<PAGE>

      AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 2003
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

                Annual Report pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act Of 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                         Commission file number 0-27466

                                NICE-SYSTEMS LTD.
  ----------------------------------------------------------------------------
    (Exact name of Registrant as specified in its charter and translation of
                         Registrant's name into English)

  ----------------------------------------------------------------------------
                                     ISRAEL

                 (Jurisdiction of incorporation or organization)

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

 Securities registered or to be registered pursuant to Section 12(b) of the Act:


                                                  Name of Each Exchange
              Title of Each Class                  On Which Registered
              -------------------                  -------------------

                     NONE                                  NONE
       --------------------------------     ---------------------------------

 Securities registered or to be registered pursuant to Section 12(g) of the Act:

                  AMERICAN DEPOSITARY SHARES, EACH REPRESENTING
                        ONE ORDINARY SHARE, PAR VALUE ONE
                          NEW ISRAELI SHEKEL PER SHARE
  ----------------------------------------------------------------------------
                                (Title of Class)

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

                                      NONE
  ----------------------------------------------------------------------------
                                (Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
                        15,704,425 ORDINARY SHARES, PAR VALUE NIS 1.00 PER SHARE
                        --------------------------------------------------------

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   X           No
            -------          -------

  Indicate by check mark which financial statements the registrant has elected
                                   to follow:

         Item 17           Item 18   X
                --------          -------

================================================================================
<PAGE>

                                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" AND "SHOULD" 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. 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, 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.

     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, NICE Systems Inc., NICE Systems GmbH, NICE
Systems Canada Ltd., NICE CTI Systems UK Ltd., STS Software Systems (1993) Ltd.,
NiceEye BV, NICE Systems S.A.R.L, NICE APAC Ltd., NiceEye Ltd. and Racal
Recorders Ltd.

     In this annual report, unless otherwise specified or unless the context
otherwise requires, all references to "$" or "dollars" are to U.S. dollars 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.

                                       ii
<PAGE>
<TABLE>
<CAPTION>

                                                  TABLE OF CONTENTS

                                                                                                                 PAGE
                                                                                                                 ----

                                                        PART I
<S>          <C>                                                                                                <C>
Item 1.      Identity of Directors, Senior Management and Advisers........................................         2
Item 2.      Offer Statistics and Expected Timetable......................................................         2
Item 3.      Key Information..............................................................................         2
Item 4.      Information on the Company...................................................................        16
Item 5.      Operating and Financial Review and Prospects.................................................        34
Item 6.      Directors, Senior Management and Employees...................................................        60
Item 7.      Major Shareholders and Related Party Transactions............................................        75
Item 8.      Financial Information........................................................................        77
Item 9.      The Offer and Listing........................................................................        80
Item 10.     Additional Information.......................................................................        82
Item 11.     Quantitative and Qualitative Disclosures About Market Risk...................................        95
Item 12.     Description of Securities Other than Equity Securities.......................................        96

                                                       PART II

Item 13.     Defaults, Dividend Arrearages and Delinquencies..............................................        97
Item 14.     Material Modifications to the Rights of Security Holders and Use of Proceeds.................        97
Item 15.     Controls and Procedures......................................................................        97
Item 16.     [Reserved]...................................................................................        97

                                                       PART III

Item 17.     Financial Statements.........................................................................        98
Item 18.     Financial Statements.........................................................................        98
Item 19.     Exhibits.....................................................................................        98
Index to Financial Statements.............................................................................       F-1
</TABLE>


<PAGE>

                                     PART I

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

              Not Applicable.

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE.

              Not Applicable.

ITEM 3.  KEY INFORMATION.

SELECTED FINANCIAL DATA

     The following selected consolidated financial data as of December 31, 2001
and 2002 and for the years ended December 31, 2000, 2001 and 2002 have been
derived from our audited consolidated financial statements. These financial
statements have been prepared in accordance with generally accepted accounting
principles in the United States, or U.S. GAAP, and audited by Kost, Forer &
Gabbay, a member of Ernst & Young Global. The consolidated selected financial
data as of December 31, 1998, 1999 and 2000 and for the years ended December 31,
1998 and 1999 have been derived from other consolidated financial statements not
included in this annual report and have also been prepared in accordance with
U.S. GAAP and audited by Kost, Forer & Gabbay, a member of Ernst & Young Global.
The selected consolidated financial data set forth below should be read in
conjunction with and are qualified by reference to "Item 5, Operating and
Financial Review and Prospects" and the consolidated financial statements and
notes thereto and other financial information included elsewhere in this annual
report.

                                        2
<PAGE>
<TABLE>
<CAPTION>

                                                                YEAR ENDED DECEMBER 31,
                                               -----------------------------------------------------------
                                                  1998        1999        2000         2001         2002
                                               ---------    ---------  ---------    ---------    ---------
                                                   (IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
<S>                                           <S>          <C>         <C>         <C>          <C>
OPERATING DATA:
Revenues.....................................
     Products                                     N/A          N/A        N/A        $112,634     $134,783
     Services                                     N/A          N/A        N/A          14,474       27,722
                                               ---------    ---------  ---------    ---------    ---------
Total revenues                                    90,970      117,411    153,163      127,108      162,505
                                               ---------    ---------  ---------    ---------    ---------
Cost of revenues.............................
      Products                                    N/A          N/A        N/A          54,321       58,693
      Services                                    N/A          N/A        N/A          19,446       26,054
                                               ---------    ---------  ---------    ---------    ---------
Total cost of revenues ......................     37,038       49,020     73,554       73,767       84,747
                                               ---------    ---------  ---------    ---------    ---------
Gross profit.................................     53,932       68,391     79,609       53,341       77,758
                                               ---------    ---------  ---------    ---------    ---------
Operating expenses:
     Research and development, net...........      9,819       12,353     19,502       19,190       17,925
     Selling and marketing...................     18,767       25,793     35,448       35,046       40,494
     General and administrative..............     16,579       18,734     28,300       27,143       23,806
     Other special charges...................      9,733        5,415      7,646       17,967       29,092
                                               ---------    ---------  ---------    ---------    ---------
Total operating expenses.....................     54,898       62,295     90,896       99,346      111,317
                                               ---------    ---------  ---------    ---------    ---------
Operating income (loss)......................       (966)       6,096    (11,287)     (46,005)     (33,559)
Financial income, net........................      5,792        4,809      6,188        4,254        3,992
Other income (expenses), net.................          -           (4)        53       (4,846)      (4,065)
                                               ---------    ---------  ---------    ---------    ---------
Income (loss) before taxes on income.........      4,826       10,901     (5,046)     (46,597)     (33,632)
Taxes on income..............................        347           74        273          198          350
                                               ---------    ---------  ---------    ---------    ---------
Net income (loss)............................     $4,479      $10,827   $(5,319)     $(46,795)    $(33,982)
                                               =========    =========  =========    =========    =========
Basic earnings (loss) per share..............      $0.40        $0.94    $(0.43)       $(3.59)      $(2.46)
                                               =========    =========  =========    =========    =========
Weighted average number of shares used in
  computing basic earnings (loss) per share
  (in thousands).............................     11,192       11,559     12,317       13,047       13,795
                                               =========    =========  =========    =========    =========
Diluted earnings (loss) per share............      $0.37        $0.88    $(0.43)       $(3.59)      $(2.46)
                                               =========    =========  =========    =========    =========
Weighted average number of shares used in
  computing diluted earnings (loss) per
  share (in thousands).......................     12,010       12,249     12,317       13,047       13,795
                                               ---------    ---------  ---------    ---------    ---------


                                                                    AT DECEMBER 31,
                                               -----------------------------------------------------------
                                                  1998        1999        2000         2001         2002
                                               ---------    ---------  ---------    ---------    ---------
BALANCE SHEET DATA:
Working capital..............................   $126,266     $133,398   $117,319      $69,931      $79,206
Total assets.................................    179,155      206,022    251,489      210,012      236,288
Total debt...................................          -            3          -            -           24
Shareholders' equity.........................    157,207      179,070    208,577      167,018      154,536
</TABLE>

                                        3

<PAGE>

EXCHANGE RATE INFORMATION

     The following table shows, for each of the months indicated, the high and
low exchange rates between New Israeli Shekels and U.S. dollars, expressed as
shekels per U.S. dollar and based upon the daily representative rate of exchange
as reported by the Bank of Israel:

     MONTH                                            HIGH             LOW
     ----------------------                       ------------      ----------
     December 2002.........................   NIS       4.791   NIS     4.632
     January 2003..........................             4.898           4.769
     February 2003.........................             4.924           4.810
     March 2003............................             4.858           4.687
     April 2003............................             4.671           4.521
     May 2003..............................             4.577           4.373

     The following table shows, for periods indicated, the average exchange rate
between New Israeli Shekels and U.S. dollars, expressed as shekels per U.S.
dollar, calculated based on the average of the exchange rates on the last day of
each month during the relevant period as reported by the Bank of Israel:

            YEAR                                               AVERAGE
          ---------                                      ---------------------
            1998.....................................           3.810
            1999.....................................           4.153
            2000.....................................           4.068
            2001.....................................           4.203
            2002.....................................           4.738

     On June 17, 2003, the exchange rate was NIS 4.353 per U.S. dollar as
reported by the Bank of Israel.

     The effect of exchange rate fluctuations on our business and operations is
discussed in "Item 5. Operating and Financial Review and Prospects."

DIVIDENDS

     We have never declared or paid dividends on our ordinary shares. We intend
to retain our earnings for future growth and therefore do not anticipate paying
any cash dividends in the foreseeable future.

                                       4
<PAGE>

RISK FACTORS


GENERAL BUSINESS RISKS TO NICE BUSINESS PORTFOLIO AND STRUCTURE

INTEGRATION OF THALES CONTACT SOLUTIONS FOLLOWING THE ACQUISITION IN NOVEMBER
2002 MAY PLACE SIGNIFICANT DEMANDS ON OUR OPERATIONS AND FINANCIAL RESOURCES.

     We completed the acquisition of Thales Contact Solutions (or TCS) in
November 2002. We cannot guarantee the successful integration of top management,
people, product platforms, partners and distribution channels. The integration
of TCS also requires a high level of management attention, which further puts
risk on day-to-day business management. The integration of acquired companies
may place significant demands on our operations and financial resources.
Acquisitions of companies involve financial, operational and legal risks,
including the difficulty of assimilating operations and personnel of the
acquired companies and of maintaining uniform standards, controls, procedures
and policies. Any failure to effectively integrate any acquired company could
have a material adverse effect on our business, financial condition and results
of operations.

THE MARKETS IN WHICH WE OPERATE ARE CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES
AND FREQUENT NEW PRODUCTS AND SERVICE INTRODUCTIONS. WE MAY NOT BE ABLE TO KEEP
UP WITH THESE RAPID TECHNOLOGICAL AND OTHER CHANGES.

     We are operating in several markets, each characterized by rapidly changing
technology 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 a number of existing and potential
competitors will be introducing new and enhanced products. 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 where 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. We cannot assure you that the market or demand for our 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
render our products obsolete. 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.

WE MAY NOT SUCCEED IN MAKING ADDITIONAL ACQUISITIONS OR BE EFFECTIVE IN
INTEGRATING SUCH ACQUISITIONS.

     One of our business strategies is to pursue acquisitions of businesses,
products and technologies that are complementary to those of our businesses. In
the past, we have entered into a number of acquisitions and we may make
additional acquisitions in the future. There can be no

                                       5
<PAGE>

assurance that we will be successful in making additional acquisitions or
effective in integrating such acquisitions. In addition, if we consummate one or
more significant acquisitions in which the consideration consists, in whole or
in part, of ordinary shares or ADSs, shareholders would suffer dilution of their
interests in us.

WE MAY BE UNABLE TO MANAGE OUR EXPANSION AND ANTICIPATED GROWTH EFFECTIVELY.

     In 2002 we have expanded our presence in Europe (mainly in the UK) and the
Middle East and Africa (or EMEA) through organic growth and through the
acquisition of TCS. The growth in our business in EMEA is still in its early
stage, and particularly, we are just beginning to develop our digital video
business in EMEA. We expect continued growth, particularly in connection with
the enhancement and expansion of our operations in EMEA as well as in the Asia
Pacific (or APAC) region. 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. Failure to effectively manage
expansion of our sales, marketing, service and support organizations could have
a negative impact on our business.

WE HAVE RECENTLY MIGRATED TOWARDS THE OUTSOURCING OF THE MANUFACTURING OF OUR
KEY PRODUCTS. THE FAILURE OF OUR SUPPLIERS TO MEET OUR QUALITY OR DELIVERY
REQUIREMENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.

     During 2002, we implemented a manufacturing agreement with Flextronics
Israel Ltd., a global electronics manufacturing services company. Under this
agreement Flextronics is providing us with a turnkey manufacturing solution from
order receipt to product shipment including purchasing, manufacturing, testing,
configuration, and delivery services. This agreement currently covers all our
products. With the acquisition of TCS, we assumed a contract manufacturing
agreement with INSTEM (of the UK) for all ex-TCS products. Consequently, we are
now fully dependent on Flextronics and INSTEM and the manufacturing of our
products is not in our control. We may experience delivery delays due the
inability of the outsourcers to consistently meet our quality or delivery
requirements. If these suppliers or any other supplier were to cancel contracts
or commitments with us or fail to meet the quality or delivery requirements
needed to satisfy customer orders for our products, we could lose time-sensitive
customer orders and have significantly decreased quarterly revenues and
earnings, which would have a material adverse effect on our business, results of
operations and financial condition.

IF WE LOSE OUR KEY SUPPLIERS, OUR BUSINESS MAY SUFFER.

     Certain components and subassemblies that we use in our existing products
are purchased from a single or a limited number of suppliers. In the event 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
suppliers' 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. 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

                                       6
<PAGE>

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.

IF WE LOSE OUR KEY PERSONNEL OR CANNOT RECRUIT ADDITIONAL PERSONNEL, OUR
BUSINESS MAY SUFFER.

     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, 2002, approximately 25% of our employees were
devoted to research and product development and 27% were devoted to marketing
and sales. An inability to attract and retain highly qualified employees may
have an adverse effect on our ability to develop new products and enhancements
for existing products and to successfully market such products.

     Our success also depends, to a significant extent, upon the continued
service of a number of key management, sales, marketing and technical employees,
the loss of whom could materially adversely affect our business, financial
condition and results of operations.

OPERATING INTERNATIONALLY EXPOSES US TO ADDITIONAL AND UNPREDICTABLE RISKS.

     We sell our products throughout the world and intend to continue to
increase our penetration of international markets. In 1998, 1999, 2000, 2001 and
2002, approximately 98%, 99%, 97%, 96% and 98%, respectively, of our total sales
were derived from sales to customers outside of Israel, and approximately 42%,
50%, 53%, 48% and 50% respectively, of our total sales were made to customers in
North America. A number of risks are inherent in international transactions.
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.

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 certain extent, upon our proprietary
technology. We currently own ten patents (including seven in the United States)
to protect our technology and we have 46 applications pending in the United
States and other countries. We currently rely on a combination of patent, trade
secret, copyright and trademark law, together with non-disclosure and
non-compete agreements, to establish and protect the technology used in our
systems. However, we cannot assure you that such measures will protect our
proprietary technology, that competitors will not develop products with features
based upon, or otherwise similar to, our systems or that we will prevail in any
proceeding instituted by us in order to enjoin competitors from selling similar
products.

                                       7
<PAGE>

     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. In June 2000, Dictaphone Corporation, one of our competitors, filed a
patent infringement claim relating to certain technology embedded in some of our
products. The claim is for damages for past infringement and enjoinment of any
continued infringement of Dictaphone patents. In the court's discretion, the
damages may be trebled and attorney fees awarded. As a result we might be forced
to pay significant damages and licensing fees, modify our business practices or
even be enjoined from conducting a significant part of our U.S. business. Any
such results could materially harm our business. We believe, however, that we
have a valid defense to this claim and are vigorously defending it. We have
received notification from our insurance company indicating that the claim is
not covered by our insurance policy; however, our insurance company has agreed
to reimburse for us all legal expenses that we are expending in defense of the
claim while reserving its final decision on this matter until the final outcome
of the litigation. The discovery period is closed, dispositive motions have been
filed with the Court, and we are awaiting the Court's decisions on these motions
as well as scheduling for trial.

     In April 2002, we received a letter from Dictaphone stating that several of
our products were using technology protected by additional Dictaphone patents
and offering us a licensing arrangement for these patents. We believe that none
of our products infringe upon those patents.

     From time to time, we receive "cease and desist" letters alleging patent
infringements. No formal claims or other actions (aside from Dictaphone) have
been filed with respect to such letters. We believe that none of these
allegations has merit. We cannot assure you, however, that we will be successful
in defending Dictaphone's infringement claim or other claims. We also cannot
assure you that Dictaphone's claims, or others' claims if asserted, will not
have a material adverse effect on our business, financial condition, or
operations. Defending the infringement claim or other claims could involve
substantial costs and diversion of management resources. In addition, to the
extent we are not successful in defending such claims, we may be subject to
injunctions with respect to the use or sale of certain of our products or to
liabilities for damages and may be required to obtain licenses which may not be
available on reasonable terms.

WE FACE POTENTIAL PRODUCT LIABILITY CLAIMS AGAINST US.

     We may be subject to claims that our products are defective or that some
function or malfunction of our products caused or contributed to property,
bodily or consequential damages. We minimize this risk by incorporating
provisions into our distribution and standard sales agreements that are designed
to limit our exposure to potential claims of liability. We carry product
liability insurance in the amount of $10,000,000 per occurrence and $10,000,000
overall. No assurance can be given that all claims will be covered either by the
contractual provisions limiting liability or by the insurance, or that the
amount of any individual claim or all claims will be covered by the insurance or
that the amount of any individual claim or all claims in the aggregate will not
exceed policy coverage limits.

                                       8
<PAGE>

WE MAY 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. Although to date we have not experienced
any material problems in our performance of government contracts, or in the
receipt of payments in full under such contracts, we cannot assure you that we
will not experience problems in the future.

RISKS RELATING TO ISRAEL

OUR BUSINESS MAY BE IMPACTED BY INFLATION AND NIS EXCHANGE RATE FLUCTUATIONS.

     Exchange rate fluctuations between the 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 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 dollar. We cannot predict any future trends in the rate
of inflation in Israel or the rate of devaluation of the NIS against the dollar.
If the dollar cost of our operations in Israel increases, our dollar-measured
results of operations will be adversely affected.

WE ARE SUBJECT TO THE POLITICAL, ECONOMIC AND MILITARY CONDITIONS IN ISRAEL.

     Our headquarters, research and development and main manufacturing
facilities are located in the State of Israel, and we are directly affected by
the political, economic and military 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, which has led to a crisis in the entire
peace process and affected Israel's relationship with several Arab countries.
Any 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 the increase in the degree of violence
between Israel and the Palestinians. 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 the
recent increase in hostilities. Our products are heavily dependent upon
components imported from, and most of our sales are made to, countries outside
of Israel. Accordingly, our operations could be materially adversely affected if
trade between Israel and its present trading partners were interrupted or
curtailed.

     Some of our directors, officers and employees are currently obligated to
perform annual military reserve duty. Additionally, 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.

                                       9
<PAGE>

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.

     There is doubt as to the enforceability of civil liabilities under the
Securities Act and the Securities Exchange Act in original actions instituted in
Israel. However, subject to certain time limitations and other conditions,
Israeli courts may enforce final judgments of United States courts for
liquidated amounts in civil matters, including judgments based upon the civil
liability provisions of those Acts.

WE DEPEND ON THE AVAILABILITY OF GOVERNMENT GRANTS AND TAX BENEFITS.

     We derive and expect to continue to derive significant benefits from
various programs and laws in Israel including tax benefits relating to our
"Approved Enterprise" programs and certain grants from the Office of the Chief
Scientist, 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). 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 Government's support of grants, programs and benefits will
continue.

     Pursuant to an amendment to Israeli regulations, income from two of our
"Approved Enterprises" is exempt from income tax for only two years. Following
this two-year period, 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 the other two
"Approved Enterprises" is tax exempt for four years. Following this four-year
period, the "Approved Enterprises" are 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.

     If grants, programs and benefits available to us or the laws 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), our business, financial condition
and results of operations could be materially adversely affected.

                                       10
<PAGE>

RISKS RELATING TO NICE BUSINESS

THE INDUSTRY FOR OUR VOICE PLATFORMS AND APPLICATIONS BUSINESS IS 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 THAT REFLECT A HIGHLY COMPETITIVE MARKET.

     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 entities operating in the contact
center, trading floor, public safety and air traffic control segments to
capture, store, retrieve and analyze recorded data. The market for our Voice
Platforms and Applications is characterized by a group of highly competitive
vendors that are introducing rapidly changing competitive offerings around
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 a number of existing and potential competitors will
be introducing new and enhanced products. 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, 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. We cannot assure you that the market or demand for our 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
render our products obsolete. 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 or results of
operations.

CONTINUING ADVERSE CONDITIONS IN INFORMATION TECHNOLOGY SECTORS MAY LEAD TO A
DECREASED DEMAND FOR OUR VOICE PLATFORMS AND APPLICATIONS AND MAY HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     Our operating results may be materially adversely affected as a result of
recent unfavorable economic conditions and reduced information technology
spending, particularly in the product segments in which we compete. During 2002,
there was a decrease in demand for our Voice Platforms and Applications as
customers delayed or reduced information technology expenditures. In particular,
many enterprises, telecommunications carriers and service providers have reduced
spending in connection with contact centers, and many financial institutions
have reduced spending related to trading floors. These trends may adversely
affect the growth of sales of new Applications. If these industry-wide
conditions persist, they will likely have an adverse impact, which may be
material, on our business, financial condition and results of operations.

                                       11
<PAGE>

VOIP EXPANSION

     The expansion of the new Voice over Internet Protocol (or VOIP) in contact
centers and trading floors may lead to other companies taking leadership.
Strategic partners may change their vendor preferences. New developments of VOIP
may lead to embedded VOIP recording as part of the VOIP switch or networking
infrastructure. We cannot assure you that our products or existing partnerships
will ensure sustainable leadership.

WE DEPEND ON A NUMBER OF KEY STRATEGIC DISTRIBUTION PARTNERS FOR OUR VOICE
PLATFORM AND APPLICATION SALES

     In 2002 more than 57% of our indirect sales for Voice Platforms and
Applications came from strategic partners, which accounted for a total of 39% of
our entire Voice Platforms and Applications sales, or 32% of our entire sales.
Our competitors' ability to penetrate these strategic relationships,
particularly our relationship with AVAYA, our largest global distribution
partner, may result in a significant reduction of sales through that partner.

WE DEPEND ON THE SUCCESS OF THE NICELOG SYSTEM AND RELATED PRODUCTS.

     We are dependent on the success of the NiceLog system and related products
to maintain profitability. In 1998, 1999, 2000, 2001 and 2002, approximately and
respectively, 94%, 88%, 84%, 79%, and 78% 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 ARE EXPANDING THE SCOPE OF OUR VOICE PLATFORMS AND APPLICATIONS TO INCLUDE
ENTERPRISE BUSINESS PERFORMANCE MANAGEMENT SOLUTIONS. WE MAY NOT HAVE THE
SUFFICIENT RESOURCES TO SUCCESSFULLY LEAD SUCH A PROCESS.

     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 assure you 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.

OUR SUCCESS IN THE PUBLIC SAFETY SEGMENT DEPENDS ON SEVERAL MARKETING FACTORS.

                                       12
<PAGE>

     Our ability to succeed in the public safety segment 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 a low-end entry
barrier. We face fierce competition from players like Dictaphone, CVDS,
VoicePrint and others that results in price erosion. We believe that our ability
to sell and distribute our Voice Platforms and Applications to the public safety
market depends on a number of successful marketing and product development
initiatives, but cannot assure you of their success.

THE VIDEO PLATFORM AND APPLICATIONS MARKET IN WHICH WE OPERATE IS HIGHLY
COMPETITIVE AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY.

     Another market which we service is the market for digital video products
and applications (or Video Platform and Applications). Our Video Platform 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 Platform and Applications is
highly competitive and includes products offering a broad range of features and
capacities. We compete with a number of large, established manufacturers of
video recording systems and distributors of similar products, as well as new
emerging players in the field. 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 thereof. We cannot assure you that we will be able
to compete successfully or that competition will not have a material adverse
effect on our business, financial condition and results of operations.

WE MAY BE UNABLE TO DEVELOP STRATEGIC ALLIANCES AND MARKETING PARTNERSHIPS FOR
THE GLOBAL DISTRIBUTION OF OUR VIDEO PLATFORM 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 Platform and
Applications and in penetrating new markets for such products. We have recently
started to develop a number of strategic alliances for the marketing and
distribution of our Video Platform and Applications. We cannot assure that we
will be able to successfully develop such partnerships or strategic alliances.
Failure to develop such arrangements may limit our ability to successfully
market and sell our Video Platform and Applications and may have a negative
impact on our business.

                                       13
<PAGE>

WE ARE DEVELOPING NEW VIDEO CONTENT ANALYSIS APPLICATIONS. WE MAY NOT HAVE
SUFFICIENT RESOURCES TO SUCCESSFULLY COMMERCIALIZE SUCH APPLICATIONS.

     We are developing and commercializing new video content analysis
applications that enable real-time detection of security threats. The market for
such video content analysis applications is still in an early phase. As this is
a new opportunity for changing security procedures and transition to proactive
security management, we cannot anticipate the pace in which security
organizations will adopt this technology. 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 the
market awareness or demand for such 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 video content analysis applications.

OUR COMINT/DF BUSINESS IS SMALL.

     Another market we serve is the market for communication intelligence and
direction finding (or COMINT/DF) applications utilized by military intelligence
operations. Our COMINT/DF business is small in size, we are considered a niche
player, and are depending on system integrators for the growth of the business.
We cannot assure you the sustainability of this business in the longer term.

OUR LAWFUL INTERCEPTION PRODUCT OFFERINGS BUSINESS IS IN ITS EARLY STAGES.

     Our NiceTrack system for the Lawful Interception marketplace is
particularly designed for the new European Telecommunications Standardization
Institute (or ETSI) standard. The implementation of this standard may be very
slow and the potential of sales may be limited.

THE PACE OF THE HOMELAND SECURITY SPENDING MAY BE SLOWER THAN ANTICIPATED.

     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 US Homeland Security
department as well as local, state and municipal governments and security
organizations in international markets. We cannot be sure that the spending
cycle will materialize and that we will be positioned to benefit from the
potential opportunities.

RISKS RELATED TO OUR ORDINARY SHARES AND ADSS

OUR SHARE PRICE MAY BE VOLATILE AND MAY DECLINE.

     Numerous factors, some of which are beyond our control, may cause the
market price of our ordinary shares or our American Depositary Shares, or ADSs,
each of which represents one ordinary share, to fluctuate significantly. These
factors include, among other things, announcements of technological innovations,
customer orders or new products by us or our competitors, earning releases by us
or our competitors, 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.

                                       14
<PAGE>

OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS MAY FLUCTUATE SIGNIFICANTLY
AND MAY CAUSE OUR SHARE PRICE TO BE VOLATILE.

     Our quarterly operating results may be subject to significant fluctuations
due to various factors, including the length of the sale cycles, 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. In particular, the COMINT/DF products are long-term
projects that may also affect quarterly results. 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 shares
and ADSs would likely be materially adversely affected.

                                       15
<PAGE>

ITEM 4.   INFORMATION ON THE COMPANY.


GENERAL

     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 renamed NICE-Systems Ltd. on October 14, 1991. Our principal
executive offices are located at 8 Hapnina Street, P.O. Box 690, Ra'anana 43107,
Israel and the telephone number at that location is +972-9-775-3030. Our agent
for service in the United States is our subsidiary, NICE Systems Inc., 301 Route
17 North, Rutherford, New Jersey 07070.


PRODUCTS/MARKETS OVERVIEW

1) VOICE PLATFORMS AND APPLICATIONS

     PRODUCTS

     Our Voice Platforms and Applications include recording, monitoring, quality
management and business performance management solutions which are designed to
protect businesses and customers against risks posed by lost or misinterpreted
voice or data transmissions and capture, evaluate and analyze customer
interactions in order to improve contact center agent performance, business
processes and the customers' experience.

     Voice recorders (or loggers) are systems that capture and record large
volumes of voice data transmitted over multiple telephone or other communication
lines and allow users to retrieve and playback specific communication data.
Traditional voice recorders were based on analog reel-to-reel technology, which
limited an organization's ability to store and retrieve data efficiently, and
which could not interface with digital computer and telecommunication networks.
In the early 1990s, analog reel-to-reel recorders began to be replaced with
analog VHS-based products and, more recently, by digital products, including
those based on magnetic disk, optical disk or digital audio tapes (or DAT).
Organizations' growing needs to record, process and store large amounts of voice
data resulted in the introduction of digitally-based voice recording systems
characterized by increased performance and improved system economics. Digital
multi-channel recording systems enable simultaneous recording and logging of a
large number of channels, while enabling a large number of users to process
voice data simultaneously. Digital systems' advantages over traditional analog
systems include the immediate random access to recorded data, open connectivity
and compact size of both the recording unit and storing and archiving media.
Advanced, industry-standard, digital voice recording systems employing CTI
technologies allow for integration of the recording and retrieval functions with
organizations' computer and telecommunications networks, thereby delivering
maximum business benefits, increased user efficiency, and wider access for a
larger numbers of users. The demand for sophisticated CTI digital voice
recording systems is increasing as a result of the increased demand for digital
recording systems, particularly in the contact center market and the conversion
by the large installed base of analog systems to digital technology,
specifically in the financial institutions, public safety and ATC markets.

                                       16
<PAGE>

     NiceLog, our flagship 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 playback up to 224 channels allowing
for substantial space saving. NiceLog's open architecture provides a wide
variety of connectivity options to computer networks such as Novell/IPX and
TCP/IP using Windows 95, Windows NT, Windows 2000, Windows XP and UNIX operating
systems, and telecommunication interfaces such as T1, E1, ISDN and analog
trunks. The modular design of the NiceLog system makes it a powerful voice
management tool that can be expanded to satisfy customers' needs by integrating
it with additional NiceLog units on the same local area network, or LAN.

     The NiceLog's system administrator software enables the system's supervisor
to configure individual or multiple voice loggers from the central workstation
and to setup passwords for individual users. The supervisor software constantly
monitors the integrity of the system and displays error or warning messages when
storage capacity is low or if there are any other problems with the system. The
voice recorders are activated by commands received from a workstation through a
LAN. NiceLog stores all information on hard disk for immediate retrieval, and on
DAT for long-term archiving, through advanced compression technology. All stored
information can be accessed simultaneously by any number of authorized users
connected to the LAN through decompression of stored data.

     NiceLog`s central storage option can integrate with enterprise storage
networks (SAN or NAS) for long term or medium term voice storage. Central
storage sites can hold the entire voice recording from all the organization's
different sites thus reducing management costs and redundancy. The retrieval
process for voice on the central site is fully automatic.

     NiceLog's playback function can be activated by any authorized user through
a workstation or a standalone PC, connected via a standard network interface.
Easy scanning and subsequent instantaneous random access playback of all
recorded voice communications can be performed by a single or several authorized
users at their desktop with the help of the NiceLog graphical user interface,
which operates under a Windows platform. The playback can be routed directly
through a speaker or via the private automatic branch exchange (PABX) to the
user's phone extension. The playback user interface provides for full playback
control, including advanced features such as random jumps, loops and optional
variable speed reproduction without pitch distortion.

     NiceCLS is an add-on module included in the NiceLog system. NiceCLS is a
CTI server connected to the customer's switch, business data system and other
NiceLog system components. It collects call details such as start and stop
times, extension numbers, caller ID, routing path in the switch, agent
identification, agent group, and customer and transaction identification. This
information is integrated with the recorded voice, forming a comprehensive call
database and enabling additional recording solutions. With this high level of
integration, NiceLog provides

                                       17
<PAGE>

additional advanced solutions, such as selective recording and recording on
demand, and enables calls to be quickly retrieved and analyzed. The
sophisticated indexing of the database enables prompt location and retrieval of
recordings. Free-seating environments, such as contact centers and trading
floors, where the trader or agent may log-in to any telephone station, require
NiceCLS' capabilities for immediate recognition of individual users regardless
of the telephone or channel accessed. NiceCLS also enables cost-effective
trunk-side recording. NiceCLS can be adapted to the customer's needs based on
the host environment and the size and type of database.

     NiceCall Focus is a voice recording system that records up to 32 input
channels and provides up to 4000 hours of on-line voice storage capacity.
NiceCall Focus is the next generation product replacing the NiceCall product.
NiceCall Focus 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 the NiceLog. NiceCall Focus 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, introduced in February 1998, is a comprehensive quality
management solution used to evaluate 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 real-time monitoring for instant access to live customer interactions
and enhanced reporting and administration features. NiceUniverse uses a CTI that
integrates with ACDs. This enables NiceUniverse to monitor and record agent
sessions (voice and screen) on a user-defined schedule and store them in
compressed digital format. Sessions are later retrieved by the reviewers from
their network PCs, 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.

     Through the acquisition of TCS, NICE provides first responders and air
traffic control organizations with a full range of recording features for voice,
radio and trunked radio, including on-line access to hundreds of hours of
recording for a quick response time, a choice of different types of archiving
media, and a dubbing capability to edit calls on-line for courtroom
presentations. The system enables the organizations to re-construct scenarios,
investigate and improve performance. NICE is a leader in this market and our
products are currently being used in a significant number of air traffic control
facilities, including FAA and NAV Canada, as well as large police,
transportation, emergency services command and control centers.

     The underlying voice recording platforms used in the public safety
marketplace are similar to the products described above. Their primary use is to
record and replay voice conversations and associated data in order to be able to
reconstruct and analyze incidents that have occurred. However, there are some
significant technical differences owing to the need in many cases to capture not
only voice traffic coming into and out of the public service command and control
center, e.g. a 911 center, but also the radio traffic that is occurring between
the command and control center and the field personnel. Hence the technical
interfaces and architecture of the products are often different to those
required for commercial environments.

                                       18
<PAGE>

     The other major difference is that there may be the need to replay and
analyze multiple conversations that occurred in connection with an event in
order to fully analyze it. For example, it may be necessary to replay, in
synchronism, many different radio channels, together with the radio dispatch
conversations, together with the telephone conversations from multiple callers.

     Our public safety products range 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. Below
is a description of our public safety products.

     Wordnet is a medium sized recording system and its current Series 3 version
is available with up to 128 channels per unit. Multiple units can be configured
into a larger, integrated system of many hundreds or thousands of channels.
Wordnet has a wide range of analogue and digital interfaces, to the
telecommunications networks that it is recording from and stores the digitized
voice and other data on internal hard disk and optional additional external RAID
hard disk storage systems. Voice recordings and associated data can be archived
for long term retention onto DVD disks or VXA tapes. Wordnet is usually
connected to a LAN to provide access to the system management and replay
applications that run on separate PC servers. Wordnet has a powerful CTI
capability and can be integrated with a wide range of proprietary CTI interfaces
from companies including Aspect, Siemens, Avaya, Damovo, Nortel, Alcatel,
Motorola and BT.

     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 analogue and digital interfaces. Mirra has been designed
to be simple to install, operate and maintain and has been sold into many local,
city and state public safety organizations that have a single site operation.
Digitized voice and associated data are stored onto 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.

     Tienna is a large recorder that is designed to form part of a Renaissance
solution. Renaissance solutions are used when the customer has a complex
requirement typically involving multiple recorders, multiple sites and
dual-redundant components in order to provide very high performance and
resilience. Tienna can provide up to 480 channels per unit and multiple units
can be interconnected to form a system of many thousands of ports. Tienna is
unique in that it provides dynamic channel allocation between the active ports
on the recorder and a greater number of channels on the networks to which it is
connected. This provides a more efficient use of the system's resources than a
permanent 1:1 connection of channels to ports. Tienna contains internal hard
disks for short term storage but relies upon the Renaissance Centralized Mass
Storage Unit (CMSU) for all medium and long term storage and for archiving onto
tapes.

     Renaissance solutions can incorporate combinations of Wordnet and Tienna
recorders as well as the Central Mass Storage Unit (CMSU), Calls Database and
Replay Server. These components operate together in a networked configuration to
provide a complete recording solution and can be fully duplicated in order to
provide very high levels of redundancy and reliability.

                                       19
<PAGE>

MARKETS

     The market for digital voice recording, quality monitoring and performance
management products has experienced steady growth in recent years as a result of
the increase in the use of telephones to obtain information, to initiate
business and consumer contacts, to provide services such as banking and
insurance, and to sell products through contact centers.

     Users of our Voice Platforms and Applications, include financial
institutions, such as brokerage and trading houses; contact centers, such as
telemarketing, telebanking and teleinsurance facilities; public safety and
transportation agencies, such as police, fire and ambulance departments; ATC
centers; and intelligence agencies.

     FINANCIAL INSTITUTIONS. Financial institutions conduct a substantial
portion of their business over the telephone and are increasingly relying upon
their ability to record, store and retrieve voice data of transactions in a
timely, reliable and efficient manner. Brokers and dealers record and store
recordings of transactions to provide back-up and verification of such
transactions and to guard against risks posed by lost or misinterpreted voice
communications. Our customers in the financial institutions market include ABN
AMRO Bank, Chase Manhattan Bank, Citibank, Deutsche Bank, Dresdner Bank, First
Chicago NBD, CIBC Oppenheimer, Bank of America, the Sydney Futures Exchange and
many others.

     CONTACT CENTERS. Businesses and other organizations are increasingly using
dedicated centers for processing and managing high volumes of incoming and
outgoing customer telephone traffic. Contact centers have been used extensively
in such fields as credit card and consumer collections, telebanking,
teleinsurance, catalog sales, telemarketing and customer service. In these
contact centers, activities such as placing and receiving telephone calls are
linked to database management computer functions to capture, store and report
relevant customer information. Typically, the contact center is the primary
"hub" within an organization for placing or receiving a large volume of customer
calls. Customer service representatives are the contact center's workforce
responsible for talking with customers about subjects, including reservations,
product information, account information, and problem resolution. As the
importance of the contact center has increased and as more functions and
capabilities have been combined, a parallel industry has emerged. This industry
creates and supports the systems, software and services that are designed to
make these contact centers efficient, effective and well matched to the broader
corporate mission of the enterprise. The contact center market, particularly in
the United States, has been increasingly using continuous and random voice
recording systems to enable storage of the details of telephone orders and other
transactions, supervision of contact center operators and campaigns, and
evaluation of salespersons' efficiency, customer service and training. Users of
the NiceLog system in this market include Addison Lee, Banque Directe, British
Gas, Halifax Direct, The Montana Power Company, Thomas Cook, Vodafone Connect
and Yorkshire Electricity. Users of our NiceUniverse quality management system
include APAC Customer Services, Arch Communications, Boston Communications,
Electric Insurance Company, and TeleTech Holdings.

                                       20
<PAGE>

     PUBLIC SAFETY AND EMERGENCY SERVICES. These organizations include police,
fire, ambulance, coastguard, mountain rescue and other similar public and
private bodies that respond to calls for assistance from the public. In most
cases, local, state or federal law requires that all communications traffic be
recorded in order that evidence can be provided in courts of law, and in order
that the public safety body can verify that it is following prescribed processes
and meeting performance standards. Our customers in the public safety market
include: New York Police Department, Los Angeles Police Department, Chicago
Police Department, Indiana State Police, New Jersey State Police, Seattle Fire
Department, US Department of Defense, Hampshire Police - UK and Hertfordshire
Police - UK.

     PUBLIC TRANSPORT AGENCIES. These organizations include rail, bus and mass
transit metro systems. They use large-scale, distributed, fixed and mobile
communications networks in order to provide command and control capabilities
between the mobile units and one or more control rooms. In the event of an
incident, they are required to be able to produce recordings of all associated
communications traffic. Many of these organizations are implementing the latest
generation of digital trunked radio systems according to one of the several
international standards, such as TETRA, Tetrapol or APCO25, and the recording
system is required to interface to these radio systems in order to capture and
identify all radio traffic. Our customers in the public transportation market
include authorities like Singapore Mass Transit Authority and Railtrack - UK.

     AIR TRAFFIC CONTROL. The ATC market is a traditional user of voice
recording systems due to mandatory requirements for the recording of voice
communications and radio transmissions. ATC centers are evaluating the need to
upgrade their voice communications recording and archiving systems by installing
digital voice loggers. NiceLog was selected by the FAA as the voice recording
system to be installed in over 800 ATC centers in the United States. NiceLog and
Wordnet have also been selected by ICAO and other ATC authorities in Austria,
Canada, China, Croatia, Cyprus, Finland, Germany, Hong Kong, Hungary,
Kazakhstan, Iceland, Israel, Japan, the Maldive Islands, the Netherlands,
Norway, Poland, Romania, Switzerland and Turkey.

     INTELLIGENCE AGENCIES. Law enforcement and intelligence agencies collect
large amounts of information in various media for analysis and evaluation,
although only a small portion of that information is valuable. Intelligence
agencies require sophisticated multi media recording systems that enable the
recording, retrieval and processing of the information gathered for purposes of
analysis and evaluation. Users who have installed NiceLog or Wordnet systems,
either as stand alone systems or in combination with other systems, include
intelligence agencies in more than twenty countries.

                                       21
<PAGE>

SALES AND MARKETING, STRATEGIC RELATIONSHIPS

     We market, distribute and service our Voice Platforms and Applications
worldwide primarily through independent dealers that predominantly specialize in
the voice recording market and contact center market, as well as through our own
sales and technical support force in the United States, Canada, Germany, the
United Kingdom, France, Hong Kong and Israel. Most of the sales made by our
sales force are made to our distributors, who then install the systems and
provide day-to-day support to end-users.

     In the Financial Trading segment, we have established marketing, sales and
support arrangements with leading suppliers of complementary products such as
IPC and Etrali, two leading suppliers of telephony switching equipment to
financial institutions and trading rooms. These companies market and distribute
our products to their customers either as stand-alone systems or as integrated
components of their own systems, as follows:

     o    An OEM agreement with IPC Information Systems, Inc. IPC, a leading
          provider of integrated communications solutions to the financial
          services community, has embedded a NiceLog platform customized for IPC
          into IPC's Alliance MX product line and sells this product as an
          integral part of the IPC product.

     o    A marketing agreement with Etrali S.A., a telecom integrator serving
          the financial community. Etrali is the European leader of dealerboard
          systems for trading rooms. Etrali and we have closely integrated our
          products for dealing rooms, which are distributed globally by Etrali
          S.A.

     o    A marketing agreement with BT Syntegra, BT's selling and integration
          company in the trading floor segment.

     In the Contact Center segment, we have also entered into global
distribution agreements with Avaya Inc. (formerly the Enterprise Network Group
of Lucent Technologies), Siemens and Alcatel, as follows:

     o    A marketing partnership with Avaya Inc. (formerly the Enterprise
          Network Group of Lucent Technologies). Avaya is the leading global
          provider of enterprise business communication platforms in voice,
          e-business and data. Avaya is co-selling our Voice Platforms and
          Applications to its customers globally. In addition, and following our
          acquisition of CenterPoint Solutions, Avaya sells our NICE
          ANALYZER(TM) software as part of its software application suite.

     o    A non-exclusive marketing and reseller collaboration with Alcatel,
          Siemens and Philips.

     o    We also participate in an alliance program with Aspect
          Telecommunications Ltd. to ensure the compatibility of our call center
          product line with Aspect's automatic call distribution systems and to
          promote this integration through Aspect's marketing materials.
          Additionally, we participate in an alliance program with Aspect to
          promote the compatibility of the NiceLog system with Aspect's
          automatic call distribution systems through Aspect's marketing
          materials.

                                       22
<PAGE>

     o    We also integrate our products with Siebel Systems and Amdocs (Clarify
          Inc.) in the CRM Space. These integrations with leading CRM providers
          enable our customers to capture and enhance their customers' entire
          experience in the contact center from start to finish and to more
          tightly integrate the functionality delivered by our products into
          their business environment.

     In the public safety market we distribute our products worldwide through a
network of over 100 national and local independent dealers and distributors that
also provide installation and maintenance services.

     o    A marketing agreement with Motorola Inc. for the co-marketing and
          resale of our range of products for the public safety market in North
          American and International markets. This relationship includes the
          appointment of NICE as the only authorized Dimetra Application Partner
          for Motorola's trunked radio solutions.

     o    We also market and sell systems through major regional or global
          partners, such as BT, Siemens, Damovo, Marconi, Nokia and Alcatel.

     In the ATC market, we have been awarded contracts for installation of
NiceLog systems on the basis of bids submitted to ATC authorities by Denro
Systems, Inc. (part of Northrup Grumman, Inc.) and others that incorporated
NiceLog as the voice recording system as part of their proposal. Pursuant to an
agreement dated August 1995 between the FAA and Denro, NiceLog was selected as
the voice recording system to be installed in various ATC centers in the United
States. We provide the NiceLog cards (including software) to Denro and Denro
assembles and installs the NiceLog cards.

2) DIGITAL VIDEO PLATFORMS AND APPLICATIONS

     PRODUCTS

     NiceVision is a state-of-the-art digital video and audio recording system
that provides continuous closed circuit television, or CCTV, recording,
archiving, and debriefing capabilities that meet the needs of today's demanding
security environment, including central banks, Fortune 500 companies,
transportation facilities, prisons, and casinos.

     Our NiceVision product line consists of the NiceVision Pro and the
NiceVision Harmony The NiceVision Pro is a premium solution designed for
high-end applications requiring high- frame rate and/or a large number of
cameras in a campus environment. Typical environments for the Pro are airports,
casinos, ground transportation facilities, etc. The Pro accommodates 96 video
channels in half real time (48 real time) in one single box and can handle
storage devices in the range of tera-bytes. These devices are of two types: disk
based on-line storage (internal drives or RAIDs) and tap-based off-line juke box
devices.

                                       23
<PAGE>

     The 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, spanning from single frames per second to
full frame rate, when required. Typical environments for the Harmony are retail
shops, certain bank facilities, corporate buildings, etc. The Harmony caters for
64 video channels with a preset frame rate shared between groups of channels.
The Harmony can also support large storage devices as the Pro.

MARKETS

     The market for Digital Video platforms, which provide continuous video
surveillance and recording for security protection purposes, is currently
unfolding as CCTV applications shift from traditional analog recorders to
digital recorders. Users of our digital video recording systems include
correctional facilities, banks, telecommunication data-center hosting centers,
retail, casinos, transportation and city centers.

     Customers for our products include the Bank of England, Dell Computer
Corporation, Atlanta Hartsfield International Airport, Toronto Pearson
International Airport, the Helsinki Railway Station - Finland, Casino Cosmopol
in Sweden, the Metropolitan Nashville Airport Authority, correctional facilities
in Brooklyn, New York, and Rush City, Minnesota, Wycombe District Council and
Dulwich College - UK and the Palace Indian Gaming Center of Lemoore, one of
California's largest gaming facilities,.

SALES AND MARKETING, STRATEGIC RELATIONSHIP

     We have a dedicated sales organization for the NiceVision digital video
recording system. We use a network of dealers and security systems integrators
for the sale, installation and support of our solutions. Most of our NiceVision
sales and marketing organization focuses on the U.S. market and we have started
to develop the European market through a team in the U.K. and Israel. In North
America we work through key partners such as Siemens Building Technologies and
Diebold. In EMEA we have recently started to work with Thales Security and
Surveillance group.

3) LAWFUL INTERCEPTION

     PRODUCTS

     In 2001, we introduced NiceTrack(TM), a telecommunications monitoring
system for the government law enforcement markets, that meets the United States
CALEA (Communications Assistance for Law Enforcement Act) requirements according
to the standard defined by TIA (Telecommunication Industry Association), and the
European ETSI (European Telecommunications Standard Institute) standard.
NiceTrack(TM) enables government law enforcement agencies to monitor the calls
of targets, which are intercepted by the service providers and delivered to the
monitoring agencies.

                                       24
<PAGE>

     NiceTrack(TM) is a comprehensive solution for monitoring a wide range of
targets' telecommunications and in-depth analysis of their related meta-data.
NiceTrack(TM) monitors a variety of communications media, including analog
lines, fixed telephony, cellular networks, SMS, fax, data and Internet networks.
Internet monitoring may be implemented as a stand-alone system or may be fully
integrated with the telephony monitoring system, providing a unified monitoring
center.

     NiceTrack(TM), as a lawful interception solution, is fully compliant with
the international standards set by ETSI standard 201671 and the American TIA
(J-std-025).

     MARKET

     The market for telecommunications monitoring systems for government law
enforcement and intelligence agencies has undergone some drastic changes in the
last few years. Standards defining the methods and the protocols of delivery of
the intercepted targets' communications by the service providers to the law
enforcement agencies have been released by the American TIA, the European ETSI
and by other countries. These standards are being adopted by governments through
new regulations which place the responsibility of interception of targets'
traffic on the service providers and requires them to comply with these
standards. Additionally, these new regulations expand the freedom and scope of
monitoring targets' telecommunications.

     SALES AND MARKETING

     We have a dedicated sales and marketing organization for the NiceTrack
system. We market the system worldwide through our direct sales force and
through distributors.

4) COMINT/DF

     PRODUCTS

     We develop, design, manufacture and market COMINT/DF systems, which are
used primarily for spectrum monitoring, signal tracing and direction finding
applications. Our COMINT/DF systems can be installed on a wide range of
platforms, including mobile and fixed ground installations as well as aboard
airplanes and ships. Users of our COMINT/DF systems include government agencies,
primarily intelligence gathering organizations. These systems are tailored to
the specific requirements of users. In addition, our COMINT/DF systems may be
used, in the future, by ATC centers in order to detect the direction of aircraft
and for spectrum surveillance for commercial applications such as locating the
unauthorized use of frequencies.

                                       25
<PAGE>

     Our COMINT/DF principal systems are the CDF 1500 and the CDFS-5000,
powerful spectral surveillance and direction finding systems that operate in the
1.5-1200 MHz frequency range (CDF 1500) and in 0.5 to 3000 MHz frequency range
(CDFS-5000), enabling users to detect, locate and monitor transmitted
communications signals. Our NiceFix COMINT/DF system is specially adapted for
the ATC and VTS (Vessel Traffic Service) markets. We are currently in the final
developing phase of the CDFS-5000 product family, with first deliveries expected
in 2003. This system is based on wide band receiver technology and software
radio digital processing platforms designed to provide a solution for the
communication transmissions.

     Our COMINT/DF systems are usually combined with our voice recording
systems, enabling the monitoring of detected transmissions as well as storage
and retrieval of the transmitted data. As a result, our COMINT/DF systems
provide users with the capability of archiving large volumes of recorded
information and applying sophisticated database management for automatic
retrieval and analysis.

     The COMINT/DF systems can operate either as a stand alone single sensor to
measure direction of arrival, or to locate the transmitting object when using
two or more sensors. This information is stored on the system data base,
enabling retrieval of all relevant data, of transmitted communications. Our
COMINT/DF systems' modular approach, open system architecture and use of
commercial off the shelf, or COTS, elements enable us to cost effectively tailor
the interfaces and other features of the system to address the highly
specialized needs of individual users.

     Our COMINT/DF systems are used by governmental/intelligence agencies in
order to detect and measure the direction of transmission signals. The Nicefix
COMINT/DF system is used by ATC/VTS centers to locate aircraft/vessels by
measuring the direction of the aircraft/vessel communications signal. This data
is then used by the control tower operator to direct the aircraft/vessel. To
date, our COMINT/DF systems are in use by more than ten governments/agencies.

SALES AND MARKETING

     We sell standard systems to systems houses such as Elisra Electronic
Systems Ltd. as well as custom-made systems tailored to the specific needs of
their respective customers. These companies market and distribute our product
primarily to foreign governments and governmental agencies as integrated
components of their sophisticated intelligence systems. Our relationships with
the systems houses allow us to take advantage of their strengths in selling
integrated communication intelligence and electronics systems to governments.

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 selling "software only"
solutions for screen loggers, based on standard HP and IBM servers.

         Prior to the first quarter of 2002, our manufacturing operations
consisted primarily of final assembly and testing of components and
subassemblies. We manufactured our CTI and NiceVision products in our facility
in Ra'anana, Israel and our COMINT and special NiceLog systems in our facilities
in Ra'anana and Sunnyvale, California.

                                       26
<PAGE>

     During the first quarter of 2002, however, we began implementation of a
contract manufacturing agreement with Flextronics Israel Ltd., a subsidiary of a
global electronics manufacturing services (EMS) company. Under this agreement
Flextronics is providing us with a turnkey manufacturing solution from order
receipt to product shipment including purchasing, manufacturing, testing and
configuration. 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 RMA. We believe this outsourcing agreement provides us
with a number of cost advantages due to Flextronic's large-scale purchasing
power, and greater supply chain flexibility. We completed the transfer to
Flextronics of the production for all our products during the second half of
2002.

     Some of the components 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 OEM relationships directly with some of the more
significant manufacturers of our components. Although certain components and
subassemblies we use in our existing products are purchased from a limited
number of suppliers, we believe that we can obtain alternative sources of supply
in the event that such suppliers are unable to meet our requirements in a timely
manner.

     We also have a contract manufacturing agreement entered into by TCS prior
to its acquisition by NICE, with Instem Technologies Ltd, a UK company. Under
this agreement Instem is the exclusive manufacturer of all TCS products. This
manufacturing facility is located in the UK.

     Quality control is conducted at various stages at our manufacturing
outsourcers' facilities and at their subcontractors' facilities. Quality control
for the COMINT DF systems is conducted at our facility. 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.

     Our manufacturing operation has qualified for and received the ISO-9002
quality standard for all of our products. Additionally, our COMINT/DF systems
are qualified for and have received the ISO-9001 quality standard.

SERVICE AND SUPPORT

     We have focused on building a strong service and support organization for
all our systems. Our dealers, as well as other telecommunications companies that
market our products, are primarily responsible for supporting the day-to-day
requirements of the end-users, while we provide technical support to such
dealers and partners. In order to support our direct customers and partners, we
established three regional support centers, the largest of which in Denver,
Colorado, to support our U.S. customers and partners, as well as one in Hong
Kong to support APAC customers, dealers and partners, and one in the UK to
support EMEA customers, dealers

                                       27
<PAGE>

and partners. 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
training sessions for our dealers and installation support as well.

     In 2002, we significantly increased the revenues from services while
successfully integrating the TCS services group. We now have a consolidated
support group delivering services to both NICE and TCS business partners and
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. Our customers
may purchase a renewable maintenance agreement from our dealers or directly from
us. The maintenance agreements generally provide for maintenance, upgrades of
standard system software and on-site repair or replacement.

     Due to the nature of the end-user market for our COMINT/DF systems and
their marketing channels, we are not ordinarily required to provide for their
service and support. Such end-users normally maintain their COMINT/DF systems
with their own personnel.

     For our telecommunications monitoring systems, we provide first and second
tier service and support either directly using our support organization or
indirectly through local companies working closely with the law enforcement
agencies.

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. 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 2000, 2001 and 2002 were
approximately $25.4 million, $26.0 million and $24.7 million, respectively, of
which approximately $1.2 million, $1.4 million and $2.2 million, respectively,
were derived from third-party funding, and $4.7 million, $5.4 million and $4.6
million, respectively, were capitalized software development costs.

     As of January 1, 1999, we have been qualified to participate in an Israeli
government-aided consortium to develop generic technology relevant to the
development of our wide band products, from which we received $240,000 in 1999.
In 2000, we were qualified to participate in three additional Israeli
government-aided consortiums for the development of generic technology related
to our products. In 2002, we were qualified to participate in two additional
Israeli government-aided consortiums for the development of generic technology
related to our products. In 2000, 2001, 2002 we received a total of $1,330,000,
$1,318,000 and $1,925,000, respectively, and we anticipate receiving
approximately $1,600,000 in 2003 from these plans. The generic technology plans
are not subject to royalty payments.

                                       28
<PAGE>

     We are eligible to receive grants, constituting up to 66% of certain
research and development expenses, from the Government of Israel, through the
Office of the Chief Scientist, or OCS, for the development of products intended
for export. Under the terms of the OCS participation, a royalty of 3% to 5% of
the net sales of products developed in, and related services resulting from, a
project funded by OCS generally is required to be paid beginning with the
commencement of sales of such products and ending when 100% to 150% of the grant
is repaid in New Israeli Shekels, or NIS, linked to the dollar plus Libor
interest. In 1999, 2000, 2001 and 2002, we incurred royalties on sales of such
products in the amounts of approximately $395,000, $227,000, $4,000 and $0,
respectively. As of May 31, 2002, we have no further royalty obligations to the
OCS. Terms of Israeli Government participations also require that the research
and development be conducted by the applicant for the grant as specified in the
application and that the manufacturing of products developed with government
grants be performed in Israel, unless a special approval has been granted.
Separate Israeli Government consent is required to transfer to third parties
technologies developed through projects in which the government participates.
Such restrictions, however, do not apply to exports from Israel of products
developed with such technologies. From time to time the Government of Israel has
revised its policies regarding the availability of grants, and there can be no
assurance that the Government's support of research and development will
continue.

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 hold the
following seven issued U.S. Patents:

     o    No. 5,861,959 titled "Facsimile Long Term Storage and Retrieval
          System"
     o    No. 5,937,029 titled "Data Logging System Employing M[N + 1]
          Redundancy"
     o    No. 6,122,665 titled "Communication Management System"
     o    No. 6,046,824 titled "CIF - Facsimile Long Term Storage and Retrieval
          System"
     o    No. 6,330,025 titled "Digital Video Logging System"
     o    No.6,542,602 titled "Telephone Call Monitoring System"
     o    No. 5,353,168 titled "Recording and Reproduction System using Time
          Division Multiplexing.

     We currently have three other patents issued in additional countries and 46
patent applications pending in the U.S 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 protection. We
generally enter into non-disclosure and non-compete agreements with our
employees and subcontractors. However, there can be no assurance that such
measures will protect our technology, or that others will not develop a similar
technology or use technology in products competitive with those offered by us.
Although we believe that our products do not infringe upon the proprietary
rights of third parties, there can be no assurance that one or more third
parties will not make a contrary claim or that we will be successful in
defending such claim.

                                       29
<PAGE>

     In June 2000, Dictaphone Corporation, one of our competitors, filed a
patent infringement claim relating to certain technology embedded in some of our
products. The claim is for damages for past infringement and enjoinment of any
continued infringement of Dictaphone patents. In the court's discretion, the
damages may be trebled and attorney fees awarded. As a result we might be forced
to pay significant damages and licensing fees, modify our business practices or
even be enjoined from conducting a significant part of our U.S. business. Any
such results could materially harm our business. We believe, however, that we
have a valid defense to this claim and are vigorously defending it. We have
received notification from our insurance company indicating that the claim is
not covered by our insurance policy; however, our insurance company has agreed
to reimburse for us all legal expenses that we are expending in defense of the
claim while reserving its final decision on this matter until the final outcome
of the litigation. The discovery period is closed, dispositive motions have been
filed with the Court, and we are awaiting the Court's decisions on these motions
as well as scheduling for trial.

     In April 2002, we received a letter from Dictaphone stating that several of
our products were using technology protected by additional Dictaphone patents
and offering us a licensing arrangement for these patents. We believe that none
of our products infringe upon those patents.

     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 letters. We believe that none of these has merit. We cannot
assure you, however, that we will be successful in defending the Dictaphone
infringement claim or other claims, 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 the infringement claim or other
claims could involve substantial costs and diversion of management resources. In
addition, to the extent we are not successful in defending such claims, we may
be subject to injunctions with respect to the use or sale of certain of our
products or to liabilities for damages and may be required to obtain licenses
which may not be available on reasonable terms.

     We own the following trademarks: 3600 View, Agent@home, Executive Connect,
Executive Insight, Experience Your Customer, Investigator, Lasting Loyalty,
Listen Learn Lead, MEGACORDER, Mirra, My Universe, NICE, NiceAdvantage, NICE
Analyzer, NiceCall, NiceCLS, NiceCMS, NICE Feedback, NiceFix, NiceGuard, NICE
Learning, NICE Link, NiceLog, NICE Playback Organizer, Renaissance, ScreenSense,
NiceScreen, NiceSoft, NICE Storage Center, NiceTrack, NiceUniverse, NiceUniverse
LIVE, NiceVision, NiceVision Harmony, NiceVision Mobile, NiceVision Pro,
NiceVision Virtual, NiceWatch, Renaissance, Secure Your Vision, Tienna, and
Wordnet are trademarks of ours. 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.

                                       30
<PAGE>

REGULATION

     The export of certain defense products from Israel, such as our COMINT/DF
and NiceTrack(TM) products, requires a permit from the Defense Sales and Exports
branch of the Israeli Ministry of Defense (SIBAT). In 2002, approximately 6.3%
of our sales were subject to such permit requirements. Additionally, certain
components of our COMINT/DF systems are manufactured in the United States,
requiring us to obtain a license from the United States government for the sale
of such products. To date, we have encountered no difficulties in obtaining such
licenses.

COMPETITION

     The market for our Voice Platforms and Applications is highly competitive
and includes numerous products offering a broad range of features and
capacities. 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 quality
management for contact center agent monitoring businesses include Dictaphone
Corporation, Witness Systems ,Inc., Teknekron Infoswitch Corporation (now called
e-talk), and Verint Systems Inc. (formerly Comverse Infosys), a subsidiary of
Comverse Technology Inc.

     We believe that competition in the sale of our Voice Platforms and
Applications is based on a number of factors, including system performance and
reliability, the ability to integrate with a variety of other computer and
communications systems, marketing and distribution capacity, price and service
and support. We believe that the wide range of features provided by the NiceLog
system and related applications, their wide connectivity and compatibility with
telephone and computer networks and their ease of use create a competitive
advantage to the NiceLog and such related applications compared to other similar
systems currently being offered on the market.

     There are several small competitors who have products that compete with our
Video Platform and Applications, however our main competitors in this market are
Loronix Information Systems, Inc (a wholly owned subsidiary of Verint Systems
Inc.), Lennel and Dallmeier.

     In the public safety market, there are a number of competitors providing
solutions, including Mercom Inc, CVDS Inc, Voiceprint Inc, Dictaphone
Corporation and Witness Systems, Inc.

     We are aware of a limited number of manufacturers of systems for defense
applications that compete with our COMINT/DF systems such as Rhode & Schwartz,
Thales, Tadiran Ltd. and Elta Electronic Industries Ltd. We believe that our
COMINT/DF systems offer high performance for relatively moderate price and
therefore have a competitive advantage over other COMINT/DF systems, which may
require large expenditures by the customer.

                                       31
<PAGE>

     There are a number of competitors in the telecommunications monitoring
market, having products competing with our NiceTrack(TM) system, the major ones
being Verint Systems Inc., Ectel Ltd., and ETI. We believe that our solution
offers innovations that provide the law enforcement agencies the tools and
capabilities they require to meet the challenges of today's advanced
telecommunications world, as well as being price competitive.

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.


                                           COUNTRY OF           PERCENTAGE OF
                                        INCORPORATION OR         OWNERSHIP
NAME OF SUBSIDIARY                          RESIDENCE             INTEREST
-------------------------------------  ------------------      ---------------
NICE Systems, Inc.                        United States             100%
NICE Systems GmbH                            Germany                100%
NICE Systems Canada Ltd.                     Canada                 100%
NICE CTI Systems UK Ltd.                 United Kingdom             100%
STS Software Systems (1993) Ltd.*            Israel                 100%
NICE APAC Ltd.                              Hong Kong               100%
NiceEye BV*                                Netherlands              100%
NiceEye Ltd.*                                Israel                 100%
Nice Systems SARL                            France                 100%
Racal Recorders Ltd                      United Kingdom             100%

* Inactive

PROPERTY AND EQUIPMENT

     Our executive offices and engineering, research and development operations
are located in Ra'anana, Israel, where we occupy approximately 126,000 square
feet of space, pursuant to a lease expiring in 2008. This lease may be
terminated by us at any time from the year 2003, subject to certain conditions.
The annual rent and maintenance fee for the facility is approximately $2.8
million linked to the changes in the U.S. consumer price index. We have various
offices and other facilities in North America and in several other countries, as
described below.

     Our North American facilities consist of:

     o    Our North American headquarters in Rutherford, New Jersey, which
          occupy approximately 25,000 square feet with a monthly rental of
          approximately $57,000 We also have a warehouse facility in Lyndhurst,
          New Jersey, which occupies approximately 6,000 square feet, with a
          monthly rental of approximately $5,000;

                                       32
<PAGE>

     o    Our office in San Diego, California, which occupies approximately
          6,250 square feet with a monthly rental of approximately $17,500.

     o    Our office in Chicago, Illinois, which occupies approximately 3,000
          square feet with a monthly rental of approximately $4,500;

     o    Our office in Denver, Colorado, which occupies approximately 42,000
          square feet with a monthly rental of approximately $78,000;

     o    Our office in New York City, New York, which occupies approximately
          4,300 square feet with a monthly rental of approximately $10,000.

     Our international facilities consist of:

     o    Our office in Germany, which occupies approximately 3,000 square feet
          with a monthly rental of approximately $3,200;

     o    Our office in London, which occupies approximately 1,430 square feet,
          with a monthly rental of approximately $16,000; and

     o    Our office in Southampton which occupies approximately 34,249 square
          feet ,with a monthly rental of approximately $53,500.

     o    Our office in Hong Kong, which occupies approximately 3,100 square
          feet, with a monthly rental of approximately $10,000.

     o    Our office in France which occupies approximately 1,894 square feet,
          with a monthly rental of approximately $4,700

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

                                       33
<PAGE>

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS


     We may from time to time make written or oral forward-looking statements,
including in filings with the United States Securities and Exchange Commission
("SEC"), in reports to shareholders and in press releases and investor webcasts.
You can identify these forward-looking statements by use of words such as
"strategy", "expects", "continues", "plans", "anticipates", "believes", "will",
"estimates", "intends", "projects", "goals", "targets", and other words of
similar meaning. You can also identify them by the fact that they do not relate
strictly to historical or current facts.

     We cannot assure you that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from those anticipated, estimated or projected. Investors should bear
this in mind as they consider forward-looking statements and whether to invest
or remain invested in NICE Systems Ltd.'s securities. The forward-looking
statements relate to, among other things: operating results; anticipated cash
flows; gross margins; adequacy of resources to fund operations; our ability to
maintain our average selling prices despite the aggressive marketing and pricing
strategies of our competitors; our ability to maintain and develop profitable
relationships with our key distribution partners, one of which constitutes more
than 20% of our revenues, and the financial strength of our key distribution
partners.

     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. Please read the section below entitled "Factors That May Affect
Future Results" to review conditions that we believe could cause actual results
to differ materially from those contemplated by the forward-looking statements.
You should understand that it is not possible to predict or identify all risk
factors. Consequently, you should not consider the following to be a complete
discussion of all potential risks or uncertainties. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect our view
only as of the date of this report. Except as required by law, we undertake no
obligation to update these forward-looking statements to reflect future events
or circumstances or the occurrence of unanticipated events.

     The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and the related notes and other financial information
included elsewhere in this annual report.

OVERVIEW

     We develop, market and support integrated, scalable multimedia digital
recording platforms, enhanced software applications and related professional
services. These solutions capture and analyze unstructured (non-transaction)
data, and convert it into actionable knowledge for business and security
performance management applications. Our solutions capture multiple forms of
interaction, including voice, fax, email, web chat, radio, and video
transmissions over wireline, wireless, packet telephony, terrestrial trunk radio
and data networks. The markets from which we currently derive the majority of
our revenues and expect to continue to do so in the future are highly
competitive.

                                       34
<PAGE>

     Our products are based on two types of recording platforms - audio and
video - and are used primarily in contact centers, trading floors, public safety
organizations, transportation, corporate security, gaming and correctional
facilities as well as various government and intelligence agencies.

     Our development efforts for our recording platforms are aimed at addressing
several trends we see developing in the industry. The trend towards the
proliferation of voice over IP-based networks is leading to a greater
requirement for VOIP recording capabilities in financial trading, contact
centers and public safety environments. The continued trend towards replacing
analog video recording with digital video recording 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, particularly in contact centers (voice, fax, email,
chat, screen) and public safety (voice, radio, video, data) markets. We are
beginning to see this same trend developing in the financial trading sector, and
we expect some Homeland Security initiatives in areas such as border control,
critical infrastructure security, first responder communications and lawful
interception to require multimedia capture platforms as well.

     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 knowledge that can be distributed
via 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 more content analysis applications 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 in financial trading environment for compliance
monitoring and dispute management to improve business performance. We see
similar trends happening in digital video recording. We 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, as well as various homeland security applications to
enable proactive security management.

     We expect to see an increase in the demand for VOIP recording products,
networked video security solutions, and multimedia recording solutions as well
as to increase the proportion of software in our product revenue mix and
gradually increase the amount of professional services and maintenance revenue.

                                       35
<PAGE>

     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
approximately 22%, 12%, and 19% of revenues in 2002, 2001 and 2000,
respectively.

ACQUISITIONS

     We have consummated three acquisitions during the past three years. These
acquisitions were accounted for as purchases, 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 operations
from the date of acquisition. The following are details for each of these
acquisitions:

     o    In November 2002, we consummated an agreement to acquire certain
          assets and liabilities of Thales Contact Solutions (or TCS), a
          developer of customer-facing technology for public safety, financial
          trading and customer contact centers, based in the United Kingdom. TCS
          was a unit of Thales Group, one of Europe's premier electronics
          companies. In connection with the acquisition, we paid an initial
          $29.9 million in cash and issued 2,187,500 ordinary shares to Thales
          Group at a fair market value of $18.1 million calculated at the date
          of closing. As a result, Thales Group holds approximately 14% of the
          Company's shares and two Thales executives were elected to the Board
          of Directors of NICE.

          Under the terms of the agreement, the cash portion of the purchase
          price was subject to downward adjustment based on the value of net
          assets at closing and the full year 2002 sales of TCS. Based on the
          actual value of net assets acquired and 2002 sales of TCS, we reduced
          the cash portion of the purchase price as of December 31, 2002 by
          $12.8 million. This amount is presented on our balance sheet as a
          Related Party Receivable. Thus, the adjusted purchase price paid,
          including $4.5 million of capitalized acquisition costs, was recorded
          as $39.7 million. Of the $12.8 million adjustment referred to above,
          Thales paid us $6.6 million in March 2003, and pending agreement on
          the actual value of net assets acquired, we expect to recover the
          outstanding balance during 2003. Should we and Thales not reach
          agreement on the net asset value, the matter will be submitted to
          binding arbitration in accordance with the terms of the acquisition
          agreement.

          Also under the terms of the agreement, contingent cash payments of up
          to $10 million in 2003, $7.5 million in 2004, and $7.5 million in 2005
          would be due if certain financial performance criteria are met as part
          of a three-year earn-out provision related to the sale of a particular
          product in 2002 through 2004. The relevant criteria for 2002 were not
          met and therefore no contingent payment in respect of 2002 was
          recorded. Should any contingent payments be made under the agreement
          in the future, the additional consideration when determinable will
          increase the purchase price and accordingly additional goodwill will
          be recorded.

                                       36
<PAGE>

          In the fourth quarter of 2002, we recorded a current liability of $2.8
          million and a long-term liability of $13.5 million reflecting
          obligations under a long-term contract assumed by NICE in the TCS
          acquisition. We have entered into negotiations to amend this contract
          but there can be no assurance that we will be successful in these
          negotiations.

     o    On December 5, 2000, we completed the acquisition of certain assets
          and liabilities of Stevens Communications Inc. (SCI). SCI is a systems
          distributor, whose activities included the promotion, distribution,
          installation and maintenance of our audio recording products and
          related software applications in North America. We paid $7.0 million
          in cash and issued 426,745 ADSs of which 186,818 were deemed target
          shares contingent upon the achievement of certain objectives and
          events through 2002 and 38,914 ADSs were allotted for the benefit of
          certain SCI employees subject to vesting based on continued employment
          with the Company. The contingent target shares were released to SCI
          upon agreement as to the achievement of the determined objectives.

          In October 2001, we entered into a final settlement agreement with SCI
          addressing a dispute with SCI regarding the fair value of the working
          capital acquired. The terms of the final settlement resulted in a
          charge to Other Expense, Net of $4.4 million representing settlement
          of disputed items of $3.6 million and obligations for future
          consulting services, which were no longer of value to us.

     o    In April 2000, we acquired all of the outstanding capital stock of
          Centerpoint Solutions Inc. (CPS) for $3 million in cash and the
          issuance of 200,000 ADSs of NICE of which 50,000 were deemed target
          shares contingent upon the achievement of certain objectives, which
          were not met. CPS is a developer of internet-based applications for
          statistical monitoring, digital recording and automatic customer
          surveys for contact centers.

          In November 2002, we entered into a settlement agreement with Doug
          Chapiewski, the sole shareholder of CPS, in respect of allegations of
          misrepresentation, breach of contract and securities fraud in
          connection with the acquisition of CPS. The terms of the settlement
          agreement, which included 50,000 shares, resulted in a charge to Other
          Expense, Net of $3.5 million.

CRITICAL ACCOUNTING POLICIES

     Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States ("US GAAP"). Our significant accounting principles are presented
within Note 2 to our Consolidated Financial Statements. While all the accounting
policies impact the financial statements, certain policies may be viewed to be
critical. These policies are those that are both most important to the portrayal
of our financial condition and results of operations and require our
management's most difficult, subjective and complex judgments and estimates.
Actual results could differ from those estimates.

                                       37
<PAGE>

     Management believes that the significant accounting policies which affect
its more significant judgments and estimates used in the preparation of the
consolidated financial statements and are the most critical to aid in fully
understanding and evaluating our reported results include the following:

     o    Revenue recognition
     o    Allowance for doubtful accounts
     o    Inventory valuation
     o    Impairment of long-lived assets
     o    Deferred income taxes
     o    Contingencies
     o    Restructuring expenses

     REVENUES. We derive our revenue primarily from two sources: product
revenues, which include hardware and software, and service revenues, which
include, support and maintenance, installation, consulting 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 and
determinable, no further obligations exist, and collectibility is probable.
Sales agreements with specific acceptance terms are not recognized until the
customer has confirmed that the product or service has been accepted.

     Revenues from fixed-price contracts that require significant customization
are recognized using the percentage-of-completion method generally on the basis
of value added and results achieved out of the completeness of the product as a
whole.

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

     When transactions involve multiple elements, revenue is allocated to the
elements based on Vendor Specific Objective Evidence ("VSOE") of the relative
fair values of each element in the arrangement, according to the residual
method. Our VSOE used to allocate the sales price to support services and
maintenance is based on the renewal price.

     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 level of open
account 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.

                                       38
<PAGE>

     We record a provision for estimated sales returns and allowances on product
sales 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.

     ALLOWANCE FOR DOUBTFUL ACCOUNTS. We evaluate the collectibility of 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 based on the
length of time the receivables are past due. Insured balances are not reserved.
If the financial condition of one of our significant customers or our customers
in general should deteriorate, our revenue growth may be limited and additional
allowances may be required.

     INVENTORY VALUATION. At each balance sheet date, we evaluate our inventory
balance for excess quantities and obsolescence. This evaluation includes
analyses of sales levels by product line and projections of future demand. In
addition, we write off inventories that are considered obsolete. Remaining
inventory balances are adjusted to the lower of cost or market value. If future
demand or market conditions are less favorable than our projections, additional
inventory write-downs may be required and would be reflected in cost of sales in
the period the revision is made.

     During 2002 we completed the outsourcing of the manufacture of our audio
and video product platforms. Under this arrangement, 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, however, liable to purchase
above a certain level, which is based on historical level of orders to the
contract manufacturer, excess raw material and subassembly inventories from the
contract manufacturer deemed obsolete or slow-moving. We monitor the levels of
the contract manufacturer's relevant inventories periodically and, if required,
will write-off such deemed excess or obsolete inventory.

     IMPAIRMENT OF LONG-LIVED ASSETS. Our long-lived assets include property and
equipment, long term investments, goodwill and other intangible assets. The fair
value of the long-term investments 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 forecast financial
performance of the investees and other pertinent information. We record an
investment impairment charge when we believe that the investment has experienced
a decline in value that is other than temporary. During 2002, we recognized $229
thousand of impairment losses related to our long-term investments. As of
December 31, 2002, the carrying value of the Company's long-term investments was
$1.2 million.

     In assessing the recoverability of our property and equipment, goodwill and
other intangible assets, we must make assumptions regarding the estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future, we
may be required to record impairment charges for these assets.

                                       39
<PAGE>

     In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets". SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired in a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives will be amortized and that goodwill and intangible
assets with indefinite lives will not be amortized, but rather will be tested at
least annually for impairment. We adopted SFAS No. 142 beginning January 1,
2002. Upon adoption of SFAS No. 142, we discontinued the amortization of
recorded goodwill, which was approximately $3.4 million on an annual basis at
that time. We performed an impairment test of our goodwill as of January 1, 2002
under the transitional provisions of SFAS No. 142; our test did not indicate an
impairment of goodwill. We confirmed that we have only one reporting unit (the
Company) to which we allocated all recorded goodwill, as well as all assets and
liabilities.

     By October 1, 2002, our stock price had declined significantly from January
1, 2002, at which point our market capitalization, based on our stock price, was
below book value. The price of our ADSs on January 2, 2002 was $17.04 per ADS
and declined to $8.47 per ADS on October 1, 2002. We determined the fair value
of the Company based on relative market multiples for comparable businesses and
a discounted cash flow model. This evaluation indicated that an impairment might
exist. We then performed Step 2 under SFAS No. 142 in which the amount of the
impairment loss, if any, must be measured. Four categories of intangible assets
were identified as being separable from goodwill in accordance with SFAS No.
141. These included: trade names; an in-place distribution network; technology
based intangible assets and maintenance contracts. In valuing the NICE trade
name a relief from royalty method was used. Under this method, the value of a
trade name reflects the savings realized by owning the trade name. The value of
the intangible asset under the relief from royalty method is dependent upon the
following factors: the selected royalty rate, the revenues expected to be
generated from the underlying intellectual property, the discount rate and the
expected life of the intellectual property. The value of our distribution
network was determined through the use of the cost approach. Using this method,
the value of the distribution network is estimated as the after-tax direct costs
that a potential acquirer would avoid spending in recreating a similar
functional distribution network. The value of the intangible asset under the
cost method is dependent upon the estimated direct cost of establishing a new
distributor relationship. Qualifying technology-based intangible assets consist
of current and core technology and technologies that were under development at
the valuation date. The current and core technology was valued using a
derivation of the income approach, namely the excess earnings method. This
method is used to analyze the earnings contribution of an intangible asset.
Under this method, the excess earnings that an intangible asset generates are
calculated over the intangible asset's expected life and discounted to the
present to calculate the fair value of the intangible asset. Excess earnings are
defined as the residual earnings after providing for appropriate returns on the
other identified contributing assets. The value under the excess earnings method
is dependent upon the following factors: the expected revenues generated by the
intangible asset, the expected after-tax earnings on those revenues, the charges
(or returns) required on other contributing assets and the discount rate. Our
maintenance contracts, which are intangible assets under the contractual-legal
criterion of SFAS No. 141, were valued using the excess earnings method. In
determining the applicable discount rate to be used to estimate the fair value
of our net assets, we calculated a market-derived rate based on the estimated
weighted average cost of capital for the Company. In determining the cost of
equity for the Company, we used a standard methodology based on the capital
asset pricing model and analyzed selected guideline companies, industry data and
factors specific to NICE. We expect to use a similar decision process in the
future

                                       40
<PAGE>

     Following these analyses, we compared the carrying amount of goodwill to
the implied fair value of the goodwill and determined that an impairment loss
existed. A non-cash charge totaling $28.3 million was recorded in the fourth
quarter of 2002 to write down goodwill to its fair value under the caption
"Goodwill impairment". This impairment is primarily attributable to the change
in evaluation criteria for goodwill from an undiscounted cash flow approach,
which was previously used under the guidance in Accounting Principles Board
Opinion No. 17 INTANGIBLE ASSETS, to the fair value approach stipulated in SFAS
No.142. The valuation of long-lived assets requires significant estimates and
assumptions. These estimates contain management's best estimates, using
appropriate and customary assumptions and projections at the time. If different
estimates or projections were used, it is reasonably possible that our analysis
would have generated materially different results.

     DEFERRED INCOME TAXES. We record income taxes using the asset and liability
approach. Deferred income tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, and net operating loss and tax credit carryforwards. Our financial
statements contain fully reserved tax assets which have arisen as a result of
net operating losses, primarily incurred in 2001 and 2002, as well as other
temporary differences between book and tax accounting. Significant management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. We have considered future taxable income, prudent and
feasible tax planning strategies and other available evidence in determining the
need for a valuation allowance. We evaluate all of these factors to determine
whether it is more likely than not that some portion or all of the deferred
income tax assets will not be realized. As a result of significant net operating
losses incurred in 2001 and 2002, anticipated additional net operating losses
for the first quarter of 2003 and uncertainty as to the extent and timing of
profitability in future periods, we have continued to record a full valuation
allowance, which was approximately $14.8 million as of December 31, 2002. The
establishment and amount of the valuation allowance requires significant
estimates and judgment and can materially affect our results of operations. If
the realization of deferred tax assets in the future is considered more likely
than not, an adjustment to the deferred tax assets would increase net income in
the period such determination was made.

     Our effective tax rate may vary from period to period based on changes in
estimated taxable income or loss, changes to the valuation allowance, changes to
state or foreign tax laws, future expansion into geographic areas with varying
country, state and local income tax rates, deductibility of certain costs and
expenses by jurisdiction and as a result of acquisitions, divestitures and
reorganizations.

                                       41
<PAGE>

     CONTINGENCIES. From time to time, we are defendant or plaintiff in various
legal actions, which arise in the normal course of business. We are also a
defendant in an intellectual property infringement action. We are required to
assess the likelihood of any adverse judgments or outcomes to these matters as
well as potential ranges of probable losses. A determination of the amount of
reserves required for these contingencies, if any, which would be charged to
earnings, is made after careful and considered analysis of each individual
action together with our legal advisors. The required reserves may change in the
future due to new developments in each matter or changes in circumstances, such
as a change in settlement strategy. A change in the required reserves would
affect our earnings in the period the change is made.

     RESTRUCTURING. We established exit plans for each of the restructuring
activities which took place in 2001 and 2002. In early 2001, with mounting
evidence of an economic slowdown in the information technology and
telecommunications sectors as well as changing business dynamics, we conducted a
comprehensive review of our strategy, products, organization and infrastructure.
This review culminated in the restructuring of our global operations, including
the reduction of approximately 340 of our 1,110 employees, consolidation of our
field facilities in North America, expansion of our local presence in Europe and
Asia, and various other actions aimed at focusing on our core markets, products
and competencies. We accounted for the 2001 plan in accordance with EITF Issue
No. 94-3 "Liability Recognition for Certain Employee Benefits and Other Costs to
Exit an Activity (including Certain Costs incurred in a Restructuring)". Under
EITF 94-3, an entity recognized a liability for an exit cost on the date that
the entity committed itself to the exit plan. The exit cost included involuntary
employee termination benefits, estimates regarding our ability to sub-lease
vacated facilities, rates to be charged to a sub-tenant and the timing of the
sub-lease arrangement and included an estimate of the timing of the pace and
completion of the outsourcing of manufacturing to Flextronics, the contract
manufacturer. During the fourth quarter of 2002, we reduced the restructuring
accrual by $400 thousand to reflect mainly lower than estimated employee
termination costs. Our remaining cash lease commitments net of sub-lease income
related to restructured facilities are approximately $124 thousand, which is
fully accrued in the accompanying balance sheet.

     In July 2002, the Financial Accounting Standards Board issued SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities", SFAS No. 146
requires that a liability for a cost that is associated with an exit activity be
recognized only when the liability is incurred. It supersedes the guidance in
EITF 94-3. In SFAS No. 146, an entity's commitment to a plan does not, by
itself, create a present obligation to other parties that meets the definition
of a liability and establishes that fair value is the objective for the initial
measurement of the liability. Although SFAS No. 146 became effective for exit or
disposal activities initiated after December 31, 2002, we elected to adopt the
new ruling in respect of our fourth quarter 2002 restructuring plan. With the
acquisition of TCS, we identified an opportunity to increase flexibility and
focus, improve responsiveness and reduce unnecessary overhead. We adopted a plan
to achieve these objectives in December 2002 which involves the phased reduction
of approximately 140 of our initially combined 1,077 staff and consolidation of
certain offices. Some of the involuntary reductions were effected in December
and the liability related to those terminations of $282 thousand was included in
our fourth quarter 2002 results. The remaining reductions in force are planned
to be implemented over the first three quarters of 2003.

In the event that we redefine our strategic direction and/or difficult economic
conditions continue to prevail, we may be required to implement further
restructuring measures. We are not currently able to determine whether or to
what extent such circumstances may continue or worsen.

                                       42
<PAGE>

RESULTS OF OPERATIONS

     The following table sets forth selected consolidated income statement data
for NICE for each of the three years ended December 31, 2000, 2001, and 2002
expressed as a percentage of total revenues. Figures may not add due to
rounding.

<TABLE>
<CAPTION>
                                                      2000              2001              2002
                                                  ------------      ------------     -------------
<S>                                                <C>               <C>               <C>
Revenues
         Products                                     n/a     %            88.6 %            82.9 %
         Services                                     n/a                  11.4              17.1
                                                  ------------      ------------     -------------
                                                        100.0             100.0             100.0
Cost of revenues
         Products                                     n/a                  48.2 *            43.5 *
         Services                                     n/a                 134.4 *            94.0 *
                                                  ------------      ------------     -------------
                                                         48.0              58.0              52.2

Gross profit                                             52.0              42.0              47.8

Operating expenses
         Research and development, net                   12.7              15.1              11.0
         Selling and marketing                           23.1              27.6              24.9
         General and administrative                      18.5              21.4              14.6
         Restructuring and other                          0.0              11.5              -0.3
         In-process research and development              4.4               0.0               0.8
         Amortization of acquired intangibles             0.6               2.7               0.0
         Goodwill impairment                              0.0               0.0              17.4
                                                  ------------      ------------     -------------
Total operating expenses                                 59.3              78.3              68.4

Operating loss                                           -7.3             -36.3             -20.6
Financial income, net                                     4.0               3.3               2.4
Other income (expenses), net                              0.0              -3.8              -2.5
                                                  ------------      ------------     -------------

Loss before taxes on income                              -3.3             -36.8             -20.7
Taxes on income                                           0.2               0.2               0.2
                                                  ------------      ------------     -------------

Net loss                                                 -3.5 %           -37.0 %           -20.9 %
                                                  ============      ============     =============

*Percent of related revenue.
</TABLE>

YEARS ENDED DECEMBER 31, 2002 AND 2001

     REVENUES. Our total revenues rose 28% to $162.5 million in 2002 from $127.1
million in 2001.

                                       43
<PAGE>

     Product revenues rose $22.1 million or 20% to $134.8 million in 2002 from
$112.6 million in the prior year due mainly to a net $19.9 million (23%)
increase in sales of our audio platform and related applications mainly to
contact center and trading floor markets and an $8.3 million (60%) increase in
digital video platform sales. These increases were partially offset by a $6.1
million (46%) decrease in sales of our COMINT/DF products. We believe that our
growth in product sales to contact center and financial trading floor markets
principally reflects market share gains but also the inclusion of $6.8 million
of revenues following the acquisition of TCS in November 2002. There can be no
assurance that we will continue to experience market share gains or that, given
the continuing weakened global economy, we will continue to report growth in
audio platform and related software application sales. We believe that the
high-end digital video market is still in its nascency and thus volatile;
consequently, looking forward, we do not expect to experience the same degree of
growth in revenues as we did in 2002.

     Services revenues rose $13.2 million (92%) to $27.7 million in 2002 from
$14.5 million in the previous year. The increase reflects an increasing portion
of our installed base engaging us for maintenance services, higher installation
and training revenues related to the increase in contact center and financial
trading floor sales and $1.5 million in services revenue following the
acquisition of TCS. Service revenues accounted for 17% of total revenues up from
11% in 2001. Although we 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
thus expect services to represent a growing portion of total revenues in the
future.

     Revenues in 2002 in the Americas, which includes the United States, Canada,
Latin and South America, rose 33% to $88.4 million from $66.3 million in 2001.
The increase is largely attributable to higher sales of products and services to
contact center and financial trading floor markets. Sales to Europe, Middle East
and Africa ("EMEA") rose 29% to $51.2 million in 2002 from $39.8 million in
2001. The increase is due mainly to the acquisition of TCS in November 2002
($6.6 million) and the more than doubling of digital video sales in this region.
Sales to Asia-Pacific ("APAC") increased 9% to $22.8 million in 2002 from $21.0
million in 2001.

     COST OF REVENUES. Cost of revenues was $84.7 million in 2002 compared with
$73.8 million in 2001.

     Cost of product revenues rose 8% to $58.7 million in 2002 from $54.3
million in 2001. The increase in cost in 2002 is due to the higher sales volume.
Cost of services revenue rose 34% to $26.1 million from $19.4 million in 2001.
The increase in cost is due principally to higher labor, travel and material
costs associated with the growth in product installations and maintenance
contracts and $1.4 million of service costs incurred following the acquisition
of TCS.

     GROSS PROFIT. Gross profit on product revenues represented 56.5% of product
revenues in 2002 compared with 51.8% in 2001 due mainly to a higher proportion
of sales of our comparatively higher margin audio platform and applications in
the sales mix and product manufacturing cost efficiencies achieved through both
the outsourcing of manufacturing to the contract manufacturer over the course of
the year and engineering design modifications mainly to our digital video
recording platform. Gross profit margin on services revenue was 6% in 2002
compared with a loss of 34% in 2001 due primarily to the higher growth rate in
services revenues as compared with service expenses. For the reasons mentioned
above, gross profit was $77.8 million or 47.8% of total revenues in 2002
compared with $53.3 million or 42.0% of revenues in 2001. On a forward-looking
basis, we expect our gross margins to increase gradually as we realize the
benefit of contract manufacturing efficiencies, of leveraging our global service
operations and of a growing proportion of software applications in our product
revenue mix.

                                       44
<PAGE>

     RESEARCH AND DEVELOPMENT, NET. Research and development expense, before
capitalization of software development costs and grants, declined to $24.7
million in 2002 from $26.0 million in 2001 and represented 15.2% and 20.5% of
revenues in 2002 and 2001, respectively. The decrease in gross outlays is due
mainly to the impact of the approximate 7% annual devaluation of the New Israel
Shekel to the US dollar on R&D labor costs, as approximately 75% of our R&D
staff is based in Israel, and a lower average number of R&D staff in 2002 versus
2001.

     Software development costs capitalized were $4.6 million in 2002 compared
with $5.4 million in 2001. Net research and development expense decreased 7% in
2002 to $17.9 million from $19.2 million in 2001. Amortization of capitalized
software development costs, included in cost of product revenues, was $4.3
million and $2.8 million in 2002 and 2001, respectively.

     SELLING AND MARKETING EXPENSES. Selling and marketing expenses in 2002
increased 16% to $40.5 million from $35.0 million in 2001. The increase in
selling and marketing expenses was due principally to higher labor costs mainly
from the acquisition of TCS, higher commission expenses and higher discretionary
marketing outlays for trade shows and promotional activities. Selling and
marketing expenses represented 24.9% of total revenues in 2002 compared with
27.6% in 2001. We expect that we will continue to leverage our global sales and
distribution infrastructure in the future such that selling and marketing
expenses, while increasing on an absolute dollar basis, will decline moderately
as a percentage of total revenues.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 12% in 2002 to $23.8 million from $27.1 million in 2001. The reduction
in cost in 2002 was due primarily to lower legal costs and general cost
containment efforts only partly offset by higher corporate insurance premiums
and allowances for doubtful accounts. The increase in the allowance for doubtful
accounts in 2002 compared with 2001 is mainly due to specific accounts deemed
uncollectible and an increase in the aging of receivables reflecting weak
general economic conditions worldwide. On a forward-looking basis, general and
administrative expenses are expected to increase in absolute terms due mainly to
the inclusion for a full year of the operations of TCS and higher corporate
insurance premiums.

     RESTRUCTURING. In connection with the restructuring plan implemented in
December 2002, we recorded restructuring and other related charges of $282
thousand in accordance with SFAS No. 146. All of the staff whose termination
costs were included in our fourth quarter 2002 financial statements were located
in North America. The plan also included vacating a portion of our Southampton
facility and the closing of our Herndon, Virginia and Bergisch Gladbach, Germany
offices.

                                       45
<PAGE>

     In the quarter ending December 31, 2002, we reduced the remaining 2001
restructuring plan accrual by $400 thousand. The 2001 restructuring plan charge
of $14.6 million included severance and outplacement costs of $9.6 million,
consolidation of facility costs of $1.9 million, related property write-downs of
$1.9 million and impairment of intangible assets and other of $1.1 million. The
2001 restructuring plan was substantially completed by December 31, 2001 with
the principal exception of employee terminations related to the completion of
the outsourcing of manufacturing of our products. The remaining amounts net of
sub-lease income relating to the consolidation of facilities in Sunnyvale and
Las Vegas of $124 thousand will be paid over the respective lease terms mainly
through 2005.

     IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition of
TCS and in accordance with SFAS No. 2 "Accounting for Research and Development
Costs", a portion of the purchase price, $1.3 million, was allocated to
purchased in-process research and development. As part of the process of
analyzing this acquisition, we made a decision to buy three technologies that
had not yet been commercialized rather than develop those technologies
internally. In doing so, we considered our internal research resource allocation
and our progress on comparable technology, if any. At the date of the
acquisition, technological feasibility had not yet been established for the
in-process research and development projects and they had no alternative future
use. Accordingly, the fair value allocated to these technologies, which was
based on an analysis of the discounted excess earnings that the intangible
assets generate over their expected lives, was immediately expensed at
acquisition.

     AMORTIZATION OF ACQUIRED INTANGIBLES. Amortization expense was $3.4 million
in 2001. With the adoption of SFAS No. 142 as of January 1, 2002, we ceased to
amortize acquired intangibles of indefinite lives, primarily goodwill.

     GOODWILL IMPAIRMENT. During the fourth quarter of 2002 we performed our
annual impairment test of acquired intangible assets as prescribed by SFAS No.
142. Our stock price had declined significantly from January 1, 2002, at which
point our market capitalization, based on our stock price, was below book value.
We determined the fair value of the Company based on relative market multiples
for comparable businesses and a discounted cash flow model. This evaluation
indicated that an impairment loss might exist. We then performed Step 2 under
SFAS No. 142 and compared the carrying amount of goodwill to the implied fair
value of the goodwill and determined that an impairment loss existed.

     A non-cash charge totaling $28.3 million was recorded in the fourth quarter
of 2002 to write down the goodwill recorded primarily in the acquisitions of
SCI, CPS and STS to its fair value. We will perform an impairment test at least
annually and on an interim basis should circumstances indicate that an
impairment loss may exist. The outcome of such testing may lead to the
recognition of an impairment loss. As of December 31, 2002, we had $33.7 million
of non-amortizable goodwill and other intangible assets.

     FINANCIAL INCOME, NET. Financial income, net decreased 6% to $4.0 million
in 2002 from $4.3 million in 2001. The decrease in 2002 reflects lower
prevailing average market interest rates in 2002 compared with 2001 only partly
offset by exchange gains.

                                       46
<PAGE>

     OTHER INCOME (EXPENSE), NET. Other expense, net was $4.1 million in 2002
compared with $4.8 million in 2001. In 2002, we recorded $3.5 million in respect
of the settlement of claims by Douglas Chapiewski, the sole shareholder of CPS;
$335 thousand representing the cost of moving our North American headquarters to
a different facility, and $229 thousand to write-off of our long-term investment
in Espro Ltd. In 2001, we recorded a $4.4 million charge following the
settlement of a dispute with SCI relating to certain post-closing adjustments in
connection with the acquisition of certain assets and liabilities by NICE.

     TAXES ON INCOME. In 2002, we recorded a provision for income taxes of $350
thousand compared with $198 thousand in 2001. The increase is primarily related
to operating profits recorded at certain distribution subsidiaries where net
operating loss carryforwards are not available to offset operating profits and
changes in US state tax laws.

     NET LOSS. Net loss was $34.0 million in 2002 compared with a net loss of
$46.8 million in 2001. The decrease in 2002 resulted primarily from the increase
in revenues and gross margin.


YEARS ENDED DECEMBER 31, 2001, AND 2000

     REVENUES. Our revenues decreased to $127.1 million in 2001 from $153.2
million in 2000. The 17% decrease in revenues in 2001 was due primarily to the
overall slowdown in technology spending combined with the impact, particularly
in North America, of internal operational changes implemented in early 2001.
Sales in North America declined 26% in 2001 (after increasing 40% in 2000).
Sales in Europe (including Israel) decreased 14% and sales in the rest of the
world rose 2% in 2001. On a product line basis, sales of our audio recording
platform and related applications for contact centers and financial trading
floors decreased 22% to $99.8 million in 2001 and represented 79% of total
revenues; sales of digital video products declined 11% to $14.1 million and
represented 11% of total revenues, and revenues from sales of COMINT systems
increased 52% to $13.2 million and accounted for 10% of total revenues.

     COST OF REVENUES. Cost of revenues was $73.8 million in 2001 compared with
$73.6 million in 2000. During 2000, we more than doubled the number of customer
support staff who provide installation and technical support to our customers
from about 100 at the start of the year to approximately 210 at the end of
December 2000. Of the total, 37 support employees joined us as part of the
December 2000 acquisition of the direct sales and customer support channel and
service and maintenance agreements of our then largest distributor in North
America, Stevens Communications, Inc. As a result, the increase in cost of
revenues in 2001 was due primarily to the impact on an annual basis of the
significant increase in the number of customer support employees and related
costs without a commensurate increase in customer support revenue, which
resulted in a substantial negative gross profit on customer support. This
increase in customer support cost was only partly offset by lower sales volume
and manufacturing labor costs.

                                       47
<PAGE>

     GROSS PROFIT. For the reasons mentioned above, gross profit was $53.3
million in 2001 compared with $79.6 million in 2000. Gross profit margin was
42.0% and 52.0% in 2001 and 2000, respectively.

     RESEARCH AND DEVELOPMENT, NET. Research and development expense, before
capitalization of software development costs and grants, rose to $26.0 million
in 2001 from $25.4 million in 2000 and represented 20.5% and 16.6% of revenues
in 2001 and 2000, respectively. The level of spending reflects our efforts to
continue to improve our long-term competitive position. In 2000, we increased
the number of R&D staff by 24% in order to support the development of new or
enhanced products for each of our product lines. In 2001, these efforts included
major functionality improvements to our voice recording platforms and quality
monitoring and contact center performance applications as well as the market
introduction of the NICEVISION PRO high-end video recording platform and the
NICETRACK telecommunications monitoring solution. The increase in gross research
and development expense in 2001 resulted from the overall average higher level
of R&D staff.

     Software development costs capitalized were $5.4 million in 2001 compared
with $4.7 million in 2000. Net research and development expense decreased 2% in
2001 to $19.2 million from $19.5 million in 2000. Amortization of capitalized
software development costs, included in cost of revenues, was $2.8 million and
$1.6 million in 2001 and 2000, respectively.

     SELLING AND MARKETING EXPENSES. Selling and marketing expenses in 2001 were
$35.0 million compared with $35.4 million in 2000. The decrease in selling and
marketing expenses was due principally to reductions in staff, lower
revenue-related expenses and lower discretionary marketing outlays only partly
offset by expansion of our sales and marketing infrastructure in Europe and
Asia.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $27.1 million in 2001 and $28.3 million in 2000. The decrease in 2001 was
due primarily to the reduction in administrative staff and cost containment
efforts.

     RESTRUCTURING AND OTHER SPECIAL CHARGES.

     RESTRUCTURING. As a result of the decline in general economic and business
conditions in late 2000 and the changing competitive environment, we implemented
a restructuring program in 2001 to better align our cost structure with the
current business environment and to focus our resources on the highest potential
growth areas of our business. As a result, we incurred a $14.6 million charge
for restructuring costs in the first quarter of 2001.

     Our restructuring program included a 30% reduction in force across all
business functions. Approximately 60% of such employees were based in Israel and
the remainder were based in primarily in North America. The workforce reduction
resulted in a charge of $9.6 million for termination benefits. We also
consolidated our North American operations into two main facilities and
eliminated excess field office space. The restructuring program included a
charge of $1.9 million for lease terminations and estimated losses on subleases
and $1.9 million for nonrecoverable investments in leasehold improvements and
facility equipment. The restructuring program included exiting a product line
acquired as part of the Dees transaction. As a result, a charge of $1.1 million,
relating to the impairment of the associated goodwill was taken.

                                       48
<PAGE>

     The restructuring program was substantially completed by December 31, 2001
with the principal exception of employee terminations related to the completion
of the outsourcing of manufacturing of our products. The cash impact of the
total charge was $11.0 million, of which $9.0 million was paid in 2001 and the
remainder was substantially paid by mid-2002. Amounts relating to the
consolidation of facilities will be paid over the respective lease terms mainly
through 2003.

     OTHER SPECIAL CHARGES. In 2000, the Company recorded a charge of $6.8
million related to in-process research and development of software acquired in
the CenterPoint Solutions, Inc. transaction for which technological feasibility
had not yet been established and for which no alternative future use existed.

     AMORTIZATION OF ACQUIRED INTANGIBLES. Amortization expense was $3.4 million
and $0.9 million in 2001 and 2000, respectively. The increase in 2001 is due
mainly to the acquisition of certain assets of SCI.

     FINANCIAL INCOME, NET. Financial income, net decreased 31% to $4.3 million
in 2001 from $6.2 million in 2000. The decrease in 2001 reflects lower average
cash balances and lower average interest rates in 2001 compared with 2000.

     OTHER INCOME (EXPENSE), NET. Other expense, net was $4.8 million in 2001
compared with other income, net of $53 thousand in 2000. In 2001, we recorded a
$4.4 million charge following the settlement of a dispute with SCI relating to
certain post-closing adjustments in connection with the acquisition of certain
assets and liabilities by NICE.

     NET LOSS. Net loss was $46.8 million in 2001 compared with $5.3 million in
2000. The decrease in 2001 resulted primarily from the factors described above.


LIQUIDITY AND CAPITAL RESOURCES

     We have historically financed our operations through cash generated from
operations and sales of equity securities. We invest our excess cash in
instruments that are highly liquid, investment grade securities. At December 31,
2002, we had approximately $ 68.6 million of cash and cash equivalents and short
and long-term investments compared with $89.0 million at December 31, 2001 and
$98.0 million at December 31, 2000. The decrease in 2002 is due to the payment
of $29.9 million in the acquisition of TCS partly offset by net operating cash
flow.

     For 2002, cash provided by operations was $20.1 million compared with $2.3
million in 2001. The improvement in 2002 compared with 2001 was primarily
attributable to the narrowed net loss and continued improvement in working
capital. We place particular focus on managing our working capital, particularly
the level of accounts receivable days sales outstanding and inventories. Days
sales outstanding (DSO) in accounts receivable for 2002, excluding the effect of
the acquisition of TCS, was 94 days compared with 99 days at the end of 2001.
The improvement is primarily attributable to the implementation of process
improvements and our credit policy. Including the impact of the acquisition of
the assets of TCS, our DSO was 118 days. We expect to see our DSO return to
levels below 100 days during the first half of 2003. In connection with the TCS
acquisition, we recorded a current liability of $2.8 million and a long-term
liability of $13.5 million reflecting obligations under a long-term contract
assumed by NICE. We have entered into negotiations to amend this contract but
there can be no assurance that we will be successful in these negotiations.

                                       49
<PAGE>

     For 2001, cash provided by operations was $2.3 million, compared with cash
used in operations of $2.1 million in 2000 The improvement in 2001 compared with
2000 was primarily attributable to an overall improvement in working capital
associated with substantial reductions in accounts receivable and inventories
largely offset by the $46.8 million loss incurred in the year. Days sales
outstanding (DSO) in accounts receivable was 99 days at the end of 2001 compared
with 113 days at December 31, 2000.

     Net cash used in investing activities was $28.3 million compared with net
cash provided by investing activities of $2.5 million in 2001. The decrease in
2002 is due to the acquisition of TCS. Capital expenditures were $5.4 million in
2002 and $7.6 million in 2001. Capital expenditures in 2002 included investment
in additional modules for our global ERP system including the implementation of
the order management and financial system modules at TCS' Southampton facility
following the acquisition and equipment for research and development and
demonstration purposes. As of December 31, 2002, we have no material commitment
for capital expenditures.

     Net cash provided by investing activities was $2.5 million in 2001 and net
cash used in investing activities was $18.1 million in 2000. The increase in
2001 reflects lower capital expenditures and lower outlays for acquisitions.
Capital expenditures were $7.6 million and $14.2 million in 2001 and 2000,
respectively. 2001 capital expenditures related primarily to investment in a
global ERP system and equipment for research and development purposes.

     Net cash provided by financing activities (mainly net proceeds from the
issuance of shares upon the exercise of stock options) was $2.1 million, $1.9
million and $15.0 million in 2002, 2001 and 2000, respectively, primarily as a
result of stock options exercised. We have available for use short-term
revolving lines of credit at a number of commercial banks totaling up to $25
million. As of December 2002, we also have available for use committed credit
lines of $22 million secured by one of our commercial bond portfolios. There are
no financial covenants associated with these credit lines. As of December 31,
2002, we had less than $0.1 million outstanding on our lines of credit. As of
May 1, 2003, no amounts were drawn against our short-term lines of credit. The
availability under the lines of credit has been reduced, however, by $2.2
million in outstanding guarantees and letters of credit. Additionally, we have
one advance payment guarantee in the amount of $1.6 million which stipulates
that the Company will have at least $20 million of cash and long term
investments and shareholders' equity of $100 million.

     We believe that based on our current operating forecast, the combination of
existing working capital, expected cash flows from operations and available
credit lines will be sufficient to finance our ongoing operations for the next
twelve months. Depending upon our future growth, the success of our business
initiatives and acquisition opportunities, we will consider from time to time
various financing alternatives and may seek to raise additional capital to
finance our strategic efforts through debt or equity financing, the sale of
non-strategic assets or to enter into strategic arrangements.

                                       50
<PAGE>

     Set forth below are our contractual obligations and other commercial
commitments over the medium term as of December 31, 2002($ in thousands):

<TABLE>
<CAPTION>
<S>                                   <C>                <C>           <C>            <C>              <C>
-------------------------------------------------------------------------------------------------------------------
                                                             PAYMENTS DUE BY PERIOD
                              -------------------------------------------------------------------------------------
                                                      LESS THAN 1
CONTRACTUAL OBLIGATIONS                TOTAL             YEAR        1- 3 YEARS    4-5 YEARS     AFTER 5 YEARS
-------------------------------------------------------------------------------------------------------------------
Operating Leases                      12,392             5,358         6,437          579              18
-------------------------------------------------------------------------------------------------------------------
Unconditional Purchase
Obligations                           15,377             6,190         9,187           -
-------------------------------------------------------------------------------------------------------------------
Other Long-Term Obligations
-------------------------------------------------------------------------------------------------------------------
Total Contractual Cash
Obligations                           27,769             11,548        15,624         579              18
-------------------------------------------------------------------------------------------------------------------


-------------------------------------------------------------------------------------------------------------------
                                                              AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
                                                     --------------------------------------------------------------
                                      TOTAL
                                     AMOUNTS         LESS THAN 1
                                    COMMITTED          YEAR        1- 3 YEARS      4-5 YEARS      OVER 5 YEARS
-------------------------------------------------------------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS
-------------------------------------------------------------------------------------------------------------------
Lines of Credit
-------------------------------------------------------------------------------------------------------------------
Standby Letters of Credit
-------------------------------------------------------------------------------------------------------------------
Guarantees                             3,778              800          2,488          490
-------------------------------------------------------------------------------------------------------------------
Standby Repurchase Obligations
-------------------------------------------------------------------------------------------------------------------
Other Commercial Commitments
-------------------------------------------------------------------------------------------------------------------
Total Commercial Commitments
                                       3,778              800          2,488          490
-------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       51
<PAGE>

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

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

     FOREIGN CURRENCY RISK. We conduct our business primarily in U.S. dollars
but also in the currencies of the United Kingdom, Canada, the European Union and
Israel. Thus, we are exposed to foreign exchange movements, primarily in UK,
European and Israel currencies. We monitor foreign currency exposure and, from
time to time, may enter into various contracts to preserve the value of sales
transactions and commitments.

     INTEREST RATE RISK. We invest in investment-grade U.S. corporate bonds and
dollar deposits with FDIC-insured U.S. banks. Since these investments carry
fixed interest rates and since our policy and practice is to hold these
investments to maturity, interest income over the holding period is not
sensitive to changes in interest rates. As of December 31, 2002, we had no other
exposure to changes in interest rates and had no interest rate derivative
financial instruments outstanding.

RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses significant issues
regarding the recognition, measurement, and reporting of costs associated with
exit and disposal activities, including restructuring activities. SFAS No. 146
requires that costs associated with exit or disposal activities be recognized
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 is effective for all exit or disposal activities
initiated after December 31, 2002. The Company elected early adoption of SFAS
No. 146.


FACTORS THAT MAY AFFECT FUTURE RESULTS

     We operate globally in a dynamic and changing environment that involves
numerous risks and uncertainties. The following section lists some, but not all,
of those risks and uncertainties that could cause actual results and outcomes to
differ materially from those contained in any forward-looking statement made by
or on behalf of the Company.

     THE OVERALL ECONOMIC ENVIRONMENT CONTINUES TO BE WEAK. We are subject to
the effects of general global economic and market conditions. Our operating
results have been materially adversely affected as a result of recent
unfavorable economic conditions and reduced information technology spending,
particularly in the product segments in which we compete. During 2002, there was
an increase in demand for our type of products as customers allocated resources
to enhance their recording and analysis capabilities for compliance and risk
management and for security. However, customer purchase decisions may be
significantly affected by a variety of factors including trends in spending for
information technology, enterprise software, market competition, and the
viability or announcement of alternative technologies. If economic conditions
continue to be weak, demand for our products could decrease resulting in lower
revenues, profits and cash flows.

                                       52
<PAGE>

     OUR BUSINESS STRATEGY CONTINUES TO EVOLVE. Historically we have supplied
the hardware and some software for implementing multimedia recording solutions.
Our shift to providing professional support services and now towards 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 and technical personnel;
expanded or differing competition resulting from entering the enterprise
software market; increased need to expand our distribution network to include
system integrators which could impact revenues and gross margins, and, as our
applications are sold either to our installed base or to new customers together
with our recording platforms, the rate of adoption of our software applications
by the market.

     WE MAY EXPERIENCE DIFFICULTY MANAGING CHANGES IN OUR BUSINESS. 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. If we do not carefully manage expense and
inventory levels consistent with product demand and do not carefully manage
accounts receivable to limit credit risk, this could materially adversely affect
our results of operations.

     OUR SERVICE REVENUES ARE DEPENDENT ON OUR INSTALLED BASE OF CUSTOMERS. We
derive 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 services 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.

     RISKS ASSOCIATED WITH OUR DISTRIBUTION CHANNELS 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 or more of our distributor channels. Our financial results
could be materially adversely affected if our contracts with channel partners
were terminated, if our relationship with channel partners were to deteriorate
or if the financial condition of our channel partners were to weaken. In
addition, as our market opportunities change, we may have increased reliance on
particular channel partners, 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, there can be no assurance that our channel
partners will not develop or market products or services in competition with us
in the future.

                                       53
<PAGE>

     OUR UNEVEN SALES PATTERNS COULD SIGNIFICANTLY IMPACT OUR QUARTERLY REVENUES
AND EARNINGS. The sales cycle for our solutions 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 product 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.

     COMPETITIVE PRICING AND DIFFICULTY MANAGING PRODUCT COSTS COULD MATERIALLY
ADVERSELY AFFECT OUR REVENUES AND EARNINGS. The market for our products and
related services, in general, is highly competitive. Additionally, some of our
principal competitors such as Witness Inc., Verint, Inc., and ASC 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.

     OUR GROSS MARGINS ARE HIGHLY DEPENDENT UPON OUR PRODUCT MIX. 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 COMINT.

     IF OUR SUPPLIERS ARE NOT ABLE TO MEET OUR REQUIREMENTS, WE COULD HAVE
DECREASED REVENUES AND EARNINGS:

     o    We migrated the manufacturing of all of our key products to a contract
          manufacturer. The TCS product line is also manufactured by a third
          party. We may experience delivery delays due the inability of the
          outsourcers to consistently meet our quality or delivery requirements.
          If these suppliers or any other supplier 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.

     o    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.

                                       54
<PAGE>

We depend on certain critical components in the production of our products and
parts. Some of these components are obtained only from a single supplier and
only in limited quantities. 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, if 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.

     UNDETECTED PROBLEMS IN OUR PRODUCTS COULD DIRECTLY IMPAIR OUR FINANCIAL
RESULTS. If flaws in 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. There can be no assurance
that our efforts to monitor, develop, modify and implement appropriate test and
manufactruing processes for our products will be sufficicent 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 of which could have a material adverse effect on our business,
results of operations and financial condition.

     OUR GROWTH IS DEPENDENT UPON RECRUITING AND RETAINING KEY PERSONNEL. If our
growth continues, we will be required to hire and integrate new employees. There
can be no assurance that we will be able to successfully recruit and integrate
new employees. Competition for highly skilled employees, including sales,
technical and management personnel, may again become high in the technology
industry. We may experience personnel changes as a result of our move from
multimedia recording equipment towards business performance solutions. Our
failure to attract talented employees or retain the services of key personnel,
could have a material adverse effect on our results of operations and financial
position.

     WE MAY EXPERIENCE DIFFICULTY MANAGING OPERATIONAL EXPANSION. We have
recently established a sales infrastructure in Hong Kong by relocating a portion
of our Israel-based sales operations and by recruiting new managers and sales
persons in order to bring about a growth in revenue in the Asia Pacific market.
We may establish additional operations within the region where growth
opportunities are projected to warrant the investment. 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. 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.

                                       55
<PAGE>

     CHANGES IN FOREIGN CONDITIONS COULD MATERIALLY ADVERSELY AFFECT OUR
FINANCIAL RESULTS. Approximately half of our revenues are derived from sales
outside the United States. Accordingly, 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, and longer payment cycles in the countries in our geographic areas
of operations.

     OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF THE
RISKS ASSOCIATED WITH ACQUISITIONS AND INVESTMENTS. As part of our growth
strategy, we have made a number of acquisitions and have made minority
investments in complementary businesses, products or technologies. 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. 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 anticipated synergies
or economies of scale on a timely basis and the potential impairment of acquired
assets. Moreover, there can be no assurance that the anticipated benefits of any
acquisition or investment will be realized. Future acquisitions or investments
contemplated and/or consummated could result in potentially dilutive issuances
of equity securities, the incurrence of debt and contingent liabilities,
amortization expenses related to intangible assets, any of which could have a
material adverse effect on our operating results and financial condition. 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.

     WE MAY BE UNABLE TO KEEP PACE WITH RAPID INDUSTRY, TECHNOLOGICAL AND MARKET
CHANGES. The market for our products and services is subject to rapid
technological change and new product introductions. Current competitors and/or
new market entrants may develop new, proprietary products with features that
could adversely affect the competitive position of our products. We may not
successfully anticipate market demand for new products or services, or introduce
them in a timely manner. The convergence of voice and data networks, wired and
wireless communications could require substantial modification and customization
of our current products and business models, as well as the introduction of new
products. Further, customer acceptance of these new technologies may be slower
than we anticipate. We may not be able to compete effectively in these markets.
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.
Additional factors that may cause actual results to differ materially from our
expectations include industry specific factors; our ability to continuously
develop, introduce and deliver commercially viable products, solutions and
technologies, and the market's rate of acceptance of the solutions we offer and
our ability to keep pace with market and technology changes and to compete
successfully.

                                       56
<PAGE>

     WE FACE POTENTIAL PRODUCT LIABILITY CLAIMS AGAINST US. We may be subject to
claims that our products are defective or that some function or malfunction of
our products caused or contributed to property, bodily or consequential damages.
We minimize this risk by incorporating provisions into our distribution and
standard sales agreements that are designed to limit our exposure to potential
claims of liability. We carry product liability insurance in the amount of
$10,000,000 per occurrence and $10,000,000 overall. No assurance can be given
that all claims will be covered either by the contractual provisions limiting
liability or by the insurance, or that the amount of any individual claim or all
claims will be covered by the insurance or that the amount of any individual
claim or all claims in the aggregate will not exceed policy coverage limits.

     OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY. Our
success is dependent, to a certain extent, upon our proprietary technology. We
currently rely on a combination of patent, trade secret, copyright and trademark
law, together with non-disclosure and non-compete agreements, to establish and
protect the technology used in our systems. However, we cannot assure you that
such measures will protect our proprietary technology that competitors will not
develop products with features based upon, or otherwise similar to, our systems
or that we will prevail in any proceeding instituted by us in order to enjoin
competitors from selling similar products.

     WE ARE INVOLVED IN LITIGATION AND MAY BECOME INVOLVED IN LITIGATION THAT
MAY MATERIALLY ADVERSELY AFFECT US. In our industry, there has been extensive
litigation regarding patents and other intellectual property rights. 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. In June
2000, Dictaphone Corporation, one of our competitors, filed a patent
infringement claim relating to certain technology embedded in some of our
products. The claim is for damages for past infringement and enjoinment of any
continued infringement of Dictaphone patents. In the court's discretion, the
damages may be trebled and attorney fees awarded. As a result we might be forced
to pay significant damages and licensing fees, modify our business practices or
even be enjoined from conducting a significant part of our U.S. business. Any
such results could materially harm our business. We believe, however, that we
have a valid defense to this claim and are vigorously defending it. We have
received notification from our insurance company indicating that the claim is
not covered by our insurance policy; however, our insurance company has agreed
to reimburse for us all legal expenses that we are expending in defense of the
claim while reserving its final decision on this matter until the final outcome
of the litigation. The discovery period is closed, dispositive motions have been
filed with the Court, and we are awaiting the Court's decisions on these motions
as well as scheduling for trial.

     In April 2002, we received a letter from Dictaphone stating that several of
our products were using technology protected by additional Dictaphone patents
and offering us a licensing arrangement for these patents. We believe that none
of our products infringe upon those patents. We cannot assure you, however, that
we will be successful in defending the Dictaphone infringement claim or other
claims, or that infringement claims or other claims, if asserted, will not have
a material adverse effect on our business, financial condition or results of
operations. Any claims, with or without merit, could be costly and
time-consuming to defend, divert our management's attention, cause product
delays and have an adverse effect on our revenues and operating results. If any
of our products were found to infringe a third party's proprietary rights, we
could be required to enter into royalty or licensing agreements to be able to
sell our products, which may not be available on terms acceptable to us or at
all.

                                       57
<PAGE>

     CHANGES IN ISRAELI GOVERNMENT BENEFIT PROGRAMS COULD MATERIALLY ADVERSELY
AFFECT US. We derive and expect to continue to derive significant benefits from
various programs and laws in Israel including tax benefits relating to our
"Approved Enterprise" programs and grants from the Office of the Chief
Scientist, 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. From time to
time, the Israeli Government has discussed reducing or eliminating the
availability of these grants, programs and benefits. Pursuant to an amendment to
Israeli regulations, income from two of our "Approved Enterprises" is exempt
from income tax for only two years. Following this two year period, 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 the other two "Approved Enterprises" are
tax exempt for four years. Following this four year period, the "Approved
Enterprises" are 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. If grants, programs and benefits available to us or the laws 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 receive approval for
future Approved Enterprises, our business, financial condition and results of
operations could be materially adversely affected.

     WE MAY HAVE EXPOSURE TO ADDITIONAL INCOME TAX LIABILITIES. As a global
corporation, we are subject to income 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
is subject to our interpretation of applicable laws in the jurisdictions in
which we file. From time to time, we are subject to income tax audits. While we
believe we comply with all 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 affect on our results of operations and
financial condition.

     OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED BY WAR, TERRORISM AND
NATURAL DISASTER. In the event of war, acts of terrorism or natural disaster,
such as widespread disease, earthquake and flood, we could experience
significant business interruption. Such conflicts may also cause damage or
disruption to transportation and communication systems, which could affect our
suppliers' ability to deliver products and to our employees' and distributors'
ability to conduct business and provide services.

     OUR STOCK PRICE IS VOLATILE. Numerous factors, some of which are beyond our
control, may cause the market price of our ordinary shares or the American
Depositary Shares (ADSs) representing our ordinary shares to fluctuate
significantly.

                                       58
<PAGE>

These factors include, among other things, announcements of technological
innovations, customer orders or new products by us or our competitors, earning
releases by us or our competitors, 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).

                                       59
<PAGE>

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

DIRECTORS AND SENIOR MANAGEMENT

     The following table sets forth, as of June 15, 2003, the name, age and
position of each of our directors and executive officers:

<TABLE>
<CAPTION>

     NAME                             AGE                      POSITION
     ----                             ---                      --------
<S>                                   <C>     <C>
Ron Gutler(2)                         45      Chairman of the Board of Directors

Joseph Atsmon(2)                      54      Vice-Chairman of the Board of Directors

Rimon Ben-Shaoul(4)                   58      Director

Joseph Dauber(1)(4)                   58      Director

Dan Falk(1)(2)(3)(4)                  58      Director

John Hughes                           51      Director

David Kostman                         38      Director

Dr. Leora  Meridor(1)(2)(3)           55      Director

Timothy Robinson(2)                   39      Director

Haim Shani                            46      President and Chief Executive Officer

Lauri Hanover                         43      Corporate Vice President and Chief Financial Officer

Ya'akov Huberman                      46      Corporate Vice President, Business Development

Dr. Rivi Sherman                      49      Corporate Vice President and Chief Technology Officer

Daphna Kedmi                          50      Corporate Vice President, General Counsel and Corporate Secretary

Meni Gal                              49      Corporate Vice President, Human Resources

Yoav Zaltzman                         45      Corporate Vice President, NiceTrack

Doron Eidelman                        48      Executive Vice President, NiceVision

Eytan Bar                             37      Corporate Vice President, Products

Zvi Baum                              47      Corporate Vice President, Marketing

Dr. Shlomo Shamir                     56      President and Chief Executive Officer of NICE Systems Inc.

Jim Park                              47      President NICE CTI Systems UK Ltd.
</TABLE>

                                       60
<PAGE>

     NAME                             AGE                      POSITION
     ----                             ---                      --------

Doron Ben Sira                        43      President NICE APAC Ltd.

Eran Porat                            41      Corporate Controller

     (1)  Member of the Internal Audit Committee.
     (2)  Member of the Audit Committee.
     (3)  Outside Director. See "-- Outside Directors."
     (4)  Member of the Compensation Committee

     Set forth below is a biographical summary of each of the above-named
directors and executive officers of NICE.

     RON GUTLER has been a director of NICE 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. Between 2000 and
2002, he managed the Blue Border Horizon Fund, a global macro fund. Mr. Gutler
is a former Managing Director and a Partner of Bankers Trust Company (currently
part of Deutche Bank). Between 1987 and 1999, he filled various positions with
Bankers Trust. Mr. Gutler headed the 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, cum
laude, both from the Hebrew University, Jerusalem.

     JOSEPH ATSMON has been a director of NICE since September 2001 and
Vice-Chairman of the Board since May 2002. Mr. Atsmon currently serves as a
Director of Ceragon Networks. From 1995 until 2000, Mr. Atsmon served as Chief
Executive Officer of Teledata Communications Ltd., a public company acquired by
ADC Telecommunications Inc. in 1998. Mr. Atsmon had a twenty year career with
Tadiran Ltd. In his last role at Tadiran Ltd., Mr. Atsmon served as Corporate VP
for business development. Prior to that, he served as President of various
military communications divisions. Mr. Atsmon received a B.Sc. in Electrical
Engineering, suma cum laude, from the Technion, Israel Institute of Technology.

     RIMON BEN-SHAOUL has been a director of NICE since September 2001. Mr.
Ben-Shaoul currently serves as co-Chairman, President, and CEO of Koonras
Technologies Ltd. which he joined on February 1, 2001. Koonras Technologies Ltd.
is a technology investment company controlled by Poalim Investments Ltd., a
large Israeli holding company. Between 1997 and February 1, 2001, Mr. Ben-Shaoul
was the President and CEO of Clal Industries and Investments Ltd., one of the
largest holding companies in Israel with substantial holdings in the high tech
industry. During that time, Mr. Ben-Shaoul also served as Chairman of the Board
of Directors of Clal Electronics Industries Ltd., Scitex Corporation Ltd., and
various other companies within the Clal Group. Mr. Ben-Shaoul also served as a
director of ECI Telecom Ltd., Fundtech Ltd., Creo Products, Inc., Nova Measuring
Instruments Ltd., and other public and private companies. From 1985 to 1997, Mr.
Ben-Shaoul was President and CEO of Clal Insurance Company Ltd. and a director
of the company and its various subsidiaries. Mr. Ben-Shaoul holds a bachelor's
degree in economics and a master's degree in business administration, both from
Tel-Aviv University.
                                       61
<PAGE>

     JOSEPH DAUBER has been a director of NICE since April 2002. Mr. Dauber is
currently the chairman of the B.O.D of the Maritime Bank Of Israel. Until June
2002 he was deputy chairman of the board of Management and joint Managing
Director of Bank HaPoalim and was responsible for the commercial division of the
bank. During the years 1994-1996 and until 6/ 2002 Mr. Dauber served as Chairman
of Poalim American Express and of the Isracard Group. He holds a Bachelor's
degree in Economics and Statistics and an MBA, both from the Hebrew University
of Jerusalem.

     DAN FALK has been a director of NICE since January 2002. Mr. Falk serves as
a member of the boards of directors of Orbotech Systems Ltd., Attunity Ltd.,
Orad Ltd., Netafim Ltd., Visionix Ltd., Ramdor Ltd., Medcon Ltd., Advanced
Vision Technology Ltd., ClickSoftware Technologies Ltd., Dor Chemicals Ltd. and
Poalim(C.M.) Hi-Tech Ltd., all of which are Israeli companies. In1999 and 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 Systems 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 holds a Bachelor's degree in
Economics and Political Science and a Master's degree in Business Administration
from the Hebrew University, Jerusalem. As described above, Mr. Falk serves on
the board of directors of a number of companies, both public and private and
qualifies as an Outside Director under Israeli law. See "-- Outside Directors."

     JOHN HUGHES has been a director of NICE since November 2,2002.Mr Hughes is
currently Executive Vice President and COO of the Thales Group and CEO of its
IT&S Aerospace Business Areas. During the years 1997 until 2000 he held
positions with Lucent Technologies, and was President of its GMS/UMTS division
and in the years 1991 through 1997,Mr Hughes served as Director Convex Global
Field operations within the Hewlett Packard Company. Prior to that Mr. Hughes
held various positions with UK and US companies. Mr. Hughes holds a bachelor of
science degree in Electrical and Electronic Engineering from the University of
Hertfordshire.

     DAVID KOSTMAN has been a director of NICE since January 2000. Mr. Kostman
is currently the Chief Operating Officer of Delta Galil USA Inc., a subsidiary
of Delta Galil Industries Ltd., a Nasdaq-listed apparel manufacturer. Until May,
2002 he was the Chief Operating Officer of VerticalNet, Inc. and of VerticalNet
International, which he joined in June 2000. Prior thereto, Mr. Kostman was a
Managing Director in the Investment Banking Division of Lehman Brothers Inc.,
which he joined in 1994. Mr. Kostman holds a bachelor's degree in law from
Tel-Aviv University and a master's degree in business administration from
INSEAD, France.

     LEORA (RUBIN) MERIDOR has been a director of NICE since January 2002. Since
2001, Dr. Meridor has been the Chairman of the Board of Bezeq International,
Poalim Capital Markets and Walla Telecommunication. From 1996 to 2000, Dr.
Meridor served as Senior Vice President, Head of the Credit and Risk Management
Division of the First International Bank of Israel. Between 1983 and 1996 Dr.
Meridor held various positions in the Bank of Israel, the last of which was Head
of the Research Department. Dr. Meridor has held various teaching positions with
the Hebrew University and holds a Bachelor's degree in mathematics and physics,
a Master's degree in Mathematics and a PhD in Economics from the Hebrew
University, Jerusalem. Dr. Meridor serves on several boards of directors and
qualifies as an Outside Director under Israeli law. See "--Outside Directors."

                                       62
<PAGE>

     TIMOTHY ROBINSON has been a director of NICE since November 2, 2002. Mr.
Robinson is currently Senior Vice President of the Secure Operations business
unit of the Thales Group. During the years 1997-2001 Mr. Robinson was Chief
Executive of the DCS Group prior to which he was Managing Director of Silicon
Graphics/Cray Research. In the years 1984-1995 Mr. Robinson held several
positions with IBM Corporation in Europe and Asia the last of which was Director
of IBM UK. Mr. Robinson holds a Bachelor of Science (Hons) from the University
of Leeds and is currently a director of Camelot, the National Lottery Operator
for the United Kingdom.

     HAIM SHANI has served as President and Chief Executive Officer of NICE
since January 2001. Mr. Shani came to NICE from Applied Materials (Israel),
where he served as General Manager in its Israeli office from 1998 to 2000,
heading up the Process Diagnostic and Control (PDC) business group formed
following the acquisition by Applied Materials of Opal Ltd. and Orbot
Instruments, Ltd. Prior to joining Applied Materials, Mr. Shani held various
management positions at Orbotech Ltd. From 1995 to 1998, he 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.

     LAURI HANOVER has served as Corporate Vice President and Chief Financial
Officer of NICE since December 2000. Ms. Hanover previously served as Executive
Vice President and Chief Financial Officer of Sapiens International Corporation
N.V. since March 1997. From 1984 to 1997, Ms. Hanover served in a variety of
financial management positions, including Corporate Controller, at Scitex
Corporation Ltd. Prior thereto, Ms. Hanover was a senior financial analyst at
Philip Morris Companies, Inc. Ms. Hanover holds a bachelor's degree in finance
from the Wharton School of Business and a bachelor of arts degree from the
College of Arts and Sciences, both of the University of Pennsylvania. Ms.
Hanover also holds a master's degree in business administration from New York
University. Ms. Hanover is a Director and Chairman of the Audit Committee of
Nova Measuring Instruments Ltd.

     YA'AKOV HUBERMAN has served as Corporate Vice President, Business
Development of NICE since January 2000. From 1998 to January 2000, Mr. Huberman
served as Vice President of Marketing for the Enterprise Internetworking Systems
Group 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 leading vendor of
artificial intelligence and knowledge-based software for call center and
customer service applications. Mr. Huberman holds a bachelor's degree in
economics and business administration from the Leon Recanati Business School of
Tel-Aviv University.

                                       63
<PAGE>

     DR. RIVI SHERMAN has served as Chief Technology Officer of NICE since
December 2001. From 1997 to 2001, she served as General Manager Advanced
Products Development of Applied Materials (Israel). From 1989 to 1997, Dr.
Sherman held several positions with Orbot Instruments, including Vice President,
Wafer Inspection Product Line .Prior to that she conducted research in the area
of distributed computing in the University of California. Dr. Sherman holds a
bachelor's degree in Mathematics from the Tel Aviv University and a Master's
degree and PhD in Computer Science from the Weizmann Institute of Science. Dr.
Sherman has various publications and patents to her name.

     DAPHNA KEDMI has served as Corporate Vice President, General Counsel and
Corporate Secretary of NICE since February 2000. From 1989 to December 1999, Ms.
Kedmi served as General Counsel to Elisra Electronic Systems Ltd. and then to
Tadiran Ltd., both of which are subsidiaries of Koor Industries Ltd. From 1979
through 1988, Ms. Kedmi was an attorney and then Deputy General Counsel within
the legal Department of the Israel Ministry of Defense. Ms. Kedmi has a
bachelor's degree in law from Tel-Aviv University and is a member of the Israeli
Bar.

     MENI GAL has served as Corporate Vice President, Human Resources since
January 2001. Prior to joining NICE, Mr. Gal served as Director of Human
Resources of Applied Materials Israel since 1999. From 1994 to 1999, Mr. Gal
served as Senior Vice President of Human Resources for Strauss Company, an
international food company. From 1986 to 1994, Mr. Gal held senior management
positions in human resources at Tadiran Communications, a developer of
communications technologies for the defense and military industries. Mr. Gal
holds a bachelor's degree in education and Behavioral Sciences from Tel-Aviv
University.

     YOAV ZALTZMAN has served as Corporate Vice President, Business Operations
of NICE since May 2001 and is now Corporate Vice President, NiceTrack. Prior to
joining NICE, Mr. Zaltzman served as Senior Director of Sales for Applied
Materials Israel since 1997. From 1994 to 1997, Mr. Zaltzman served as General
Manager of Orbot Instruments in Europe, based in Brussels, which was acquired by
Applied Materials in 1997. From 1987 to 1992, Mr. Zaltzman held various sales
and marketing positions for Oracle in Israel. Mr. Zaltzman holds a bachelor's
degree in Computer Sciences and a master's degree in business administration,
both from Tel Aviv University.

     DORON EIDELMAN serves as Executive Vice President, NiceVision since May
2002. Previously, he was COO of AudioCodes, a telecommunications company. From
1992 to 2001, Mr. Eidelman was Executive Vice President and President of the
Display Division of Orbotech and from 1987 to 1992, he held various positions in
Optrotech, the last of which was Vice President. Mr. Eidelman served in an elite
intelligence unit in the IDF and was awarded the prestigious Israel Defense
Award .He holds a bachelor's degree in electronic engineering from the
Technion-Israel Institute of Technology and a master's degree in electronic
engineering from the University of Tel Aviv.

                                       64
<PAGE>

     EYTAN BAR is currently Corporate Vice President Product Lines. From 2000 to
2001, he was Vice President Professional Services and from 2001 to 2002, he
served as Vice President R&D of the Company . Prior to joining NICE, Mr. Bar
held several positions with the STS Group, including General Manager of STS
Software Systems Ltd.

     ZVI BAUM served as Director of Product Management in the CEM Division of
NICE since January 2002. In May 2003 Mr. Baum was promoted to the position of
Corporate VP of Marketing. Before joining NICE, Mr. Baum served as the Managing
Director of Call Vision Israel Ltd - a company that specialized in the
development of advanced web-based quality monitoring solutions for call centers.
Prior to that, he served as the VP of International Sales and Marketing at STS
Software Systems which developed recording solutions and was acquired by NICE at
the end of 1999. Between 1987 and 1998 Mr. Baum worked for a number of American
and European companies in several areas, including technical management,
marketing and channel management. Mr. Baum holds a B.Sc. in Engineering from the
Technion - Israel Institute of Technology and M.Sc. in Computer Science and MBA
- both from the University of California LA (UCLA).

     DR. SHLOMO SHAMIR has served as President and Chief Executive Officer of
NICE Systems Inc., NICE's wholly owned subsidiary and corporate headquarters in
North America, since April 2001. Dr. Shamir previously served as President and
CEO of CreoScitex America, Inc. from 2000 to April 2001. From 1997 to 2000, Dr.
Shamir served as President and CEO of Scitex America Corp. and from 1994 to
1997, he served as its Corporate Vice President of Operations. Prior to 1994,
Dr. Shamir served in the IDF where he attained the rank of Brigadier General.
Dr. Shamir also built and led the planning division in the IDF headquarters and
served as Israel's military attache to Germany. Dr. Shamir holds a bachelor's
degree in physics from the Technion - Israel Institute of Technology and masters
of science and doctorate degrees in engineering and economic systems from
Stanford University.

     JIM PARK is currently the President of NICE Sytems CTI UK Ltd, NICE's
wholly owned subsidiary and corporate headquarters in EMEA. Mr. Park was
previously CEO of Thales Contact Solutions (Previously Racal Recorders) which
was acquired, by NICE, in Nov 2002. Prior to Joining Racal, in 1998, Mr. Park
held various senior management positions at Mitel Telecom. From 1996 to 1998 he
served as General Manager for Mitel's EMEA switching business, from 1994 to 1996
he was VP of business development, from 1991 to 1994 he was director of
Marketing and from 1982 to 1991 he held various sales management roles, in
Europe, the Middle East and Africa. Mr. Park's early career was spent in various
engineering roles with Siemens UK (1979 to 1982) and British Telecom (1974 to
1979), who sponsored him through college.

     DORON BEN SIRA has served as President of NICE APAC since February 2002.
Mr. Ben-Sira came to NICE from Orbotech, where he served as Vice president of
its Assembly division, based in Hong Kong, from 1998 to 2002, leading all sales,
marketing and customer support activities of that division. Prior to joining
Orbotech, Mr. Ben Sira served from 1996 to 1998 as the East Europe Regional
Director of Cisco Systems, Channel and OEM Director at Siemens Data
communication from 1995 to 1997, based in Munich, and Sales & Marketing Vice
President at Mashov Computers, where he was responsible for all Novell
activities in the Middle East region from 1989 to1995. Mr. Ben-Sira holds a
bachelor's degree in economics and a master's degree in business administration
from Tel Aviv University.

                                       65
<PAGE>

     ERAN PORAT has served as Corporate Controller of NICE since March 2000.
From 1997 to February 2000, Mr. Porat served as Corporate Controller of
Technomatics Technologies Ltd. From 1996 to 1997, he served as Corporate
Controller of Nechushtan Elevators Ltd. Mr. Porat is a CPA and holds a
bachelor's degree in economics and accounting from the University of Tel-Aviv.

COMPENSATION

     The aggregate compensation paid to or accrued on behalf of all our
directors and executive officers as a group (27 persons) during 2002 consisted
of approximately $3.3 million, in salary, fees, bonus, commissions and
directors' fees and $50,000 in amounts set aside or accrued for to provide
pension, retirement or similar benefits, but excluding amounts we expended for
automobiles made available to our officers, expenses (including business travel,
professional and business association dues and expenses) reimbursed to our
officers and other fringe benefits commonly reimbursed or paid by companies in
Israel.

     During 2002, our officers and directors received, in the aggregate, options
to purchase up to 410,000 ordinary shares under our 1995 Stock Option Plan.
These options have an average exercise price of $11.87 and will expire 6 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 Israeli Companies Law. The statutory rates for Outside Directors is
approximately NIS 46,000 per annum and approximately NIS 1,800 per meeting.
Compensation and reimbursement of all other directors who do not serve as
officers are the same as the statutory rates paid to Outside Directors except
for the chairman and vice chairman of the Board who receive 150% and 137.5% of
the annual amount, respectively. We do not have directors who serve as officers
in the Company.

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 13. 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 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.

     The board may, subject to the provisions of the Israeli 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 Israeli Companies Law, that has three members,
an audit committee that has five members and a compensation committee that has
three members.

                                       66
<PAGE>

     OUTSIDE DIRECTORS

     Under the Israeli 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 that
is a 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:

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

     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:

     o    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

     o    the total number of shares of non-controlling shareholders voted
          against the election of the outside directors does not exceed one
          percent of the aggregate voting rights in the company.

     The term of an outside director will be three years and may be extended for
an additional three years. 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. We intend to take all actions required for us to
comply with the Israeli Companies Law and its requirements for outside
directors.

     Our outside directors were elected at a Special General Meeting held on
December 26, 2001.An outside director is entitled to compensation as provided in
regulations adopted under the Israeli Companies Law and is otherwise prohibited
from receiving any other compensation, directly or indirectly, in connection
with service as director of the company.

                                       67
<PAGE>

     INDEPENDENT DIRECTORS

     We are also subject to the rules of the Nasdaq National Market applicable
to listed companies. Under the Nasdaq rules applicable to us, we are required to
appoint a minimum of two independent directors. The independence standard under
the Nasdaq rules excludes any person who is a current or former employee of a
company or any of its affiliates, as well as any immediate family member of an
executive officer of a company or any of its affiliates. At least two of our
current directors meet the independence standard of the Nasdaq rules.

     AUDIT COMMITTEE AND INTERNAL AUDIT COMMITTEE

     The Israeli Companies Law requires public companies to appoint an internal
audit committee. The role of the internal audit committee under the Israeli
Companies Law is to examine flaws in the business management of the company 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
Israeli 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.

     In addition, under the Nasdaq rules applicable to us, we are required to
maintain an audit committee, comprised of a majority of independent directors.
The responsibilities of the audit committee under the Nasdaq rules include,
among other things, evaluating the independence of a company's outside auditors.

     Pursuant to the Sarbanes-Oxley Act of 2002, the Securities and Exchange
Commission (the "SEC") has issued new rules, which would, among other things,
require Nasdaq to impose independence requirements on each member of the audit
committee. Nasdaq has proposed rules that would comply with the SEC's
requirements and which are expected to be applicable to us in 2004.

     The proposed requirements would implement two basic criteria for
determining independence: (i) audit committee members would be barred from
accepting any consulting, advisory or other compensatory fee from the issuer or
an affiliate of the issuer, other than in the member's capacity as a member of
the board of directors and any board committee, and (ii) audit committee members
of an issuer that is not an investment company may not be an "affiliated person"
of the issuer or any subsidiary of the issuer apart from his or her capacity as
a member of the board and any board committee.

     The SEC has proposed to define "affiliate" for non-investment companies as
"a person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified." The term "control" is proposed to be consistent with the other
definitions of this term under the Securities Exchange Act of 1934, as "the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise." A safe harbor has been proposed by the
SEC, under which a person who is not an executive officer, director or 10%
shareholder of the issuer would be deemed not to have control of the issuer.

                                       68
<PAGE>

     Under the final rules adopted by the SEC, an issuer is required to disclose
in its annual report, beginning with the annual report for 2003, whether or not
such issuer has at least one audit committee financial expert. If it does, the
issuer must disclose the name of the expert. If not, the issuer must disclose
why it does not have an audit committee financial expert.

     We intend to continue to take all actions as may be necessary for us to
maintain our compliance with applicable Nasdaq requirements.

     INTERNAL AUDITOR

     Under the Israeli Companies Law, the board of directors must appoint an
internal auditor, proposed by the 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 Israeli 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 Israeli Companies Law.

EMPLOYEES

     At December 31, 2002, we had approximately 1076 employees worldwide, which
represented an increase of 29% from year-end 2001.

     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:

                                       69
<PAGE>
<TABLE>
<CAPTION>

                                                                 AT DECEMBER 31,
           CATEGORY OF ACTIVITY                         2000           2001           2002
          ----------------------------------------   ----------     ----------     ----------
<S>                                                   <C>            <C>             <C>
           Operations..........................          160            90              66
           Customer Support....................          252           224             296
           Sales & Marketing...................          217           171             293
           Research & Development..............          326           232             269
           General & Administrative............          154           115             152
                                                     ----------     ----------     ----------
                TOTAL..........................        1,109           832           1,076
                                                     ==========     ==========     ==========
           GEOGRAPHIC LOCATION
           Israel..............................          738           543             498
           North America.......................          359           260             332
           Europe..............................           12            22             230
           Asia Pacific........................            -             7              16
                                                     ----------     ----------     ----------
                TOTAL..........................        1,109           832           1,076
                                                     ==========     ==========     ==========
</TABLE>

     We also utilize temporary employees in various activities. On average, we
employed approximately 17 such temporary employees and 44 contractor employees
(not included in the numbers set forth above) during 2002.

     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 the Industrialists'
Association of Israel) that are applicable to our Israeli employees by order of
the Israeli Ministry of Labor and Welfare. These statutes and provisions
principally concern the length of the work day and the work week, minimum wages
for workers, contributions to a pension fund, 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 employees are
automatically adjusted based on changes in the Israeli consumer price index, or
CPI. The amount and frequency of these adjustments are modified from time to
time.

     Israeli law generally requires the payment by employers of severance pay
upon the death of an employee, his retirement or upon termination of employment
by the employer without due

                                       70
<PAGE>

cause. We currently fund our ongoing severance obligations by making monthly
payments to approved severance funds or insurance policies. Please see Note 2(s)
to our consolidated financial statements. In addition, according to the National
Insurance Law, Israeli employers and employees are required to pay predetermined
sums to the National Insurance Institute, an organization similar to the United
States Social Security Administration. These contributions entitle the employees
to benefits in periods of unemployment, work injury, maternity leave,
disability, reserve military service and bankruptcy or winding-up of the
employer. Since January 1, 1995, such amount also includes payments for national
health insurance. The payments to the National Insurance Institute are equal to
approximately 16.25% of an employee's wages , of which the employee contributes
approximately 66% and the employer contributes approximately 34%.

     EMPLOYMENT AGREEMENTS

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

SHARE OWNERSHIP

     As of May 31, 2003, our directors and executive officers beneficially owned
an aggregate of 14,321 ordinary shares, or approximately 0.090% of our
outstanding ordinary shares. Rimon Ben-Shaoul, one of our directors, is deemed
to have beneficial ownership of 600,000 ordinary shares (approximately 3.7% of
our outstanding ordinary shares) held by Koonras Technologies Ltd., of which he
is the Co-Chairman of the Board, President and Chief Executive Officer. Other
than Mr. Ben-Shaoul, no individual director or executive officer beneficially
owns 1% or more of our outstanding ordinary shares.

     As of May 31, 2003, all of our directors and executive officers, in the
aggregate, held options under our stock option plans to purchase up to 1,924,500
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.

     On December 9, 1998, our board of directors decided to reduce the exercise
price of all outstanding employee stock options having an original exercise
price above $22.50, excluding options held by members of our board of directors.
The amount of options that were repriced was 1,122,066 and the new exercise
price was set at $22.50, the fair market value of the ordinary shares on such
date. The original exercise price of these options ranged from $33.00 to $42.00.

     1995 STOCK OPTION PLAN

     In 1995, we adopted the NICE-Systems Ltd. 1995 Stock Option Plan, or 1995
Plan, to attract, motivate and retain talented employees by rewarding
performance and encouraging behavior that will improve our profitability. Under
the 1995 Plan, our employees and officers 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, 6,000,000 ADSs
for issuance under the 1995 Plan.

                                       71
<PAGE>

     Under the terms of the 1995 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, 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.

     Pursuant to the Tax Reform (as defined below) and in order to comply with
the provisions of Section 102 of the Income Tax Ordinance (Amendment No. 132),
5762-2002 (the "Ordinance"), on February 11, 2003 our board of directors adopted
an addendum to our share option plan with respect to options granted as of
January 1, 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. Generally, subject
to the fulfillment of the provisions of Section 102 of the Ordinance, under the
Capital Gains Route gains realized from the sale of shares issued upon exercise
of options shall be taxed at a rate of only 25% and not at the marginal income
tax rate applicable to the grantee (up to 50%). In general, according to the
Addendum and pursuant to the election of the Capital gains Route by our board of
directors, all options granted to Israeli grantees, shares issued upon exercise
of such options and any bonus shares issued with respect to such shares, shall
be held in trust for the benefit of the grantee and registered in the name of a
trustee appointed by the Company and approved by the Israeli tax authorities.
Such options and shares will, subject to the provisions of Section 102 of the
Ordinance and any regulations, rules or orders promulgated thereunder, be held
in trust for a period of two years from the end of the tax year in which the
options are granted and shall not be released from the trust prior to the
payment of the grantee's tax liabilities. In the event the requirements of
Section 102 for the allocation of options according to the Capital Gains Route
are not met - the options will be regarded as options granted under Section
102(c) of the Ordinance and the applicable marginal income tax rate shall apply.
The Addendum, the trustee and the Company's election of the "Capital Gains
Route" is approved by the Israeli tax authorities.

     The 1995 Plan is generally administered by our board of directors which
determines the grantees under the 1995 Plan and the number of options to be
granted. As of May 31, 2003, options to purchase 3,274,396 ordinary shares were
outstanding under the 1995 Plan at a weighted average exercise price of $35.04

                                       72
<PAGE>

     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, 2,000,000 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 board of directors, which
determines the grantees under the 1997 Plan and the number of options to be
granted. As of May 31, 2003,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 options to acquire our ordinary shares in order to
further the advancement our business. The options to acquire ordinary shares are
granted at an exercise price equal to the closing price of our ADSs as quoted on
the Nasdaq National 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, 4,000,000 ADSs for issuance under
the 2001 Plan.

                                       73
<PAGE>

     Under the terms of the 2001 Plan, one-third of the stock options granted
became exercisable ten months after the date of grant and the remaining
two-thirds will become exercisable on the first and second anniversaries of the
first date of exercise so long as the grantee is, subject to certain exceptions,
employed by us at the date the stock option becomes exercisable. The third
portion of the options granted under this plan may be exercised at the end of
the second anniversary of the first date of exercise if we meet a pre-tax profit
target of 20%, as determined by our board of directors in its discretion. 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 board of directors which
determines the grantees under the 2001 Plan and the number of options to be
granted. As of May 31, 2003, options to purchase 2,292,810 ordinary shares were
outstanding under the 2001 Plan at a weighted average exercise price of $12.10.

     2001 STOCK OPTION PLAN FOR TRANSITIONAL EMPLOYEES.

     In 2001, we adopted the NICE-Systems Ltd. 2001 Stock Option Plan for
Transitional Employees, or 2001 Transitional Employees Plan, for the purpose of
providing, during a period of transition during which we terminate or transfer
certain of our activities, certain officers and other employees options to
acquire our ordinary shares. The options to acquire ordinary shares are granted
at an exercise price equal to the closing price of our ADSs as quoted on the
Nasdaq National 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, 200,000 ADSs for issuance under the
2001 Transitional Employees Plan.

     Under the terms of the 2001 Transitional Employees Plan, each stock option
granted generally becomes exercisable upon the optionee's termination of
employment in accordance with the optionee's termination agreement with us and
will remain exercisable until the first to occur of the date which is six months
following the date of such termination and the expiration of the stock option's
term. Unless otherwise determined by our board of directors as of the date of
grant, stock options expire on December 31, 2002. Stock options are
non-transferable except upon the death of the grantee.

     The 2001 Transitional Employees Plan is generally administered by our board
of directors which determines the grantees under the 2001 Transitional Employees
Plan and the number of options to be granted. As of May 31, 2003, there were no
outstanding options to purchase ordinary shares under the 2001 Transitional
Employees Plan. All of the outstanding options under this plan have expired.

                                       74
<PAGE>

     1999 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 have registered,
through the filing of a registration statement on Form S-8 with SEC under the
Securities Act, 500,000 ADSs for issuance under the ESPP.

     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 election price under the ESPP is 85% of the lowest price
of our ordinary shares as quoted on the Nasdaq National Market on the
commencement date of each offering period or on the semi-annual purchase date.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

MAJOR SHAREHOLDERS

     The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of May 31, 2003 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.

                                       75
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------ -------------------------------------
                                                                               ------------------------------------
                                                                                    SHARES BENEFICIALLY OWNED
------------------------------------------------------------------------------ -------------------------------------
NAME AND ADDRESS                                                                    NUMBER          PERCENT(1)
----------------                                                                    ------          ----------

------------------------------------------------------------------------------ ------------------ ------------------
<S>                                                                                <C>                  <C>
Bank Leumi                                                                         1,045,420            6.5%
24-32 Yehuda Halevi Street
Tel-Aviv 65546, Israel(2)
------------------------------------------------------------------------------ ------------------ ------------------

Bank Hapoalim                                                                       862,292             5.4%
65 Yehuda Halevi Street
Tel Aviv 65227, Israel (3)
------------------------------------------------------------------------------ ------------------ ------------------

Thales SA                                                                          2,187,500             14%
173 Boulevard Haussman
Paris 75415, France(4)
------------------------------------------------------------------------------ ------------------ ------------------

---------------------------------------------------------------------------------------------------------------
</TABLE>

     (1)Based upon 15,831,690 ordinary shares issued and outstanding on June 5,
     2003.

     (2)Based upon the information contained in a report filed with the Tel Aviv
     Stock Exchange on June 5, 2003 by Bank Leumi. Bank Leumi holds the shares
     through several trust funds and provident funds.

     (3) Based upon the information contained in a report filed with the Tel
     Aviv Stock Exchange on June 5, 2003 by Bank Hapoalim. Bank Hapoalim holds
     the shares through several trust funds and provident funds.

     (4) Based on information contained in the Company's files.


     As of May 31, 2003, we had 41 ADS holders of record in the United States,
holding approximately 47% of our outstanding ordinary shares, as reported by The
Bank of New York, the depositary for our ADSs.

     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

REGISTRATION RIGHTS AGREEMENT

In November 2002, we consummated an agreement to acquire certain assets and
liabilities of Thales Contact Solutions (or TCS), a developer of customer-facing
technology for public safety, financial trading and customer contact centers,
based in the United Kingdom. TCS was a unit of Thales Group, one of Europe's
premier electronics companies. In connection with the acquisition, we issued
2,187,500 ordinary shares to the Thales Group. In November 2, 2002, we entered
into a Registration Rights Agreement with Thales SA relating to the 2,187,500
ordinary shares issued to the Thales Group. Under the agreement, we agreed to
prepare and file under the Securities Act of 1933 a registration statement
covering the offer and sale of the ordinary shares by June 30, 2003. We agreed
to bear the expense of such registration. For a discussion of the TCS
acquisition, please see "Item 5, Operating and Financial Review."

                                       76
<PAGE>

ITEM 8. FINANCIAL INFORMATION.

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.

     See "Item 18. Financial Statements" and pages F-1 through F-39.

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.

DICTAPHONE PATENT INFRINGEMENT CLAIM

     In June 2000, Dictaphone Corporation, one of our competitors, filed a
patent infringement claim relating to certain technology embedded in some of our
products. The claim is for damages for past infringement and enjoinment of any
continued infringement of Dictaphone patents. In the court's discretion, the
damages may be trebled and attorney fees awarded. As a result we might be forced
to pay significant damages and licensing fees, modify our business practices or
even be enjoined from conducting a significant part of our U.S. business. Any
such results could materially harm our business. We believe, however, that we
have a valid defense to this claim and are vigorously defending it. We have
received notification from our insurance company indicating that the claim is
not covered by our insurance policy; however, our insurance company has agreed
to reimburse for us all legal expenses that we are expending in defense of the
claim while reserving its final decision on this matter until the final outcome
of the litigation. The discovery period is closed, dispositive motions have been
filed with the Court, and we are awaiting the Court's decisions on these motions
as well as scheduling for trial.

THE 2001 SECURITIES ACTIONS

     On February 8, 2001, the trading price of our securities dropped, following
our announcements that, among other things, we would be restating our revenue
for fiscal year 1999 and the first three quarters of 2000 and that we were
revising downward our revenue estimates for the final quarter of 2000.
Thereafter, various plaintiffs filed in the United States District Court for the
District of New Jersey fourteen putative class action securities lawsuits
against us and several of our present or former officers and directors. The
first of these actions was commenced on February 13, 2001. All of the actions
have been allocated to the Newark vicinage of the District of New Jersey, and
all have been assigned to the Hon. Joseph A. Greenaway, Jr., U.S.D.J.

     The complaint in each action alleges that we and the individual defendants
violated Section 10(b) of the Exchange Act, 15 U.S.C. ss. 78j(b), and Rule 10b-5
promulgated thereunder. The plaintiffs also attempt to state a "control person"
claim against several of the individual defendants under Section 20(a) of the
Exchange Act, 15 U.S.C. ss. 78t(a). While there are differences among the
fourteen complaints, the plaintiffs essentially contend that we and the
individual defendants misrepresented to investors, either affirmatively or
through omissions, our financial results and the value of our securities. The
plaintiffs seek damages in an unspecified amount. The plaintiffs in each such
action seek to represent a class of investors in our securities throughout a
specified period, approximately from February 2000 to February 2001.

                                       77
<PAGE>

     On April 11, 2001, we and several of the individual defendants successfully
moved to consolidate the various actions under the caption "IN RE: NICE SYSTEMS
LTD. SECURITIES LITIGATION," Master File No. 01-CV-00737 (JAG), and to establish
a schedule for the filing by plaintiffs of an amended consolidated complaint and
our and the individual defendants' response to such complaint.

     By Order dated May 21, 2001, a group of plaintiffs were appointed "lead
plaintiffs" pursuant to the Private Securities Litigation Reform Act of 1995, 15
U.S.C. ss. 78u-4(a)(3)(B). On August 20, 2001, the Lead Plaintiffs filed and
served a Consolidated Amended Class Action Complaint, purporting to bring their
securities claims on behalf of a class of persons who purchased our ADSs between
November 3, 1999, and February 7, 2001. On October 22, 2001, we and the
individual defendants moved to dismiss the consolidated complaint in its
entirety, for failure to state a claim upon which relief could be granted, for
failure to plead fraud with the requisite particularity, and on grounds of FORUM
NON CONVENIENS in favor of proceedings in Israel. Briefing on that motion was
completed on December 27, 2001.

     Before that motion was decided by the Court, the parties to the litigation
entered into a settlement of the claim, without any admission of liability or
wrongdoing on our part, in the amount of ten million dollars, including
attorneys' fees. We received the funds for this settlement through our directors
and officers insurance policy.

     Because the action was brought as a class action, the settlement was
subject to court approval. By Order dated April 7, 2003, the settlement was
approved by the United States District Court for the District of New Jersey,
over the objections of two shareholders. On April 30, 2003, one of those
shareholders, James J. Hayes, appealed from that Order to the United Stated
Court of Appeals for the Third Circuit.

     Class action proceedings were also filed against us in Israel as a result
of the revenue restatement announcement and ensuing decline in the trading price
of our securities. On March 7, 2001, Mr. Volfin, a shareholder, filed a request
for a class action against us and Benjamin Levin, our former Chairman of the
Board, claiming that our financial reports for fiscal year 1999 and the first
three quarters of 2000 did not reflect our actual earnings and were therefore
misleading. The class that the plaintiff requested to represent included all
shareholders that purchased our ordinary shares that are traded on the Tel-Aviv
Stock Exchange between February 16, 2000 and February 8, 2001. The plaintiff
sought damages with respect to each shareholder in the class in an amount equal
to the difference between the purchase price paid for our ordinary shares by
such shareholder and the value of our ordinary shares after our financial
restatement announcement. In March 2002, we agreed to settle this class action
for approximately $4 million, including attorneys fees, without any admission of
liability or wrongdoing on our part. We received the funds for this settlement
through our directors and officers insurance policy.

                                       78
<PAGE>

THE CHAPIEWSKI ACTION

     In April 2000, we acquired all of the stock of CenterPoint Solutions, Inc.,
or CenterPoint, an application developer of Web-enabled solutions for
statistical tracking, digital recording and automated customer surveys for
contact centers, from Douglas Chapiewski, CenterPoint's sole shareholder, in
exchange for $3 million in cash and up to 200,000 ordinary shares, of which
50,000 ordinary shares were placed in escrow as target shares for sales target
to be achieved by December 31, 2000. Following the acquisition, CenterPoint was
merged into a wholly owned subsidiary of ours. The sales target was not achieved
as of December 31, 2000 and we are therefore entitled to receive the escrow
shares.

     By complaint dated March 19, 2002, Mr. Chapiewski filed an action against
us and NICE Centerpoint, in the District Court, City and County of Denver, State
of Colorado, under the caption "CHAPIEWSKI V. NICE SYSTEMS LTD. AND
NICE-CENTERPOINT SOLUTIONS, INC.," Case No. 02 CV 2603. In this complaint, Mr.
Chapiewski alleged that we violated Sections 604(3) and 604(4) of the Colorado
Securities Act, committed common law fraud and negligent misrepresentation, and
breached representations and warranties in the agreement relating to the
acquisition, by misrepresenting to Mr. Chapiewski, either affirmatively or
through omissions, our financial results and the value of our securities. Mr.
Chapiewski also claimed that NICE Centerpoint breached severance provisions of
an employment agreement with him in the amount of $80,000. Mr. Chapiewski sought
damages in an unspecified amount.

     On November 25, 2002 we settled the claim with Mr. Chapiewski, without any
admission of liability or wrongdoing on our part, for an amount of three million
dollars and fifty thousand NICE shares. We are now seeking reimbursement from
our insurance company of the portion of the settlement amount which is, in our
opinion, covered by our Directors and Officers insurance policy

                                       79
<PAGE>

ITEM 9. THE OFFER AND LISTING.

TRADING IN THE ADSS

     Our American Depositary Shares, or ADSs, have been quoted on The Nasdaq
National 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 last reported sale prices for our
ADSs.

                                                              ADSS
                                              ----------------------------------
                                                   HIGH                 LOW
                                              --------------      --------------
ANNUAL
        1997 .........................         $    57.500          $    18.625
        1998 .........................              48.750               12.000
        1999 .........................              50.000               21.375
        2000 .........................              99.000               17.500
        2001 .........................              27.750                8.875
        2002 .........................              17.040                6.700

QUARTERLY 2001
--------------
        First Quarter ................         $    27.750          $     9.813
        Second Quarter ...............              15.270                8.875
        Third Quarter ................              15.600               12.000
        Fourth Quarter ...............              17.750               12.670

QUARTERLY 2002
--------------
        First Quarter ................         $    17.040          $    13.320
        Second Quarter ...............              14.090               11.670
        Third Quarter ................              12.000                8.390
        Fourth Quarter ...............              11.280                6.700

MONTHLY 2002/2003
-----------------
         December ....................         $    11.280          $     8.070
         January .....................               9.200                8.340
         February ....................              10.250                8.400
         March .......................              11.130                9.750
         April .......................              12.190               11.100
         May .........................              15.110               12.140

     On June 17, 2003, the last reported sale price of our ADSs was $14.72 per
ADS.

                                       80
<PAGE>

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

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 last reported prices
of our ordinary shares (in NIS and dollars) on the TASE. The translation into
dollars is based on the daily representative rate of exchange published by the
Bank of Israel.

<TABLE>
<CAPTION>
                                                                  ORDINARY SHARES
                                               ---------------------------------------------------
                                                         HIGH                         LOW
                                               -----------------------     -----------------------
                                                  NIS            $            NIS             $
                                               ---------      -------      ---------       -------
<S>      <C>                                    <C>            <C>           <C>            <C>
ANNUAL
------
         1997.............................      204.00         59.13         62.14          18.01
         1998.............................      178.20         46.89         54.20          14.26
         1999.............................      209.00         50.48         87.90          21.23
         2000.............................      388.00         95.10         79.50          19.49
         2001.............................       97.90         23.68         39.19           9.27
         2002.............................       75.50         16.81         32.02           6.63

QUARTERLY 2001
--------------
         First Quarter....................       97.90         23.68         42.58          10.10
         Second Quarter...................       63.70         15.41         39.19           9.27
         Third Quarter....................       64.70         15.33         49.81          11.48
         Fourth Quarter...................       74.80         17.64         55.20          12.63

QUARTERLY 2002
--------------
         First Quarter....................       75.50         16.81         61.20          13.11
         Second Quarter...................       68.70         14.02         56.30          11.45
         Third Quarter....................       57.40         12.24         40.51           8.36
         Fourth Quarter...................       53.00         11.42         32.02           6.63

MONTHLY 2002/2003
-----------------
         December.........................       53.00         11.42         39.02           8.18
         January..........................       44.56          9.23         37.96           8.01
         February.........................       47.94          9.90         41.70           8.56
         March............................       52.80         11.12         47.98           9.91
         April............................       56.30         12.30         51.70          11.28
         May..............................       65.90         14.76         57.30          12.77
</TABLE>

                                       81
<PAGE>

     As of June 17, 2003, the last reported price of our ordinary shares on the
TASE was NIS 63.90 (or $14.68) per share.

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.

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.

     In our annual general meeting of shareholders held on December 24, 2002,we
adopted amended and restated articles of association of the Company.

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 13. 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 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 each director. The quorum required for a meeting of
the board consists of a majority of directors. 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 a majority of directors consent in writing.

     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. Notwithstanding the foregoing, the board may, at any time,
amend, restate or cancel the delegation of any of its powers to any of its
committees. The board has appointed an internal audit committee which has three
members, an audit committee which has five members and a compensation committee
which has three members.

                                       82
<PAGE>

APPROVAL OF CERTAIN TRANSACTIONS

     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. 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.
Arrangements regarding the compensation of directors also require audit
committee and shareholder approval.

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

     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 matter that is
considered at a meeting of the board of directors or the audit committee may not
be present at the deliberations or vote on this matter.

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

                                       83
<PAGE>

     In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds five percent or more of the
company's outstanding share capital (assuming the exercise or conversion of all
securities held by such person that are exercisable for or convertible into
shares) 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,
requires approval by the board of directors and the shareholders of the company.
However, if the receiving party is not a director in the company, its CEO, or a
controlling shareholder, and will not become a controlling shareholder as a
result of the private placement, shareholder approval is not required if the
allotted securities amount to twenty percent or less, of the company's
outstanding share capital before the allotment.

     Certain types of resolutions, called special or extraordinary resolution,
such as resolutions amending a company's articles of association and regarding
changes in capitalization, mergers, consolidations, windings up, or authorizing
a class of shares with special rights, require approval of the holders of 75% of
the shares represented at the meeting and voting thereon. Under the provisions
of the Companies Law, the shareholders of a company may decide to amend such
company's articles of association to reduce the percentage required for a
special resolution to as low as a simple majority or eliminate the distinction
between ordinary and special resolutions completely; such an amendment must be
adopted by a 75% majority. We have not so amended our articles of association.

     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:

     o    any amendment to the articles of association;
     o    an increase of the company's authorized share capital;
     o    a merger; or
     o    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.

                                       84
<PAGE>

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, provided the articles of association of the company allow
it to do so. Our articles of association do not allow us to exempt our office
holders to the fullest extent permitted by law.

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:

     o    a breach of his duty of care to us or to another person,

     o    a breach of his fiduciary duty 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

     o    a financial liability imposed upon him in favor of another person
          concerning an act performed by him in his capacity as an office
          holder.

INDEMNIFICATION OF OFFICE HOLDERS

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

     o    a financial liability imposed on him 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, and

     o    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.

LIMITATIONS ON EXEMPTION, INSURANCE AND INDEMNIFICATION

     The Israeli 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:

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

                                       85
<PAGE>

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

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

     o    any fine levied against the office holder.

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

MATERIAL CONTRACTS

TCS ACQUISITION

     In November 2002, we consummated an agreement to acquire certain assets and
liabilities of Thales Contact Solutions (or TCS), a developer of customer-facing
technology for public safety, financial trading and customer contact centers,
based in the United Kingdom. TCS was a unit of Thales Group, one of Europe's
premier electronics companies. In connection with the acquisition, we paid an
initial $29.9 million in cash and issued 2,187,500 ordinary shares to Thales
Group at a fair market value of $18.1 million calculated at the date of closing.
As a result, Thales Group holds approximately 14% of the Company's shares and
two Thales executives were elected to the Board of Directors of NICE.

     Under the terms of the agreement, the cash portion of the purchase price
was subject to downward adjustment based on the value of net assets at closing
and the full year 2002 sales of TCS. Based on the actual value of net assets
acquired and 2002 sales of TCS, we reduced the cash portion of the purchase
price as of December 31, 2002 by $12.8 million. This amount is presented on our
balance sheet as a Related Party Receivable. Thus, the adjusted purchase price
paid, including $4.5 million of capitalized acquisition costs, was recorded as
$39.7 million. Of the $12.8 million adjustment referred to above, Thales paid us
$6.6 million in March 2003, and pending agreement on the actual value of net
assets acquired, we expect to recover the outstanding balance during 2003.
Should we and Thales not reach agreement on the net asset value, the matter will
be submitted to binding arbitration in accordance with the terms of the
acquisition agreement..

     Also under the terms of the agreement, contingent cash payments of up to
$10 million in 2003, $7.5 million in 2004, and $7.5 million in 2005 would be due
if certain financial performance criteria are met as part of a three-year
earn-out provision related to the sale of a particular product in 2002 through
2004. The relevant criteria for 2002 were not met and therefore no contingent
payment in respect of 2002 was recorded. We cannot predict with certainty
whether, however we do not believe that, the financial criteria will be met in
years 2003 and 2004. Should any contingent payments be made under the agreement
in the future, the additional consideration when determinable will increase the
purchase price and accordingly additional goodwill will be recorded.

                                       86
<PAGE>

     In the fourth quarter of 2002, we recorded a current liability of $2.8
million and a long-term liability of $13.5 million reflecting obligations under
a long-term contract assumed by NICE in the TCS acquisition. We have entered
into negotiations to amend this contract but there can be no assurance that we
will be successful in these negotiations.

STEVENS ACQUISITION

     On October 31, 2000, we entered into an Asset Purchase Agreement, among us,
our subsidiary Nice Systems, Inc. and Stevens Communications, Inc., or Stevens.
This agreement related to our acquisition of certain assets of Stevens, a
systems distributor, relating to the promotion, distribution, installation and
maintenance of our products in North America, which was consummated in December
2000. Pursuant to the agreement, we acquired the Stevens assets in exchange for
approximately $7.0 million in cash, subject to adjustment, and up to 426,745
ordinary shares, of which 95,804 ordinary shares were placed in escrow as
security for the indemnification obligations of Stevens to us, 186,818 ordinary
shares were placed in escrow as target shares and 38,914 ordinary shares were
placed in escrow for the benefit of certain employees of Stevens who we employed
following the acquisition, which we released to such employees based on their
continued employment by us.

     In October 2001, Stevens and we agreed to settle certain disputes relating
to the Asset Purchase Agreement and provide mutual releases from certain claims
arising under or relating to that agreement. According to the settlement
agreement, Stevens paid us approximately $1.3 million, which represented
collections by Stevens of accounts receivable for assets purchased by us in the
acquisition, less monies owed by us to Stevens for claims under the Asset
Purchase Agreement, certain equipment and services received from Stevens and
fees for use of Stevens' Business Support Center. In addition, Stevens and we
agreed that all of the indemnification and target shares held in escrow pursuant
to the Asset Purchase Agreement would be transferred to Stevens.

CENTERPOINT ACQUISITION

     On February 19, 2000, we entered into an Amended and Restated Agreement and
Plan of Reorganization, among us, CPS Merger Corp., CenterPoint Solutions, Inc.,
or CenterPoint, and Douglas Chapiewski, the sole stockholder of CenterPoint.
This agreement related to our acquisition of all of the stock of CenterPoint, an
application developer of Web-enabled solutions for statistical tracking, digital
recording and automated customer surveys for contact centers, which was
consummated in April 2000. Pursuant to the agreement, we acquired the
CenterPoint stock from Mr. Chapiewski in exchange for $3 million in cash and up
to 200,000 ordinary shares, of which 50,000 ordinary shares were placed in
escrow as target shares for sales target to be achieved by December 31, 2000. We
filed a shelf registration statement on Form F-3 to register the resale by Mr.
Chapiewski of up to 200,000 ADSs, representing the ordinary shares he received
in the transaction. Following the acquisition, CenterPoint was merged into a
wholly owned subsidiary of ours.

                                       87
<PAGE>

     By complaint dated March 19, 2002, Mr. Chapiewski filed an action against
us and NICE Centerpoint, in Colorado alleging that we violated several Colorado
securities laws, committed common law fraud and negligent misrepresentation, and
breached representations and warranties in the agreement relating to the
acquisition, by misrepresenting to Mr. Chapiewski, either affirmatively or
through omissions, our financial results and the value of our securities. Mr.
Chapiewski also claimed that NICE Centerpoint breached severance provisions of
an employment agreement with him in the amount of $80,000. Mr. Chapiewski sought
damages in an unspecified amount. On May 9, 2002, Nice-Centerpoint and we filed
and served an answer to the Mr. Chapiewski's complaint. On November 25, 2002 we
settled the claim with Chapiewski, without any admission of liability or
wrongdoing on our part, for an amount of three million dollars and fifty
thousand of the Company's shares. We are now seeking reimbursement from our
insurance company of the portion of the settlement amount which is, in our
opinion, covered by our Directors and Officers insurance policy.

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.

TAXATION

     The following is a discussion of Israeli and United States tax consequences
material to our United States 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 current tax laws of the State of Israel
and certain material Israeli tax considerations as they apply to our United
States shareholders. For a discussion of certain Israeli government programs
benefiting various Israeli businesses, including us, please see "Item 5,
Operating and Financial Review and Prospects."

                                       88
<PAGE>

     TAX REFORM

     On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No.132), 5762-2002, known as the Tax Reform, came into effect,
following its enactment by the Israeli Parliament on July 24, 2002. On December
17, 2002, the Israeli Parliament approved a number of amendments to the tax
reform, which came into effect on January 1, 2003. The tax reform, aimed at
broadening the categories of taxable income and reducing the tax rates imposed
on employment income, introduced the following, among other things:

     o Reduction of the tax rate levied on capital gains (other than gains
     deriving from the sale of listed securities) derived after January 1, 2003,
     to a general rate of 25% for both individuals and corporations. Regarding
     assets acquired prior to January 1, 2003, the reduced tax rate will apply
     to a proportionate part of the gain, in accordance with the holding periods
     of the asset, before or after January 1, 2003, on a linear basis;

     o Imposition of Israeli tax on all income of Israeli residents, individuals
     and corporations, regardless of the territorial source of income, including
     income derived from passive sources such as interest, dividends and
     royalties;

     o Introduction of controlled foreign corporation (CFC) rules into the
     Israeli tax structure. Generally, under such rules, an Israeli resident who
     holds, directly of indirectly,10% or more of the rights in a foreign
     corporation whose shares are not publicly traded, in which more than 50% of
     the rights are held directly or indirectly by Israeli residents, and a
     majority of whose income in a tax year is considered passive income, will
     be liable for tax on the portion of such income attributed to his holdings
     in such corporation, as if such income were distributed to him as a
     dividend; and

     o Imposition of capital gains tax on capital gains realized by individuals
     as of January 1, 2003, from the sale of shares of publicly traded companies
     (such gain was previously exempt from capital gains tax in Israel). For
     information with respect to the applicability of Israeli capital gains
     taxes on the sale of ordinary shares, see "CAPITAL GAINS AND INCOME TAXES
     APPLICABLE TO NON-ISRAELI SHAREHOLDERS" below;

     o Introduction of a new regime for the taxation of shares and options
     issued to employees and officers (including directors).

                                       89
<PAGE>

CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS

     Israeli law generally imposes a capital gains tax on the sale of capital
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 between the
date of purchase and the date of sale. The real gain is the excess of the total
capital gain over the inflationary surplus.

     Prior to the tax reform, sales of our ordinary shares by individuals were
generally exempt from Israeli capital gains tax for so long as they were quoted
on Nasdaq or listed on a stock exchange in a country appearing in a list
approved by the Controller of Foreign Currency and we qualified as an Industrial
Company. Pursuant to the tax reform, generally, capital gains tax is imposed at
a rate of 15% on real gains derived on or after January 1, 2003, from the sale
of shares in companies (i) publicly traded on the Tel Aviv Stock Exchange
("TASE") or; (ii) (subject to a necessary determination by the Israeli Minister
of Finance) Israeli companies publicly traded on a recognized stock exchange
outside of Israel (such as NICE). This tax rate does not apply to: (i) dealers
in securities; (ii) shareholders that report in accordance with the Inflationary
Adjustment Law; or (iii) shareholders who acquired their shares prior to an
initial public offering (that are subject to a different tax arrangement). The
tax basis of shares acquired prior to January 1, 2003 will 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.

     Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares publicly traded on a the TASE, and are
exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on a recognized stock exchange
outside of Israel, provided however that such capital gains are not derive from
a permanent establishment in Israel and provided that such shareholders did not
acquire their shares prior to an initial public offering. However, non-Israeli
corporations will not be entitled to such exemption if an Israeli resident (i)
has a controlling interest of 25% or more in such non-Israeli corporation, or
(ii) is the beneficiary or is entitled to 25% or more of the revenues or profits
of such non-Israeli corporation, whether directly or indirectly.

     In any event, the provisions of the tax reform shall not effect the
exemption from capital gains tax for gains accrued before January 1, 2003, as
described above.

     Individuals who are non-residents of Israel are subject to a graduated
income tax on income derived or accrued from sources in Israel or received in
Israel. Dividend distributions, other than bonus shares (share dividends), are
subject to a 25% withholding tax (15% in the case of dividends distributed from
taxable income derived from an Approved Enterprise), unless a different rate is
provided in a treaty between Israel and the shareholder's country of residence.
The withheld tax is the final tax in Israel on dividends paid to non-residents.
See "--U.S.-Israel Tax Treaty."

                                       90
<PAGE>

     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.

     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.

U.S.-ISRAEL TAX TREATY

     Pursuant to the U.S.-Israel Tax Treaty, which became effective as of
January 1, 1995, the sale, exchange or disposition of ADSs by a person who
qualifies as a resident of the United States within the meaning of, and who is
entitled to claim the benefits afforded to such resident by, the U.S.-Israel Tax
Treaty ("Treaty U.S. Resident") will not be subject to the Israeli capital gains
tax unless such Treaty U.S. Resident 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 exchange or disposition, subject to certain
conditions. A sale, exchange or disposition of ADSs by a Treaty U.S. Resident
who holds, directly or indirectly, shares representing 10% or more of the voting
power of NICE at any time during such preceding 12-month period would be subject
to such 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 Treaty 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.

     Under the U.S.-Israel Treaty, the maximum Israeli withholding tax on
dividends is 25%. Dividends of an Israeli company derived from income of an
Approved Enterprise are subject to a 15% withholding tax under Israeli law. The
U.S.-Israel Tax Treaty further provides for a 12.5% Israeli dividend withholding
tax on dividends paid to a United States corporation owning 10% or more of an
Israeli company's voting stock for, in general, the current and preceding tax
years of the Israeli company provided such United States corporation meets
certain limitations concerning the amount of its dividend and interest income.
The lower 12.5% rate applies only on dividends from income not derived from an
Approved Enterprise in the applicable period and does not apply if the company
has certain amounts of passive income. See "--Capital Gains and Income Taxes
Applicable to Non-Israeli Shareholders."

U.S. FEDERAL INCOME TAX CONSIDERATIONS

     The following is a summary of certain material U.S. Federal income tax
consequences that apply to U.S. Holders who hold ADSs as capital assets. This
summary is based on U.S. Federal income tax laws, regulations, rulings and
decisions in effect as of the date of this annual report, all of which are
subject to change at any time, possibly with retroactive effect. This

                                       91
<PAGE>

summary does not address all tax considerations that may be relevant with
respect to an investment in ADSs. This summary does not account for the specific
circumstances of any particular investor such as

     o    broker-dealers;

     o    financial institutions;

     o    certain insurance companies;

     o    investors liable for alternative minimum tax;

     o    tax-exempt organizations;

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

     o    investors holding ADSs as part of a straddle or a hedging or
          conversion transaction; and

     o    investors that are treated as partnerships or other pass through
          entities for U.S. federal income tax purposes.

     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.

     You are urged to consult your tax advisors regarding the foreign and United
States Federal, state and local tax considerations of an investment in ADSs. For
purposes of this summary, a U.S. Holder is:

     o    an individual who is a citizen or, for U.S. Federal income tax
          purposes, a resident of the United States;

     o    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;

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

     o    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.

   TAXATION OF DIVIDENDS

     Subject to the discussion below under "passive foreign investment
companies," the gross amount of any distributions that you receive with respect
to ADSs, including the amount of any Israeli taxes withheld from these
distributions, will constitute dividends for U.S. Federal income tax purposes,
to the extent of our current and accumulated earnings and profits as determined
for

                                       92
<PAGE>

U.S. Federal income tax principles. You will be required to include this amount
of dividends in gross income as ordinary income on the date such dividend is
actually or constructively received. Distributions in excess of our earnings and
profits will be treated as a non-taxable return of capital to the extent of your
tax basis in the ADSs and, to the extent in excess of your tax basis, will be
treated as capital gain. See "--Dispositions of ADSs" below for the discussion
on the taxation of capital gains. Dividends generally will not qualify for the
dividends-received deduction available to corporations.

     Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld from these dividends, will be included as income to you in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
such dividends are distributed. If you convert dividends paid in NIS into U.S.
Dollars on the day the dividends are distributed, you generally should not be
required to recognize foreign currency gain or loss with respect to such
conversion. Any gain or loss resulting from a subsequent exchange of such NIS
generally will be treated as U.S. source ordinary income or loss.

     Subject to certain conditions and limitations, you may elect to claim a
credit against your U.S. Federal income tax liability for Israeli tax withheld
from dividends received in respect of the ADSs. Dividends generally will be
treated as foreign-source passive income or financial services income for United
States foreign tax credit purposes. The rules relating to the determination of
the foreign tax credit are complex, and you should consult your personal tax
advisors to determine whether and to what extent you would be entitled to this
credit. Alternatively, you may elect to claim a U.S. tax deduction, instead of a
foreign tax credit, for such Israeli tax, but only for a year in which you elect
to do so with respect to all foreign income taxes. DISPOSITIONS OF ADSS

     If you sell or otherwise dispose of your ADSs, you will recognize gain or
loss 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 your adjusted
tax basis in your 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 you 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 than ordinary income.
Under most circumstances, any gain that you recognize on the sale or other
disposition of ADSs will be U.S.-source for purposes of the foreign tax credit
limitation; and losses recognized will be allocated against U.S. source income.

     PASSIVE FOREIGN INVESTMENT COMPANIES

     For U.S. Federal income tax purposes, we will be considered a passive
foreign investment company, or 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, you are urged to consult your tax
advisors regarding the application of such rules.

                                       93
<PAGE>

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

     o    you would be required to allocate income recognized upon receiving
          certain dividends or gain recognized upon the disposition of ADSs
          ratably over your holding period for such ADSs,

     o    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,

     o    gain recognized upon the disposition of ADSs would be taxable as
          ordinary income and

     o    you would be required to make an annual return on IRS Form 8621
          regarding distributions received with respect to ADSs and any gain
          realized on your ADSs.

     One method to avoid the aforementioned treatment is to make a timely
mark-to-market election in respect of your ADSs. If you elect to mark-to-market
your ADSs, you will generally include in income any excess of the fair market
value of the ADSs at the close of each tax year over your adjusted basis in the
ADSs. If the fair market value of the ADSs had depreciated below your adjusted
basis at the close of the tax year, you 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 you included in income 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.

     Based on our income, assets and activities for the year 2002, we believe
that we were not a PFIC for that year, nor do we expect to become a PFIC in the
foreseeable future. However, there can be no assurances that we will not be
treated as a PFIC for that year or any taxable year. If we are or become a PFIC
for any taxable year included in your holding period, we generally will remain a
PFIC for all subsequent taxable years with respect to your holding of our ADSs.

     YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE POSSIBILITY OF US
BEING CLASSIFIED AS A PFIC AND THE POTENTIAL TAX CONSEQUENCES ARISING FROM THE
OWNERSHIP AND DISPOSITION (DIRECTLY OR INDIRECTLY) OF AN INTEREST IN A PFIC.

     BACKUP WITHHOLDING AND INFORMATION REPORTING

     Payments in respect of ADSs may be subject to information reporting to the
U.S. Internal Revenue Service and to U.S. backup withholding tax. Backup
withholding will not apply, however, if you furnish a correct taxpayer
identification number and make any other required certification or are otherwise
exempt from backup withholding. Generally, you will provide such certification
on Form W-9 (Request for Taxpayer Identification Number and Certification).

                                       94
<PAGE>

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 Securities and Exchange Commission as frequently or as promptly as U.S.
companies whose securities are registered under the Securities Exchange Act.
However, we will file with the Securities and Exchange Commission an annual
report on Form 20-F containing financial statements audited by an independent
accounting firm. We will also furnish 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, 450 Fifth Street, N.W., 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 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC also maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The address of this web site is
http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities. In addition,
our ADSs are quoted on the Nasdaq Stock 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.

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. We conduct our business primarily in U.S. dollars
but also in the currencies of the United Kingdom, Canada, the European Union and
Israel. Thus, we are exposed to foreign exchange movements, primarily in UK,
European and Israel currencies. We monitor foreign currency exposure and, from
time to time, may enter into various contracts to preserve the value of sales
transactions and commitments.

                                       95
<PAGE>

     INTEREST RATE RISK. We invest in investment-grade U.S. corporate bonds and
dollar deposits with FDIC-insured U.S. banks. Since these investments carry
fixed interest rates and since our policy and practice is to hold these
investments to maturity, interest income over the holding period is not
sensitive to changes in interest rates. As of December 31, 2002, we had no other
exposure to changes in interest rates and had no interest rate derivative
financial instruments outstanding.

ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

          Not Applicable.



                                       96
<PAGE>

                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

              Not Applicable.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS.

              Not Applicable.

ITEM 15. CONTROLS AND PROCEDURES

Within the 90 days prior to the filing date of this report, NICE carried out an
evaluation under the supervision and with the participation of NICE's
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of NICE's disclosure control
and procedures pursuant to Rule 13a-14 under the Securities Act of 1934. Based
upon that evaluation, NICE's Chief Executive Officer and Chief Financial Officer
concluded that NICE's disclosure controls and procedures are effective in timely
alerting them to material information relating to NICE (including its
consolidated subsidiaries) required to be included in NICE's periodic SEC
filings. Since the date of the evaluation, there have been no significant
changes in our internal controls or in other factors that could significantly
affect the controls. We intend to continue to refine our internal controls on an
ongoing basis as we deem appropriate with a view towards making improvements.

ITEM 16. [RESERVED]

                                       97
<PAGE>

                                    PART III

ITEM 17. FINANCIAL STATEMENTS.

              Not Applicable.

ITEM 18. FINANCIAL STATEMENTS.

              See pages F-1 through F-42, incorporated herein by reference.

ITEM 19. EXHIBITS.

<TABLE>
<CAPTION>

EXHIBIT NO.        DESCRIPTION
-----------        -----------
<S>            <C>
   1.1*        Memorandum of Association of NICE-Systems Ltd. (together with an English translation thereof) (filed
               as Exhibit 3.1 to NICE-Systems Ltd.'s Registration Statement on Form F-1 (Registration No. 333-99640)
               filed with the Commission on November 21, 1995, and incorporated herein by reference)

   1.2         Articles of Association of  NICE-Systems Ltd. approved by the Annual General Meeting of the Company's
               shareholders held on December 24, 2002.

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

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

   4.1*        Amended and Restated Agreement and Plan of Reorganization, dated February 19, 2000, by and among
               NICE-Systems Ltd., CPS Merger Corp., CenterPoint Solutions, Inc. and Douglas Chapiewski. (filed as
               Exhibit 2 to NICE-Systems Ltd.'s Annual Report on Form 20-F (File No. 000-27466) filed with the
               Commission on May 26, 2000, and incorporated herein by reference)

   4.2*        Asset Purchase Agreement, dated October 31, 2000, by and among NICE-Systems Ltd., NICE Systems, Inc.
               and Stevens Communications Inc. (filed as Exhibit 10.1 to NICE-Systems Ltd.'s Registration Statement
               on Form F-3 (Registration No. 333-12996) filed with the Commission on December 18, 2000, and
               incorporated herein by reference)

   4.3         Sales and Purchase Agreement dated July 30, 2002 by and
               among NICE-Systems Ltd, NICE CTI Systems UK Ltd., NICE
               Systems SARL, NICE Systems GmbH, NICE Systems, Inc. and
               Thales SA.

   4.4         Registration Rights Agreement between NICE-Systems Ltd. and Thales SA.

   4.5         Manufacturing Outsourcing Agreement between Nice Systems Ltd. dated January 21, 2002 by and among
               Nice Systems Ltd. and Flextronics Israel Ltd.

   4.6         Manufacturing Agreement dated November 5,2001 by and among Thales Contact Solutions Ltd. And Instem
               Technologies Ltd.

   8.1         List of significant subsidiaries
</TABLE>

                                       98
<PAGE>
<TABLE>
<CAPTION>
<S>            <C>
  10.1         Consent Kost, Forer & Gabbay, a member of Ernst & Young Global.

  10.2         Certification of Haim Shani pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
               the Sarbanes-Oxley Act of 2002.

  10.3         Certification of Lauri Hanover pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
               of the Sarbanes-Oxley Act of 2002.
</TABLE>

  *   Previously Filed


                                       99

<PAGE>

                       NICE SYSTEMS LTD. AND SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2002


                            U.S. DOLLARS IN THOUSANDS




                                      INDEX


                                                               PAGE
                                                        ------------------
REPORT OF INDEPENDENT AUDITORS                                 F-2

CONSOLIDATED BALANCE SHEETS                                 F-3 - F-4

CONSOLIDATED STATEMENTS OF OPERATIONS                          F-5

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                  F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS                       F-7 - F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  F-11 - F-42




                               - - - - - - - - - -

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                                NICE SYSTEMS LTD.


       We have audited the accompanying consolidated balance sheets of NICE
Systems Ltd. ("the Company") and subsidiaries as of December 31, 2001 and 2002,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

       We conducted our audits in accordance with auditing standards generally
accepted in the 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 subsidiaries as of December 31, 2001 and 2002, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.

       As discussed in Note 2l to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" effective January 1, 2002.



                                                          /s/ Kost Forer & Gabay
                                                          ----------------------


Tel-Aviv, Israel                                  KOST FORER & GABBAY
May 28, 2003                               A Member of Ernst & Young Global

                                       F-2
<PAGE>
<TABLE>
<CAPTION>

                                                                                                  NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                                                                                                DECEMBER 31,
                                                                                   --------------------------------------
                                                                                         2001                 2002
                                                                                   -----------------    -----------------
     ASSETS
<S>                                                                                 <C>                  <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                        $      25,256        $      19,281
   Short-term bank deposits                                                                   311                  208
   Marketable securities                                                                   29,270               33,853
   Trade  receivables  (net of allowance  for doubtful  accounts of $ 3,146
     and $6,010 in 2001 and 2002, respectively)                                            28,435               45,863
   Unbilled receivables                                                                     6,574                7,495
   Other receivables and prepaid expenses                                                   5,465                8,234
   Related party receivables                                                                    -               12,804
   Inventories                                                                             11,057               13,480
                                                                                   -----------------    -----------------

TOTAL current assets                                                                      106,368              141,218
                                                                                   -----------------    -----------------

LONG-TERM INVESTMENTS:
   Long-term marketable securities                                                         34,176               15,247
   Investment in affiliates                                                                 1,429                1,200
   Severance pay fund                                                                       5,357                5,490
   Long-term receivables and prepaid expenses                                                 471                  888
                                                                                   -----------------    -----------------

TOTAL long-term investments                                                                41,433               22,825
                                                                                   -----------------    -----------------

PROPERTY AND EQUIPMENT, NET                                                                22,111               24,345
                                                                                   -----------------    -----------------

INTANGIBLE ASSETS, NET                                                                     11,900               20,483
                                                                                   -----------------    -----------------

GOODWILL                                                                                   28,200               27,417
                                                                                   -----------------    -----------------

TOTAL assets                                                                        $     210,012        $     236,288
                                                                                   =================    =================



The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                               - F-3 -
<PAGE>
<TABLE>
<CAPTION>

                                                                                                  NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)


                                                                                                DECEMBER 31,
                                                                                   --------------------------------------
                                                                                         2001                 2002
                                                                                   -----------------    -----------------
<S>                                                                                 <C>                  <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

 CURRENT LIABILITIES:
   Short-term bank credit                                                           $           -        $          24
   Trade payables                                                                          11,123               16,129
   Accrued expenses and other liabilities                                                  25,314               45,859
                                                                                   -----------------    -----------------

TOTAL current liabilities                                                                  36,437               62,012
                                                                                   -----------------    -----------------

LONG-TERM LIABILITIES:
   Accrued severance pay                                                                    6,543                6,240
   Other long-term liabilities                                                                 14               13,500
                                                                                   -----------------    -----------------

TOTAL long-term liabilities                                                                 6,557               19,740
                                                                                   -----------------    -----------------

 COMMITMENTS AND CONTINGENT LIABILITIES

 SHAREHOLDERS' EQUITY:
   Share capital-
     Ordinary shares of NIS 1 par value:
       Authorized: 50,000,000 shares as of December 31, 2001 and 2002;
       Issued and  outstanding:  13,273,798 and 15,704,425  shares as of
              December 31, 2001 and 2002, respectively                                       4,398                4,908
   Additional paid-in capital                                                              192,845              213,003
   Deferred stock compensation                                                                 (24)                 (12)
   Accumulated other comprehensive income (loss)                                               (38)                 782
   Accumulated deficit                                                                     (30,163)             (64,145)
                                                                                   -----------------    -----------------

TOTAL shareholders' equity                                                                 167,018              154,536
                                                                                   -----------------    -----------------

TOTAL liabilities and shareholders' equity                                          $      210,012       $      236,288
                                                                                   =================    =================



The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                              - F-4 -
<PAGE>
<TABLE>
<CAPTION>

                                                                                                  NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)


                                                                                  YEAR ENDED DECEMBER 31,
                                                                -----------------------------------------------------------
                                                                      2000                 2001                 2002
                                                                -----------------   ------------------   ------------------
<S>                                                              <C>                 <C>                  <C>
 Revenues
   Products                                                      $*)         -        $     112,634       $      134,783
   Services                                                       *)         -               14,474               27,722
                                                                -----------------   ------------------   ------------------

 Total revenues                                                        153,163              127,108              162,505
                                                                -----------------   ------------------   ------------------


 Cost of revenues
   Products                                                       *)         -               54,321               58,693
   Services                                                       *)         -               19,446               26,054
                                                                -----------------   ------------------   ------------------

 Total cost of revenues                                                 73,554               73,767               84,747
                                                                -----------------   ------------------   ------------------

 Gross profit                                                           79,609               53,341               77,758
                                                                -----------------   ------------------   ------------------

 Operating expenses:
    Research and development, net                                       19,502               19,190               17,925
    Selling and marketing                                               35,448               35,046               40,494
    General and administrative                                          28,300               27,143               23,806
    Amortization of acquired intangible assets,
      restructuring expenses, in-process research and
      development and goodwill impairment                                7,646               17,967               29,092
                                                                -----------------   ------------------   ------------------

 TOTAL operating expenses                                        9       0,896               99,346              111,317
                                                                -----------------   ------------------   ------------------

 Operating loss                                                        (11,287)             (46,005)             (33,559)
 Financial income, net                                                   6,188                4,254                3,992
 Other income (expenses), net                                               53               (4,846)              (4,065)
                                                                -----------------   ------------------   ------------------

 Loss before taxes on income                                            (5,046)             (46,597)             (33,632)
 Taxes on income                                                           273                  198                  350
                                                                -----------------   ------------------   ------------------

 Net loss                                                        $      (5,319)      $      (46,795)      $      (33,982)
                                                                =================   ==================   ==================

 Basic and diluted net loss per share                            $       (0.43)      $        (3.59)      $        (2.46)
                                                                =================   ==================   ==================



*) Not available.

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                              - F-5 -
<PAGE>
<TABLE>
<CAPTION>

                                                                                                  NICE SYSTEMS LTD. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
                                                                                                              ACCUMULATED
                                                                             ADDITIONAL       DEFERRED           OTHER
                                                              SHARE           PAID-IN           STOCK        COMPREHENSIVE
                                                             CAPITAL          CAPITAL       COMPENSATION     INCOME (LOSS)
                                                          ---------------   -------------   --------------   ---------------

<S>                                                        <C>               <C>             <C>              <C>
Balance as of January 1, 2000                              $     4,062       $  153,160      $      (103)     $         -
  Issuance of shares of ESPP                                         7              934                -                -
  Issuance of shares in respect of the acquisition of CPS           37            9,349                -                -
  Issuance of shares in respect of the acquisition of SCI           54           10,267                -                -
  Deferred stock compensation                                        -               72              (72)               -
  Amortization of deferred stock compensation                        -                -              128                -
  Exercise of share options and warrants                           153           13,897                -                -
  Comprehensive loss:
    Net loss                                                         -                -                -                -
                                                          ---------------   --------------  --------------   ---------------
  Total comprehensive loss


Balance as of December 31, 2000                                  4,313          187,679              (47)               -
  Issuance of shares of ESPP                                        31            1,408                -                -
  Issuance of shares related to a settlement agreement
    in respect of the acquisition of SCI                            46            3,345                -                -
  Amortization of deferred stock compensation                        -                -               23                -
  Exercise of share options                                          8              413                -                -
  Comprehensive loss:
    Unrealized gains (losses) on derivative
      instruments, net                                               -                -                -              (38)
    Net loss                                                         -                -                -                -
                                                          ---------------   --------------  --------------   ---------------
Total comprehensive loss


Balance as of December 31, 2001                                  4,398          192,845              (24)             (38)
  Issuance of shares of ESPP                                        28            1,355                -                -
  Issuance of shares in respect of settlement agreement             11              458                -                -
  Issuance of shares in respect of the acquisition of TCS          458           17,593                -                -
  Issuance of shares in respect of the acquisition of SCI        *)  -               29                -                -
  Amortization of deferred stock compensation                        -                -               12                -
  Exercise of share options                                         13              723                -                -
  Comprehensive loss:
    Foreign currency translation adjustments                         -                -                -              793
    Unrealized gains (losses) on derivative
        instruments, net                                             -                -                -               27
    Net loss                                                         -                -                -                -
                                                          ---------------   --------------  --------------   ---------------
Total comprehensive loss
Balance as of December 31, 2002                            $     4,908       $  213,003      $       (12)     $       782
                                                          ===============   ==============  ==============   ===============
  Accumulated unrealized losses on  derivative
    instruments                                                                                               $       (11)
  Accumulated foreign currency translation adjustments                                                                793
                                                                                                             ---------------
  Accumulated other comprehensive income as of
    December 31, 2002                                                                                         $       782
                                                                                                             ===============

(CONTINUED)

                                                             RETAINED
                                                             EARNINGS           TOTAL             TOTAL
                                                           (ACCUMULATED     COMPREHENSIVE     SHAREHOLDERS'
                                                             DEFICIT)            LOSS             EQUITY
                                                          ---------------   ---------------  -----------------

Balance as of January 1, 2000                               $   21,951                          $    179,070
  Issuance of shares of ESPP                                         -                                   941
  Issuance of shares in respect of the acquisition of CPS            -                                 9,386
  Issuance of shares in respect of the acquisition of SCI            -                                10,321
  Deferred stock compensation                                        -                                     -
  Amortization of deferred stock compensation                        -                                   128
  Exercise of share options and warrants                             -                                14,050
  Comprehensive loss:
    Net loss                                                    (5,319)      $    (5,319)             (5,319)
                                                          ---------------   ---------------   ----------------
  Total comprehensive loss                                                   $    (5,319)
                                                                            ===============

Balance as of December 31, 2000                                 16,632                               208,577
  Issuance of shares of ESPP                                         -                                 1,439
  Issuance of shares related to a settlement agreement
    in respect of the acquisition of SCI                             -                                 3,391
  Amortization of deferred stock compensation                        -                                    23
  Exercise of share options                                          -                                   421
  Comprehensive loss:
    Unrealized gains (losses) on derivative
      instruments, net                                               -       $       (38)                (38)
    Net loss                                                   (46,795)          (46,795)            (46,795)
                                                          ---------------   ---------------   ----------------
Total comprehensive loss                                                     $   (46,833)
                                                                            ===============

Balance as of December 31, 2001                                (30,163)                               167,018
  Issuance of shares of ESPP                                         -                                  1,383
  Issuance of shares in respect of settlement agreement              -                                    469
  Issuance of shares in respect of the acquisition of TCS            -                                 18,051
  Issuance of shares in respect of the acquisition of SCI            -                                     29
  Amortization of deferred stock compensation                        -                                     12
  Exercise of share options                                          -                                    736
  Comprehensive loss:
    Foreign currency translation adjustments                         -       $       793                  793
    Unrealized gains (losses) on derivative
        instruments, net                                             -                27                   27
    Net loss                                                   (33,982)          (33,982)             (33,982)
                                                          ---------------   ---------------   ----------------
Total comprehensive loss
Balance as of December 31, 2002                             $  (64,145)      $   (33,162)      $      154,536
                                                          ===============   ===============   ================
  Accumulated unrealized losses on  derivative
    instruments
  Accumulated foreign currency translation adjustments

  Accumulated other comprehensive income as of
    December 31, 2002

*) Represents an amount lower than $ 1.

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                              - F-6 -
<PAGE>
<TABLE>
<CAPTION>

                                                                                                  NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                                                                                       YEAR ENDED DECEMBER 31,
                                                                        ---------------------------------------------------
                                                                             2000              2001              2002
                                                                        ----------------  ----------------  ---------------

<S>                                                                      <C>               <C>               <C>
  CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                             $     (5,319)     $    (46,795)     $    (33,982)
    Adjustments required to reconcile net loss to net cash provided
      by (used in) operating activities:
      Depreciation and amortization                                            11,725            15,266            15,665
      Write-off of acquired in-process research and development                 6,786                 -             1,270
      Stock compensation in respect of SCI acquisition                              -               476                 -
      Stock compensation in respect of CPS settlement                               -                 -               469
      Amortization of deferred stock compensation                                 128                23                12
      Accrued severance pay, net                                                  899              (330)             (436)
      Loss on disposal of property and equipment and goodwill
        impairment in respect of restructuring                                      -             3,062                 -
      Goodwill impairment                                                           -                 -            28,260
      Impairment of investment in affiliate                                         -                 -               229
      Amortization of discount (premium) and accrued interest on
        held-to-maturity marketable securities                                   (345)              183               915
      Loss on sale of assets of Dees                                                -               281                 -
      Decrease (increase) in trade and unbilled receivables                   (12,968)           12,459            (2,146)
      Decrease (increase) in other receivables and prepaid expenses               (82)            6,512            (1,254)
      Decrease (increase) in inventories                                      (10,006)            9,635             4,510
      Increase in long-term prepaid expenses                                        -              (471)             (446)
      Increase (decrease) in trade payables                                     1,438            (1,527)            3,199
      Increase in accrued expenses and other liabilities                        5,729             3,392             3,533
      Other                                                                       (53)              113               315
                                                                        ----------------  ----------------  ---------------

  Net cash provided by (used in) operating activities                          (2,068)            2,279            20,113
                                                                        ----------------  ----------------  ---------------



The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                              - F-7 -
<PAGE>
<TABLE>
<CAPTION>

                                                                                                  NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                                                                                   YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------------------------------
                                                                        2000                2001                 2002
                                                                  -----------------   -----------------   ------------------
<S>                                                                <C>                 <C>                 <C>
  CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                                   (14,161)            (7,623)             (5,439)
    Proceeds from sale of property and equipment                             394              1,301                 557
    Purchase of intangible assets                                              -                (25)               (610)
    Investment in held-to-maturity marketable securities                 (45,138)           (48,601)            (16,936)
    Proceeds from maturity of held-to-maturity marketable
      securities                                                          38,525             39,977              29,492
    Proceeds from sale of a held-to-maturity marketable security               -                  -                 820
    Investment in short-term bank deposits                               (31,028)              (384)               (150)
    Proceeds from short-term bank deposits                                49,454             24,448                 265
    Investment in affiliates                                              (1,200)                 -                   -
    Payment for the acquisition of CPS (a)                                (3,189)                 -                   -
    Payment for the acquisition of assets and liabilities  of
      SCI (b)                                                             (6,960)                 -                   -
    Proceeds from sale of assets of Dees (c)                                   -                255                   -
    Payment for the acquisition of TCS (d)                                     -                  -             (31,480)
    Decrease in accrued acquisition costs                                      -             (1,436)               (214)
    Capitalization of software development costs                          (4,730)            (5,435)             (4,609)
    Other                                                                    (80)                 -                   -
                                                                  -----------------   -----------------   ------------------

  Net cash provided by (used in) investing activities                    (18,113)             2,477             (28,304)
                                                                  -----------------   -----------------   ------------------

  CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from issuance of shares and exercise of share
      options and warrants, net                                           14,991              1,860               2,119
    Short-term bank credit, net                                               (3)                 -                  24
                                                                  -----------------   -----------------   ------------------

  Net cash provided by financing activities                               14,988              1,860               2,143
                                                                  -----------------   -----------------   ------------------

  Effect of exchange rate changes on cash                                      -                  -                  73
                                                                  -----------------   -----------------   ------------------

  Increase (decrease) in cash and cash equivalents                        (5,193)             6,616              (5,975)
  Cash and cash equivalents at the beginning of the year                  23,833             18,640              25,256
                                                                  -----------------   -----------------   ------------------

  Cash and cash equivalents at the end of the year                 $      18,640       $     25,256        $     19,281
                                                                  =================   =================   ==================

  SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:
    Cash paid during the year for:
      Income taxes                                                 $         105       $        257        $        445
                                                                  =================   =================   ==================



The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                              - F-8 -
<PAGE>
<TABLE>
<CAPTION>

                                                                                                  NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                                                                                 YEAR ENDED DECEMBER 31,
                                                               -----------------------------------------------------------
                                                                      2000                2001                 2002
                                                               ------------------   -----------------    -----------------
<S>                                                            <C>                  <C>                  <C>
 (a) PAYMENT FOR THE ACQUISITION OF CPS:


            Net fair value of assets acquired and liabilities
              assumed at the acquisition date:

            Working capital (excluding cash and cash
              equivalents)                                      $          158
            Property and equipment                                         185
            Long-term investments                                           93
            Long-term liabilities                                          (42)
            In-process research and development                          6,786
            Core technology                                              2,189
            Assembled work-force                                           409
            Goodwill                                                     2,797
                                                               ------------------

                                                                        12,575
          Less - amount acquired by issuance of shares                  (9,386)
                                                               ------------------

                                                                $        3,189
                                                               ==================

 (b)        PAYMENT FOR THE ACQUISITION OF CERTAIN ASSETS AND
              LIABILITIES OF SCI:

            Estimated fair value of assets acquired and
              liabilities assumed at the acquisition date:

            Working capital deficiency                          $       (5,231)
            Assembled work-force                                           523
            Goodwill                                                    23,639
                                                               ------------------

                                                                        18,931
          Less - amount acquired by issuance of shares                 (10,321)
          Less - accrued acquisition costs                              (1,650)
                                                               ------------------

                                                                $       6,960
                                                               ==================

          ISSUANCE OF ADDITIONAL SHARES IN RESPECT OF SCI
            ACQUISITION:

            Adjustment to working capital                                            $       (282)        $          -
            Goodwill                                                                        3,197                   29
                                                                                    ------------------   -----------------

                                                                                     $      2,915         $         29
                                                                                    ==================   =================


The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                              - F-9 -
<PAGE>
<TABLE>
<CAPTION>

                                                                                                  NICE SYSTEMS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                                                                                    YEAR ENDED DECEMBER 31,
                                                                    -------------------------------------------------------
                                                                         2000                2001               2002
                                                                    ----------------   -----------------  -----------------
<S>                                                                 <C>                <C>                <C>
  (c) PROCEEDS FROM SALE OF ASSETS OF DEES:

           Working capital                                                              $        536
           Loss on sale                                                                         (281)
                                                                                       -----------------

                                                                                        $        255
                                                                                       =================

  (d)        PAYMENT FOR THE ACQUISITION OF CERTAIN ASSETS AND LIABILITIES OF
             TCS

           Estimated fair value of assets acquired and liabilities assumed at
            the acquisition date:

           Working capital (excluding cash and cash equivalents)                                           $      8,347
           Related party receivables                                                                             12,804
           Property and equipment                                                                                 7,616
           Intangible assets                                                                                      9,320
           In-process research and development                                                                    1,270
           Other long-term liability                                                                            (13,500)
           Goodwill                                                                                              26,682
                                                                                                          -----------------

                                                                                                                 52,539
          Less - amount acquired by issuance of shares                                                          (18,051)
          Less - accrued acquisition costs                                                                       (3,008)
                                                                                                          -----------------

                                                                                                           $     31,480
                                                                                                          =================




The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                              - F-10 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 1:-      GENERAL

              a.     NICE Systems Ltd. ("NICE") and subsidiaries (collectively -
                     "the Company") develop, market and support integrated,
                     scalable multimedia digital recording platforms, enhanced
                     software applications and related professional services.
                     These solutions capture and analyze unstructured
                     (non-transaction) data and convert it into actionable
                     knowledge for business and 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.

                     The Company's products are based on two types of recording
                     platforms - audio and video - and are used primarily in
                     contact centers, trading floors, public safety
                     organizations, transportation, corporate security, gaming
                     and correctional facilities, as well as various government
                     and intelligence agencies.

                     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's markets are located primarily in North
                     America, Europe and the Far East.

                     The Company depends on 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 its customers, it could
                     result in the loss of sales, which could adversely affect
                     the Company's results of operations and financial position.

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

                     As for major customer data, see Note 16c.

              b.     Acquisition of Thales Contact Solutions:

                     In November 2002, the Company acquired certain assets and
                     assumed certain liabilities of Thales Contacts Solutions
                     ("TCS") for an aggregate consideration of $ 52,539
                     including the issuance of 2,187,500 American Depositary
                     Shares ("ADSs") of NICE valued at $ 18,051. TCS is a
                     developer of customer-facing technology for Public Safety,
                     Wholesale Trading and Call Centers, based in the United
                     Kingdom. 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 TCS. The value
                     of the shares issued was determined based on the market
                     price of NICE's shares on the acquisition date. The results
                     of TCS's operations have been included in the consolidated
                     financial statements since November 2, 2002 ("the closing
                     date").

                                    - F-11 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 1:-      GENERAL (CONT.)

                     With the acquisition of TCS, the Company significantly
                     expanded its customer base, presence in Europe, and its
                     network of distributors and partners. Additionally, the
                     Company broadened its product offerings and global
                     professional services team.

                     Under the terms of the acquisition agreement ("the
                     agreement"), contingent cash payments of up to $ 10,000 in
                     2003, $ 7,500 in 2004 and $ 7,500 in 2005 would be due if
                     certain financial performance criteria are met as part of a
                     three-year earn-out provision covering 2002 through 2004.
                     The relevant criteria for 2002 were not met and therefore
                     no contingent payment in respect of 2002 was recorded.
                     Should any contingent payment be made under the agreement
                     in the future, the additional consideration, when
                     determinable, will increase the purchase price and
                     accordingly additional goodwill will be recorded.

                     In the fourth quarter of 2002, the Company recorded a
                     current liability of $ 2,800 and a long-term liability of $
                     13,500 reflecting obligations under a long-term contract
                     assumed by the Company in the TCS acquisition for which no
                     future benefit exists. See also Note 12b(1).

                     Under the terms of the agreement, the initial cash portion
                     of the purchase price was adjusted downward by $ 12,804 in
                     respect of the actual net value of assets acquired and 2002
                     sales of TCS. This amount is presented on the balance sheet
                     as related party receivables. As a result of the purchase
                     price adjustment, the acquisition cost was reduced to $
                     39,735.


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

                     Trade receivables                           $     15,808
                     Other receivables and prepaid expenses             1,448
                     Inventories                                        6,776
                     Property and equipment                             7,616
                     In-process research and development                1,270
                     Trademarks                                         1,040
                     Core technology                                    1,620
                     Distribution network                               6,160
                     Maintenance contracts                                500
                     Goodwill                                          26,682
                                                               ----------------

                     Total assets acquired                             68,920

                     Trade payables                                    (1,747)
                     Accrued expenses and other liabilities           (13,938)
                     Long-term liability                              (13,500)
                                                               ----------------

                     Total liabilities assumed                        (29,185)
                                                               ----------------

                     Net assets acquired                         $     39,735
                                                               ================

                                    - F-12 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 1:-      GENERAL (CONT.)

                     The $ 1,270 assigned to in-process research and development
                     was written off at the date of acquisition in accordance
                     with FASB Interpretation ("FIN") No. 4, "Applicability of
                     FASB Statement No. 2 to Business Combinations Accounted for
                     by the Purchase Method".

                     The following represents the unaudited pro-forma condensed
                     results of operations for the years ended December 31, 2001
                     and 2002, assuming that the acquisition occurred on January
                     1, 2001 and January 1, 2002, respectively. The pro-forma
                     information is not necessarily indicative of the results of
                     operations, which actually would have occurred if the
                     acquisition had been consummated at the beginning of each
                     year presented, nor does it purport to represent the
                     results of operations for future periods.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                            -----------------------------------
                                                                  2001              2002
                                                            ----------------  -----------------
<S>                                                           <C>               <C>
                     Revenues                                 $    202,439      $    214,002
                                                            ================  =================

                     Net loss                                 $    (61,846)     $    (53,821)
                                                            ================  =================

                     Basic and diluted net loss per share     $      (4.06)     $      (3.45)
                                                            ================  =================
</TABLE>

                     The condensed results of operations of TCS are based on the
                     financial statements of TCS for the year ended December 31,
                     2001 and on the results of operations of TCS for the period
                     from January 1, 2002 to November 2, 2002 (the closing
                     date), which were prepared by TCS's management and were
                     submitted to the Company as part of the acquisition. The
                     2001 financial statements of TCS were prepared in
                     conformity with U.S GAAP and were audited by TCS's
                     independent auditors, who provided an unqualified opinion.

              c.     Acquisition of Stevens Communications Inc.

                     In December 2000, the Company acquired certain assets and
                     assumed certain liabilities of Stevens Communications Inc.
                     ("SCI") for an aggregate consideration of $ 18,931
                     including the issuance of up to 426,745 ADSs of NICE of
                     which 186,818 ADSs were target shares contingent upon the
                     achievement of certain objectives and events through 2002
                     and 38,914 ADSs are for the benefit of certain SCI's
                     employees. 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 SCI.

                     SCI is a systems distributor, whose activities included the
                     promotion, distribution, installation and maintenance of
                     the Company's products in North America.

                     An amount of $ 24,162, out of the total acquisition cost,
                     was attributed to goodwill and assembled work force.

                     In 2001, the Company entered into a final settlement
                     agreement with SCI addressing a dispute with SCI regarding
                     the fair value of SCI's working capital. The adjustments
                     from the terms of the final settlement resulted in a
                     one-time charge to other expense of $ 4,448 representing a
                     lump-sum settlement of disputed items of $ 3,600 and
                     obligations for future consulting services, which are no
                     longer of value to the Company. In addition, the Company
                     released from escrow the 186,818 ADS contingent target
                     shares upon the achievement of the determined objectives
                     and events and accordingly, recorded approximately $ 3
                     million to goodwill.

                                    - F-13 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 1:-      GENERAL (CONT.)

              d.     Acquisition of Centerpoint Solutions Inc.:

                     In April 2000, the Company acquired all of the outstanding
                     capital stock of Centerpoint Solutions Inc. ("CPS") for a
                     total consideration of $ 12,886 including the issuance of
                     200,000 ADSs of NICE of which 50,000 were deemed target
                     shares ("the target shares") contingent upon the
                     achievement of certain objectives. 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 CPS.

                     CPS is a developer of Internet-based applications for
                     statistical monitoring, digital recording and automatic
                     customer surveys for customer contact centers.

                     In connection with the CPS acquisition, the Company
                     recorded in the second quarter of 2000, a one-time expense
                     of $ 6,786 to write-off software acquired from CPS for
                     which technological feasibility has not yet been
                     established and for which no alternative future use exists.
                     An amount of $ 5,395 out of the total acquisition cost was
                     attributed to goodwill and other intangible assets.

                     On March 19, 2002, Mr. Chapiewski, a former shareholder of
                     CPS, filed an action against the Company by complaint. In
                     this complaint, Mr. Chapiewski alleged that the Company
                     violated Sections 604(3) and 604(4) of the Colorado
                     Securities Act, committed common law fraud and negligent
                     misrepresentation, and breached representations and
                     warranties in the agreement relating to the CPS
                     acquisition, by misrepresenting to Mr. Chapiewski, either
                     affirmatively or through omissions, the Company's financial
                     results and value of securities. Mr. Chapiewski also
                     claimed that NICE Centerpoint breached severance provisions
                     of an employment agreement with him in the amount of $ 80.
                     Mr. Chapiewski sought damages in an unspecified amount. On
                     November 25, 2002 the Company settled the claim with
                     Chapiewsky, without any admission of liability or
                     wrongdoing on its part, for an amount of $ 3,000 and the
                     release from escrow of the target shares valued at $ 469.
                     The settlement agreement resulted in a one-time charge to
                     other expenses of $ 3,469.


                                    - F-14 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES

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

              a.     Use of estimates:

                     The preparation of financial statements in conformity with
                     generally accepted accounting principles requires
                     management to make estimates and assumptions that effect
                     the amounts reported in the financial statements and
                     accompanying notes. 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 its U.S subsidiary are conducted
                     is the U.S. dollar ("dollar"); thus, the dollar is the
                     reporting and functional currency of the Company.

                     The Company's transactions and balances denominated in
                     dollars are represented at their original amounts.
                     Non-dollar transactions and balances have been remeasured
                     to dollars in accordance with Statement of Financial
                     Accounting Standards ("SFAS") No. 52 "Foreign Currency
                     Translation". All transaction gains and losses from
                     remeasurement of monetary balance sheet items denominated
                     in non-dollar currencies are reflected in the statements of
                     operations 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 operations items are translated at average
                     exchange rates prevailing during the year. Such translation
                     adjustments are recorded as a separate component of
                     accumulated other comprehensive income (loss) in
                     shareholders' equity.

              c.     Principles of consolidation:

                     Intercompany transactions and balances have been eliminated
                     upon consolidation.

              d.     Cash equivalents:

                     The Company considers short-term unrestricted highly liquid
                     investments that are readily converted into cash,
                     originally purchased with maturities of three months or
                     less to be cash equivalents.

              e.     Short-term bank deposits:

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

              f.     Marketable securities:

                     The Company accounts for investments in debt securities in
                     accordance with SFAS No. 115, "Accounting for Certain
                     Investments in Debt and Equity Securities".

                                    - F-15 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                     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.
                     Debt securities are classified as held-to-maturity when the
                     Company has the positive intent and ability to hold the
                     securities to maturity and are stated at amortized cost.
                     The amortized cost of held-to-maturity securities is
                     adjusted for amortization of premiums and accretion of
                     discounts to maturity. Such amortization, decline in value
                     judged to be other than temporary, and interest are
                     included in financial income or expenses, as appropriate.

              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" method, and the cost of
                     finished goods - on the basis of computed manufacturing
                     costs.

                     Inventory provisions are provided to cover risks arising
                     from slow-moving items, technological obsolescence, excess
                     inventories, discontinued products and for market prices
                     lower than cost. Inventory provisions for 2000, 2001 and
                     2002 were $ 2,675, $ 3,400 and $ 1,650, respectively, and
                     have been included in cost of revenues.

              h.     Investment in affiliates:

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

                     The Company's investments in other companies are reviewed
                     for impairment whenever events or changes in circumstances
                     indicate that the carrying amount of an investment may not
                     be recoverable, in accordance with Accounting Principle
                     Board Opinion ("APB") No. 18 "The Equity Method of
                     Accounting for Investments in Common Stock".

                     As of December 31, 2002 an impairment loss had been
                     identified in the amount of $ 229.

              i.     Property and equipment, net:

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

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

                     Computers and peripheral equipment            33
                     Office furniture and equipment              6 - 15
                     Motor vehicles                                15

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


                                    - F-16 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              j.     Impairment of long-lived assets:

                     The Company's long-lived assets and certain identifiable
                     intangibles are reviewed for impairment in accordance with
                     SFAS No. 144 "Accounting for the Impairment or Disposal of
                     Long-Lived Assets" 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 an asset 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 2002, no
                     impairment losses have been identified.

              k.     Intangible assets:

                     Intangible assets subject to amortizations, which arose
                     from acquisitions prior to July 1, 2001 are being amortized
                     on a straight-line basis over their useful lives in
                     accordance with APB No. 17 "Intangible Assets". Intangible
                     assets acquired in a business combination on or after July
                     1, 2001, are amortized over their 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".

                     In accordance with the requirement of SFAS No. 142,
                     intangible assets deemed to have indefinite lives are no
                     longer amortized after January 1, 2002. Under SFAS No. 142
                     the Company will perform an annual test for impairment of
                     intangible assets with indefinite lives.

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

<TABLE>
<CAPTION>
                                                                                  %
                                                                          --------------------
<S>                                                                               <C>
                     Capitalized software development costs (see o)               33
                     Distribution network                                     Indefinite
                     Core technology                                            17 - 33
                     Trademarks                                                 17 - 50
                     Maintenance contracts                                        33
                     Other intangible assets                                      33
</TABLE>

              l.     Goodwill

                     Goodwill represents the excess of the cost over the net
                     assets of businesses acquired. Goodwill arising from
                     acquisitions prior to July 1, 2001 was amortized until
                     December 31, 2001 on a straight-line basis over 10 years.
                     Under SFAS No. 142 goodwill acquired in a business
                     combination consummated on or after July 1, 2001, is not
                     amortized.

                                    - F-17 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                     SFAS No.142 requires goodwill be tested for impairment on
                     adoption and at least annually thereafter or between annual
                     tests in certain circumstances, and written down when
                     impaired, rather than amortized as previous accounting
                     standards required. Goodwill is tested for impairment by
                     comparing the fair value of the reporting unit with its
                     carrying value. Fair value is determined using discounted
                     cash flows, market multiples and market capitalization.
                     Significant estimates used in the fair value methodologies
                     include estimates of future cash flows, future short-term
                     and long-term growth rates, weighted average cost of
                     capital and estimates of market multiples of the reportable
                     unit. The Company performed the transitional impairment
                     test during the first quarter of 2002, and did not
                     recognize any impairment loss. The Company performed the
                     annual impairment test during the fourth quarter of 2002,
                     and recognized an impairment loss of $ 28,260.

              m.     Revenue recognition:

                     The Company generates revenues from sales of products,
                     which include hardware and software, software licensing,
                     fixed price contracts, professional services and
                     maintenance.

                     The Company sells its products indirectly through
                     resellers, integrators and distributors, all of whom are
                     considered end-users, and through its direct sales force.

                     Revenues from product sales and software license agreements
                     are recognized when all criteria outlined in Statement Of
                     Position ("SOP") 97-2 "Software Revenue Recognition" (as
                     amended) and Staff Accounting Bulletin ("SAB") No. 101
                     "Revenue Recognition in the Financial Statements" are met.
                     Revenue from products and license fees is recognized when
                     persuasive evidence of an agreement exists, delivery of the
                     product has occurred, the fee is fixed or determinable, no
                     further obligations exist and collectibility is probable.
                     Sales agreements with specific acceptance terms are not
                     recognized until the customer has confirmed that the
                     product or service has been accepted.

                     Where software arrangements involve multiple elements,
                     revenue is allocated to each element based on Vendor
                     Specific Objective Evidence ("VSOE") of the relative fair
                     values of each element in the arrangement, in accordance
                     with the residual method. The Company's VSOE used to
                     allocate the sales price to professional services and
                     maintenance is based on the renewal price. Under the
                     residual method, revenue is recognized for the delivered
                     elements when (1) there is VSOE of the fair values of all
                     the undelivered elements, and (2) all revenue recognition
                     criteria of SOP 97-2, as amended, are satisfied. Under the
                     residual method any discount in the arrangement is
                     allocated to the delivered element.

                     The Company maintains a provision for product returns in
                     accordance with SFAS No. 48 "Revenue Recognition When Right
                     of Return Exists". The provision was estimated based on the
                     Company's past experience and was deducted from revenues.

                     Trade receivables as of December 31, 2001 and 2002 are
                     presented net of provision for product returns in the
                     amounts of $ 2,455 and $ 2,311, respectively.

                                    - F-18 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                     The Company recognizes revenues from fixed price contracts
                     that require significant customization, integration and
                     installation based on SOP No. 81-1 "Accounting for
                     Performance of Construction - Type and Certain Production -
                     Type Contracts" using the percentage-of-completion method
                     of accounting based on the value added and results achieved
                     out of the completeness of the product as a whole. In order
                     to verify the measure of the added value, the Company
                     identifies elements or sub-components of those elements.
                     Provisions for estimated losses on uncompleted contacts are
                     made in the period in which such losses are determined. As
                     of December 31, 2002, no such estimated losses were
                     identified.

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

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

              n.     Warranty costs:

                     Provisions for warranty are made at the time revenues are
                     recognized for estimated material costs during the warranty
                     period based on the Company's experience.

              o.     Research and development costs:

                     Research and development costs (net of grants and
                     participations) 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 the Costs of Computer Software to be
                     Sold, Leased or Otherwise Marketed". Based on the Company's
                     product development process, technological feasibility is
                     established upon completion of a detailed program design or
                     a working model.

                     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 on a
                     product-by-product basis commencing with general product
                     release by the greater of the amount computed using the:
                     (i) ratio that current gross revenues from sales of the
                     software bear to the total of current and anticipated
                     future gross revenues from sales of that software, or (ii)
                     the straight-line method over the estimated useful life of
                     the software product.

                     The Company assesses the recoverability of the unamortized
                     capitalized cost on a regular basis by determining whether
                     the amortization of the asset over its remaining life can
                     be recovered through undiscounted future operating cash
                     flows from the specific software product sold. Based on its
                     most recent analyses, management believes that no
                     impairment of capitalized software development costs exists
                     as of December 31, 2002.

                                    - F-19 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              p.     Income taxes:

                     The Company accounts for income taxes in accordance with
                     SFAS No. 109, "Accounting for Income Taxes". This statement
                     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 their estimated realizable value.

              q.     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 reduction to research and development costs.

              r.     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
                     and unbilled receivables, marketable securities and related
                     party receivables.

                     The Company's cash and cash equivalents and short-term bank
                     deposits are invested in deposits mainly in dollars with
                     major international banks. Such deposits in the United
                     States 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 sound and, accordingly, minimal
                     credit risk exists with respect to these investments.

                     The Company's trade and unbilled receivables are derived
                     from sales to customers located primarily in North America,
                     Europe and the Far East. 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. An 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.

                     The Company's marketable securities include investment in
                     debentures of U.S. corporations. Management believes that
                     those corporations are financially sound, the portfolio is
                     well diversified, and accordingly, minimal credit risk
                     exists with respect to those marketable securities.

                     Related party receivables are balances due from Thales SA.
                     Management believes that minimal credit risk exists with
                     respect to this balance.

                     The Company entered into forward contracts and option
                     strategies (together: "derivative instruments") intended to
                     protect against the increase in value of forecasted
                     non-dollar currency cash flows. The derivative instruments
                     effectively hedge the Company's non-dollar currency
                     exposure (see Note 10).


                                    - F-20 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              s.     Severance pay:

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

                     The deposited funds include profits 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 law or labor agreements. The value of
                     the deposited funds is based on the cash surrendered value
                     of these policies and includes immaterial profits.

                     Severance pay expense for 2000, 2001 and 2002, was $ 1,255,
                     $ 2,428 and $ 2,003, respectively.

              t.     Basic and diluted net loss per share:

                     Basic net loss per share is computed based on the weighted
                     average number of Ordinary shares outstanding during each
                     year. Diluted net loss per share is 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 SFAS No. 128, "Earnings Per Share".

                     All outstanding stock options and warrants have been
                     excluded from the calculation of the diluted net loss per
                     share because all such securities are anti-dilutive for all
                     periods presented. The total weighted average number of
                     shares related to the outstanding options and warrants
                     excluded from the calculations of diluted net loss per
                     share was 3,583,149, 4,929,910 and 5,315,170 for the years
                     ended December 31, 2000, 2001 and 2002, respectively.

              u.     Stock-based compensation:

                     The Company has elected to follow APB No. 25, "Accounting
                     for Stock Issued to Employees" and FIN No. 44 "Accounting
                     for Certain Transactions Involving Stock Compensation" in
                     accounting for its employee stock option plan. Under APB
                     No. 25, when the exercise price of the Company's options is
                     less than the market value of the underlying shares on the
                     date of grant, compensation expense is recognized and
                     amortized over the vesting period. The pro forma
                     information with respect to the fair value of the options
                     is provided in accordance with the provisions of SFAS No.
                     123 "Accounting for Stock-based Compensation".

                     In December 2002, the FASB issued SFAS No. 148, "Accounting
                     for Stock Based Compensation - Transition and Disclosure -
                     an amendment of SFAS No. 123". SFAS No. 148 permits two
                     additional transition methods for entities that adopt the
                     fair value based method of accounting for stock-based
                     employee compensation. The transition guidance and annual
                     disclosure provisions of SFAS No. 148 are effective for
                     fiscal years ending after December 15, 2002, with earlier
                     application permitted in certain circumstances. The interim
                     disclosure provisions are effective for financial reports
                     containing financial statements for interim periods
                     beginning after December 15, 2002. As at the balance sheet
                     date, the Company continues to apply APB No. 25.


                                    - F-21 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                     Pro forma information regarding net income (loss) and net
                     earnings (loss) per share is required by SFAS No. 123, and
                     has been determined as if the Company had accounted for its
                     employee options under the fair value method prescribed by
                     that statement. The fair value for these options was
                     estimated at the date of grant using a Black-Scholes option
                     pricing model with the following weighted-average
                     assumptions for 2000, 2001 and 2002: risk-free interest
                     rates of 6%, 4.3% and 1.7%, respectively dividend yields of
                     0%, 0% and 0%, respectively volatility factors of the
                     expected market price of the Company's Ordinary shares of
                     0.821, 0.506 and 0.827, respectively, and a weighted
                     average expected life of the option of 3.5, 4.3 and 4.3
                     years, respectively.

                     Pro forma information under SFAS No. 123:

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                                     ----------------------------------------------------
                                                                          2000               2001              2002
                                                                     ---------------    ---------------   ---------------
<S>                                                                   <C>                <C>               <C>
                       Net loss as reported                           $    (5,319)       $   (46,795)      $   (33,982)
                       Add: Stock based compensation expense
                         included in the determination of net loss
                         as reported                                          128                 23                12
                       Deduct: Stock based compensation expense
                         determined under fair value method for
                         all awards                                       (43,972)           (31,636)          (18,467)
                                                                     ---------------    ---------------   ---------------

                       Pro forma net loss                             $   (49,163)       $   (78,408)      $   (52,437)
                                                                     ===============    ===============   ===============

                       Basic and diluted net loss per share as
                         reported                                     $     (0.43)       $     (3.59)      $     (2.46)
                                                                     ===============    ===============   ===============

                       Pro forma basic and diluted net loss per
                       share                                          $     (3.97)       $     (6.01)      $     (3.80)
                                                                     ===============    ===============   ===============
</TABLE>

              v.     Fair value of financial instruments:

                     The following methods and assumptions were used by the
                     Company in estimating its fair value disclosures for
                     financial instruments:

                     The carrying amount reported in the balance sheet for cash
                     and cash equivalents, short-term bank deposits, trade and
                     unbilled receivables, related party receivables, short-term
                     bank credit and trade payables approximates their fair
                     value due to the short-term maturities of such instruments.

                     The fair value for marketable U.S. corporate securities is
                     based on quoted market prices and does not differ
                     significantly from the carrying amount (see Note 3).

                     The fair value of other long-term liabilities is estimated
                     by discounting the future cash flows using the current
                     interest rate for liabilities of similar terms and
                     maturities. The fair value of other long-term liabilities,
                     which carrying amount as of December 31, 2002 was $ 13,500,
                     is approximated to $ 12,400.


                                    - F-22 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              w.     Advertising expenses:

                     Advertising expenses are charged to expense as incurred
                     (see Note 17d).

              x.     Derivatives and hedging activities:

                     SFAS No. 133, "Accounting for Derivative Instruments and
                     Hedging Activities" 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.

                     For derivative instruments that are designated and qualify
                     as a fair value hedge (i.e., hedging 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 loss on the derivative
                     instrument as well as the offsetting loss or gain on the
                     hedged item attributable to the hedged risk are recognized
                     in the same line item associated with the hedged item in
                     current earnings during the period of the change in fair
                     values. 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 other comprehensive income and
                     reclassified into earnings in the same line item associated
                     with the hedged transaction in the same 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 current earnings during the
                     period of change.

                     For derivative instruments not designated as hedging
                     instruments, the gain or loss is recognized in financial
                     income/expense in current earnings during the period of
                     change.

              y.     Impact of recently issued accounting standards:

                     In June 2002, the FASB issued SFAS No. 146, "Accounting for
                     Costs Associated with Exit or Disposal Activities", which
                     addresses significant issue regarding the recognition,
                     measurement, and reporting of costs associated with exit
                     and disposal activities, including restructuring
                     activities. SFAS No. 146 requires that costs associated
                     with exit or disposal activities be recognized when they
                     are incurred rather than at the date of a commitment to an
                     exit or disposal plan. SFAS No. 146 is effective for all
                     exit or disposal activities initiated after December 31,
                     2002. The Company elected early adoption of SFAS No. 146.


                                    - F-23 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              z. 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
                     loss, shareholder's equity or cash flows.


NOTE 3:-      MARKETABLE SECURITIES

<TABLE>
<CAPTION>
                                     AMORTIZED           GROSS UNREALIZED        GROSS UNREALIZED           ESTIMATED
                                        COST                   GAINS                  LOSSES                FAIR VALUE
                               ---------------------- ----------------------  ---------------------- ------------------------
                                    DECEMBER 31,           DECEMBER 31,            DECEMBER 31,            DECEMBER 31,
                               ---------------------- ----------------------  ---------------------- ------------------------
                                  2001       2002        2001        2002        2001       2002        2001         2002
                               ---------- ----------- ----------  ----------  ---------- ----------- ----------   -----------
<S>                             <C>        <C>         <C>         <C>         <C>        <C>         <C>          <C>
               U.S. corporate
                 debentures     $ 63,446   $  49,100   $    988    $    330    $    314   $    309    $ 64,120     $  49,121
                               ========== =========== ==========  ==========  ========== =========== ==========   ===========

              As of December 31, 2001 and 2002, all the Company's securities
              were classified as held-to-maturity.

              In 2000 and 2001 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 these years.

              In 2002, the Company sold one security, which was classified as
              held-to-maturity, due to a rating decrease, and accordingly
              recorded a loss of $ 55.

              The scheduled maturities of held-to-maturity securities at
              December 31, 2002, are as follows:

                                                                                        AMORTIZED            ESTIMATED
                                                                                           COST             FAIR VALUE
                                                                                     ----------------    -----------------
                 HELD-TO-MATURITY:

                   Due within one year                                                $     33,853        $     33,616
                   Due after one year through five years                                    15,247              15,505
                                                                                     ----------------    -----------------

                                                                                      $     49,100        $     49,121
                                                                                     ================    =================


NOTE 4:-      OTHER RECEIVABLES AND PREPAID EXPENSES

                                                                                                 DECEMBER 31,
                                                                                    --------------------------------------
                                                                                          2001                 2002
                                                                                    -----------------    -----------------

                Government authorities                                                $      2,475        $       4,010
                Interest receivable                                                            637                  301
                Prepaid expenses                                                             1,243                2,694
                Other                                                                        1,110                1,229
                                                                                    -----------------    -----------------

                                                                                      $      5,465        $       8,234
                                                                                    =================    =================
</TABLE>

                                    - F-24 -
<PAGE>
<TABLE>
<CAPTION>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 5:-      INVENTORIES
                                                                                                DECEMBER 31,
                                                                                   --------------------------------------
                                                                                         2001                 2002
                                                                                   -----------------   ------------------
<S>                                                                                  <C>                 <C>
                Raw materials                                                        $      6,995        $      4,880
                Work-in-progress                                                              843                 535
                Finished goods                                                              3,219               8,065
                                                                                   -----------------   ------------------

                                                                                     $     11,057        $     13,480
                                                                                   =================   ==================


NOTE 6:-      PROPERTY AND EQUIPMENT, NET

                Cost:
                  Computers and peripheral equipment                                 $     34,373        $     40,828
                  Office furniture and equipment                                            6,362              12,017
                  Motor vehicles                                                            2,853               1,570
                  Leasehold improvements                                                    3,335               3,567
                                                                                   -----------------   ------------------

                                                                                           46,923              57,982
                                                                                   -----------------   ------------------
                Accumulated depreciation:
                  Computers and peripheral equipment                                       20,711              28,830
                  Office furniture and equipment                                            1,975               2,941
                  Motor vehicles                                                            1,242                 792
                  Leasehold improvements                                                      884               1,074
                                                                                   -----------------   ------------------

                                                                                           24,812              33,637
                                                                                   -----------------   ------------------

                Depreciated cost                                                     $     22,111        $     24,345
                                                                                   =================   ==================



              Depreciation expense totaled $ 8,101, $ 8,044 and $ 10,192 for the
              years ended December 31, 2000, 2001 and 2002, respectively.

              As for pledges, see Note 12c.
</TABLE>

                                    - F-25 -
<PAGE>
<TABLE>
<CAPTION>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 7:-      INTANGIBLE ASSETS, NET

              a.     Intangible assets
                                                                                                  DECEMBER 31,
                                                                                      -------------------------------------
                                                                                            2001                2002
                                                                                      -----------------   -----------------
<S>                                                                                     <C>                 <C>
                      Original amounts:
                        Capitalized software development costs                          $     16,078        $     20,687
                        Core technology                                                        2,189               4,419
                        Trademarks                                                                 -               1,040
                        Maintenance contracts                                                      -                 510
                        Other intangible assets                                                1,498                 279
                                                                                      -----------------   -----------------

                                                                                              19,765              26,935
                                                                                      -----------------   -----------------
                      Accumulated amortization:
                        Capitalized software development costs                                 5,868              10,174
                        Core technology                                                        1,217               2,219
                        Trademarks                                                                 -                  58
                        Maintenance contracts                                                      -                  28
                        Other intangible assets                                                  780                 253
                                                                                      -----------------   -----------------

                                                                                               7,865              12,732
                                                                                      -----------------   -----------------

                      Amortized cost                                                          11,900              14,203
                      Distribution network                                                         -               6,280
                                                                                      -----------------   -----------------

                      Total intangible assets                                           $     11,900        $     20,483
                                                                                      =================   =================
</TABLE>


              b.     Amortization expense amounted to $ 2,954, $ 4,278 and $
                     5,473 for the years ended December 31, 2000, 2001 and 2002,
                     respectively.

              c.     Estimated amortization expense for the years ended:

                                                               DECEMBER 31,
                                                             ----------------

                      2003                                    $       6,344
                      2004                                            4,820
                      2005                                            2,258
                      2006                                              436
                      2007 and thereafter                               345
                                                             ----------------

                                                              $      14,203
                                                             ================


                                    - F-26 -
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                             <C>
                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 8:-      GOODWILL

              The changes in the carrying amount of goodwill for the year ended
              December 31, 2002 are as follows:

               Balance as of January 1, 2002                                                                 *) $   28,813
                 Goodwill acquired during the year                                                                  26,682
                 Impairment losses                                                                                 (28,260)
                 Foreign currency translation adjustments and other                                                    182
                                                                                                            ----------------

               Balance as of December 31, 2002                                                                  $   27,417
                                                                                                            ================

              *)     Includes an amount of $ 613 of assembled workforce that was
                     classified as goodwill effective January 1, 2002.

              The unaudited results of operations presented below for the three
              years ended December 31, 2000, 2001 and 2002, respectively,
              reflect the impact on results of operations had the Company
              adopted the non-amortization provisions of SFAS No. 142 effective
              January 1, 2000:

                                                                                      YEAR ENDED DECEMBER 31,
                                                                        ----------------------------------------------------
                                                                             2000               2001              2002
                                                                        --------------     --------------    ---------------

              Reported net loss                                          $     (5,319)      $    (46,795)     $     (33,982)
              Goodwill amortization                                               670              2,944                  -
                                                                        --------------     --------------    ---------------

              Adjusted net loss                                          $     (4,649)      $    (43,851)     $     (33,982)
                                                                        ==============     ==============    ===============

              Basic and diluted net loss per share:
                Reported net loss                                        $      (0.43)      $      (3.59)     $       (2.46)
                Goodwill amortization                                            0.05               0.23                  -
                                                                        --------------     --------------    ---------------

              Adjusted basic and diluted net loss per share              $      (0.38)      $      (3.36)     $       (2.46)
                                                                        ==============     ==============    ===============


NOTE 9:-      ACCRUED EXPENSES AND OTHER LIABILITIES
                                                                                                DECEMBER 31,
                                                                                   --------------------------------------
                                                                                         2001                 2002
                                                                                   -----------------   ------------------

                Employees and payroll accruals                                      $       8,445       $       9,249
                Accrued expenses                                                            9,001              23,694
                Restructuring accrual                                                       2,444                 406
                Deferred revenues                                                           5,013              10,728
                Other                                                                         411               1,782
                                                                                   -----------------   ------------------

                                                                                    $      25,314       $      45,859
                                                                                   =================   ==================
</TABLE>

                                    - F-27 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 10:-     DERIVATIVE INSTRUMENTS

              To protect against changes in the value of forecasted foreign
              currency cash flows, the Company has instituted a foreign currency
              cash flow hedging program. The Company hedges portions of its
              forecasted cash flows denominated in foreign currencies with
              forward contracts and option strategies (together: "derivative
              instruments").

              During 2001 and 2002, the Company entered into derivative
              instruments to hedge portions of the anticipated New Israeli
              Shekel ("NIS") payroll payments. These derivative instruments are
              designated as cash flows hedges, as defined by SFAS No. 133, as
              amended, and are all highly effective as hedges of these expenses
              when the salary is recorded. The effective portion of the hedged
              instruments is included in payroll expenses in the statements of
              operations.

              In addition, the Company entered into forward foreign exchange
              contracts to hedge certain trade and unbilled receivables, trade
              payable payments and expected payments under a fixed price
              contract denominated in foreign currency. 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.

              At December 31, 2002, the Company expects to reclassify $ 11 of
              net losses on derivative instruments from accumulated other
              comprehensive income to earnings during the next twelve months.


NOTE 11:-     RESTRUCTURING EXPENSES

              As part of the Company's strategic plan to address the changing
              business dynamics in the markets for its products and offerings,
              the Company recorded a restructuring charge in the amount of $
              14,554 in the first quarter of 2001, in accordance with EITF 94-3,
              "Liability Recognition for Certain Employee Termination Benefits
              and Other Costs to Exit an Activity (Including Certain Costs in a
              Restructuring)" and SAB No. 100 "Restructuring and Impairment
              Charges". The restructuring consisted of a series of actions to
              improve the Company's long-term strategic opportunity including a
              reduction of 30% of the workforce (approximately 340 employees),
              consolidation of functions, the closing of certain facilities
              (mainly in the U.S.), and the disposal of assets that were no
              longer required due to the change in strategic direction. In
              addition, goodwill impairment was recognized for the effect of
              discontinuing a certain product line, which was acquired in the
              1997 Dees transaction.


                                    - F-28 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 11:-     RESTRUCTURING EXPENSES (CONT.)

              Following the acquisition of TCS, the Company identified an
              opportunity to increase flexibility and focus, improve
              responsiveness and reduce unnecessary overhead. In December 2002,
              the Company adopted a plan to achieve these objectives, which
              involves the phased reduction of approximately 140 of the
              initially combined 1,077 staff and consolidation of certain field
              offices. The Company expects to incur a total cost of $ 3,000 in
              connection with this plan. The Company elected early adoption of
              SFAS No. 146 "Accounting for Costs Associated with Exit or
              Disposal Activities". SFAS No. 146 requires that a liability for a
              cost that is associated with an exit activity be recognized only
              when the liability is incurred. It supersedes the guidance in EITF
              94-3. In SFAS No. 146, an entity's commitment to a plan does not,
              by itself, create a present obligation to other parties that meets
              the definition of a liability. Additionally, SFAS No. 146
              establishes that fair value is the objective for the initial
              measurement of the liability. Accordingly, the liability related
              to the involuntary reductions that were effected in December 2002
              of $ 282 was included in the Company's balance sheet. The
              remaining reductions in force are planned to be implemented over
              the first three quarters of 2003 and will be recognized as
              incurred.

              At December 31, 2002, a total amount of $ 406 is included in
              accrued expenses and other liabilities. The major components of
              the fiscal 2001 and 2002 restructuring costs are as follows:

<TABLE>
<CAPTION>
                                                                               LOSS ON
                                                                               DISPOSAL
                                                EMPLOYEE                     OF PROPERTY
                                              TERMINATION      FACILITY          AND           GOODWILL          TOTAL
                                                BENEFITS        CLOSURE       EQUIPMENT       IMPAIRMENT        CHARGE
                                            --------------- --------------- --------------  --------------- ---------------
<S>                                          <C>             <C>             <C>             <C>             <C>
               2001 PLAN:
               ----------
               Original provision            $      9,564    $      1,928    $      1,946    $      1,116    $     14,554
               Utilized:
                 Cash                              (7,997)         (1,051)              -               -          (9,048)
                 Non-cash                               -               -          (1,946)         (1,116)         (3,062)
                                            --------------- --------------- --------------  --------------- ---------------
               Balance as of                        1,567             877               -               -           2,444
                 December 31, 2001
               Utilized:
                 Cash                              (1,043)           (877)              -               -          (1,920)
                 Non-cash                               -               -               -               -               -
               Additional restructuring
               expenses (reversal of
               over accrued amounts)                 (524)            124               -               -            (400)
                                            --------------- --------------- --------------  --------------- ---------------
               Balance as of
                 December 31, 2002                      -             124               -               -             124
                                            --------------- --------------- --------------  --------------- ---------------
               2002 PLAN:
               ----------
               Original provision                     282               -               -               -             282
                                            --------------- --------------- --------------  --------------- ---------------
               Balance as of                          282               -               -               -             282
                 December 31, 2002
                                            --------------- --------------- --------------  --------------- ---------------
               2001 and 2002 plans as of
               December 31, 2002             $        282    $        124    $          -    $          -    $        406
                                            =============== =============== ==============  =============== ===============
</TABLE>

                                    - F-29 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 12:-     COMMITMENTS AND CONTINGENT LIABILITIES

              a.     Lease commitments:

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

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

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

                             2003                          $      5,358
                             2004                                 2,685
                             2005                                 2,485
                             2006                                 1,267
                             2007 and thereafter                    597
                                                          -----------------

                                                           $     12,392
                                                          =================

                            Rent expense for the years ended December 31, 2000,
                            2001 and 2002, was approximately $ 4,011, $ 5,190
                            and $ 5,761, respectively.

                     2.     The Company leases its motor vehicles under
                            cancelable operating lease agreements for periods
                            through 2003.

                            The minimum payment under these operating leases,
                            upon cancellation of these lease agreements,
                            amounted to $ 1,268 as of December 31, 2002.

                            Lease expenses for the years ended December 31,
                            2000, 2001 and 2002, were $ 70, $ 1,677 and $ 1,616,
                            respectively.

              b.     Other commitments:

                     1.     During 2002 the Company completed a contract
                            manufacturing agreement with a third party
                            contractor ("the contractor"). Under the
                            manufacturing agreement ("the agreement"), the
                            contractor provides the Company with a turnkey
                            manufacturing solution for all of its products. The
                            Company is liable under the agreement to purchase
                            above a certain level specified in the agreement,
                            which is based on historical level of orders to the
                            contractor, excess raw material and subassembly
                            inventories deemed obsolete or slow moving. As of
                            December 31, 2002 there were no such obsolete or
                            slow moving inventories.

                            In addition, the Company assumed an outsourcing
                            manufacturing agreement in the acquisition of TCS
                            (see also Note 1b). The minimum payments under this
                            non-cancelable manufacturing agreement for which
                            future benefit exists for the years ended December
                            31, are as follows:

                            2003                  $           3,109
                            2004                              2,104
                            2005                              1,448
                            2006                                515
                                                ---------------------

                                                  $           7,176
                                                =====================

                                    - F-30 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 12:-     COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

                     2.     The company is committed under non-cancelable
                            services agreements to pay minimum payments to its
                            suppliers. The minimum payments under these services
                            agreements for the years ended December 31, are as
                            follows:

                            2003                  $           2,798
                            2004                              2,513
                            2005                              2,513
                            2006                                 94
                                                ---------------------

                                                  $           7,918
                                                =====================

              c.     Security interests and pledges:

                     The Company provided a guarantee in the amount of $ 52 to
                     the Israeli Chamber of Commerce and Industry to secure the
                     return of equipment shipped abroad; in the amount of $
                     1,133 in respect of liability for projects in progress; in
                     the amount of $ 1,901 for the performance of projects for
                     customers who made advance payments in respect of said
                     projects and in the amount of $ 257 to the Ministry of
                     Finance of Belgium in respect of VAT registration. The
                     Company also provided a guarantee in the amount of $ 34 in
                     respect of premises leased in France, $ 35 in respect of
                     warranty of its products, $ 330 in respect of bids and $ 36
                     in respect of customs.

              d.     Legal proceedings

                     1.     In June 2000, Dictaphone Corporation, one of the
                            Company's competitors, filed a patent infringement
                            claim relating to certain technology embedded in
                            some of the Company's products. The claim is for
                            damages for past infringement and enjoinment of any
                            continued infringement of Dictaphone patents. In the
                            court's discretion, the damages may be trebled and
                            attorney fees awarded. As a result the Company might
                            be forced to pay significant damages and licensing
                            fees, modify its business practices or even be
                            enjoined from conducting a significant part of its
                            U.S. business. Any such results could materially
                            harm the Company's business. The Company believes,
                            however, that it has a valid defense to this claim
                            and is vigorously defending it. The Company has
                            received notification from its insurance company
                            indicating that the claim is not covered by the
                            Company's insurance policy; however, the insurance
                            company has agreed to reimburse for all legal
                            expenses that the Company is expending in defense of
                            the claim while reserving its final decision on this
                            matter until the final outcome of the litigation.
                            The discovery period is closed, dispositive motions
                            have been filed with the Court, and the Company is
                            awaiting the Court's decisions on these motions as
                            well as scheduling for trial.

                     2.     On February 8, 2001, the trading price of the
                            Company's securities dropped, following the
                            Company's announcements that, among other things,
                            the Company would be restating its revenue for
                            fiscal year 1999 and the first three quarters of
                            2000 and that the Company was revising downward its
                            revenue estimates for the final quarter of 2000.
                            Thereafter, various plaintiffs filed in the United
                            States District Court for the District of New Jersey
                            fourteen putative class action securities lawsuits
                            against the Company and several of its present or
                            former officers and directors. The first of these
                            actions was commenced on February 13, 2001. All of
                            the actions have been allocated to the Newark
                            vicinage of the District of New Jersey, and all have
                            been assigned to the Hon. Joseph A. Greenaway, Jr.,
                            U.S.D.J.

                                    - F-31 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 12:-     COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

                            The complaint in each action alleges that the
                            Company and the individual defendants violated
                            Section 10(b) of the Exchange Act, 15 U.S.C. ss.
                            78j(b), and Rule 10b-5 promulgated there under. The
                            plaintiffs also attempt to state a "control person"
                            claim against several of the individual defendants
                            under Section 20(a) of the Exchange Act, 15 U.S.C.
                            ss. 78t(a). While there are differences among the
                            fourteen complaints, the plaintiffs essentially
                            contend that the Company and the individual
                            defendants misrepresented to investors, either
                            affirmatively or through omissions, the Company's
                            financial results and the value of its securities.
                            The plaintiffs seek damages in an unspecified
                            amount. The plaintiffs in each such action seek to
                            represent a class of investors in the Company's
                            securities throughout a specified period,
                            approximately from February 2000 to February 2001.

                            On April 11, 2001, the Company and several of the
                            individual defendants successfully moved to
                            consolidate the various actions under the caption
                            "In re: Nice Systems Ltd. Securities Litigation,"
                            Master File No. 01-CV-00737 (JAG), and to establish
                            a schedule for the filing by plaintiffs of an
                            amended consolidated complaint and the Company and
                            the individual defendants' response to such
                            complaint.

                            By Order dated May 21, 2001, a group of plaintiffs
                            were appointed "lead plaintiffs" pursuant to the
                            Private Securities Litigation Reform Act of 1995, 15
                            U.S.C. ss. 78u-4(a)(3)(B). On August 20, 2001, the
                            Lead Plaintiffs filed and served a Consolidated
                            Amended Class Action Complaint, purporting to bring
                            their securities claims on behalf of a class of
                            persons who purchased the Company's ADSs between
                            November 3, 1999, and February 7, 2001. On October
                            22, 2001, the Company and the individual defendants
                            moved to dismiss the consolidated complaint in its
                            entirety, for failure to state a claim upon which
                            relief could be granted, for failure to plead fraud
                            with the requisite particularity and on grounds of
                            forum non conveniens in favor of proceedings in
                            Israel. Briefing on that motion was completed on
                            December 27, 2001.

                            Before that motion was decided by the Court, the
                            parties to the litigation entered into a settlement
                            of the claim, without any admission of liability or
                            wrongdoing on the Company's part, in the amount of $
                            10,000 dollars, including attorneys' fees. The
                            Company received the funds for this settlement
                            through its directors and officers' insurance
                            policy.

                            Because the action was brought as a class action,
                            the settlement was subject to court approval. By
                            Order dated April 7, 2003, the settlement was
                            approved by the United States District Court for the
                            District of New Jersey, over the objections of two
                            shareholders. On April 30, 2003, one of those
                            shareholders, James J. Hayes, appealed from that
                            Order to the United Stated Court of Appeals for the
                            Third Circuit.

NOTE 13:-     CREDIT LINES

              As of December 31, 2002, the Company had authorized credit lines
              from banks in the amount of $ 47,000. When utilized, the credit
              lines will be denominated in dollars and will bear interest at the
              rate of up to LIBOR + 1.6%. An amount of $ 22,000 out of the total
              credit lines is secured by the Company's marketable securities.
              There are no financial covenants associated with these credit
              lines. As of December 31, 2002, $2,200 were used for bank
              guarantees.

                                    - F-32 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 14:-     TAXES ON INCOME

              a.     Measurement of taxable income:

                     Results for tax purposes are measured in real terms, in
                     accordance with the changes in the Israeli Consumer Price
                     Index, or changes in the exchange rate of the NIS against
                     the dollar, for a "foreign investors" company. Until
                     taxable year 2001, NICE measured its results for tax
                     purposes in accordance with changes in the Israeli consumer
                     price index. Commencing with taxable year 2002, NICE has
                     elected to measure its results for tax purposes on the
                     basis of the changes in the exchange rate of NIS against
                     the dollar. This election obligates NICE for three years.

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

                     Certain production facilities of NICE have been granted the
                     status of "Approved Enterprise" under the Law, in four
                     separate investment programs.

                     According to the provisions of the Law, NICE elected the
                     "alternative benefits" and has waived government grants in
                     return for a tax exemption.

                     Income derived from the first program is tax-exempt for a
                     period of four years, commencing 1999, 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 six years.

                     Income derived from the second program is tax-exempt for a
                     period of four years, commencing 1997, 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 six years.

                     Income derived from the third and fourth programs will be
                     tax-exempt for a period of two years, commencing with the
                     year the Company first earns taxable income, 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.

                     In December 2002, the Company filed an application for a
                     fifth "Approved Enterprise" investment program for its
                     facilities in Israel. To date, the Company has not received
                     a notice of approval for this fifth program.

                     The period of tax benefits detailed above, is subject to
                     limits of the earlier of 12 years from the commencement of
                     production or 14 years from receiving the approval.

                     The Law also entitles NICE to claim accelerated
                     depreciation on equipment used by the "Approved Enterprise"
                     during five tax years.

                     The entitlement to the above benefits is conditional upon
                     NICE's fulfilling the conditions stipulated by the above
                     Law, regulations published hereunder and the instruments of
                     approval for the specific investments in an "Approved
                     Enterprise". In the event of failure to comply with these
                     conditions, the benefits may be canceled and the Company
                     may be required to refund the amount of the benefits, in
                     whole or in part, including interest. As of December 31,
                     2002 the Company is in compliance with all the conditions
                     required by the law.

                                    - F-33 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)


NOTE 14:-     TAXES ON INCOME (CONT.)

                     The tax-exempt income attributable to the "Approved
                     Enterprise" can be distributed to shareholders without
                     subjecting NICE to taxes only upon the complete liquidation
                     of NICE. As of December 31, 2002, approximately $ 16,029
                     was derived from tax-exempt profits earned by NICE's
                     "Approved Enterprise". NICE has decided not to declare
                     dividends out of such tax-exempt income. Accordingly, no
                     deferred income taxes have been provided on income
                     attributable to NICE's "Approved Enterprises".

                     If the net retained tax exempt income is distributed in a
                     manner other than in the complete liquidation of NICE, it
                     would be taxed at the corporate tax rate applicable to such
                     profits as if NICE had not elected the alternative tax
                     benefits (currently - 20% of the gross distributed amount)
                     and an income tax liability would be incurred of
                     approximately $ 4,007 as of December 31, 2002.

                     Income from sources other than the "Approved Enterprise"
                     during the period of benefits will be taxable at the
                     regular corporate tax rate of 36%.

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

                     NICE is an industrial company under 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 as a
                     deduction for tax purposes.

              d.     Net operating loss carryforward:

                     As of December 31, 2002, the Company had carryforward tax
                     losses totaling approximately $ 69,752, most of which can
                     be carried forward and offset against taxable income
                     indefinitely. The remaining carryforward tax losses can be
                     carried forward and offset against taxable income with
                     expiration dates from 2003 to 2021. Utilization of U.S. net
                     operating losses may be subject to the substantial annual
                     limitation due to the "change in ownership" provisions of
                     the Internal Revenue Code of 1986 and similar state
                     provisions. The annual limitation may result in the
                     expiration of net operating losses before utilization.

                                    - F-34 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)


NOTE 14:-     TAXES ON INCOME (CONT.)

              e.     Deferred income taxes:

                     Deferred income taxes reflect the net tax effects of
                     temporary differences between the carrying amounts of
                     assets and liabilities for financial reporting purposes and
                     the amounts used for income tax purposes. Significant
                     components of the Company's deferred tax assets are as
                     follows:

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                    --------------------------------------
                                                                                          2001                 2002
                                                                                    -----------------    -----------------
<S>                                                                                   <C>                  <C>
                     Net operating loss carryforward                                  $     11,954         $     10,994
                     Reserves and allowances                                                 3,320                3,787
                                                                                    -----------------    -----------------

                     Net deferred tax asset before valuation allowance                      15,274               14,781
                     Valuation allowance                                                   (15,274)             (14,781)
                                                                                    -----------------    -----------------

                     Net deferred tax asset                                           $          -         $          -
                                                                                    =================    =================

                     The Company has provided valuation allowances in respect of
                     deferred tax assets resulting from tax loss carryforwards,
                     due to its history of operating losses and current
                     uncertainty concerning its ability to realize these
                     deferred tax assets in the future.

              f.     A reconciliation between the theoretical tax expense,
                     assuming all income is taxed at the statutory tax rate
                     applicable to income of the Company, and the actual tax
                     expense as reported in the consolidated statements of
                     operations, is as follows:

                                                                                        YEAR ENDED DECEMBER 31,
                                                                          ---------------------------------------------------
                                                                               2000              2001              2002
                                                                          ---------------   ---------------   ---------------
                       Loss before taxes on income, as reported in the     $      (5,046)    $     (46,597)    $     (33,632)
                         consolidated statements of operations
                                                                          ===============   ===============   ===============

                       Statutory tax rate in Israel                                   36%               36%               36%
                                                                          ===============   ===============   ===============

                       Theoretical income tax benefit                      $      (1,817)    $     (16,775)    $     (12,108)
                       Losses and other items for which a valuation
                         allowance was provided                                    2,456            12,837             2,725
                       Non-deductible acquisition-related costs                    2,761               338            11,201
                       Tax exempt interest income                                 (2,117)           (1,554)           (1,145)
                       Utilization of net operating losses for which
                         a valuation allowance was provided                            -                 -              (676)
                       Non-deductible expenses                                       244               257               407
                       Increase (decrease) from difference between
                         Israeli currency income and US dollar income             (1,159)            5,031                 -
                       Other                                                         (95)               64               (54)
                                                                          ---------------   ---------------   ---------------

                       Actual tax expense                                  $         273     $         198     $         350
                                                                          ===============   ===============   ===============
</TABLE>

                                    - F-35 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 14:-     TAXES ON INCOME (CONT.)

              g.     Loss before taxes on income is comprised as follows:

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                                     ----------------------------------------------------
                                                                          2000               2001              2002
                                                                     ---------------    ---------------   ---------------
<S>                                                                   <C>                <C>               <C>
                       Domestic                                       $     2,740        $    (31,057)     $    (32,673)
                       Foreign                                             (7,786)            (15,540)             (959)
                                                                     ---------------    ---------------   ---------------

                                                                      $    (5,046)       $   (46,597)      $    (33,632)
                                                                     ===============    ===============   ===============

              h.     The provision for income taxes is
                     comprised as follows:

                      Current taxes                                   $       273        $       198        $       350
                                                                     ===============    ===============    ===============

                      Domestic                                        $        90        $       100        $       126
                      Foreign                                                 183                 98                224
                                                                     ---------------    ---------------    ---------------

                                                                      $       273        $       198        $       350
                                                                     ===============    ===============    ===============
</TABLE>

              i.     Israeli tax reform:

                     On January 1, 2003, a comprehensive tax reform took effect
                     in Israel. Pursuant to the reform, resident companies are
                     subject to Israeli tax on income accrued or derived in
                     Israel or abroad.

                     In addition, the concept of "controlled foreign
                     corporation" was introduced, according to which an Israeli
                     company may become subject to Israeli taxes on certain
                     income of a non-Israeli subsidiary if the subsidiary's
                     primary source of income is passive income (such as
                     interest, dividends, royalties, rental income or capital
                     gains). The tax reform also substantially changed the
                     system of taxation of capital gains.

NOTE 15:-     SHAREHOLDERS' EQUITY

              a.     The Ordinary shares of the Company are traded on the Tel
                     Aviv Stock Exchange and its ADSs are traded on NASDAQ.

                     In April 2000, the Company issued 150,000 ADSs to the sole
                     shareholder of CPS as part of the consideration for the
                     acquired shares of CPS (See Note 1d).

                     In December 2000, the Company issued 220,523 ADSs of NICE
                     as part of the consideration for the acquisition of certain
                     assets and liabilities of SCI (See Note 1c).

                     In December 2001, the Company issued 186,818 ADSs of NICE
                     as part of a settlement agreement with SCI (See Note 1c).

                     In November 2002, the Company issued 2,187,500 ADSs as part
                     of the consideration in the acquisition of certain assets
                     and liabilities of TCS (See Note 1b).

                     In November 2002, the Company released from escrow 50,000
                     ADSs of NICE as part of the settlement agreement with Mr.
                     Chapiewsky (See Note 1d).

                                    - F-36 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 15:-     SHAREHOLDERS' EQUITY (CONT.)

              b.     Share option plans:

                     In 1995, the Company adopted an employee share option plan
                     (the "1995 Option Plan"). Under the 1995 option plan,
                     employees and officers of the Company may be granted
                     options to acquire Ordinary shares. The options to acquire
                     Ordinary shares, which may 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.
                     8,310,566 of the 1995 options were granted at an exercise
                     price of not less than the fair market value of the
                     Ordinary shares at the date of grant.

                     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 to be 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. The options expire no later than 6 years from
                     the date of grant.

                     In 1996, the Company adopted the 1997 Executive Share
                     Option Plan (the "1997 Option Plan"). Under the terms of
                     the 1997 Option Plan, stock options will be exercisable
                     during a 60-day period ending four years after grant. The
                     plan met the definition of Time Accelerated Restricted
                     Stock Award Options ("TARSAP"). The TARSAP includes an
                     acceleration feature based on the following: if the
                     year-end earnings per share of the Company 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, the operating profit of the
                     Company 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. 950,000
                     of the 1997 options were granted at an exercise price of
                     not less than the fair market value of the Ordinary shares
                     at the date of grant. As of December 31, 2002, none of the
                     targets specified under the TARSAP were met and accordingly
                     there was no acceleration of options.

                     In 2001, the Company adopted the 2001 Stock Option Plan
                     (the "2001 Option Plan"). The options to acquire Ordinary
                     shares, which may 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. 2,959,750 of the 2001 options were granted
                     at an exercise price of not less than the fair market value
                     of the Ordinary shares at the date of grant. Under the
                     terms of the 2001 Plan, a third of the stock options
                     granted became exercisable ten months after the grant date
                     and the remaining two thirds will become exercisable on the
                     first and second anniversaries of the first date of
                     exercise so long as the grantee is, subject to certain
                     exceptions, employed by the Company at the date the stock
                     option becomes exercisable. The third portion of the
                     Options may be exercised at the end of the second year
                     following the first date of exercise, if the Company meets
                     a pre-tax profit target of 20%, as determined by the Board
                     of Directors and at its discretion. 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.

                                    - F-37 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 15:-     SHAREHOLDERS' EQUITY (CONT.)

                     In 2001, the Company adopted the 2001 Stock Option Plan for
                     Transitional Employees (the "2001 Transitional Employees
                     Plan") for the terminated employees as part of the
                     restructuring plan (See Note 11). The options to acquire
                     Ordinary shares, which may 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. 96,800 of the 2001 transitional
                     employees options were granted at an exercise price of not
                     less than the fair market value of the Ordinary shares at
                     the date of grant. Under the terms of the 2001 Transitional
                     Employees Plan, each share option granted generally becomes
                     exercisable upon the optionee's termination of employment
                     in accordance with the optionee's termination agreement
                     with the Company and will remain exercisable until the
                     first to occur of the date which is six months following
                     the date of such termination and the expiration of the
                     share option's term. Unless otherwise determined by the
                     Board of Directors as of the date of grant, the stock
                     options expired on December 31, 2002.

                     A summary of the Company's stock options activity and
                     related information for the years ended December 31, 2000,
                     2001 and 2002, is as follows:

<TABLE>
<CAPTION>

                                                           2000                     2001                     2002
                                                 ---------------------------------------------------------------------------
                                                               WEIGHTED-                WEIGHTED                 WEIGHTED
                                                               AVERAGE                  AVERAGE                  AVERAGE
                                                  NUMBER OF    EXERCISE     NUMBER OF   EXERCISE     NUMBER OF   EXERCISE
                                                   OPTIONS       PRICE       OPTIONS      PRICE       OPTIONS      PRICE
                                                 ------------ -----------  ----------- -----------  ----------- ------------
<S>                                               <C>          <C>          <C>         <C>          <C>         <C>
                      Outstanding at the          3,036,591    $   26.37    4,463,523   $    50.58   6,408,825   $     29.31
                        beginning of the year
                      Granted                     3,116,200    $   69.48    4,030,700   $    12.62     981,000   $     11.49
                      Exercised                    (615,643)   $   21.79      (33,809)  $    11.61     (60,830)  $     12.10
                      Forfeited                    (981,125)   $   51.83   (2,051,589)  $    43.08  (1,363,015)  $     32.87
                      Cancelled                     (92,500)   $   70.88            -   $        -           -   $         -
                      Outstanding at the end of
                        the year                  4,463,523    $   50.58    6,408,825   $    29.31   5,965,980   $     25.74
                                                 ============ ===========  =========== ===========  =========== ============
                      Exercisable at the end of
                        the year                    307,744    $   27.45    1,393,959    $   46.25   2,373,039   $     34.46
                                                 ============ ===========  =========== ===========  =========== ============

                     The options outstanding as of December 31, 2002, have been
                     separated into exercise price categories 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          2002             LIFE          PRICE            2002           EXERCISABLE
                     ------------------- ----------------- -------------- --------------  ----------------  ----------------
                             $                                (YEARS)           $                                  $
                     -------------------                   -------------- --------------                    ----------------

                        7.83 - 11.14           656,500           5.63           10.09             52,500          10.95
                       12.00 - 16.81         3,355,494           4.55           12.81            970,937          12.69
                       21.38 - 30.13           508,194           1.77           23.06            427,319          23.07
                        40.94 - 55.5           637,280           3.47           51.02            389,530          50.19
                        64.88 -76.25           808,512           3.28           73.88            532,753          74.09
                                         -----------------                                ----------------

                                             5,965,980           4.14           25.74          2,373,039          34.46
                                         ================= ============== ==============  ================  ================
</TABLE>

                                    - F-38 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 15:-     SHAREHOLDERS' EQUITY (CONT.)

                     When the Company has recorded deferred stock compensation
                     for options issued with an exercise price below the fair
                     value of the Ordinary shares, the deferred compensation is
                     amortized and recorded as compensation expense ratably over
                     the vesting period of the options.

                     Weighted average fair values and weighted average exercise
                     prices of options whose exercise price is equal, less or
                     higher than the market price of the shares at date of grant
                     are as follows:

<TABLE>
<CAPTION>
                                              WEIGHTED AVERAGE FAIR VALUE OF          WEIGHTED AVERAGE EXERCISE PRICE OF
                                           OPTIONS GRANTED AT AN EXERCISE PRICE      OPTIONS GRANTED AT AN EXERCISE PRICE
                                         ----------------------------------------- ----------------------------------------
                                                                      YEAR ENDED DECEMBER 31,
                                         ----------------------------------------------------------------------------------
                                             2000          2001          2002          2000          2001         2002
                                         ------------- ------------- ------------- ------------- ------------ -------------
<S>                                       <C>           <C>           <C>           <C>           <C>          <C>
                      Less than fair
                      value at date of
                      grant               $  55.11      $      -      $     -       $  22.707     $       -    $       -
                                         ============= ============= ============= ============= ============ =============
                      Equal to fair
                      value at date of
                      grant               $  38.93      $   5.66      $     8.03    $  69.042     $  12.664    $  12.991
                                         ============= ============= ============= ============= ============ =============
                      Higher than fair
                      value at date of
                      grant               $      -      $      -      $     5.19    $       -     $       -    $  10.507
                                         ============= ============= ============= ============= ============ =============
</TABLE>

              c.     Employee Stock Purchase Plan:

                     In February 1999, the Company's Board of Directors adopted
                     the Employee Stock Purchase Plan (the "Purchase Plan").
                     Eligible employees can have up to 10% of their earnings
                     withheld, up to certain maximums, to be used to purchase
                     Ordinary shares. The price of Ordinary share purchased
                     under the Purchase Plan will be equal to 85% of the lower
                     of the fair market value of the Ordinary share on the
                     commencement date of each offering period or on the
                     semi-annual purchase date.

                     During 2000, 2001 and 2002, employees purchased 28,626,
                     128,303 and 131,667 shares at average prices of $ 32.89, $
                     11.21 and $ 10.51 per share, respectively.

              d.     Dividends:

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

                                    - F-39 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 16: -    MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION

              a.     Summary information about geographic areas:

                     The Company manages its business on a basis of one
                     reportable segment. See Note 1a for a brief description of
                     the Company's business. The following data is presented in
                     accordance with SFAS No. 131 "Disclosure About Segments of
                     an Enterprise and Related Information". Total revenues are
                     attributed to geographic areas based on the location of end
                     customers.

                     The following presents total revenues and long-lived assets
                     for the years ended December 31, 2000, 2001 and 2002:

<TABLE>
<CAPTION>
                                                     2000                         2001                        2002
                                          ---------------------------  ---------------------------  --------------------------
                                             TOTAL       LONG-LIVED       TOTAL       LONG-LIVED       TOTAL      LONG-LIVED
                                            REVENUES       ASSETS       REVENUES        ASSETS       REVENUES       ASSETS
                                          ------------- -------------  ------------  -------------  ------------  ------------
<S>                                       <C>           <C>            <C>           <C>            <C>           <C>
                     Americas             $    90,540   $    37,213    $    66,324   $    34,183    $    88,426   $    10,843
                     EMEA    (*                39,901            97         34,955           110         47,684        18,489
                     Far East                  18,232             -         21,015            87         22,829            95
                     Israel                     4,490        28,367          4,814        27,831          3,566        42,818
                                          ------------- -------------  ------------  -------------  ------------  ------------

                                          $   153,163   $    65,677    $   127,108   $    62,211    $   162,505   $    72,245
                                          ============= =============  ============  =============  ============  ============

                     *)  Includes Europe, the Middle East (excluding Israel)
                         and Africa.

              b.     Product lines:

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


                                                                                        YEAR ENDED DECEMBER 31,
                                                                        ----------------------------------------------------
                                                                              2000              2001              2002
                                                                        ----------------  -----------------  ---------------

                       Digital audio and applications                     $    128,655      $     99,785      $     132,408
                       Digital video                                            15,824            14,084             22,933
                       COMINT                                                    8,684            13,239              7,164
                                                                        ----------------  -----------------  ---------------

                                                                          $    153,163      $    127,108      $     162,505
                                                                        ================  =================  ===============

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

                            Customer A                                            18.6              12.3               22.3
                                                                        ================  =================  ===============
</TABLE>

                                    - F-40 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 17:-     SELECTED STATEMENTS OF OPERATIONS DATA

                     a.     Research and development, net:

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                           -----------------------------------------------------
                                                                                2000               2001               2002
                                                                           ---------------    ---------------    ---------------
<S>                                                                          <C>                <C>                <C>
                            Total costs                                      $     25,406       $     26,017       $     24,742
                            Less: grants and participations                        (1,174)            (1,392)            (2,208)
                            Less - capitalization of software
                              development costs                                    (4,730)            (5,435)            (4,609)
                                                                           ---------------    ---------------    ---------------

                                                                             $     19,502       $     19,190       $     17,925
                                                                           ===============    ===============    ===============

                     b.     Financial income, net:

                            Financial income:
                              Interest and amortization/accretion of
                                premium/discount of marketable securities    $      3,326       $      3,371       $      2,747
                              Interest                                              3,433              1,294                551
                              Foreign currency translation                              -                166              1,411
                              Other                                                     -                 12                  -
                                                                           ---------------    ---------------    ---------------

                                                                                    6,759              4,843              4,709
                                                                           ---------------    ---------------    ---------------
                            Financial expenses:
                              Interest                                                (80)               (38)               (15)
                              Foreign currency translation                           (163)                 -                (95)
                              Other                                                  (328)              (551)              (607)
                                                                           ---------------    ---------------    ---------------

                                                                                     (571)              (589)              (717)
                                                                           ---------------    ---------------    ---------------

                                                                             $      6,188       $      4,254       $      3,992
                                                                           ===============    ===============    ===============

                     c.     Amortization of acquired intangible assets,
                            restructuring expenses, in-process research and
                            development and goodwill impairment:

                            Amortization of acquired intangibles             $        860       $      3,413       $          -
                            Restructuring expenses (Note 11)                            -             14,554               (118)
                            In-process research and development
                              write-off (Note 1b, d)                                6,786                  -              1,270
                            Goodwill impairment                                         -                  -             28,260
                            Other                                                       -                  -               (320)
                                                                           ---------------    ---------------    ---------------

                                                                             $      7,646       $     17,967       $     29,092
                                                                           ===============    ===============    ===============

                     d.     Advertising expenses                             $      1,485      $      1,265       $      1,760
                                                                           ===============    ===============    ===============
</TABLE>

                                    - F-41 -
<PAGE>

                                              NICE SYSTEMS LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 17:-     SELECTED STATEMENTS OF OPERATIONS DATA (CONT.)

                     e.     Net loss per share:

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

                            1.     Numerator:

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                           -----------------------------------------------------
                                                                                2000               2001               2002
                                                                           ---------------    ---------------    ---------------
<S>                                                                          <C>                <C>                <C>
                                   Numerator for basic and diluted net
                                     loss per share -
                                   Loss available to Ordinary
                                     shareholders                            $     (5,319)      $    (46,795)      $    (33,982)
                                                                           ===============    ===============    ===============

                            2.     Denominator (in thousands):

                                   Denominator for basic net loss per
                                     share -
                                   Weighted average number of shares                12,317            13,047             13,795
                                                                            ===============   ===============    ===============

                                   Denominator for diluted net loss per
                                     share - adjusted weighted average
                                     shares assuming exercise of options            12,317            13,047             13,795
                                                                            ===============   ===============    ===============
</TABLE>

                                   The effect of the inclusion of the options
                                   and warrants in 2000, 2001 and 2002 would be
                                   anti-dilutive. Because of the loss in 2000,
                                   2001 and 2002, all potential dilutive
                                   securities are anti-dilutive.


                               - - - - - - - - - -


                                    - F-42 -

<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
  filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Ra'anana,
State of Israel, on the 26th day of June, 2003.


                                NICE-SYSTEMS LTD.



                                By: /S/ Haim Shani
                                   ------------------------------------------
                                   Haim Shani
                                   President and Chief Executive Officer

<PAGE>

CERTIFICATIONS

I, Haim Shani, Chief Executive Officer, certify that:

1.   I have reviewed this annual report on Form 20-F of NICE-Systems Ltd.;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a.   designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b.   evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c.   presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

a.   all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b.   any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


     Date: June 26,2003

                                       By: /s/ Haim Shani
                                           ---------------
                                           Haim Shani
                                           President and Chief Executive Officer

<PAGE>

CERTIFICATIONS

I, Lauri Hanover, Chief Financial Officer, certify that:

1.   I have reviewed this annual report on Form 20-F of NICE-Systems Ltd.;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a.   designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b.   evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c.   presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

a.   all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b.   any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


     Date: June 26,2003


                                     By: /s/ Lauri Hanover
                                         -----------------
                                         Lauri Hanover
                                         Chief Financial Officer