UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 31, 2009

OR

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

For the transition period from                      to                     .

Commission File No. 0-49790

Verint Systems Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware		11-3200514
(State or Other Jurisdiction of Incorporation or		(I.R.S. Employer Identification No.)
Organization)
330 South Service Road, Melville, New York		11747
(Address of Principal Executive Offices)		(Zip Code)

(631) 962-9600

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 Yes o No þ

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 (§232.40S of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filer o		Small Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 32,794,402 shares of the registrant’s common stock outstanding on May 31, 2010.

 

 

Explanatory Note			ii
Cautionary Note on Forward-Looking Statements			iii
PART I. FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations			2
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)			3
Condensed Consolidated Statements of Cash Flows			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			51
Item 4. Controls and Procedures			52
PART II. OTHER INFORMATION			53
Item 1. Legal Proceedings			53
Item 1A. Risk Factors			53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 3. Defaults upon Senior Securities			55
Item 4. Removed and Reserved			55
Item 5. Other Information			55
Item 6. Exhibits			56
SIGNATURES			57
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Explanatory Note

This report of Verint Systems Inc. (together with its consolidated subsidiaries, “Verint”, the “Company”, “we”, “us”, and “our”, unless the context indicates otherwise) is for the three months ended July 31, 2009.

This report has been delayed due to the previously announced accounting reviews and internal investigations at Verint and at our majority stockholder, Comverse Technology, Inc. (“Comverse”), together with the resulting restatement of certain items and the making of other corrective adjustments to our previously-filed historical financial statements for periods through January 31, 2005, all of which were described in our comprehensive Annual Report on Form 10-K for the years ended January 31, 2008, 2007, and 2006 filed with the Securities and Exchange Commission (“SEC”) on March 17, 2010 (the “Comprehensive Form 10-K”). The filing of this report was further delayed by the preparation of the Comprehensive Form 10-K, our Annual Report on Form 10-K for the year ended January 31, 2009, and our Annual Report on Form 10-K for the year ended January 31, 2010, covering five years of audited financial information, and the process of filing of these reports over the course of a two-month period from March 17, 2010 to May 19, 2010. Please see our Comprehensive Form 10-K for more information regarding the accounting reviews and internal investigations and the related restatement.

As noted above, since the filing of our Comprehensive Form 10-K, we have filed, among other things, our Annual Report on Form 10-K for the year ended January 31, 2009 (on April 8, 2010) and our Annual Report on Form 10-K for the year ended January 31, 2010 (on May 19, 2010) as well as our Quarterly Report on Form 10-Q for the three months ended April 30, 2010 (on June 9, 2010). As a result, because information for periods subsequent to the three months ended July 31, 2009 is already available in our Annual Report on Form 10-K for the year ended January 31, 2010 and Quarterly Report on Form 10-Q for the three months ended April 30, 2010, in certain sections of this report, we have included information for periods after July 31, 2009 and, in some instances, we have made reference to such reports. Please see our Annual Report on Form 10-K for the year ended January 31, 2010 for additional information.

Cautionary Note on Forward-Looking Statements

Certain statements discussed in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (which Sections were adopted as part of the Private Securities Litigation Reform Act of 1995). Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements are often identified by future or conditional words such as “will”, “plans”, “expects”, “intends”, “believes”, “seeks”, “estimates”, or “anticipates”, or by variations of such words or by similar expressions. There can be no assurances that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:

•

risks relating to the filing of our SEC reports, including the occurrence of known contingencies or unforeseen events that could delay our filings, management distractions, and significant expense;

•

risk associated with the SEC’s initiation of an administrative proceeding on March 3, 2010 to suspend or revoke the registration of our common stock under the Exchange Act due to our previous failure to file an annual report on either Form 10-K or Form 10-KSB since April 25, 2005 or quarterly reports on either Form 10-Q or Form 10-QSB since December 12, 2005;

•

risk that our credit rating could be downgraded or placed on a credit watch based on, among other things, our financial results, delays in the filing of our periodic reports, or the results of the SEC’s administrative proceeding;

•

risks associated with being a consolidated, controlled subsidiary of Comverse and formerly part of Comverse’s consolidated tax group, including risk of any future impact on us resulting from Comverse’s special committee investigation and restatement or related effects, and risks related to our dependence on Comverse to provide us with accurate financial information, including with respect to stock-based compensation expense and net operating loss carryforwards (“NOLs”), for our financial statements;

•

uncertainty regarding the impact of general economic conditions, particularly in information technology spending, on our business;

•

risk that our financial results will cause us not to be compliant with the leverage ratio covenant under our credit facility or that any delays in the filing of future SEC reports could cause us not to be compliant with the financial statement delivery covenant under our credit facility;

•

risk that customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise;

•

risk that we will experience liquidity or working capital issues and related risk that financing sources will be unavailable to us on reasonable terms or at all;

•

uncertainty regarding the future impact on our business of our internal investigation, restatement, extended filing delay, and the SEC’s administrative proceeding, including customer, partner, employee, and investor concern, and potential customer and partner transaction deferrals or losses;

•

risks relating to the remediation or inability to adequately remediate material weaknesses in our internal controls over financial reporting and relating to the proper application of highly complex accounting rules and pronouncements in order to produce accurate SEC reports on a timely basis;

•

risks relating to our implementation and maintenance of adequate systems and internal controls for our current and future operations and reporting needs;

•

risk of possible future restatements if the processes used to produce the financial statements contained in this report or in future SEC reports are inadequate;

•

risk associated with current or future regulatory actions or private litigations relating to our internal investigation, restatement, or delays in filing required SEC reports;

•

risk that we will be unable to re-list our common stock on NASDAQ or another national securities exchange and maintain such listing;

•

risks associated with Comverse controlling our board of directors and a majority of our common stock (and therefore the results of any significant stockholder vote);

•

risks associated with significant leverage resulting from our current debt position;

•

risks due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient levels of investment in the business and with respect to introducing quality products which achieve market acceptance;

•

risks created by continued consolidation of competitors or introduction of large competitors in our markets with greater resources than us;

•

risks associated with significant foreign and international operations, including exposure to fluctuations in exchange rates;

•

risks associated with complex and changing local and foreign regulatory environments;

•

risks associated with our ability to recruit and retain qualified personnel in all geographies in which we operate;

•

challenges in accurately forecasting revenue and expenses;

•

risks associated with acquisitions and related system integrations;

•

risks relating to our ability to improve our infrastructure to support growth;

•

risks that our intellectual property rights may not be adequate to protect our business or that others may make claims on our intellectual property or claim infringement on their intellectual property rights;

•

risks associated with a significant amount of our business coming from domestic and foreign government customers;

•

risk that we improperly handle sensitive or confidential information or perception of such mishandling;

•

risks associated with dependence on a limited number of suppliers for certain components of our products;

•

risk that we are unable to maintain and enhance relationships with key resellers, partners, and systems integrators; and

•

risk that use of our NOLs or other tax benefits may be restricted or eliminated in the future.

These risks and uncertainties, as well as other factors, are discussed in greater detail in “Risk Factors” under Item 1A of our Annual Report on Form 10-K for the year ended January 31, 2010. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the filing date of this report. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VERINT SYSTEMS INC. AND SUBSIDIARIES

		July 31,				January 31,
(in thousands, except share and per share data)		2009				2009
Assets
Current Assets:
Cash and cash equivalents		$	153,714			$	115,928
Restricted cash and bank time deposits			7,660				7,722
Accounts receivable, net			117,780				113,178
Inventories			17,010				20,455
Deferred cost of revenue			10,994				8,935
Prepaid expenses and other current assets			59,658				46,748
Total current assets			366,816				312,966
Property and equipment, net			26,969				30,544
Goodwill			731,298				709,984
Intangible assets, net			190,248				200,203
Capitalized software development costs, net			9,416				10,489
Deferred cost of revenue			41,652				47,913
Other assets			24,631				25,294
Total assets		$	1,391,030			$	1,337,393
Liabilities, Preferred Stock, and Stockholders’ Deficit
Current Liabilities:
Accounts payable		$	35,628			$	38,484
Accrued expenses and other liabilities			140,708				146,741
Current maturities of long-term debt			2,136				4,088
Deferred revenue			196,609				160,918
Liabilities to affiliates			1,662				1,389
Total current liabilities			376,743				351,620
Long-term debt			618,776				620,912
Deferred revenue			61,311				88,985
Other liabilities			61,314				66,404
Total liabilities			1,118,144				1,127,921
Preferred Stock — $0.001 par value; authorized 2,500,000 shares. Series A convertible preferred stock; 293,000 shares issued and outstanding; aggregate liquidation preference and redemption value of $319,630 at July 31, 2009			285,542				285,542
Commitments and Contingencies
Stockholders’ Deficit:
Common stock — $0.001 par value; authorized 120,000,000 shares. Issued 32,643,000 and 32,623,000 shares, respectively; outstanding 32,544,000 and 32,535,000 shares, as of July 31, 2009 and January 31, 2009 respectively			32				32
Additional paid-in capital			435,492				419,937
Treasury stock, at cost — 99,000 and 88,000 shares as of July 31, 2009 and January 31, 2009, respectively			(2,426	)			(2,353	)
Accumulated deficit			(414,723	)			(435,955	)
Accumulated other comprehensive loss			(32,539	)			(58,404	)
Total Verint Systems Inc. stockholders’ deficit			(14,164	)			(76,743	)
Noncontrolling interest			1,508				673
Total stockholders’ deficit			(12,656	)			(76,070	)
Total liabilities, preferred stock, and stockholders’ deficit		$	1,391,030			$	1,337,393

See notes to condensed consolidated financial statements.

VERINT SYSTEMS INC. AND SUBSIDIARIES

		Three Months Ended July 31,								Six Months Ended July 31,
(in thousands, except per share data)		2009				2008				2009				2008
Revenue:
Product		$	88,107			$	84,965			$	185,178			$	169,811
Service and support			81,162				81,060				159,239				151,168
Total revenue			169,269				166,025				344,417				320,979
Cost of revenue:
Product			30,900				31,262				62,957				62,101
Service and support			26,190				32,582				49,103				62,606
Amortization of acquired technology and backlog			1,977				2,298				4,076				4,623
Total cost of revenue			59,067				66,142				116,136				129,330
Gross profit			110,202				99,883				228,281				191,649
Operating expenses:
Research and development, net			20,638				23,672				39,539				47,934
Selling, general and administrative			70,258				73,644				127,484				148,112
Amortization of other acquired intangible assets			5,586				6,465				11,516				13,179
Integration, restructuring and other, net			11				3,606				24				8,561
Total operating expenses			96,493				107,387				178,563				217,786
Operating income (loss)			13,709				(7,504	)			49,718				(26,137	)
Other income (expense), net:
Interest income			98				529				245				1,076
Interest expense			(6,369	)			(9,694	)			(12,722	)			(19,606	)
Other income (expense), net			(3,106	)			1,695				(8,069	)			6,622
Total other expense, net			(9,377	)			(7,470	)			(20,546	)			(11,908	)
Income (loss) before provision for income taxes			4,332				(14,974	)			29,172				(38,045	)
Provision for (benefit from) income taxes			2,850				(260	)			7,118				1,446
Net income (loss)			1,482				(14,714	)			22,054				(39,491	)
Net income (loss) attributable to noncontrolling interest			(116	)			373				822				893
Net income (loss) attributable to Verint Systems Inc.			1,598				(15,087	)			21,232				(40,384	)
Dividends on preferred stock			(3,406	)			(3,266	)			(6,668	)			(6,427	)
Net income (loss) attributable to Verint Systems Inc. common shares		$	(1,808	)		$	(18,353	)		$	14,564			$	(46,811	)
Net income (loss) per share attributable to Verint Systems Inc.
Basic		$	(0.06	)		$	(0.57	)		$	0.45			$	(1.45	)
Diluted		$	(0.06	)		$	(0.57	)		$	0.45			$	(1.45	)
Weighted-average common shares outstanding
Basic			32,465				32,385				32,462				32,383
Diluted			32,465				32,385				32,606				32,383

See notes to condensed consolidated financial statements.

VERINT SYSTEMS INC. AND SUBSIDIARIES

		Verint Systems Inc. Stockholders’ Equity (Deficit)
																						Accumulated				Total Verint
		Common Stock								Additional												Other				Systems Inc.								Total
						Par				Paid-in				Treasury				Accumulated				Comprehensive				Stockholders’				Noncontrolling				Stockholders’
(in thousands)		Shares				Value				Capital				Stock				Deficit				Loss				Equity (Deficit)				Interest				Equity (Deficit)
Balances as of January 31, 2008			32,526			$	32			$	387,537			$	(2,094	)		$	(355,567	)		$	(610	)		$	29,298			$	1,027			$	30,325
Comprehensive income (loss):
Net income (loss)			—				—				—				—				(40,384	)			—				(40,384	)			893				(39,491	)
Unrealized gains on available for sale securities, net			—				—				—				—				—				5				5				—				5
Currency translation adjustments			—				—				—				—				—				(1,351	)			(1,351	)			67				(1,284	)
Total comprehensive income (loss)			—				—				—				—				(40,384	)			(1,346	)			(41,730	)			960				(40,770	)
Stock-based compensation expense			—				—				16,599				—				—				—				16,599				—				16,599
Common stock issued for stock awards			20				—				—				—				—				—				—				—				—
Forfeitures of restricted stock awards			(7	)			—				132				(132	)			—				—				—				—				—
Purchases of treasury stock			(5	)			—				—				(93	)			—				—				(93	)			—				(93	)
Tax effects from stock award plans			—				—				165				—				—				—				165				—				165
Balances as of July 31, 2008			32,534			$	32			$	404,433			$	(2,319	)		$	(395,951	)		$	(1,956	)		$	4,239			$	1,987			$	6,226
Balances as of January 31, 2009			32,535			$	32			$	419,937			$	(2,353	)		$	(435,955	)		$	(58,404	)		$	(76,743	)		$	673			$	(76,070	)
Comprehensive income:
Net income			—				—				—				—				21,232				—				21,232				822				22,054
Unrealized gains on derivative financial instruments, net			—				—				—				—				—				1,439				1,439				—				1,439
Unrealized gains on available for sale securities, net			—				—				—				—				—				9				9				—				9
Currency translation adjustments			—				—				—				—				—				24,417				24,417				13				24,430
Total comprehensive income			—				—				—				—				21,232				25,865				47,097				835				47,932
Stock-based compensation expense			—				—				15,532				—				—				—				15,532				—				15,532
Common stock issued for stock awards			20				—				—				—				—				—				—				—				—
Forfeitures of restricted stock awards			(3	)			—				23				(23	)			—				—				—				—				—
Purchases of treasury stock			(8	)			—				—				(50	)			—				—				(50	)			—				(50	)
Balances as of July 31, 2009			32,544			$	32			$	435,492			$	(2,426	)		$	(414,723	)		$	(32,539	)		$	(14,164	)		$	1,508			$	(12,656	)

See notes to condensed consolidated financial statements.

VERINT SYSTEMS INC. AND SUBSIDIARIES

		Six Months Ended July 31,
(in thousands)		2009				2008
Cash flows from operating activities:
Net income (loss)		$	22,054			$	(39,491	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			25,507				28,324
Stock-based compensation			15,532				16,599
Losses (gains) on derivative financial instruments not designated as hedges, net			7,035				(6,719	)
Other non-cash items, net			(1,816	)			2,282
Changes in operating assets and liabilities:
Accounts receivable			(2,513	)			(336	)
Inventories			3,430				(5,771	)
Deferred cost of revenue			6,165				5,033
Accounts payable and accrued expenses			(11,321	)			(168	)
Deferred revenue			(518	)			40,161
Prepaid expenses and other assets			(8,759	)			2,310
Other, net			(2,616	)			(2,318	)
Net cash provided by operating activities			52,180				39,906
Cash flows from investing activities:
Payments of contingent consideration associated with business combinations in prior periods			(96	)			(1,991	)
Purchases of property and equipment			(2,019	)			(5,042	)
Settlements of derivative financial instruments not designated as hedges			(8,261	)			(2,673	)
Cash paid for capitalized software development costs			(1,258	)			(2,004	)
Other investing activities			223				(12,217	)
Net cash used in investing activities			(11,411	)			(23,927	)
Cash flows from financing activities:
Repayments of borrowings and other financing obligations			(5,988	)			(519	)
Dividends paid to noncontrolling interest			(2,142	)			—
Other financing activities			(202	)			(243	)
Net cash used in financing activities			(8,332	)			(762	)
Effect of exchange rate changes on cash and cash equivalents			5,349				434
Net increase in cash and cash equivalents			37,786				15,651
Cash and cash equivalents, beginning of period			115,928				83,233
Cash and cash equivalents, end of period		$	153,714			$	98,884
Supplemental disclosures of cash flow information:
Cash paid for interest		$	13,184			$	13,166
Cash paid for income taxes		$	4,991			$	1,430
Non-cash investing and financing transactions:
Accrued but unpaid purchases of property and equipment		$	329			$	769
Inventory transfers to property and equipment		$	347			$	317
Business combination consideration earned, but paid in subsequent periods		$	—			$	27
Settlement of embedded derivative		$	—			$	8,121

See notes to condensed consolidated financial statements.

VERINT SYSTEMS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

Preparation of Condensed Consolidated Financial Statements

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC for the year ended January 31, 2009. The condensed consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the periods ended July 31, 2009 and 2008, and the condensed consolidated balance sheet as of July 31, 2009, are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results of the periods shown. The condensed consolidated balance sheet as of January 31, 2009 is derived from the audited consolidated balance sheet presented in our Annual Report on Form 10-K for the year ended January 31, 2009. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Reports on Form 10-K filed with the SEC. The results for interim periods are not necessarily indicative of a full year’s results.

Unless the context otherwise requires, the terms “Verint”, “we”, “our”, and “us” and words of similar import as used in these notes to the condensed consolidated financial statements include Verint Systems Inc. and its consolidated subsidiaries.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned subsidiaries, and a joint venture in which we hold a 50% equity interest. This joint venture functions as a systems integrator for Asian markets and is a variable interest entity in which we are the primary beneficiary. Investments in companies in which we have less than a 20% ownership interest and do not exercise significant influence are accounted for at cost. We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

Standards Implemented:

In December 2007, the Financial Accounting Standards Board (“FASB”) revised their guidance on business combinations. This new guidance requires an acquiring entity to measure and recognize identifiable assets acquired and liabilities assumed, and contingent consideration at their fair values at the acquisition date with subsequent changes recognized in earnings. In addition, acquisition related costs and restructuring costs are recognized separately from the business combination and expensed as incurred. The new guidance also requires acquired in-process research and development costs to be capitalized as an indefinite-lived intangible asset and requires that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of the provision for income taxes. In April 2009, the FASB issued a new standard which clarified the accounting for pre-acquisition contingencies. This guidance was effective for us beginning on February 1, 2009.

In December 2007, the FASB issued a new accounting standard which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The new standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. On February 1, 2009, we adopted this standard, and the presentation and disclosure requirements of this standard were applied retrospectively to all periods presented, as required by the standard. The adoption of this standard did not have a material impact on our condensed consolidated financial statements, other than the following changes in presentation of the noncontrolling interest:

•

Net income (loss) now includes net income (loss) attributable to both Verint Systems Inc. and the noncontrolling interest in the condensed consolidated statements of operations. The presentation of net income (loss) in prior periods excluded the noncontrolling interest in the net income of our joint venture. Net income (loss) excluding the noncontrolling interest in the net income of our joint venture is now presented after net income (loss), with the caption net income (loss) attributable to Verint Systems Inc.

•

The noncontrolling interest, which was previously reflected in other liabilities, is now presented in stockholders’ deficit, separate from Verint Systems Inc.’s stockholders’ deficit, in the condensed consolidated balance sheets.

•

The condensed consolidated statements of cash flows now begin with net income (loss), including the noncontrolling interest, instead of net income (loss) attributable to Verint Systems Inc.

In March 2008, the FASB amended the disclosure requirements for derivative instruments and hedging activities. This new guidance requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This guidance was effective for us beginning on February 1, 2009.

In April 2009, the FASB issued staff positions that require enhanced fair value disclosures, including interim disclosures, on financial instruments, determination of fair value in turbulent markets, and recognition and presentation of other than temporary impairments. These staff positions were effective beginning with our quarter ended July 31, 2009. These staff positions did not have a material impact on our consolidated financial statements.

In May 2009, the FASB issued a new accounting standard that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In February 2010, the FASB issued an amendment to this guidance that removed the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. This standard, as amended, was effective for us beginning with our interim period ended July 31, 2009. The adoption of this standard, as amended, did not have a material impact on our consolidated financial statements.

New Standards to be Implemented:

In June 2009, the FASB issued a new accounting standard related to the consolidation of variable interest entities, requiring a company to perform an analysis to determine whether its variable interests give it a controlling financial interest in a variable interest entity. This analysis requires a company to assess whether it has the power to direct the activities of the variable interest entity and if it has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the variable interest entity. This standard requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity, eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, and significantly enhances disclosures. The standard may be applied retrospectively to previously issued financial statements with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. This standard is effective for us for the fiscal year beginning on February 1, 2010. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

During the third quarter of the year ended January 31, 2010, our financial statements will reflect our adoption of the new Accounting Standards Codification (“ASC”) as issued by the FASB. The ASC has become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. The ASC is not intended to change or alter existing GAAP. The adoption of the ASC is not expected to have a material impact on our consolidated financial statements.

In October 2009, the FASB issued guidance that applies to multiple-deliverable revenue arrangements. This guidance also provides principles and application guidance on whether a revenue arrangement contains multiple deliverables, how the arrangement should be separated, and how the arrangement consideration should be allocated. The guidance requires an entity to allocate revenue in a multiple-deliverable arrangement using estimated selling prices of the deliverables if a vendor does not have vendor specific objective evidence of fair value (“VSOE”) or third-party evidence of selling price. It eliminates the use of the residual method and, instead, requires an entity to allocate revenue using the relative selling price method. It also expands disclosure requirements with respect to multiple-deliverable revenue arrangements.

Also in October 2009, the FASB issued guidance related to multiple-deliverable revenue arrangements that contain both software and hardware elements, focusing on determining which revenue arrangements are within the scope of existing software revenue guidance. This additional guidance removes tangible products from the scope of the software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance. The above guidance related to revenue recognition should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. It will be effective for us in our fiscal year beginning February 1, 2011, although early adoption is permitted. Alternatively, an entity can elect to adopt the provisions of these issues on a retrospective basis. We are assessing the impact that the application of this new guidance, and the new guidance discussed in the preceding paragraph, may have on our consolidated financial statements.

In January 2010, the FASB issued amended standards that require additional fair value disclosures. These disclosure requirements are effective in two phases. Effective in our fiscal year beginning February 1, 2010, the amended standards will require enhanced disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers. Effective in our fiscal year beginning February 1, 2011, the amended standards will require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3). These amended standards are not expected to significantly impact our consolidated financial statements.

2. Net Income (Loss) Per Share Attributable to Verint Systems Inc.

The following table summarizes the calculation of basic and diluted net income (loss) per share attributable to Verint Systems Inc. for the three and six months ended July 31, 2009 and 2008:

		Three Months Ended July 31,								Six Months Ended July 31,
(in thousands, except per share amounts)		2009				2008				2009				2008
Net income (loss)		$	1,482			$	(14,714	)		$	22,054			$	(39,491	)
Net income (loss) attributable to noncontrolling interest			(116	)			373				822				893
Net income (loss) attributable to Verint Systems Inc.			1,598				(15,087	)			21,232				(40,384	)
Dividends on preferred stock			(3,406	)			(3,266	)			(6,668	)			(6,427	)
Net income (loss) attributable to Verint Systems Inc. for basic net income (loss) per share			(1,808	)			(18,353	)			14,564				(46,811	)
Dilutive effect of dividends on preferred stock			—				—				—				—
Net income (loss) attributable to Verint Systems Inc. for diluted net income (loss) per share		$	(1,808	)		$	(18,353	)		$	14,564			$	(46,811	)
Weighted-average shares outstanding:
Basic			32,465				32,385				32,462				32,383
Dilutive effect of employee equity award plans			—				—				144				—
Dilutive effect of assumed conversion of preferred stock			—				—				—				—
Diluted			32,465				32,385				32,606				32,383
Net income (loss) per share attributable to Verint Systems Inc.
Basic		$	(0.06	)		$	(0.57	)		$	0.45			$	(1.45	)
Diluted		$	(0.06	)		$	(0.57	)		$	0.45			$	(1.45	)

We excluded the following weighted-average shares underlying stock-based awards and convertible preferred stock from the calculations of diluted net income (loss) per share because their inclusion would have been anti-dilutive:

		Three Months Ended July 31,								Six Months Ended July 31,
(in thousands)		2009				2008				2009				2008
Shares excluded from calculation:
Stock options and restricted stock-based awards			8,530				7,546				5,763				7,389
Convertible preferred stock			9,787				9,416				9,740				9,371

Diluted weighted-average shares outstanding include the dilutive effect, if applicable, of in-the-money options and unvested restricted stock awards and restricted stock units, which is calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of the award, any unrecognized future service costs, and tax benefits that would be recorded as additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

Diluted weighted-average shares outstanding also include the dilutive effect, if applicable, of common shares issuable from the assumed conversion of our preferred stock.

In periods in which we report a net loss applicable to Verint Systems Inc., weighted-average shares outstanding for determining basic and diluted net loss per share are identical since the effect of potential common shares is antidilutuve and therefore excluded.

3. Inventories

Inventories consist of the following as of July 31, 2009 and January 31, 2009:

		July 31,				January 31,
(in thousands)		2009				2009
Raw materials		$	9,487			$	6,389
Work-in-process			4,943				5,070
Finished goods			2,580				8,996
Total inventories		$	17,010			$	20,455

4. Intangible Assets and Goodwill

Acquisition-related intangible assets consist of the following as of July 31, 2009 and January 31, 2009:

		July 31, 2009
						Accumulated
(in thousands)		Cost				Amortization				Net
Customer relationships		$	199,998			$	(45,465	)		$	154,533
Acquired technology			55,032				(24,632	)			30,400
Trade names			9,647				(7,471	)			2,176
Non-competition agreements			3,434				(1,993	)			1,441
Distribution network			2,440				(742	)			1,698
Total		$	270,551			$	(80,303	)		$	190,248

		January 31, 2009
						Accumulated
(in thousands)		Cost				Amortization				Net
Customer relationships		$	194,076			$	(34,420	)		$	159,656
Acquired technology			53,781				(20,134	)			33,647
Trade names			9,350				(5,926	)			3,424
Non-competition agreements			3,416				(1,760	)			1,656
Distribution network			2,440				(620	)			1,820
Total		$	263,063			$	(62,860	)		$	200,203

Total amortization expense recorded for acquisition-related intangible assets was $7.6 million and $15.6 million for the three and six months ended July 31, 2009, respectively, and $8.8 million and $17.8 million for the three and six months ended July 31, 2008, respectively.

Estimated future finite-lived acquisition-related intangible asset amortization expense is as follows:

(in thousands)
Years Ended January 31,		Amount
2010 (Remainder of year)		$	14,794
2011			29,588
2012			28,653
2013			27,873
2014			22,871
2015 and thereafter			66,469
Total		$	190,248

Goodwill activity for the six months ended July 31, 2009, in total and by reportable segment, was as follows:

						Reportable Segment
						Workforce				Video				Communications
(in thousands)		Total				Optimization				Intelligence				Intelligence
Goodwill, gross, at January 31, 2009		$	776,849			$	681,140			$	65,726			$	29,983
Accumulated impairment losses at January 31, 2009			(66,865	)			(30,791	)			(36,074	)			—
Goodwill, net, at January 31, 2009			709,984				650,349				29,652				29,983
Additional consideration — previous acquisitions (1)			89				—				—				89
Foreign currency translation			21,225				19,498				1,727				—
Goodwill, net, at July 31, 2009		$	731,298			$	669,847			$	31,379			$	30,072
Balance at July 31, 2009
Goodwill, gross, at July 31, 2009		$	798,163			$	700,638			$	67,453			$	30,072
Accumulated impairment losses at July 31, 2009			(66,865	)			(30,791	)			(36,074	)			—
Goodwill, net, at July 31, 2009		$	731,298			$	669,847			$	31,379			$	30,072

We test our goodwill for impairment at least annually as of November 1, or more frequently if an event occurs indicating the potential for impairment. No events or circumstances indicating the potential for goodwill impairment were identified during either the six months ended July 31, 2009 or the six months ended July 31, 2008.

5. Long-term Debt

On May 25, 2007, to partially finance the acquisition of Witness Systems Inc. (“Witness”), we entered into a $675.0 million secured credit facility comprised of a $650.0 million seven-year term loan facility and a $25.0 million six-year revolving credit facility.

The following is a summary of our outstanding financing arrangements as of July 31, 2009 and January 31, 2009:

		July 31,				January 31,
(in thousands)		2009				2009
Term loan facility		$	605,912			$	610,000
Revolving credit facility			15,000				15,000
Total debt			620,912				625,000
Less: current portion			2,136				4,088
Long-term debt		$	618,776			$	620,912

The interest rates on the term loan were 3.54% and 3.59% as of July 31, 2009 and January 31, 2009, respectively.

Our $25.0 million revolving line of credit facility was reduced to $15.0 million during the three months ended October 31, 2008 as a result of the bankruptcy of Lehman Brothers. During the three months ended January 31, 2009, we borrowed the full $15.0 million available under the revolving credit facility. Repayment of these borrowings is required upon expiration of the facility in May 2013. The interest rates on the revolving line of credit borrowings were 3.54% and 3.64% as of July 31, 2009 and January 31, 2009, respectively.

On May 25, 2007, concurrently with entry into our credit facility, we entered into a receive-variable/pay-fixed interest rate swap agreement with a multinational financial institution on a notional amount of $450.0 million to mitigate a portion of the risk associated with variable interest rates on the term loan. This interest rate swap agreement terminates in May 2011. See Note 10, “Fair Value Measurements and Derivative Financial Instruments” for further details regarding the interest rate swap agreement.

We incurred interest expense on borrowings under our credit facilities of $5.7 million and $11.5 million during the three and six months ended July 31, 2009, respectively, and $9.2 million and $18.6 million during the three and six months ended July 31, 2008, respectively. We also recorded amortization of our deferred debt issuance costs of $0.5 million and $1.0 million during the three and six months ended July 31, 2009, respectively, which is reported within interest expense. Amortization of our deferred debt issuance costs during the three and six months ended July 31, 2008 was $0.4 million and $0.8 million, respectively.

In May 2009, we made a $4.1 million mandatory “excess cash flow” prepayment of the term loan, based upon our operating results for the year ended January 31, 2009, which was applied to the three immediately following principal payments.

The credit agreement also includes a requirement that we submit audited consolidated financial statements to the lenders within 90 days of the end of each fiscal year, beginning with the financial statements for the year ended January 31, 2010. Should we fail to deliver such audited consolidated financial statements as required, the agreement provides a thirty day period to cure such default, or an event of default occurs.

On April 27, 2010, we entered into an amendment to our credit agreement to extend the due date for delivery of audited consolidated financial statements and related documentation for the year ended January 31, 2010 from May 1, 2010 to June 1, 2010. See Note 14, “Subsequent Events” for further details regarding this amendment.

6. Convertible Preferred Stock

On May 25, 2007, in connection with our acquisition of Witness, we entered into a Securities Purchase Agreement with Comverse, whereby Comverse purchased, for cash, an aggregate of 293,000 shares of our Series A Convertible Preferred Stock, for an aggregate purchase price of $293.0 million. Proceeds from the issuance of the preferred stock were used to partially finance the acquisition.

The terms of the preferred stock provide that upon a fundamental change, as defined, the holders of the preferred stock would have the right to require us to repurchase the preferred stock for 100% of the liquidation preference then in effect. Therefore, the preferred stock has been classified as mezzanine equity on our condensed consolidated balance sheets as of July 31, 2009 and January 31, 2009, separate from permanent equity, because the occurrence of these fundamental changes, and thus potential redemption of the preferred stock, however remote in likelihood, is not solely under our control. Fundamental change events include the sale of substantially all of our assets and certain changes in beneficial ownership, board of directors’ representation, and business reorganizations.

We concluded that, as of July 31, 2009 and January 31, 2009, there were no indications that the occurrence of a fundamental change and the associated redemption of the preferred stock were probable. We therefore have not adjusted the initial carrying amount of the preferred stock to its redemption amount, which is its liquidation preference. Through July 31, 2009, cumulative, undeclared dividends on the preferred stock were $26.6 million and as a result, the liquidation preference of the preferred stock was $319.6 million at that date. If it were convertible at July 31, 2009, the preferred stock could be converted into approximately 9.8 million shares of our common stock.

7. Stockholders’ Deficit

Accumulated Other Comprehensive Loss

The following table summarizes, as of each balance sheet date, the components of our accumulated other comprehensive loss. Income tax effects on unrealized gains and losses on available-for-sale marketable securities and derivative financial instruments were not significant.

		July 30,				January 31,
(in thousands)		2009				2009
Foreign currency translation losses, net		$	(34,059	)		$	(58,476	)
Unrealized gains on derivative financial instruments			1,540				101
Unrealized losses on available-for-sale marketable securities			(20	)			(29	)
Total accumulated other comprehensive loss		$	(32,539	)		$	(58,404	)

Foreign currency translation losses, net, primarily reflect the strengthening of the U.S. dollar against the British pound sterling since our acquisition of Witness in May 2007, which has resulted in lower U.S. dollar translated balances of British pound sterling denominated goodwill and intangible assets associated with the acquisition of Witness. The British pound sterling was weaker against the U.S dollar at January 31, 2009 compared to July 31, 2009, resulting in larger net foreign currency translation losses at January 31, 2009 compared to July 31, 2009.

8. Integration, Restructuring and Other, Net

Integration, restructuring and other, net, is comprised of the following for the three and six months ended July 31, 2009 and 2008:

		Three Months Ended July 31,								Six Months Ended July 31,
(in thousands)		2009				2008				2009				2008
Restructuring expenses		$	11			$	1,007			$	24			$	1,208
Integration expenses			—				898				—				2,135
Other legal expenses			—				1,701				—				5,218
Total integration, restructuring and other, net		$	11			$	3,606			$	24			$	8,561

Restructuring and Integration Expenses

During the three months ended January 31, 2009, we implemented a global cost reduction plan in order to reduce our operating costs in response to uncertainty in the global economic environment. The associated restructuring charges consisted predominantly of severance and related employee payments resulting from terminations.

During the three and six months ended July 31, 2008, we also recorded activity related to the following restructuring plans:

•

During the three months ended July 31, 2008, as a result of reduced demand for our consulting services in Europe, we implemented a cost reduction plan in this sector of our Workforce Optimization segment. The associated restructuring charges consisted predominantly of severance and related employee payments related to terminations;

•

Following the acquisition of Witness in May 2007, we implemented a plan to integrate the Witness business with our existing Workforce Optimization segment, which included actions to reduce fixed costs and eliminate redundancies; and

•

During the year ended January 31, 2008, we implemented a restructuring plan in our Video Intelligence segment to reduce our overall cost structure, predominantly in our North American and Hong Kong locations.

The following table summarizes our restructuring expenses, by restructuring activity, for the three and six months ended July 31, 2009 and 2008:

		Three Months Ended July 31,								Six Months Ended July 31,
(in thousands)		2009				2008				2009				2008
Restructuring activity:
Global cost reduction plan		$	11			$	—			$	24			$	—
Consulting business in Europe			—				491				—				491
Acquisition of Witness			—				498				—				620
Video Intelligence plan			—				18				—				97
Total		$	11			$	1,007			$	24			$	1,208

The following table summarizes the activity during the six months ended July 31, 2009 in accrued restructuring expenses:

		Global Cost				Video
		Reduction Plan				Intelligence Plan				Total
Accrued restructuring costs — January 31, 2009		$	531			$	10			$	541
Expenses accrued			24				—				24
Payments and settlements			(537	)			(10	)			(547	)
Accrued restructuring costs — July 31, 2009		$	18			$	—			$	18

In addition to the aforementioned restructuring charges, we also incurred integration expenses of $0.9 million and $2.1 million during the three and six months ended July 31, 2008, respectively, resulting from the integration of the Witness and Verint businesses following our May 2007 acquisition of Witness. The process of integrating the Witness and Verint businesses was substantially complete as of January 31, 2009.

Other Legal Costs

During the three and six months ended July 31, 2008, we incurred $1.7 million and $5.2 million of legal fees, respectively, related to an ongoing patent infringement litigation matter, which we are reporting within integration, restructuring and other, net. This litigation was subsequently settled in our favor during the three months ended October 31, 2008.

9. Income Taxes

Our quarterly provision for (benefit from) income taxes is measured using an estimated annual effective tax rate for the period, adjusted for discrete items that occurred within the periods presented. For the three months ended July 31, 2009, we recorded an income tax provision of $2.9 million, which represents an effective tax rate of 65.8%. This rate is higher than the U.S. federal statutory rate of 35% primarily due to the mix of income and losses by jurisdiction. We recorded an income tax provision on income from certain profitable foreign subsidiaries while we did not record an income tax benefit on losses incurred by certain domestic and foreign operations where we maintain valuation allowances. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by taxing jurisdiction, foreign income tax rate differentials, relative impact of permanent book to tax differences, and the effects of valuation allowances on certain loss jurisdictions.

For the three months ended July 31, 2008, we recorded an income tax benefit of $(0.3) million, which represents an effective tax rate of 1.7%. The tax rate for the three months ended July 31, 2008 is positive due to the fact that we reported an income tax benefit on a consolidated pre-tax loss. The effective tax rate is lower than the U.S. federal statutory rate of 35% because the income tax benefit recognized on losses incurred by certain foreign subsidiaries was taxed at rates lower than the U.S. federal statutory rate and losses incurred by domestic operations did not result in a tax benefit as we maintain a valuation allowance against our U.S. deferred tax assets.

For the six months ended July 31, 2009, we recorded an income tax provision of $7.1 million, which represents an effective tax rate of 24.4%. This rate is lower than the U.S. federal statutory rate of 35% primarily because we recorded an income tax provision on income from certain foreign subsidiaries taxed at rates lower than the U.S. federal statutory rate, but did not record either a significant federal income tax expense or income tax benefit because we maintain a valuation allowance against our U.S. deferred tax assets. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by taxing jurisdiction, foreign income tax rate differentials, relative impact of permanent book to tax differences, and the effects of valuation allowances on certain loss jurisdictions.

For the six months ended July 31, 2008, we recorded an income tax provision of $1.4 million, which represents an effective tax rate of (3.8%). The tax rate for the six months ended July 31, 2008 is negative due to the fact that we reported income tax expense on a consolidated pre-tax loss. We did not record either a significant federal income tax expense or income tax benefit because we maintain a valuation allowance against our U.S. deferred tax assets, but recorded an income tax provision on income from certain foreign subsidiaries taxed at rates lower than the U.S. federal statutory rate.

As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, we establish a valuation allowance. We determined there is sufficient negative evidence to maintain the valuation allowances against our federal and certain state and foreign deferred tax assets as a result of historical losses in the most recent three-year period in the U.S. and certain foreign jurisdictions. We intend to maintain a valuation allowance against these assets until sufficient positive evidence exists to support its reversal.

We had unrecognized tax benefits of $38.1 million (excluding interest and penalties) as of July 31, 2009. As of July 31, 2009 the total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately $33.2 million. We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. We believe that it is reasonably possible that the total amount of unrecognized tax benefits at July 31, 2009 could decrease by approximately $2.1 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional taxes, the adjustment of certain deferred taxes including the need for additional valuation allowances, and the recognition of tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur which would require increases or decreases to the balance of reserves for unrecognized tax benefits; however, an estimate of such changes cannot reasonably be made.

10. Fair Value Measurements and Derivative Financial Instruments

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This fair value hierarchy consists of three levels of inputs that may be used to measure fair value:

Level 1: quoted prices in active markets for identical assets or liabilities;

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

Level 3: unobservable inputs that are supported by little or no market activity.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification of our applicable assets and liabilities on a quarterly basis. Changes in the observability of valuation inputs may result in transfers within the fair value measurement hierarchy. We did not identify any transfers between levels of the fair value measurement hierarchy during the six months ended July 31, 2009.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of July 31, 2009 and January 31, 2009:

		July 31, 2009
		Fair Value Hierarchy Category
(in thousands)		Level 1				Level 2				Level 3
Assets:
Money market funds		$	43,104			$	—			$	—
Foreign currency forward contracts			—				1,664				—
Total assets		$	43,104			$	1,664			$	—
Liabilities:
Foreign currency forward contracts		$	—			$	768			$	—
Interest rate swap agreement			—				33,013				—
Total liabilities		$	—			$	33,781			$	—

		January 31, 2009
		Fair Value Hierarchy Category
(in thousands)		Level 1				Level 2				Level 3
Assets:
Money market funds		$	34,292			$	—			$	—
Foreign currency forward contracts			—				146				—
Total assets		$	34,292			$	146			$	—
Liabilities:
Foreign currency forward contracts		$	—			$	2,000			$	—
Interest rate swap agreement			—				33,114				—
Total liabilities		$	—			$	35,114			$	—

Fair Value Measurements

Money Market Funds — We value our money market funds using quoted market prices for such funds.

Foreign Currency Forward Contracts — The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparty. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market exchange rates.

Interest Rate Swap Agreement — The fair value of our interest rate swap agreement is based in part on data received from a third party financial institution. These fair values represent the estimated amount we would receive or pay to settle the swap agreement, taking into consideration current and projected interest rates as well as the creditworthiness of the parties.

Derivative Financial Instruments

Interest Rate Swap Agreement