development costs:

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

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

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

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

o.n.Income taxes:

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

-

F - 26 -

22
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:-–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

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

o.Government grants:

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

 q.p.Concentrations of credit risk:

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

 The Company’sCompany's cash and cash equivalents and short-term bank deposits are invested in deposits mainly in dollars with major international banks. Such depositsDeposits in the United StatesU.S. may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company’s investments are financially soundGenerally, these deposits may be redeemed upon demand and accordingly, low credit risk exists with respect to these investments.therefore bear minimal risk.

 The Company’sCompany's trade receivables are derived from sales to customers located primarily in North America, EMEA and the Far East.APAC. The Company performs ongoing credit evaluations of its customers and obtains letter of credit and bank guarantees for certain receivables. Additionally, the Company insures certain of its receivables with a credit insurance company. AnA general allowance for doubtful accounts is provided, with respect to specific debts that the Company has determined to be doubtful of collection and a general provision on the remaining balance, based on the length of time the receivables are past due.

 The Company’sCompany's marketable securities include investment in U.S. corporate debentures U.Sand U.S. government debentures, structured notes and auction rate securities. Management believesdebentures. The Company's investment policy limits the amount that the portfolio is well diversified, and accordingly, lowCompany may invest in any one type of investment or issuer, thereby reducing credit risk exists with respectconcentrations. As a result of the last turmoil in capital markets, the Company has tightened its control and monitoring over its marketable securities portfolio in order to those marketable securities.minimize potential risks stemming from current capital markets environment.

 The Company entered into forward contracts and option strategies (together: “derivative instruments”"derivative instruments") intended to protect against the increase in value of forecasted non-dollar currency cash flows and the increase/decrease in fair value of non-dollar liabilities/assets.flows. The derivative instruments effectively hedge a portion of the Company’sCompany's non-dollar currency exposure (see w below and Note 10)11 below).
F - 23
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

 r.q.Severance pay:

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

- F - 27 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

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

 Severance pay expense for 2004, 20052007, 2008 and 2006 was2009 amounted to $ 2,956,5,680, $ 3,6227,822 and $ 4,305,7,709, respectively.

 The Company has a 401(K) defined contribution plan covering certain employees in the U.S. All eligible employees may elect to contribute up to 6%, of their eligible compensation, but generally not greater than $ 1516.5 per year, (for certain employees over 50 years of age the maximum contribution is $ 2022 per year) of their annual compensation to the plan through salary deferrals, subject to IRS limits. The Company matches 50% of employee contributions to the plan up to a limit of 6% of their eligible compensation. In the years 2004, 2005,2007, 2008, and 20062009, the Company recorded an expense for matching contributions in the amount of $ 547,1,769, $ 8122,154 and $ 1,1762,330, respectively.

 s.r.Basic and diluted net earnings per share:

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

 The weighted average number of shares related to outstanding antidilutiveanti-dilutive options and restricted shares excluded from the calculations of diluted net earnings per share was 2,189,550, 1,937,2221,817,895, 3,133,816 and 705,5893,867,517 for the years ended December 31, 2004, 20052007, 2008 and 2006,2009, respectively.
F - 24
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

 t.s.Accounting for Stock-basedstock-based compensation:

 On January 1, 2006, theThe Company adopted Statement of Financial Accounting Standardsaccounts for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation" (formerly SFAS No. 123 (revised 2004)(R)), “Share-Based Payment” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), for periods beginning in fiscal year 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). SFAS 123(R)ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’sCompany's consolidated income statements.

- F - 28 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Prior to January 1, 2006, the Company accounted for options granted to employees and directors under the recognition and measurement provisions of APB 25 as permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) whereby compensation expenses is equal to the excess, if any of the quoted market price of the stock over the exercise price at the grant date of the award.

During the years ended December 31, 2004 and 2005, the Company did not recognize anystock-based compensation expense related to employee stock options.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method. Under that transition method, compensation cost recognized in the year ended December 31, 2006, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

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

As a result of adopting SFAS 123(R) on January 1, 2006, the Company’s income before taxes on income and net income for the year ended December 31, 2006, is approximately $ 12,571 and $ 10,424 lower, respectively, than if it had continued to account for stock-based compensation under APB 25. Basic and diluted net earnings per share for the year ended December 31, 2006 are $ 0.21 and $ 0.20 lower, respectively, than if the Company had continued to account for stock-based compensation under APB 25.

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

 The fair value of the Company’s stock options granted to employees and directors for the year ended December 31, 2006 was estimated using the following assumptions:

Expected volatility33.9%-40.6%
Weighted average volatility40.0%
Risk free interest rate4.6%-4.9%
Expected dividend0%
Expected term (in years)2.3-3.7

- F - 29 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

A summary of the Company’s stock options activity and related information for the year ended December 31, 2006, is as follows:

Number of options
Weighted-average
exercise price
Weighted-
average
remaining
contractual term
(in years)
Aggregate intrinsic
value
 
Outstanding at January 1, 2006   8,136,754 $15.80       
Granted   1,325,000 $25.99       
Exercised   (2,807,656)$13.43       
Forfeited   (996,442)$30.98       
 
Outstanding at December 31, 2006   5,657,656 $16.69  4.1 $79,749 
 
Exercisable at December 31, 2006   1,720,612 $11.20  3.1 $33,685 
 
Vested and expected to vest at December 31, 2006   5,302,490 $16.49  4.1 $75,786 

The weighted-average grant-date fair value of options granted during years ended December 31, 2004, 2005 and 2006 was $ 3.57, $ 6.73 and $ 9.20, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006 was $ 41,249.

As of December 31, 2006, there was approximately $ 13,981 of total unrecognized compensation costs related to stock-based compensation arrangements granted under the Company’s stock option plan. The cost is expected to be recognized over a weighted average period of 1.55 years.

The options outstanding under the Company’s Stock Option Plans as of December 31, 2006 have been separated into ranges of exercise price as follows:

Ranges of
exercise price
Options
outstanding
as of
December 31,
2006
Weighted
average
remaining
contractual
life
Weighted
average
exercise
price
Options
exercisable
as of
December 31,
2006
Weighted
Average
Exercise
price of
Options
Exercisable
$
(Years)
$
$
 
 3.915-5.57   162,920  1.81  5.01  162,920  5.01 
  6.00-8.27   377,890  0.83  6.67  374,140  6.66 
 9.66-14.03   1,489,757  3.59  10.62  608,413  10.26 
15.165-22.75   2,312,889  4.55  17.77  575,139  16.91 
 24.36-31.27   1,314,200  5.38  25.99  -  - 
   
    5,657,656        1,720,612    

- F - 30 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The pro forma table below illustrates the effect on net income and basic and diluted net income per share for the years ended December 31, 2004 and 2005, if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock option plans in all periods presented prior to the adoption of SFAS 123(R). For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes-Merton option pricing formula with the following weighted-average assumptions:

Year ended December 31,
2004
2005
 
Risk free interest rate2.7%4.1%
Dividend yield0%0%
Volatility factor0.4570.431
Expected life of the options3 3.83

Year ended December 31,
2004
2005
 
Net income as reported  $24,555 $36,569 
Deduct: Total stock-based employee compensation expense  
  determined under fair value based method for all awards, net  
  of related tax effects   (7,182) (9,382)
   
Pro forma net income  $17,373 $27,187 
   
Basic net earnings per share as reported  $0.70 $0.95 
   
Diluted net earnings per share as reported  $0.66 $0.89 
   
Pro forma basic net earnings per share  $0.49 $0.71 
   
Pro forma diluted net earnings per share  $0.46 $0.66 

- F - 31 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

u.t.Fair value of financial instruments:

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

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

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

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

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

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

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

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

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

 The following methodstable presents assets and assumptions were used by the Company in estimating itsliabilities measured at fair value disclosures for financial instruments:on a recurring basis at December 31, 2008 and 2009:

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

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

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

 The carrying amount reported in the balance sheet foramounts of financial instruments carried at cost, including cash and cash equivalents, short-term bank deposits, trade receivables and trade payables approximatesapproximate their fair value due to the short-term maturities of such instruments.

 The fair value for marketable securities is based on quoted market prices and does not differ significantly from the carrying amount (see Note 3).

v.u.Legal contingencies:

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

 w.v.Advertising expenses:

 Advertising expenses are charged to expense as incurred. Advertising expenses for the years 2004, 20052007, 2008 and 20062009 were $ 2,621,6,479, $ 3,2228,047 and $ 5,155,5,883, respectively.

 x.w.Derivatives and hedging activities:

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

x.Reclassification:

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

y.Adoption of New Accounting Standards:

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

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

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

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

z.Recently issued accounting pronouncements:

On July 1, 2009, the FASB issued the FASB Accounting Standards Codification ("the ASC"). The ASC became the single source of authoritative nongovernmental U.S. GAAP, superseding existing pronouncements issued by the FASB, the American Institute of Certified Public Accountants, the Emerging Issues Task Force and related literature. The ASC eliminates the previous U.S. GAAP hierarchy and establishes one level of authoritative U.S. GAAP. Rules and interpretive releases issued by the U.S. Securities and Exchange Commission ("SEC") under authority of federal securities law are also sources of the authoritative U.S. GAAP for SEC registrants. All other literature is considered non-authoritative. The codification is effective for interim and annual periods ending after September 15, 2009. Throughout the notes to the consolidated financial statements references that were previously made to former authoritative U.S. GAAP pronouncements ha ve 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 pe riods ended after June 15, 2009.  The adoption did not have a material effect on the Company's consolidated financial statements.

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

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

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


NOTE 3:-MARKETABLE SECURITIES

a.Available-for-sale marketable securities:

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


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

b.Held-to-maturity marketable securities:

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

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

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


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


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


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

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

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

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

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

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

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

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


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


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


NOTE 10:-ACCRUED EXPENSES AND OTHER LIABILITIES

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

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

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

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

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

The Company entered into derivative instrument arrangements to hedge a portion of anticipated new Israeli Shekel ("NIS") payroll payments and to hedge forecasted Euro payments received from construction-type contract net from Euro payments to sub-contractors. These derivative instruments are designated as cash flows hedges, as defined by ASC 815. The transactions to hedge salary payments and net receivables from construction-type contract are made on denominated amounts that are designatedno more than forecasted cash flows for salaries and qualify as a fair value hedge (i.e., hedgingbenefits and forecasted net receivables from construction-type contract according to the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or lossCompany's budget and on the derivative instrumentdates that the cash flows are expected to be paid or received. Therefore, those transactions are all effective and the results are recorded as wellpayroll expenses or as revenues and cost of revenues, respectively, at the offsetting loss or gain ontime that the hedged item attributable to the hedged risk are recognized in the line item associated with the hedged item in earnings during the period of the change in fair values. expense/income is recorded. The Company does not e nter into derivative transactions for trading purposes.

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

- F - 32 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 2:–SIGNIFICANT ACCOUNTING POLICIES (Cont.)

y.Recently issued accounting pronouncements:

In June 2006, the Financial Accounting Standard Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 creates a single model to address uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from Financial Accounting Standards Board Statement No. 5, “Accounting for Contingencies.” FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more-likely-than-not to be sustained). FIN 48 applies to all tax positions related to income taxes subject to SFAS No. 109, “Accounting for Income Taxes.” This includes tax positions considered to be “routine” as well as those with a high degree of uncertainty. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of the implementation of FIN 48, the Company increased its retained earnings as of January 1, 2007 by approximately $ 800.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management believes this standard will not have a material effect on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits companies to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 159 no later than January 1, 2008. The Company has not yet determined the effect that the adoption of SFAS No. 159 will have on its consolidated financial statements.

-

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

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 3:–MARKETABLE SECURITIES

a.The following table summarizes amortized costs, gross unrealized gains and losses and estimated fair values of held-to-maturity marketable securities as of December 31, 2005 and 2006:

Amortized cost
Gross unrealized gains
Gross unrealized losses
Estimated fair value
December 31,
December 31,
December 31,
December 31,
2005
2006
2005
2006
2005
2006
2005
2006
 
U.S. corporate debentures  $71,043 $102,597 $-  45 $(1,172) (970)$69,871  101,672 
U.S Government debentures   73,278  93,820  4  -  (1,424) (775) 71,858  93,045 
Structured notes   12,180  9,680  -  -  -  (123) 12,180  9,557 
   
   $156,501 $206,097 $4  45 $(2,596)$(1,868)$153,909 $204,274 

The following table shows the gross unrealized losses and fair value of Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2006:

December 31, 2006
Less than 12 months
12 months or greater
Total
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
 
U.S. corporate debentures  $37,101 $(188)$52,722 $(782)$89,823 $(970)
U.S Government debentures  $40,047 $(140)$52,997 $(635)$93,044 $(775)
Structured notes   -  - $4,877 $(123)$4,877 $(123)
   
   $77,148 $(328)$110,596 $(1,540)$187,744 $(1,868)

The unrealized losses in the Company’s investments in held-to-maturity marketable securities were caused by interest rate increases. The contractual cash flows of these investments are either guaranteed by the U.S. government or an agency of the U.S. government or were issued by highly rated corporations. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Based on the immaterial severity of the impairments and the ability and intent of the Company to hold these investments to maturity, the bonds were not considered to be other than temporarily impaired at December 31, 2006.

As of December 31, 2005 and 2006, all the Company’s U.S. corporate debentures, U.S. government debentures and structured notes were classified as held-to-maturity.

In 2004 the Company sold debt securities, which were classified as held-to-maturity, due to a rating decrease, in consideration of $ 911. As a result of the sale, the Company recorded a loss of $ 14. In 2005 and 2006, the Company did not sell any securities prior to their maturity and accordingly, did not realize any gains or losses on held-to-maturity securities in that year.

- F - 34 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 3:–MARKETABLE SECURITIES (Cont.)

During 2005 and 2006, held-to-maturity marketable securities in the amount of $ 9,630 and $ 3,000, respectively, were called by the issuers prior to maturity.

The scheduled maturities of held-to-maturity marketable securities at December 31, 2006 are as follows:

Amortized
cost
Estimated
fair value
 
Held-to-maturity:      
   
Due within one year  $70,287 $69,792 
Due after one year through five years   128,294  127,046 
Due after five years through ten years   7,516  7,436 
   
   $206,097 $204,274 

b.Auction rate securities in the amount of $ 22,572 as of December 31, 2006, were classified as available-for-sale marketable securities and were presented as short-term marketable securities. As of December 31, 2005, no auction rate securities were held by the Company. The scheduled maturities of available-for-sale marketable securities at December 31, 2006 are above 10 years.

NOTE 4:–SHORT-TERM OTHER RECEIVABLES AND PREPAID EXPENSES

December 31,
2005
2006
 
Government authorities  $1,959 $2,355 
Interest receivable   1,202  2,113 
Prepaid expenses   4,062  4,771 
Assets of discontinued operation   646  646 
Other   1,675  1,514 
   
   $9,544 $11,399 

NOTE 5:–INVENTORIES

Raw materials  $1,022 $2,457 
Work-in-progress   29  56 
Finished goods   22,121  16,106 
   
   $23,172 $18,619 

- F - 35 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 6:–PROPERTY AND EQUIPMENT, NET

December 31,
2005
2006
 
Cost:      
  Computers and peripheral equipment  $55,260 $61,941 
  Office furniture and equipment   13,839  15,154 
  Leasehold improvements   3,986  4,443 
  Motor Vehicles   23  3 
   
    73,108  81,541 
Accumulated depreciation:  
  Computers and peripheral equipment   47,439  52,382 
  Office furniture and equipment   8,038  10,077 
  Leasehold improvements   2,739  3,267 
  Motor Vehicles   4  2 
   
    58,220  65,728 
   
Depreciated cost  $14,888 $15,813 

Depreciation expense totaled $ 8,603, $ 7,941 and $ 8,244 for the years ended December 31, 2004, 2005 and 2006, respectively.

NOTE 7:–OTHER INTANGIBLE ASSETS, NET

a.Other intangible assets:

December 31,
2005
2006
 
Original amounts:      
  Capitalized software development costs  $9,063 $5,037 
  Core technology   9,319  60,910 
  Trademarks   1,440  6,642 
  Customer relationships and distribution network   17,517  60,533 
  Maintenance contracts   534  582 
   
    37,873  133,704 
   
Accumulated amortization:  
  Capitalized software development costs   6,266  2,500 
  Core technology   5,037  11,869 
  Trademarks   982  1,854 
  Customer relationships and distribution network   1,064  5,717 
  Maintenance contracts   534  582 
   
    13,883  22,522 
   
Other intangible assets, net  $23,990 $111,182 

b.Amortization expense amounted to $ 5,190, $ 5,211 and $ 13,675 for the years ended December 31, 2004, 2005 and 2006, respectively.

- F - 36 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 7:–OTHER INTANGIBLE ASSETS, NET (Cont.)

c.Estimated amortization expense for the years ended (excluding amortization of capitalized software development costs):

December 31,
 
2007    16,541 
2008    15,775 
2009    15,166 
2010    14,712 
2011    11,393 
Thereafter   35,058 
   
    108,645 

NOTE 8:–GOODWILL

The changes in the carrying amount of goodwill for the years ended December 31, 2005 and 2006 are as follows:

Balance as of January 1, 2005  $25,745 
  Adjustment to goodwill in respect of settlement   (1,191)
  Additions in respect of the acquisitions of CRS and Hannamax   26,470 
  Foreign currency translation adjustments   (1,171)
   
Balance as of December 31, 2005   49,853 
  Adjustment to goodwill in respect of settlement   1,000 
  Additions in respect of the acquisitions of Hannamax, FAST, Performix and IEX   166,734 
  Foreign currency translation adjustments   2,843 
   
Balance as of December 31, 2006  $220,430 

NOTE 9:–ACCRUED EXPENSES AND OTHER LIABILITIES

December 31,
2005
2006
 
Employees and payroll accruals  $20,692 $26,877 
Accrued expenses   26,868  45,234 
Deferred revenues   44,769  60,684 
Other   8,215  14,195 
   
   $100,544 $146,990 

- F - 37 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 10:–DERIVATIVE INSTRUMENTS

To protect against changes in the value of forecasted foreign currency transactions and balances, the Company has instituted a foreign-currency hedging program. The Company hedges portions of its forecasted cash flows and balances denominated in foreign currencies with forward contracts and option strategies (together: “derivative instruments”).

 The Company entered into derivative instrument arrangementscurrently hedges its exposure to hedge a portion of anticipated New Israeli Shekel (“NIS”) payroll payments. These derivative instruments are designated asthe variability in future cash flows hedges, as defined by SFAS No. 133, as amended, and are all highly effective as hedgesfor a maximum period of these expenses when the salary is recorded. The effective portion of the derivative instruments is included in payroll expenses in the statements of income.

In addition, the Company entered into derivative instruments to hedge certain trade receivables, trade payable payments, expected payments under fixed price contracts denominated in foreign currency, liabilities to employees and other long-term liability. The purpose of the Company’s foreign currency hedging activities is to protect the Company from changes in the foreign currency exchange rate to the dollar.

one year. At December 31, 2006,2009, the Company expects to reclassify $ 72all of the net gainslosses on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next twelve months.

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

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


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

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

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

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

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

 a.Lease commitments:

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

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

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

2007  $9,003 
2008   3,112 
2009   2,566 
2010   1,843 
2011 and thereafter   2,893 
     
   $19,417 
2010 $15,552 
2011  11,693 
2012  8,747 
2013  1,692 
2014  1,523 
2015 and thereafter  5,005 
     
  $44,212 

 Rent expenses for the years ended December 31, 2004, 20052007, 2008 and 20062009 were approximately $ 6,107,10,531, $ 6,31713,286 and $ 8,668,13,982, respectively.

 2.
The Company leases its motor vehicles under cancelable operating lease agreements.
The minimum payment under these operating leases, upon cancellation of these lease agreements was $ 9331,432 as of December 31, 2006.2009.

-

Lease expenses for motor vehicles for the years 2007, 2008 and 2009 were $ 4,041, $ 5,387 and $ 5,249, respectively.
F - 38 -

35
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 11:–12:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

Lease expenses of vehicles for the years ended December 31, 2004, 2005 and 2006 were $ 2,396, $ 2,552 and $ 2,865, respectively.

 b.Other commitments:

 The Company is obligated under certain agreements with its suppliers to purchase goods and under an agreement with its manufacturing subcontractor to purchase projected inventory and excess inventory. Non cancelable obligations, net of provisions, as of December 31, 2006,2009, were approximately $ 6,700.2,658. These obligations will be fulfilled during 2007.2010.

c.Legal proceedings:
c.         Legal proceedings:

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

The parties submitted the matter to a binding arbitration. The arbitration agreement approved by the Court and which has been embedded in one ofSeptember 2009, the Company’s products.arbitrator awarded CipherActive claims that it is entitled to license feesdamages in the amount of $ 600 in addition to the amount of $ 100 already paid to CipherActive by the Company in respect of such license fees. In the Company’s statement of defense it claims that the software developed by CipherActive under the agreement has not been successful in the market, is no longer embedded in the Company’s product188 (in original value) plus VAT and therefore, CipherActive is not entitled to any additional license fees. On February 1, 2007, a preliminary hearing took place, during which the Company suggested that the parties submit the dispute to mediation. Although the court approved the mediation, the parties failed to find an appropriate mediator. In a pretrial hearing that took place on May 27, 2007, the court accepted CipherActive’s request to allow additional time for negotiations between the parties. An additional pretrial hearing has been set for July 8, 2007.trial expenses.

 2.On July 20, 2004, STS Software System Ltd. (“STS”),September 3, 2008, Multi-Format, Inc. filed a lawsuit against Harrah's Entertainment, Inc. and NICE Systems, Inc, a wholly owned subsidiary of the Company, brought a lawsuit against Witness Systems, Inc. asserting that Witness Systems is infringing three U.S. patents of STS relating to Voice over Internet Protocol (“VoIP”). STS claims that Witness Systems infringes the VoIP patents by marketing and selling products that incorporate methods of detecting, monitoring and recording information – all fully protected by the patents. STS is seeking a permanent injunction to prevent Witness Systems from making, using, offering to sell or selling any product in the United States that infringes these patents. In response, WitnessDistrict Court for the District of New Jersey, alleging infringement of a U.S. patent and requesting damages.

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

3.
On July 20, 2004, S.T.S. Software Systems is asserting that the patents are invalid and not infringed. With the Company’s consent, STS moved the court on January 3, 2007 to join the Company asLtd. ("STS") filed a plaintiff in the litigation. The case, which is pendinglawsuit in the U.S. District Court for the NorthernSouthern District of Georgia isNew York charging Witness Systems, Inc. ("Witness") with infringement of VoIP patents in discovery.the U.S. The Court dismissed the claim and determined that Witness does not infringe the Company's patents.

- F - 39 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 11:–COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

 On August 30, 2004, Witness Systems filed a lawsuitpatent infringement action in the United States DistrictFederal Court for the Northern District of Georgia against NICE Systems, Inc., a wholly owned subsidiary of the Company. Witness Systems is alleging infringement of two U.S. patents entitled “Method  and Apparatus for Simultaneously Monitoring Computer User Screen and Telephone Activity from a Remote Location” and is seeking unspecified damages and injunctive relief. On February 24, 2005, Witness Systems filed a similar action in the Northern District of Georgia against the Company alleging infringement of the same two patents. The two actions were consolidated in April 2005. The Company has denied infringing these patents and is vigorously defending against Witness Systems’ claims. In addition, the Company has asserted its right to be indemnified for losses arising out of the claims of infringement in this litigation pursuant to an agreement between the Company and Netopia, Inc., our vendor. The case is currently in discovery and no trial date has been set.

Onon January 19, 2006, Witness Systems filed a newan additional patent infringement action in the United States DistrictFederal Court for the Northern District of Georgia against the Company and its wholly owned subsidiary, NICE Systems, Inc., alleging infringement of a U.S. patent relating to technology to extract particular information from recorded telephone conversations. This technology is used as an option with a Company product called NicePerform. Witness Systems is requesting unspecified damages and a permanent injunction to prevent any sale of allegedly infringing products. The Company has denied all material allegations and is asserting a number of defenses. The Company believes that the claims are without merit and intends to vigorously defend against them. The case is currently in discovery.

 On May 10, 2006, the CompanyNICE and its wholly owned subsidiary, NICE Systems, Inc. filed a new patent infringement lawsuit against Witness Systems, Inc. in the United States District Court for District of Delaware claiming that Witness Systems is infringing ten U.S. patents. These patents cover various aspects of recording customer interaction communicationsDelaware. This lawsuit went to trial before a jury on January 14, 2008. The jury deadlocked and traditional logging including event triggered callon January 25, 2008 and screen recording, “cradle-to-grave” recording of customer calls, traditional TDM loggers, off-site storage of calls, and multi-stage telephone data logging. In this lawsuit, the Company claims that Witness Systems infringes the Company’s patents by marketing and selling products that use methods, products and systems which the Company believes are protected by Company’s patents. The Witness products the Company has accused of infringing its patents include Impact 360®, ContactStore®, eQuality ContactStore®, ContactStore for Communication Manager®, eQuality ContactStore for Communication Manager® and Eyretel’s MediaStore®.a mistrial was declared. The Company is seekingfiled a permanent injunction to prevent Witness Systems from making, using, or offering to sell or selling any product inmotion for a new trial date for the United States which infringes these patents. In addition, the Company is seeking damages for Witness Systems’ past willful infringement of these patents. The case is in discovery and a trial is scheduled to begin on January 15, 2008.case.

 On December 28, 2006,August 1, 2008, the Company and its wholly owned subsidiary, NiceVerint Systems Inc., filed entered into an action againstagreement to settle and dismiss all of the above patent disputes (which had been commenced with Witness Systems, Inc., seeking a declaration from the court that a certain patent, which is closely related prior to the patent aforementioned with respect to the lawsuit filedits acquisition by Witness Systems on January 19, 2006, is invalid and not infringed. The case is in its very early stages and discovery has not yet begun.Verint).

-

F - 40 -

36
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 11:–12:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

3.The Company is currently in dispute with Origin Data Realisation Limited (“Origin”) relating to the terms of a license of software and other matters. The dispute was submitted to mediation and a settlement dialogue is ongoing. To date, no formal legal proceedings have been instituted by either side.

 4.On July 27, 2004, Dictaphone Corp. (which was acquired by the Company) filed an action against VoicePrint in the United States District Court for the Central District of California asserting the infringement by VoicePrint of two U.S patents, which thepatents. The Company subsequently acquired these patents from Dictaphone. This lawsuit has been settled in principle.Dictaphone as part of its acquisition. The documentation forparties were unable to reach a settlement agreement and the Company decided to abandon this settlement continues to be negotiated, and is expected to be completed and signed shortly.litigation.

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

 6.On March 9, 2007, Formatest AG filed a claim against NICE Switzerland AG, a wholly owned subsidiary of the Company, in the Cantonal Court of Zug, Switzerland. The claim iswas in the amount of approximately $ 1,600 (EUR(€ 1,187,793), plus interest at 5% per annum, and iswas made in connection with an agreement dated December 10, 2004 between FAST Video Security AG (now NICE Switzerland AG) and Formatest AG. On June 19, 2007, the Company and Formatest AG entered into an agreement settling all claims. The Company expects to bebelieves it is entitled to recover all or a substantial part of any liability owed by NICE Switzerland AGthe settlement amount paid to Formatest AG (with the addition of legal costs), under the terms of indemnification provision contained in the sale and purchase agreement relating tobetween the acquisitionselling shareholders of the shares in FAST Video Security AG although ("the parties toSellers") and the sale and purchase agreement who are obliged to pay such indemnification contest any such liability. The Company and Formatest AG have started to discussdated November 16, 2006 ("the Agreement"). On December 18, 2007, the Sellers issued a potential settlementNot ice of Arbitration in the dispute.Zurich Chamber of Commerce.

NOTE 12:–CREDIT LINES

 AsPrior to the commencement of December 31, 2006,the arbitration proceedings, the Company had authorized credit lines from banks inreleased to the Sellers a partial payment of $ 1,400 out of the escrow funds and paid to the Sellers the amount of approximately $ 260,000 When utilized, the credit lines will be denominated in dollars and will bear interest at the rate of up to LIBOR + 0.45 %. An amount of approximately $ 211,000 out of the total credit lines is secured by the Company’s cash and cash equivalents and marketable securities. As of December 31, 2006, $ 6,200 of the $ 260,000 referred to above was used for bank guarantees.1,229.

 The company has no financial covenantsOn June 23, 2008, the Sellers filed their statement of claim, asking for payment of $ 1,600 (representing the balance of the escrow funds) plus additional amounts for interest, losses on the exchange rates and legal costs and expenses.

On April 30, 2009, the Company and the Sellers entered into a settlement agreement. Pursuant to secure the above credit lines.joint application of the Company and the Sellers, the arbitration proceedings were closed by a termination order dated June 8, 2009.

-

F - 41 -

37
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

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

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

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

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

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

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

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

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

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

 a.Israeli taxation:

 1.Corporate tax rates in Israel:

 Taxable income of Israeli companies is subject to tax at the rate of 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009, and 25% in 2010,  24% in 2011, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter.

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

 The Law empowers theVarious industrial projects of NICE and its Israeli Investment Center to grant Approved Enterprise status to capital investments in production facilities that meet certain relevant criteria (“Approved Enterprise”). In general, such capital investments will receive Approved Enterprise status if the enterprise is expected to contribute to the development of the productive capacity of the economy, absorption of immigrants, creation of employment opportunities, or improvement in the balance of payments.

The tax benefits derived from any such Approved Enterprise relate only to taxable income attributable to the specific program of investment to which the status was granted. To the extent that NICE has been granted Approved Enterprise status and operates under more than one approval, or that its capital investments are only partly approved, its effective corporate tax rate will be the result of a weighted combination of the various rates applicable.

Certain production facilities of NICEsubsidiary have been granted the"Approved Enterprise" and "Privileged Enterprise" status, of anwhich provides certain benefits, including tax exemptions and reduced tax rates. Income not eligible for Approved Enterprise under the Law, in four separate investment programs. For all such Approved Enterprises, the Company elected to apply for alternative taxand Privileged Enterprise benefits (“Alternative Package”), waiving government grants in return for a tax exemption.

Income derived from the first and second program was tax-exempt for a period of four years, commencing 1999 and 1997, respectively, and is taxed at the reduced corporate tax rate of 10%-25% (based on the percentage of foreign ownership in each taxable year) for an additional period of six years. Income derived from the third and fourth programs are tax-exempt for a period of two years, commencing 2005, and will be taxed at the reduced corporate tax rate of 10%-25% (based on the percentage of foreign ownership in each taxable year) for an additional period of eight years.regular rate.

The above mentioned tax benefits are scheduled to expire by 2014 in a gradual manner.

 In the event of distribution of dividends from the said tax-exempt income, the amount distributed will be subject to corporate tax at the rate ordinarily applicable to the Approved Enterprise’sEnterprise's income. The tax-exempt income attributable to the “Approved Enterprise”"Approved Enterprise" programs mentioned above can be distributed to shareholders without subjecting NICEthe Company to taxes only upon the complete liquidation of NICE.

The duration of tax benefits, for each ofNICE or its Israeli subsidiary. Tax-exempt income generated under the Programs isCompany's Privileged Enterprise program will be subject to limitations of the earlier of 12 years from completion of the investmenttaxes upon dividend distribution or commencement of production, or 14 years from receipt of approval, as an Approved Enterprise under the Law.complete liquidation.

- F - 42 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 13:–TAXES ON INCOME (Cont.)

 The entitlement to the above benefits is conditional upon the Company’sCompany's fulfilling the conditions stipulated by the Law and regulations published thereunder. Should NICEthe Company fail to meet such requirements in the future, income attributable to its Approved Enterprise and Privileged Enterprise programs could be subject to the statutory Israeli corporate tax rate and the Company could be required to refund a portion of the tax benefits already received, with respect to such programs. As of December 31, 2006,2009, management believes that NICEthe Company is in compliance with all the conditions required by the Law.

On April 1, 2005, an amendment to the Law came into effect (“the Amendment”) and has significantly changed the provisions of the Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a “Privileged Enterprise” (rather than the previous terminology of Approved Enterprise), such as a provision requiring that at least 25% of the “Privileged Enterprise’s” income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Law so that companies are no longer required for Investment Center approval in order to qualify for tax benefits. The period of tax benefits for a new “Privileged Enterprise” commences in the “Year of Commencement”. This year is the later of: (1) the year in which taxable income is first generated by the company, or (2) a year selected by the company for commencement, on the condition that the company meets certain provisions provided by the Law (“Year of Election”).

If a company requested the “Alternative Package” of benefits for an Approved Enterprise under the old law before the 2005 amendment, it is precluded from filing a Year of Election notice for a “Privileged Enterprise” for three years after the year in which the Approved Enterprise was activated.

In addition, the Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the four existing Approved Enterprises will not be subject to the provisions of the Amendment.

The Company determined 2006 as the Year of Election for the purposes of commencing the Privileged Enterprise first program benefits under the amended law. This plan brings the total number of Approved Enterprise investment programs to five.

As a result of the amendment, tax-exempt income generated under the provisions of the amended law, will subject the Company to taxes upon dividend distribution or complete liquidation.

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

 Dividends distributed by an Approved Enterprise and “Privileged Enterprise” will be subject to withholding tax of 15%.

- F - 43 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 13:–TAXES ON INCOME (Cont.)

Out of the Company’s retained earnings asAs of December 31, 20062009, approximately $ 49,000 are189,300 is tax-exempt attributable to its various Approved and Privileged Enterprise programs. If such tax exempt income is distributed (other than in respect of the first fourApproved Enterprise programs upon the complete liquidation of the Company), it would be taxed at the reduced corporate tax rate applicable to such profits (between 15%10%-25%) and an income tax liability of up to approximately $ 10,00032,800 would be incurred as of December 31, 2006.2009.

Income from sources other than the Approved Enterprise is subject to tax at regular Israeli corporate tax rate.

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

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

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

 b.Income taxes on non-Israeli subsidiaries:

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

 c.Net operating loss carryforward:

 As of December 31, 2006,2009, the Company had carry forward tax lossesloss carry-forwards totaling approximately $ 51,00088,300 which can be carried forward and offset against taxable income with expiration dates ranging from 20072009 and onwards. Approximately $ 24,00061,100 of these carry forwardcarry-forward tax losses have no expiration date. The balance expires between 20072010 and 2026.2029.

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

Of the Company’s total carry forward tax losses, approximately $ 25,000 were inherited at the time of the acquisition of certain of our subsidiaries. A valuation allowance of $ 2,800 has been applied thereto. Any subsequent reduction of this valuation allowance and the recognition of the associated tax benefit will be applied to reduce goodwill.

- F - 44 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 13:–TAXES ON INCOME (Cont.)

 d.Deferred tax assets and liabilities:

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

December 31,
2005
2006
 
Deferred tax assets:      
   Net operating losses carry forward  $5,961 $11,412 
   Acquired intangibles   6,802  6,881 
   Other   5,833  5,679 
     
 Deferred tax assets before valuation allowance   18,596  23,972 
 Valuation allowance   (10,260) (6,577)
     
Deferred tax assets   8,336  17,395 
     
Deferred tax liabilities:  
   Acquired intangibles   (2,493) (33,130)
     
 Deferred tax assets (liabilities), net  $5,843 $(15,735)

 The Company has provided valuation allowances in respect of certain deferred tax assets resulting from tax loss carry forwards and other reserves and allowances due to uncertainty concerning realization of these deferred tax assets.

Decrease in valuation allowance in 2006 amounted to $ 3,683 resulted from decrease of $ 5,753 related to business combinations, and increase of $ 2,070 related to operations.

-

F - 45 -

40
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 13:-–TAXES ON INCOME (Cont.)

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

Year ended December 31,
2004
2005
2006
 
Income before taxes on income, as reported in the consolidated        
  statements of income  $23,638 $37,471 $30,992 
             
Statutory tax rate in Israel   35% 34% 31%
Approved and Privileged enterprise benefits *)   -  (1.9)% (14.6)%
Changes in valuation allowance   (27.2)% (30.8)% 3.8%
Foreign earnings taxed at different rates   -  -  (7.4)%
Accounting for acquired In-process research and development   -  -  14.6%
Other   2.0% 1.1% 0.3%
             
Effective tax rate   9.8% 2.4% 27.7%
             
*) Net earnings per ordinary share - amounts of the benefit resulting
  from the "Approved and Privileged Enterprise" status		  
  Basic  $- $0.02 $0.09 
             
  Diluted  $- $0.01 $0.09 
  Year ended December 31, 
  2007  2008  2009 
          
Income before taxes on income, as reported in the consolidated statements of income $47,634  $48,587  $45,796 
             
Statutory tax rate in Israel  29%  27%  26%
Approved and Privileged Enterprise benefits *)  (10.1)%  (11.9)%  (10.1)%
Changes in valuation allowance  (1.4)%  6.2%  0.1%
Earnings taxed under foreign law  (2.6)%  1.4%  (4.5)%
Acquired in-process research and development  2.3%  -   - 
Other  4.3%  (3.2)%  (4.9)%
             
Effective tax rate  21.5%  19.5%  6.6%
             
*) Net earnings per Ordinary share - amounts of the benefit resulting from the "Approved and Privileged Enterprise" status            
Basic $0.09  $0.10  $0.08 
             
Diluted $0.09  $0.09  $0.07 

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

Year ended December 31,
2004
2005
2006
 
Domestic  $15,367 $30,681 $33,629 
 Foreign *)   8,271  6,790  (2,637)
             
   $23,638 $37,471 $30,992 
  Year ended December 31, 
  2007  2008  2009 
          
Domestic $27,506  $36,000  $37,976 
Foreign  20,128   12,587   7,820 
             
  $47,634  $48,587  $45,796 

*) The loss before taxes in 2006 arose as a result of write off of acquired In Process Research and Development of approximately $ 13,000.

- F - 46 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 13:–TAXES ON INCOME (Cont.)

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

Year ended December 31,
2004
2005
2006
 
Current  $2,319 $5,743 $6,403 
Deferred   -  (4,841)$2,187 
             
   $2,319 $902 $8,591 
             
Domestic  $1,836 $1,553 $5,892 
Foreign   483  (651)$2,698 
             
   $2,319 $902 $8,591 

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

h.Uncertain tax positions:

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

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

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

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

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

 In December 20052007, the Company effectedcompleted a secondary public offering of its ADS’sADS's on NASDAQ. The Company issued 9,200,0005,175,000 shares at a price of $ 23.1335.02 per share before underwriting and issuance expenses. Total net proceeds from the issuance amounted to approximately $ 201,724.180,829.

 b.Share option plans:

 In 1995,2003, the Company adopted an employee share option plan (“the 19952003 Stock Option Plan”Plan ("the 2003 Option Plan"). Under the 1995 option plan,2003 Option Plan, employees and officers of the Company may be granted options to acquire Ordinary shares. The options to acquire Ordinary shares which may only be determined by the Board of Directors of the Company, are granted at an exercise price subject to certain exceptions, of not less than the fair market value of the Ordinary shares on the grant date. 16,691,132 optionsdate, subject to certain exceptions, which may be determined by the Company's Board of Directors. Generally, under the terms of the 19952003 Option Plan, were granted.

The options generally vest gradually over a four-year period from the date of grant. As of February 15, 2000, the Board of Directors of the Company adopted a resolution amending the exercise terms for any option granted subsequent to February 15, 2000 under the 1995 Option Plan whereby 25% of the stock options granted become exercisable on the first anniversary of the date of grant and 6.25% become exercisable once every quarter during the subsequent three years. TheStock options expire no later than 6six years fromafter the date of grant.

-

F - 47 -

42
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

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

NOTE 14:–SHAREHOLDERS’ EQUITY (Cont.)Generally, under the terms of the 2003 Actimize Plan, 25% of the options granted become exercisable on the first anniversary of the date of grant and 6.25% become exercisable following the lapse of every consecutive quarter thereafter during the subsequent three years. Options generally expire ten years after the date of grant.

 In 2001,June 2008, the Company adopted the 2001 Stock Option2008 Share Incentive Plan (“("the 2001 Option Plan”2008 Plan"), to provide incentives to employees, directors, consultants and/or contractors by rewarding performance and encouraging behavior that will improve the Company's profitability. Under the 2008 Plan, the Company's employees, directors, consultants and/or contractors may be granted any equity-related award, including any type of an option to acquire the Company's Ordinary shares and/or share appreciation right and/or share and/or restricted share and/or restricted share unit and/or other share unit and/or other share-based award and/or other right or benefit under the 2008 Plan (each an "Award"). The options to acquire Ordinary shares which may only be determined by the Board of Directors of the Company, are granted at an exercise price of not less than the fair market value of the Ordinary shares on the grant date. 5,919,500 optionsdate of the 2001 Option Plan were granted. Unless otherwisegrant, subject to certain exceptions which may be determined by the Company’sCompany's Board of Directors, asincluding in some cases options granted with an exercise price of zero.

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

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

 In 2003,The fair value of the Company's stock options granted to employees and directors for the years ended December 31, 2007, 2008 and 2009 was estimated using the following assumptions:

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

A summary of the Company's stock options activity and related information for the year ended December 31, 2009, is as follows:
  Number of options  Weighted-average exercise price  Weighted- average remaining contractual term (in years)  Aggregate intrinsic value 
             
Outstanding at January 1, 2009 *)  6,820,974  $26.33   4.3  $15,745 
Granted  1,767,050  $27.66         
Granted upon exchange**)  576,454  $10.50         
Exercised  (1,164,465) $16.80         
Forfeited  (388,860) $28.40         
Cancelled  (62,533) $41.21         
Cancelled upon exchange **)  (1,757,204) $34.68         
                 
Outstanding at December 31, 2009  5,791,416  $22.94   4.3  $48,387 
                 
Exercisable at December 31, 2009  2,276,901  $22.34   2.8  $20,882 
*)On June 15, 2009, the Company adopted the 2003 Stock Option Plan (“the 2003 Option Plan”). Under the 2003 option plan, employees and officersrepriced 1,020,400 outstanding options that were granted on September 2, 2008, from their previous exercise price of the Company may be granted options$ 30.25 to acquire Ordinary shares. The options to acquire Ordinary shares, which may only be determined by the Board of Directors of the Company, are granted at an exercise price subject to certain exceptions, of not less than$ 22.53. The Company accounted for the fair market valuere-pricing as a modification and recorded an additional compensation expense, in the amount of $ 2,082, which will be recognized over the remaining vesting period or immediately for vested options. During 2009, the Company recognized $ 1,150 out of the Ordinary sharestotal additional compensation expenses related to this modification.

**)On August 5, 2009, pursuant to a tender offer of June 23, 2009, the Company exchanged on a three-for-one basis 1,492,204 options at exercise prices above $ 30 into 311,454 options and 185,932 RSU's (at par value). The new awards vest in 25% annual increments over a four-year period and have a new six-year term. The Company accounted for the grant date. 6,739,000 optionsexchange of option as a modification and recorded total incremental costs in the 2003 Option Planamount of $ 4,684 out of which $ 884 were granted. Unless otherwise determined by the Company’s Board of Directors as of the date of grant, the stock options expire six years after the date of grant.recorded during 2009.
F - 44
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

 On December 21, 2006,June 15, 2009, the shareholdersCompany's Board of Directors resolved to approve a privately negotiated transaction with certain executive officers, pursuant to which the Company exchanged 265,000 options granted in 2007 having an exercise price per share ranging between $ 34.00 and $ 39.00 with new options having an exercise price per share equal to $ 22.53. The new options will vest in 25% annual increments over a four-year period from the new grant date and will expire six years following the new grant date. The Company accounted for the exchange as a modification and recorded an additional compensation expense, in the amount of $ 1,140, which will be recognized over the new vesting period. During 2009, the Company recognized $ 307 out of the Company approved an increasetotal additional compensation expenses related to this modification.

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

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

The options outstanding under the Company’s 2003 employeeCompany's Stock Option Plans as of December 31, 2009 have been separated into ranges of exercise price as follows:

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

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

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

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

A summary of 1,300,000 Ordinary shares.the Company's Restricted Stock Units ("RSU") activity and related information for the year ended December 31, 2009, is as follows:

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


 c.Employee Stock Purchase Plan (“ESPP”):Plan:

 In February 1999, the Company’s Board of Directors adoptedEligible employees under the Employee Stock Purchase Plan (“the Purchase Plan”("ESPP"). Eligible employees can have upbetween 2% to 10% of their earnings withheld, up tounder certain maximums,limitations, to be used to purchase Ordinary shares. Up toCommencing January 1, 2006, the price of Ordinary shares purchased under the Purchase Plan wasESPP is equal to 85% of the lower95% of the fair market value of the Ordinary shares on the commencement date of each offering period or on the semi-annual purchase date. On December 2005, the Board of Directors amended the plan effective January 1, 2006, so that the price of Ordinary shares purchased under the Purchase Plan will equal to 95% of Ordinary share price fair market value of the Ordinary shares on the semi-annual purchase date.shares.

 During 2004, 20052007, 2008 and 2006,2009, employees purchased 279,826, 334,09016,041, 17,613 and 8,57017,331 shares at average prices of $ 8.10,31.08, $ 12.9430.14 and $ 26.7321.59 per share, respectively.

 d.Stock split:

On May 17, 2006, the Company affected a two-for-one stock split on its Ordinary shares which was affected in the form of a 100% stock dividend. Shareholders of record at the close of business on May 30, 2006, the record date, received one additional Ordinary Share/ADR for each Ordinary Share/ADR held. All Ordinary share options and per share amounts have been adjusted to give retroactive effect to the stock split for all periods presented.

- F - 48 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 14:–SHAREHOLDERS’ EQUITY (Cont.)

e.Dividends:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
f.Increase in authorized share capital:

On December 21, 2006, the shareholders of the Company approved an Amendment to the Company’s Memorandum and Articles of Association in order to increase the authorized share capital from 75,000,000 to 125,000,000 Ordinary shares.

NOTE 15:-–REPORTABLE SEGMENTS, PRODUCT LINES AND MAJOR CUSTOMER AND GEOGRAPHIC INFORMATIONDATA

 a.GeographicalReportable segments:

 In 2006,The Company operates under several reportable segments. The following tables present the expansionfinancial information of the operations in certain regions, the Company determined that the various regions are consideredCompany's reportable segments and provided summarized financial information as set forth below.segments.
  Year ended December 31, 2007 
  Americas  EMEA*)  APAC**)  Actimize  Not allocated  Total 
                   
Revenues $283,009  $149,913  $72,894  $11,558  $-  $517,374 
                         
Gross profit (loss) $176,678  $98,184  $51,818  $4,110  $(19,758) $311,032 
                         
Operating expenses $63,779  $34,272  $13,426  $20,127  $46,594  $278,198 
                         
Operating income (loss) $112,899  $63,912  $38,392  $(16,017) $(166,352) $32,834 

Revenues in each geographical segment represent revenues originating from that reportable segment.

Year ended December 31, 2006
Americas
EMEA*)
APAC**)
Not allocated
Total
 
Revenues  $241,307 $112,541 $55,796 $- $409,644 
      
Gross profit (loss)  $141,797 $70,028 $37,097 $(13,492)$235,430 
      
Operating expenses  $59,766 $30,326 $10,169 $118,072 $218,333 
      
Operating income (loss)  $82,031 $39,702 $26,928 $(131,564)$17,097 
  Year ended December 31, 2008 
  Americas  EMEA*)  APAC**)  Actimize  Not allocated  Total 
                   
Revenues $311,884  $170,097  $84,029  $58,152  $-  $624,162 
                         
Gross profit (loss) $205,824  $111,496  $62,085  $28,946  $(22,935) $385,416 
                         
Operating expenses $71,936  $34,366  $15,024  $50,456  $176,283  $348,065 
                         
Operating income (loss) $133,888  $77,130  $47,061  $(21,510) $(199,218) $37,351 

Year ended December 31, 2005
Americas
EMEA*)
APAC**)
Not allocated
Total
 
Revenues  $163,286 $99,348 $48,476 $- $311,110 
   
Gross profit (loss)  $92,885 $61,184 $33,421 $(12,606)$174,884 
   
Operating expenses  $44,145 $25,448 $6,721 $66,484 $142,798 
   
Operating income (loss)  $48,740 $35,735 $26,700 $(79,089)$32,086 

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

 *)Includes Europe, the Middle East (including Israel) and AfricaAfrica.

 **)Includes Asia PacificPacific.

-

F - 49 -

47

NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 15:–MAJOR CUSTOMER AND GEOGRAPHIC INFORMATIONDATA (Cont.)

 The following presents long-lived assets of December 31, 20062008 and December 31, 2005:2009:

Year ended December 31,
2005
2006
 
Americas  $41,479 $261,408 
EMEA   44,991  82,966 
APAC   2,261  3,051 
   
   $88,731 $347,425 
  December 31, 
  2008  2009 
       
Americas $241,739  $229,449 
EMEA  88,167   95,393 
APAC  3,608   4,048 
Actimize  280,786   344,324 
         
  $614,300  $673,214 

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

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

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

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

 b.Product lines:

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

Year ended December 31,
2004
2005
2006
 
Enterprise Interaction Solutions  $194,111 $237,353 $300,920 
Public Safety and Security sector   58,532  73,757  108,724 
             
   $252,643 $311,110 $409,644 
  Year ended December 31, 
  2007  2008  2009 
          
Enterprise Interaction Solutions $382,893  $417,454  $363,576 
Public Safety And Security Sector  122,923   148,556   147,863 
Risk and financial crime Solutions  11,558   58,152   71,676 
             
  $517,374  $624,162  $583,115 

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

Customer A   19% 21% 16%
  Year ended December 31, 
  2007  2008  2009 
          
Customer A  13%  13%  * 

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

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

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

Year ended December 31,
2004
2005
2006
 
Total costs  $27,512 $33,404 $47,963 
Less - grants and participations   (1,341) (1,702) (1,858)
Less - capitalization of software development costs   (1,305) (806) (1,225)
             
   $24,866 $30,896 $44,880 

- F - 50 -

NICE SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 16:–SELECTED STATEMENTS OF INCOME DATA (Cont.)

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

Financial income:

Year ended December 31,
2004
2005
2006
 
  Interest and amortization/accretion of premium/discount of
    marketable securities		  $2,349 $4,073 $6,848 
  Interest   1,425  1,979  7,061 
  Foreign currency translation   1,078  258  1,434 
                                  
    4,852  6,310  15,343 
Financial expenses:  
  Foreign currency translation   (894) (542) (1,455)
  Other   (402) (370) (616)
                                  
    (1,296) (912) (2,071)
                                  
   $3,556 $5,398 $13,272 

 c.Net earnings per share:

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

 1.Numerator:

Year ended December 31,
2004
2005
2006
 
    Numerator for basic and diluted net earnings per share -        
    Net income from continuing operations  $21,319 $36,569 $22,401 
    Net income from discontinued operation   3,236  -  - 
    Net income available to Ordinary shareholders  $24,555 $36,569 $22,401 
          
2.Denominator (in thousands):  
          
    Denominator for basic net earnings per share -  
    Weighted average number of shares   34,994  38,242  49,572 
          
    Effect of dilutive securities:  
      Add - Employee stock options   2,396  3,042  2,429 
      Add - ESPP   16  8  1 
          
    Denominator for diluted net earnings per share - adjusted  
      weighted average shares   37,406  41,292  52,002 

-

  Year ended December 31, 
  2007  2008  2009 
          
Net income available to Ordinary shareholders $37,380  $39,107  $42,756 
F - 5149
NICE SYSTEMS LTD. AND ITS SUBSIDIARIES

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

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


NOTE 17:-SUBSEQUENT EVENTS

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

50

SIGNATURES


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


NICE-SYSTEMS LTD.
By:NICE-SYSTEMS LTD.


By: /s/ Haim Shani
——————————————
Haim Shani
/s/ Zeev Bregman
Zeev Bregman
President and Chief Executive Officer

Date:  June 13, 2007

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March 31, 2010
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