---

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# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

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

OR

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

For the fiscal year
ended December 31, 2007

OR

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

OR

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

Commission file number
0-27466

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

|N/A                                            
|-----------------------------------------------
|                                               
|(Translation of Registrant's name into English)

|Israel                                         
|-----------------------------------------------
|                                               
|(Jurisdiction of incorporation or organization)

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

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

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

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

|                                              |                            
|--------------------------------------------- | ---------------------------
|
|
|
|
|American Depositary Shares, each representing | NASDAQ Global Select Market
|one Ordinary Share, par value one             |                            
|New Israeli Shekel per share                  |                            



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

|None            
|----------------
|                
|(Title of Class)

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

|None            
|----------------
|                
|(Title of Class)

Indicate
the number of outstanding shares of each of the issuer's classes of capital or common
stock as of the close of the period covered by the annual report:

59,825,653 Ordinary Shares, par value NIS 1.00 Per Share (which includes 412,841 restricted shares)

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

x  Yes       o  No

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

o  Yes       x  No

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days:

x  Yes       o  No

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

|Large accelerated filer x | Accelerated filer o | Non-accelerated filer o
|------------------------- | ------------------- | -----------------------

Indicate
by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:

|x | U.S.
GAAP
|- | ---------

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

|o | Other
|- | -----

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

o Item 17       o  Item 18

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

o  Yes       x  No



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PRELIMINARY NOTE

This
annual report contains historical information and forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of 1995 with respect
to NICE's business, financial condition and results of operations. The words
"anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "project,"
"should," "strategy," "continue," "goal" and "target" and similar expressions, as
they relate to NICE or its management, are intended to identify forward-looking
statements. Such statements reflect the current views and assumptions of NICE with
respect to future events and are subject to risks and uncertainties. The
forward-looking statements relate to, among other things: operating results;
anticipated cash flows; gross margins; adequacy of resources to fund operations; our
ability to maintain our average selling prices despite the aggressive marketing and
pricing strategies of our competitors; our ability to maintain and develop profitable
relationships with our key distribution channels, one of which constitutes 13% of our
revenues; the financial strength of our key distribution channels; and the market's
acceptance of our technologies, products and solutions.

In
connection with the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, we are identifying important factors that, individually or in the
aggregate, could cause actual results and outcomes to differ materially from those
contained in any forward-looking statements made by us; any such statement is
qualified by reference to the following cautionary statements. Many factors could
cause the actual results, performance or achievements of NICE to be materially
different from any future results, performance or achievements that may be
expressed or implied by such forward-looking statements, including, among others,
changes in general economic and business conditions, changes in currency exchange
rates and interest rates, difficulties or delays in absorbing and integrating acquired
operations, products, technologies and personnel, changes in business strategy
and various other factors, both referenced and not referenced in this annual report.
These risks are more fully described under Item 3, "Key Information - Risk Factors" of
this annual report. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected, intended,
planned or projected. NICE does not intend or assume any obligation to update
these forward-looking statements. Investors should bear this in mind as they
consider forward-looking statements and whether to invest or remain invested in
NICE-Systems Ltd.'s securities.

In
this annual report,  all references to "NICE," "we," "us" or "our" are to NICE-Systems
 Ltd., a company  organized under the laws of the State of Israel,  and its wholly owned
 subsidiaries.  For a list of our significant subsidiaries, please refer to page 51 of
this annual report.

In
this annual report,  unless otherwise specified or unless the context otherwise
 requires,  all references  to "$" or  "dollars"  are to U.S.  dollars  and all
 references  to "NIS"  are to New  Israeli Shekels.  Except as otherwise indicated,  the
financial  statements of and information  regarding NICE are presented in U.S. dollars.

During
 May  2006,  we  effected  a  two-for-one  split of our  ordinary  shares.  The  split
was effected  by way of a 100%  stock  dividend,  which  had an  ex-dividend  date  of
May  31,  2006.  Unless otherwise  indicated,  all ordinary  share,  option and per share
 amounts in this annual report have been adjusted to give retroactive effect to the stock
split for all periods presented.



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TABLE OF CONTENTS

|                              |                                                                              | Page
|----------------------------- | ---------------------------------------------------------------------------- | ----
|
|
|
|
|                              | PART I                                                                       |     
|                             
|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                                                   | 25  
|Item 4A                       | Unresolved Staff Comments                                                    | 52  
|Item 5.                       | Operating and Financial Review and Prospects                                 | 52  
|Item 6.                       | Directors, Senior Management and Employees                                   | 77  
|Item 7.                       | Major Shareholders and Related Party Transactions                            | 93  
|Item 8.                       | Financial Information                                                        | 95  
|Item 9.                       | The Offer and Listing                                                        | 99  
|Item 10.                      | Additional Information                                                       | 103 
|Item 11.                      | Quantitative and Qualitative Disclosures About Market Risk                   | 124 
|Item 12.                      | Description of Securities Other than Equity Securities                       | 125 
|                             
|                              | PART II                                                                     
|Item 13.                      | Defaults, Dividend Arrearages and Delinquencies                              | 125 
|Item 14.                      | Material Modifications to the Rights of Security Holders and Use of Proceeds | 125 
|Item 15.                      | Controls and Procedures                                                      | 125 
|Item 16A.                     | Audit Committee Financial Expert                                             | 126 
|Item 16B.                     | Code of Ethics                                                               | 126 
|Item 16C.                     | Principal Accountant Fees and Services                                       | 127 
|Item 16D.                     | Exemptions from the Listing Standards for Audit Committees                   | 128 
|Item 16E.                     | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 128 
|                             
|                              | PART III                                                                    
|Item 17.                      | Financial Statements                                                         | 128 
|Item 18.                      | Financial Statements                                                         | 128 
|Item 19.                      | Exhibits                                                                     | 129 
|Index to Financial Statements | F-1                                                                         



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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, 2006 and 2007 and for
the years ended December 31, 2005, 2006 and 2007 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 & Kasierer, a member of Ernst & Young
Global. The consolidated selected financial data as of December 31, 2003, 2004 and 2005
and for the years ended December 31, 2003 and 2004 have been derived from other
Consolidated Financial Statements not included in this annual report and have also been
prepared in accordance with U.S. GAAP and audited by Kost, Forer, Gabbay & Kasierer, a
member of Ernst & Young Global. The selected consolidated financial data set forth
below should be read in conjunction with and are qualified by reference to Item 5,
Operating and Financial Review and Prospects and the Consolidated Financial
Statements and notes thereto and other financial information included elsewhere in this
annual report.

2

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|                                          | Year Ended December 31,
|----------------------------------------- | -----------------------
|
|
|
|
|OPERATING DATA:                           |                        
|Revenues                                  |                        
|Products                                  |                        
|Services                                  |                        
|                                          |                        
|Total revenues                            |                        
|                                          |                        
|Cost of revenues                          |                        
|Products                                  |                        
|Services                                  |                        
|                                          |                        
|Total cost of revenues                    |                        
|                                          |                        
|Gross profit                              |                        
|                                          |                        
|Operating expenses:                       |                        
|Research and development, net             |                        
|Selling and marketing                     |                        
|General and administrative                |                        
|Amortization of acquired intangible       |                        
|assets                                    |                        
|In process research and development       |                        
|write-off                                 |                        
|Other special charges                     |                        
|                                          |                        
|Total operating expenses                  |                        
|                                          |                        
|Operating income                          |                        
|Financial income, net                     |                        
|Other income (expenses), net              |                        
|                                          |                        
|Income before taxes on income             |                        
|Taxes on income                           |                        
|                                          |                        
|Net income from continuing operations     |                        
|Net income from discontinuing operations  |                        
|                                          |                        
|Net income)                               |                        
|                                          |                        
|Basic earnings per share:                 |                        
|Continuing operations                     |                        
|Discontinued operations                   |                        
|                                          |                        
|Net earnings                              |                        
|                                          |                        
|Weighted average number of shares used in |                        
|computing basic earnings per share (in    |                        
|thousands)                                |                        
|                                          |                        
|Diluted earnings per share:               |                        
|Continuing operations                     |                        
|Discontinued operations                   |                        
|                                          |                        
|Net earnings                              |                        
|                                          |                        
|Weighted average number of shares used in |                        
|computing diluted earnings per share (in  |                        
|thousands)                                |                        
|                                          |                        

3

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|                     | At December 31,
|-------------------- | ---------------
|
|
|
|
|BALANCE SHEET DATA:  |                
|Working capital      |                
|Total assets         |                
|Total debt           |                
|Shareholders' equity |                

4

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# Risk Factors

General Business Risks
Relating to Our Business and Market

The markets in which we operate
are characterized by rapid technological changes and frequent new products and service
introductions. We may not be able to keep up with these rapid technological and other
changes.

We
operate in several markets, each characterized by rapidly changing technology, new product
introductions and evolving industry standards. The introduction of products embodying new
technology and the emergence of new industry standards can render existing products
obsolete and unmarketable and can exert price pressures on existing products. A number of
existing and potential competitors might introduce new and enhanced products that could
adversely affect the competitive position of our products. Our most significant market is
the market for voice recording platforms and related enhanced applications (or Voice
Platforms and Applications). Voice Platforms and Applications are utilized by the
enterprise sector, which includes entities operating in the contact center, trading floor,
branches, home agents and back offices, and by the security sector, which includes
homeland security and first responders, transportation organizations and the public and
private sector, to capture, store, retrieve and analyze recorded data. The market for our
Voice Platforms and Applications is, in particular, characterized by a group of highly
competitive vendors that are introducing rapidly changing competitive offerings around
evolving industry standards.

Our
ability to anticipate changes in technology and industry standards and to successfully
develop and introduce new, enhanced and competitive products, on a timely basis, in all
the markets in which we operate, will be a critical factor in our ability to grow and be
competitive. As a result, we expect to continue to make significant expenditures on
research and development, particularly with respect to new software applications, which
are continuously required in all our business areas. The convergence of voice and data
networks and wired and wireless communications could require substantial modification and
customization of our current multi-dimensional products and business models, as well as
the introduction of new multi-dimensional products. Further, customer acceptance of these
new technologies may be slower than we anticipate. We cannot assure that the market or
demand for our products and solutions will grow as rapidly as we expect, if at all, that
we will successfully develop new products or introduce new applications for existing
products, that such new products and applications will achieve market acceptance or that
the introduction of new products or technological developments by others will not render
our products obsolete. In addition, our products must readily integrate with major third
party security, telephone, front-office and back-office systems. Any changes to these
third party systems could require us to redesign our products, and any such redesign might
not be possible on a timely basis or achieve market acceptance. Our inability to develop
products that are competitive in technology and price and responsive to customer needs
could have a material adverse effect on our business, financial condition and results of
operations. Additional factors that could have a material adverse effect on our business,
financial condition and results of operations include industry specific factors; our
ability to continuously develop, introduce and deliver commercially viable products,
solutions and technologies; the markets rate of acceptance of the product solutions
and technologies we offer; and our ability to keep pace with market and technology changes
and to compete successfully.

5

---

---

Our business could be materially
adversely affected as a result of the risks associated with acquisitions and investments.
In particular, we may not succeed in making additional acquisitions or be effective in
integrating such acquisitions.

As
part of our growth strategy, we have made a number of acquisitions and expect to continue
to make acquisitions. We frequently evaluate the tactical or strategic opportunity
available related to complementary businesses, products or technologies. The process of
integrating an acquired companys business into our operations, including the
business of Actimize Ltd., 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 could result in
potentially dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities, and amortization expenses related to intangible assets, any of which could
have a material adverse effect on our operating results and financial condition. There can
be no assurance that we will be successful in making additional acquisitions or effective
in integrating such acquisitions into our existing business. In addition, if we consummate
one or more significant acquisitions in which the consideration consists, in whole or in
part, of ordinary shares or American Depositary Shares (ADSs), representing our ordinary
shares, shareholders would suffer dilution of their interests in us. We have also invested
in companies which can still be considered in the start-up or development stages. These
investments are inherently risky as the market for the technologies or products they have
under development are typically in the early stages and may never materialize. We could
lose our entire initial investment in these companies.

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

Over
the last few years we have established a sales management and service infrastructure in
Asia and the Pacific (the APAC region), by recruiting sales management and service
personnel in order to bring about further growth in revenue in the Asia Pacific market and
have expanded our professional services group to include business consultants. Also, since
2002 we have been expanding our presence in Europe (mainly in the United Kingdom) and in
the Middle East and Africa (the EMEA region) through organic growth and through
acquisitions. We may establish additional operations within these regions or in other
regions where growth opportunities are projected. However, we cannot assure you that our
revenues will increase as a result of this expansion or that we will be able to recover
the expenses we incurred in effecting the expansion. Our failure to effectively manage our
expansion of our sales, marketing, service and support organizations could have a negative
impact on our business. To accommodate our global expansion, we are continuously
implementing new or expanded business systems, procedures and controls. There can be no
assurance that the implementation of such systems, procedures, controls and other internal
systems can be completed successfully.

6

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Our evolving business strategy
could adversely affect our business.

Historically
we have supplied the hardware and some software for implementing multimedia recording
solutions. Our shift towards providing value-added services and an enterprise software
business model has required and will continue to require substantial change, potentially
resulting in some disruption to our business. These changes may include changes in
management, sales force and technical personnel; expanded or differing competition
resulting from entering the enterprise software market; increased need to expand our
distribution network to include system integrators which could impact revenues and gross
margins; and, as our applications are sold either to our installed base or to new
customers together with our recording platforms, the rate of adoption of our software
applications by the market.

The
changes in our business may place a significant strain on our operational and financial
resources. We may experience substantial disruption from changes and could incur
significant expenses and write-offs. Failing to carefully manage expense and inventory
levels consistent with product demand and to carefully manage accounts receivable to limit
credit risk, could materially adversely affect our results of operations.

We depend upon outsourcers for the
manufacture of our key products. The failure of our product manufacturers to meet our
quality or delivery requirements would likely have a material adverse effect on our
business, results of operations and financial condition.

In
2002, we entered into a manufacturing agreement with Flextronics Israel Ltd., a subsidiary
of Flextronics, a global electronics manufacturing, services company. Under this
agreement, Flextronics provides us with a comprehensive manufacturing solution that covers
all aspects of the manufacture of our products from order receipt to product shipment,
including purchasing, manufacturing, testing, configuration, and delivery services. This
agreement covers all of our products. As a result of these arrangements, we are dependent
on Flextronics to process orders and manufacture our products. Consequently, the
manufacturing process of our products is not in our direct control.

We
may from time to time experience delivery delays due to the inability of Flextronics to
consistently meet our quality or delivery requirements and we may experience production
interruptions if Flextronics is for any reason unable to continue the production of our
products. Should we have on-going performance issues with our contract manufacturers, the
process to move from one contractor to another is a lengthy and costly process that could
affect our ability to execute customer shipment requirements and/or might negatively
affect revenue and/or costs. If this manufacturer or any other manufacturer were to cancel
contracts or commitments with us or fail to meet the quality or delivery requirements
needed to satisfy customer orders for our products, we could lose time-sensitive customer
orders and have significantly decreased quarterly revenues and earnings, which would have
a material adverse effect on our business, results of operations and financial condition.

7

---

---

Incorrect or improper use of our
products or failure to properly provide training, consulting, implementation and
maintenance services could result in negative publicity and legal liability.

Our
products and solutions are complex and are deployed in a wide variety of network
environments. The proper use of our software requires extensive training and, if our
software products are not used correctly or as intended, inaccurate results may be
produced. Our products may also be intentionally misused or abused by clients who use our
products. The incorrect or improper use of our products or our failure to properly provide
training, consulting, implementation and maintenance services to our clients may result in
losses suffered by our clients, which could result in negative publicity and product
liability or other legal claims against us.

# If we lose our key
suppliers, our business may suffer.

Certain
components and subassemblies that are used in the manufacture of our existing products are
purchased from a single or a limited number of suppliers. In the event that any of these
suppliers are unable to meet our requirements in a timely manner, we may experience an
interruption in production until an alternative source of supply can be obtained. Any
disruption, or any other interruption of a suppliers ability to provide components
to us, could result in delays in making product shipments, which could have a material
adverse effect on our business, financial condition and results of operations. In
addition, some of our major suppliers use proprietary technology and software code that
could require significant redesign of our products in the case of a change in vendor.
Further, as suppliers discontinue their products, or modify them in manners incompatible
with our current use, or use manufacturing processes and tools that could not be easily
migrated to other vendors, we could have significant delays in product availability, which
would have a significant adverse impact on our results of operations and financial
condition. Although we generally maintain an inventory for some of our components and
subassemblies to limit the potential for an interruption and we believe that we can obtain
alternative sources of supply in the event our suppliers are unable to meet our
requirements in a timely manner, we cannot assure you that our inventory and alternative
sources of supply would be sufficient to avoid a material interruption or delay in
production and in availability of spare parts.

We rely on software from third
parties. If we lose the right to use that software, we would have to spend additional
capital to redesign our existing software or develop new software.

We
integrate various third party software products as components of our products. We utilize
third party software products to enhance the functionality of our products. Our business
could be disrupted if functional versions of this software were either no longer available
to us or no longer offered to us on commercially reasonable terms. In either case, we
would be required to spend additional capital to either redesign our software to function
with alternate third party software or develop these components ourselves. We might as a
result be forced to limit the features available in our current or future product
offerings and the commercial release of our products could be delayed.

8

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---

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

A
directive issued by the European Union on the Restriction of the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment, or RoHS, came into effect
on July 1, 2006. The RoHS directive lists lead, mercury, cadmium, hexavalent chromium,
polybrominated biphenyls and polybrominated diphenyl ethers, which must either be removed
or reduced to within maximum permitted concentrations in any products containing
electrical or electronic components that are sold within the European Union. Our products
meet the requirements of the RoHS directive and we are making every effort in order to
maintain compliance, without otherwise adversely affecting the quality and functionalities
of our products. Our inability or failure to comply with these regulations, including by
reason of failure by our suppliers to comply with the directive, may restrict us for a
period of time from conducting certain business in the European Union and could have a
material adverse effect on our results of operations.

A
further directive on Waste Electrical and Electronic Equipment, or WEEE,
published by the European Union in 2003, promotes waste recovery with a view to reducing
the quantity of waste for disposal and saving natural resources, in particular by reuse,
recycling and recovery of waste electrical and electronic equipment. The WEEE directive
covers 10 categories of electrical and electronic equipment regardless if used by
consumers or by professional users. The directive, which partly came into effect in August
2005, requires that all new electrical and electronic equipment put on the Community
market be appropriately labeled regarding waste disposal and contains other obligations
regarding the collection and recycling of waste electrical and electronic equipment. Our
products fall within the scope of the WEEE directive, and we have set up the operational
and financial infrastructure required for collection and recycling of WEEE, as stipulated
in the WEEE directive, including product labeling, registration and the joining of
compliance schemes. We are taking and will continue to take all requisite steps to ensure
compliance with this directive. If we fail to maintain compliance, we may be restricted
from conducting certain business in the European Union, which could adversely affect our
results of operations.

The
countries of the European Union, as a single market for our products, accounted in 2007
for approximately 22% of our revenues. If our products fail to comply with WEEE or RoHS
directives or any other directive issued from time to time by the European Union, we could
be subject to penalties and other sanctions that could have a material adverse affect on
our results of operations and financial condition.

9

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---

Risks associated with our
distribution channels and key strategic partners may materially adversely affect our
financial results.

We
have agreements in place with many distributors, dealers and resellers to market and sell
our products and services in addition to our direct sales force. We derive a significant
percentage of our revenues from one of our distributor channels and new channels may, in
the future, account for a significant percentage of our revenues. Avaya, our largest
global distribution channel, accounted for approximately 21%, 16% and 13% of our revenues
in 2005, 2006 and 2007, respectively. Our financial results could be materially adversely
affected if our contracts with distribution channels or our other partners were
terminated, if our relationship with our distribution channels or our other partners were
to deteriorate or if the financial condition of our distribution channels or our other
partners were to weaken. Additionally, our competitors ability to penetrate our
strategic relationships, particularly our relationship with Avaya, one of the leading
global providers of enterprise business communication platforms in voice, e-business and
data, may result in a significant reduction of sales through that channel. Moreover, our
current distribution channels or other partners may decide to enter into our markets in
competition with us, which will likely result in the termination of our relationship and
may lead to a significant reduction in sales through related channels.

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

Our uneven sales patterns could
significantly impact our revenues and earnings.

The
sales cycle for our products and services is variable, typically ranging between a few
weeks to several months from initial contact with the potential client to the signing of a
contract. Frequently, sales orders accumulate towards the latter part of a given quarter.
Looking forward, given the lead-time required by our contract manufacturer, if a large
portion of sales orders are received late in the quarter, we may not be able to deliver
products within the quarter and thus such sales will be deferred to a future quarter.
There can be no assurance that such deferrals will result in sales in the near term, or at
all. Thus, delays in executing client orders may affect our revenue and cause our
operating results to vary widely. Additionally, as a high percentage of our expenses,
particularly employee compensation, is relatively fixed, a variation in the level of
sales, especially at or near the end of any quarter, may have a material adverse impact on
our quarterly operating results.

It
is also difficult to predict the exact mix of products for any period between hardware,
software and services as well as within the product category between audio platforms and
related applications and digital video. As each of our product types and services have
different gross margins, changes in the mix of products sold in a period will have an
impact, and perhaps a material impact, on our gross profit and net income in that period.

10

---

---

We might recognize a loss with
respect to our investments in financial instruments.

We invest most of our cash in a
variety of financial instruments. If the obligor of any of the instruments we hold
defaults or undergoes a reorganization in bankruptcy, we may lose a portion of such
investment and our financial income may decrease. In addition, to the extent there is a
general downturn in the credit markets, which could adversely affect the liquidity of our
investments, or if the credit rating of our investments is downgraded, we might recognize
some loss. For information on the types of our investments, see Item 11,
Quantitative and Qualitative Disclosures About Market Risk in this annual
report.

If we lose our key personnel or
cannot recruit additional personnel, our business may suffer.

If
our growth continues, we will be required to hire and integrate new employees. Recruiting
and retaining qualified engineers and computer programmers to perform research and
development and to commercialize our products, as well as qualified personnel to market
and sell those products, are critical to our success. As of December 31, 2007,
approximately 25% of our employees were devoted to research and product development and
approximately 20% were devoted to marketing and sales. There can be no assurance that we
will be able to successfully recruit and integrate new employees. There is often intense
competition to recruit highly skilled employees in the technology industry. We may also
experience personnel changes as a result of our move from multimedia recording equipment
towards business performance solutions. An inability to attract and retain highly
qualified employees may have an adverse effect on our ability to develop new products and
enhancements for existing products and to successfully market such products, all of which
would likely have a material adverse effect on our results of operations and financial
position. Our success also depends, to a significant extent, upon the continued service of
a number of key management, sales, marketing and development employees, the loss of any of
whom could materially adversely affect our business, financial condition and results of
operations.

Operating internationally exposes
us to additional and unpredictable risks.

We
sell our products and solutions throughout the world and intend to continue to increase
our penetration of international markets. In 2005, 2006 and 2007, approximately 99% of our
total sales were derived from sales to customers outside of Israel, and approximately 53%,
54% and 52%, respectively, of our total sales were made to customers in North America. A
number of risks are inherent in international transactions. Our future results could be
materially adversely affected by a variety of factors including changes in exchange rates,
general economic conditions, regulatory requirements, tax structures or changes in tax
laws, and longer payment cycles in the countries in our geographic areas of operations.
International sales and operations may be limited or disrupted by the imposition of
governmental controls and regulations, export license requirements, political instability,
trade restrictions, changes in tariffs and difficulties in managing international
operations. We cannot assure you that one or more of these factors will not have a
material adverse effect on our international operations and, consequently, on our
business, financial condition and results of operations.

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Inadequate intellectual property
protections could prevent us from enforcing or defending our intellectual property and we
may be subject to liability in the event our products infringe on the proprietary rights
of third parties and we are not successful in defending such claims.

Our
success is dependent, to a significant extent, upon our proprietary technology. We
currently hold 46 U.S. patents and 64 patents issued in additional countries covering
substantially the same technology as the U.S. patents. We have over 155 patent
applications pending in the United States and other countries.We rely on a
combination of patent, trade secret, copyright and trademark law, together with
non-disclosure and non-competition agreements, as well as third party licenses to
establish and protect the technology used in our systems. However, we cannot assure you
that such measures will be adequate to protect our proprietary technology, that
competitors will not develop products with features based upon, or otherwise similar to
our systems, or that third party licenses will be available to us or that we will prevail
in any proceeding instituted by us in order to enjoin competitors from selling similar
products. Although we believe that our products do not infringe upon the proprietary
rights of third parties, we cannot assure you that one or more third parties will not make
a contrary claim or that we will be successful in defending such claim.

We
generally distribute our software products under software license agreements that restrict
the use of our products by terms and conditions prohibiting unauthorized reproduction or
transfer of the software products. However, effective copyrights and other intellectual
property rights protection may be inadequate or unavailable to us in every country in
which our software products are available, and the laws of some foreign countries may not
be as protective of intellectual property rights as those in Israel and the United States.

From
time to time, we receive cease and desist letters alleging patent
infringements. No formal claims or other actions have been filed with respect to such
alleged infringements, except for claims filed by Dictaphone (which have since been
settled and dismissed) and Verint America Inc. (formerly Witness Systems, Inc.) (see Item
8, Financial InformationLegal Proceedings in this annual report). We
believe that none of these allegations has merit. We cannot assure you, however, that we
will be successful in defending against the claims that have been asserted or any other
claims that may be asserted. We also cannot assure you that such claims will not have a
material adverse effect on our business, financial condition, or operations. Defending
infringement claims or other claims could involve substantial costs and diversion of
management resources.

In
addition, to the extent we are not successful in defending such claims, we may be subject
to injunctions with respect to the use or sale of certain of our products or to
liabilities for damages and may be required to obtain licenses which may not be available
on reasonable terms, any of which may have a material adverse impact on our business or
financial condition.

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We use certain open
source software tools that may be subject to intellectual property infringement
claims, the assertion of which could impair our product development plans, interfere with
our ability to support our clients or require us to pay licensing fees.

Certain
of our software products contain a limited amount of open source code and we may use more
open source code in the future. Open source code is code that is covered by a license
agreement that permits the user to liberally use, copy, modify and distribute the software
without cost, provided that users and modifiers abide by certain licensing requirements.
The original developers of the open source code provide no warranties on such code.

As
a result of our use of open source software, we could be subject to suits by parties
claiming ownership of what we believe to be open source code and we may incur expenses in
defending claims that we did not abide by the open source code license. If we are not
successful in defending against such claims, we may be subject to monetary damages or be
required to remove the open source code from our products. Such events could disrupt our
operations and the sales of our products, which would negatively impact our revenues and
cash flow.

In
addition, under certain conditions, the use of open source code to create derivative code
may obligate us to make the resulting derivative code available to others at no cost. The
circumstances under which our use of open source code would compel us to offer derivative
code at no cost are subject to varying interpretations. If we are required to publicly
disclose the source code for such derivative products or to license our derivative
products that use an open source license, our previously proprietary software products may
be available to others without charge. If this happens, our customers and our competitors
may have access to our products without cost to them, which could harm our business.

We
monitor our use of such open source code to avoid subjecting our products to conditions we
do not intend. The use of such open source code, however, may ultimately subject some of
our products to unintended conditions so that we are required to take remedial action that
may divert resources away from our development efforts.

Undetected problems in our
products could directly impair our financial results and we could face potential product
liability claims against us.

If
flaws in the design, production, assembly or testing of our products and solutions (by us
or our suppliers) were to occur, we could experience a rate of failure in our products or
solutions that would result in substantial repair, replacement or service costs and
potential liability and damage to our reputation. There can be no assurance that our
efforts to monitor, develop, modify and implement appropriate test and manufacturing
processes for our products or solutions will be sufficient to permit us to avoid a rate of
failure in our products or solutions that results in substantial delays in shipment,
significant repair or replacement costs or potential damage to our reputation, any of
which could have a material adverse effect on our business, results of operations and
financial condition.

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We
may be subject to claims that our products are defective or that some function or
malfunction of our products caused or contributed to property, bodily or consequential
damages. We attempt to minimize this risk by incorporating provisions into our
distribution and standard sales agreements that are designed to limit our exposure to
potential claims of liability. No assurance can be given that all claims will be barred by
the contractual provisions limiting liability or that the provisions will be enforceable.
We carry product liability insurance in the amount of $25,000,000 per occurrence and
$25,000,000 overall per annum. No assurance can be given that the amount of any individual
claim or all claims will be covered by the insurance or that the amount of any individual
claim or all claims in the aggregate will not exceed insurance policy coverage limits. A
significant liability claim against us could have a material adverse effect on our results
of operations and financial position.

If our advanced compliance
recording solutions fail to record our customers interactions, we may be subject to
liability and our reputation may be harmed.

Many
of our customers use our solutions to record and to store recordings of commercial
interactions. These recordings are used to provide back-up and verification of
transactions and to guard against risks posed by lost or misinterpreted voice
communications. These customers rely on our solutions to record, store and retrieve voice
data in a timely, reliable and efficient manner. If our solutions fail to record our
customers interactions or our customers are unable to retrieve stored recordings
when necessary, we may be subject to liability and our reputation may be harmed. Although
we attempt to limit any potential exposure through quality assurance programs, insurance
and contractual terms, we cannot assure you that we will eliminate or successfully limit
our liability for any failure of our recording and storage solutions.

# We face risks relating
to government contracts.

We
sell our products to, among other customers, governments and governmental entities. These
sales are subject to special risks, such as delays in funding, termination of contracts or
sub-contracts at the convenience of the government, termination, reduction or modification
of contracts or sub-contracts in the event of changes in the governments policies or
as a result of budgetary constraints, and increased or unexpected costs resulting in
losses or reduced profits under fixed price contracts. Such occurrences have happened in
the past and we cannot assure you that we will not experience problems in the future in
our performance of such government contracts.

We face risks relating to large
projects in the security market.

Some
of the customer projects for which we offer our security products, solutions and related
services are growing in size. The larger and more complex such projects are, the greater
the risks associated with such projects. These risks may include our exposure to penalties
and liabilities resulting from a breach of contract, our ability to fully integrate our
products with third party products and complex environments, and our dependency upon
subcontractors for the successful and timely completion of such projects. Also, we may be
held liable for the failure of our subcontractors, from whom we may have no recourse. In
addition, there may be more fluctuations in cash collection and revenue recognition with
respect to such projects.

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

The
market for our products, solutions and related services, in general, is highly
competitive. Additionally, some of our principal competitors, such as Verint Systems,
Inc., may have significantly greater resources and larger customer bases than we do. We
have seen evidence of price reductions by some of our competitors and expect to continue
to see such behavior in the future, which, 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.

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, including data based on transactions. The market for such
content analysis applications is still in its early phases. Successful positioning of our
products is a critical factor in our ability to maintain growth. Furthermore, new
potential entrants from the traditional enterprise business intelligence and business
analytics sector may decide to develop recording and content analysis capabilities and
compete with us in this emerging opportunity. As a result, we expect to continue to make
significant expenditures on marketing. We cannot ensure that the market awareness or
demand for our new products will grow as rapidly as we expect, or if at all, that we will
successfully develop new products or introduce new applications for existing products,
that such new products and applications will achieve market acceptance or that the
introduction of new products or technological developments by others will not adversely
impact the demand for our products.

The
operational risk management market has emerged only in recent years and is highly
competitive and fragmented. Our software solutions in this field compete with software
developed internally by potential clients as well as software and other solutions offered
by competitors.

With
respect to the market for digital video products and applications (or Video Platforms and
Applications), our Video Platforms and Applications are utilized by entities in the closed
circuit television, or CCTV, security, gaming and retail industries to capture, store and
analyze digital video and related data. The market for our Video Platforms and
Applications is highly competitive and includes products offering a broad range of
features and capacities. We compete with a number of large, established manufacturers of
video recording systems and distributors of similar products, as well as new emerging
competitors. The price per channel of digital recording systems has decreased throughout
the market in recent years, primarily due to competitive pressures. We cannot assure you
that the price per channel of digital recording systems will not continue to decrease or
that our gross profit will not decrease as a result. Moreover, our penetration into this
market may not experience the same growth rate as the entire companys growth rate,
which might have a material adverse effect on our earnings.

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With
respect to the public safety part of our business, our ability to succeed depends on our
ability to develop an effective network of distributors to the mid-low segment of the
public safety market, while facing pricing pressures and low barriers to entry. We face
significant competition from other well-established competitors, including CVDS Inc.,
VoicePrint Inc. and others. Prices have decreased throughout the market in recent years,
primarily due to competitive pressures. We cannot assure you that prices will not continue
to decrease or that our gross profit will not decrease as a result. We believe that our
ability to sell and distribute our Voice Platforms and Applications in the public safety
market depends on the success of our marketing, distribution and product development
initiatives. We cannot assure you that we will be successful in these initiatives.

The
Voice-over-Internet-Protocol (or VoIP) contact center and trading market is highly
competitive and we may be unable to compete successfully. The recent expansion of VoIP
into contact centers and trading floors may allow one or more of our competitors to take a
leadership position with respect to this technology. Strategic partners may change their
vendor preference as a result or may develop embedded VoIP recording as part of the VoIP
switch or networking infrastructure. Successful marketing of our products and services to
our customers and partners will be critical to our ability to maintain growth. We cannot
assure you that our products or existing partnerships will permit us to compete
successfully.

Unfavorable economic and market
conditions and reduced information technology spending may lead to a decreased demand for
our products and services and may harm our business, financial condition and results of
operations.

We
are subject to the effects of general global, economic and market conditions. Recent
events in the financial market may have an impact on our enterprise business. Although to
date we have not experienced any slowdown in this business, we cannot guarantee that there
will be no implications going forward. To the extent that our business suffers as a result
of such unfavorable economic and market conditions, our operating results may be
materially adversely affected. In particular, many enterprises, telecommunications
carriers and service providers may reduce spending in connection with contact centers, and
many financial institutions may reduce spending related to trading floors and operational
risk management. Budgets for IT-related capital expenditures at financial services and
other institutions are typically cyclical in nature, with generally higher budgets in
times of improving economic conditions and lower budgets in times of economic slowdowns.
In addition, even at times when budgets for technology-related capital expenditures are
relatively high, our clients may, due to imminent regulatory or operational deadlines or
objectives or for other reasons, prioritize other expenditures over the operational risk
management solutions that we offer.

Customer
purchase decisions may be significantly affected by a variety of factors, including trends
in spending for information technology and enterprise software, market competition,
capital expenditure prioritization, budgeting and the viability or announcement of
alternative technologies. Furthermore, even when information technology is a priority,
prospective customers that made significant investments in internally developed solutions
or in point solutions would incur significant costs in switching to third-party
enterprise-wide products such as ours. If these industry-wide conditions exist, they may
have a material adverse impact on our business, financial condition and results of
operations.

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# We depend on the success
of our recording solutions.

Our
recording solutions are based on a computer telephony integrated multi-channel voice
recording and retrieval system. We are dependent on the success of our recording solutions
to maintain profitability. Our recording solutions currently generate, and in recent years
have generated, more than half of our revenues, and we anticipate that our recording
solutions will continue to account for a significant portion of our sales in the next
several years. A significant decline in sales of our recording solutions, or a significant
decrease in the profit margin on such solutions, could have a material adverse effect on
our business, financial condition or results of operations.

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

We
believe that developing marketing partnerships and strategic alliances is an important
factor in our success in marketing our video platforms and applications and in penetrating
new markets for such products. However, unlike our voice platforms and applications, we
have only recently started to develop a number of strategic alliances for the marketing
and distribution of our video platforms and applications. We cannot assure you that we
will be able to develop such partnerships or strategic alliances on terms that are
favorable to us, if at all. Failure to develop such arrangements that are satisfactory to
us may limit our ability to successfully market and sell our video platforms and
applications and may have a negative impact on our business and results of operations.

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

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

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

The
market for our security solutions in CCTV continuous recording, public safety and law
enforcement is highly dependent on the spending cycle and spending scope of the U.S.
Department of Homeland Security, as well as local, state and municipal governments and
security organizations in international markets. We cannot be sure that the spending cycle
will materialize as we expect and that we will be positioned to benefit from the potential
opportunities.

If we are unable to maintain the
security of our systems, our business, financial condition and operating results could be
harmed.

The
occurrence, or perception of occurrence, of security breaches in the operation of our
business or by third parties using our products could harm our business, financial
condition and operating results. Some of our customers use our products to compile and
analyze highly sensitive or confidential information. We may come into contact with such
information or data when we perform service or maintenance functions for our customers.
While we have internal policies and procedures for employees in connection with performing
these functions, the perception or fact that any of our employees has improperly handled
sensitive information of a customer or a customers customer could negatively impact
our business. If, in handling this information we fail to comply with our privacy policies
or privacy and security laws, we could incur civil liability to government agencies,
customers and individuals whose privacy was compromised. If personal information is
received or used from sources outside the U.S., we could be subject to civil,
administrative or criminal liability under the laws of other countries. In addition, third
parties may attempt to breach our security or inappropriately use our products through
computer viruses, electronic break-ins and other disruptions. If successful, confidential
information, including passwords, financial information, or other personal information may
be improperly obtained and we may be subject to lawsuits and other liability. Any internal
or external security breaches could harm our reputation and even the perception of
security risks, whether or not valid, could inhibit market acceptance of our products.

Our business could be materially
adversely affected by changes in the legal and regulatory environment.

Our
business, results of operations and financial condition could be materially adversely
affected if laws, regulations or standards relating to our products or us are newly
implemented or changed. In addition, our revenues would be harmed if we fail to adapt our
products to changes in regulations applicable to the business of certain of our clients,
such as securities trading, broker sales compliance and anti-money laundering laws and
regulations.

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If we fail to maintain effective
internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, it
could have a material adverse effect on our business, operating results and share price.

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us. Our efforts to comply with the
requirements of Section 404, which first applied to our financial statements for 2006,
have resulted in increased general and administrative expenses and a devotion of
management time and attention to compliance activities, and we expect these efforts to
require the continued commitment of significant resources. If we fail to maintain the
adequacy of our internal controls, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal control over financial reporting. In
addition, we may identify material weaknesses or significant deficiencies in our internal
control over financial reporting. Failure to maintain effective internal control over
financial reporting could result in investigation and/or sanctions by regulatory
authorities, and could have a material adverse effect on our business and operating
results, investor confidence in our reported financial information, and the market price
of our ordinary shares and ADSs.

Our quarterly results are likely
to fluctuate, which could cause us to miss market expectations and as a result may impact
the trading price of our ordinary shares.

The
trading price of our ordinary shares has experienced significant volatility in the past
and may continue to do so in the future. Unfavorable changes, many of which are
outside of our control, could have a material adverse affect on our business, operating
results, and financial condition.

Historically, our revenues have reflected seasonal fluctuations related to slower spending
activities in the first quarter, and the increased activity related to the year-end
purchasing cycles of many users of our products. We believe that we will continue to
encounter quarter-to-quarter seasonality.

We
operate with certain backlog and we face factors such as timing and volume of orders
within a given period that affect our ability to fulfill these orders and to determine the
amount of our revenues within the period.

We
derive our sales primarily through indirect channels, making it more difficult for us to
predict revenues because we depend partially on estimates of future sales provided by
third parties. In addition, changes in our arrangements with our network of channel
partners or in the products they offer, such as our recent introduction of new support
programs for our customers, which combines support from our channel partners with back-end
support from us, could affect the timing and volume of orders. Furthermore, our expense
levels are based, in part, on our expectations as to future revenues. If our revenue
levels are below expectations, our operating results are likely to be adversely affected,
since most of our expenses are not variable in the short term.

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Due
to the factors described above, it is possible that in a particular future quarter, our
operating results may be below the expectations of public market analysts and investors.
In this event, the price of our ordinary shares would likely decline.

Additional tax liabilities could
materially adversely affect our results of operations and financial condition.

As
a global corporation, we are subject to income and other taxes both in Israel and various
foreign jurisdictions. Our domestic and international tax liabilities are subject to the
allocation of revenues and expenses in different jurisdictions and the timing of
recognizing revenues and expenses. Additionally, the amount of income taxes paid is
subject to our interpretation of applicable laws in the jurisdictions in which we do
business. From time to time, we are subject to income and other tax audits. While we
believe we comply with applicable tax laws, there can be no assurance that a governing tax
authority will not have a different interpretation of the law and assess us with
additional taxes. Should we be assessed additional taxes, there could be a material
adverse affect on our results of operations and financial condition.

Risks relating to Israel

Our business may be impacted by
devaluation of the U.S. dollar against the NIS and inflation.

Exchange
rate fluctuations between the U.S. dollar and the NIS may negatively affect our earnings.
A substantial majority of our revenues and a substantial portion of our expenses are
denominated in U.S. dollars. However, a significant portion of the expenses associated
with our Israeli operations, including personnel and facilities related expenses, are
incurred in NIS. Consequently, inflation in Israel will have the effect of increasing the
dollar cost of our operations in Israel, unless it is offset on a timely basis by a
devaluation of the NIS relative to the U.S. dollar. In addition, if the value of the U.S.
dollar decreases against the NIS, our earnings may be negatively impacted. In the past two
years, the U.S. dollar has depreciated against the NIS. In 2007, the U.S. dollar
depreciated against the NIS by 8.53% and inflation increased by 3.4%. From January 1,
2008, to March 26, 2008, the U.S. dollar depreciated against the NIS by an additional
9.25%. We cannot predict any future trends in the rate of inflation in Israel or the rate
of devaluation or appreciation of the U.S. dollar against the NIS or of the NIS against
the U.S. dollar. If the U.S. dollar cost of our operations in Israel increases and if the
current trend of depreciation of the U.S. dollar against the NIS continues, our
dollar-measured results of operations will be adversely affected. In addition, exchange
rate fluctuations in currency exchange rates in countries other than Israel where we
operate and do business may also negatively affect our earnings.

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We are subject to the political,
economic and military conditions in Israel.

Our
headquarters, research and development and main manufacturing facilities, as well as the
facilities of Flextronics Israel Ltd., our key manufacturer, are located in the State of
Israel, and we are directly affected by the political, economic and 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. Hamas, an Islamist movement responsible for many attacks, including missile
strikes, against Israelis, won the majority of the seats in the Parliament of the
Palestinian Authority in January 2006 and took control of the entire Gaza Strip by force
in June 2007. These developments have further strained relations between Israel and the
Palestinian Authority. Further, in the summer of 2006, Israel engaged in a war with
Hezbollah, a Lebanese Islamist Shiite militia group, which involved thousands of missile
strikes and disrupted most day-to-day civilian activity in northern Israel. Acts of
terrorism, armed conflicts or political instability in the region could negatively affect
local business conditions and harm our results of operations. We cannot predict the effect
on the region of any diplomatic initiatives or political developments involving Israel or
the Palestinians or other countries in the Middle East. Furthermore, several countries
restrict doing business with Israel and Israeli companies, and additional companies may
restrict doing business with Israel and Israeli companies as a result of an increase in
hostilities. Our products are heavily dependent upon components imported from, and most of
our sales are made to, countries outside of Israel. Accordingly, our operations could be
materially adversely affected if trade between Israel and its present trading partners
were interrupted or curtailed.

Some
of our officers and employees are currently obligated to perform annual military reserve
duty and some were called to duty during the summer of 2006. 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.

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

Service
of process upon our directors and officers, most of whom reside outside the United States,
may be difficult to obtain within the United States. Furthermore, since the majority of
our assets and most of our directors and officers are located outside the United States,
any judgment obtained in the United States against us or these individuals or entities may
not be collectible within the United States. Additionally, it may be difficult to enforce
civil liabilities under U.S. federal securities law in original actions instituted in
Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities
laws because Israel is not the most appropriate forum to bring such a claim. In addition,
even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not
U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of
applicable U.S. law must be proved as a fact, which can be a time-consuming and costly
process. Certain matters of procedure will also be governed by Israeli law. There is
little binding case law in Israel addressing these matters.

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Our results may be affected by the
availability of government grants and tax benefits. Our participation in these programs
restricts our ability to freely transfer manufacturing rights and technology out of
Israel.

We
derive and expect to continue to derive significant benefits from various programs
including Israeli tax benefits relating to our Approved and Privileged
Enterprise programs and certain grants from the Office of the Chief Scientist of the
Ministry of Industry, Trade and Labor, or OCS, for research and development. To be
eligible for these grants, programs and tax benefits, we must continue to meet certain
conditions, including making certain specified investments in fixed assets and conducting
the research, development and manufacturing of products developed with such OCS grants in
Israel (unless a special approval has been granted for performing manufacturing activities
outside Israel). From time to time, the Israeli Government has discussed reducing or
eliminating the availability of these grants, programs and benefits and there can be no
assurance that the Israeli Governments support of grants, programs and benefits will
continue. If grants, programs and benefits available to us or the laws, rules and
regulations under which they were granted are eliminated or their scope is further
reduced, or if we fail to meet the conditions of existing grants, programs or benefits and
are required to refund grants or tax benefits already received (together with interest and
certain inflation adjustments) or fail to meet the criteria for future Approved or
Privileged Enterprises, our business, financial condition and results of operations
could be materially adversely affected including an increase in our provision for income
taxes.

On
April 1, 2005, an amendment to the Israeli law which deals with Approved Enterprises came
into force. Pursuant to the amendment, a companys facility will be granted the
status of Approved Enterprise only if it is proven to be an industrial
facility (as defined in such law) that contributes to the economic independence of the
Israeli economy and is a competitive facility that contributes to the Israeli gross
domestic product. The amendment incorporates certain changes to both the criteria and
procedure for obtaining Approved Enterprise status for an investment program,
and changes to the tax benefits afforded in certain circumstances to Approved
Enterprises under such law (which is referred to as a Privileged Enterprise
following such amendment). The amendment applies to Approved Enterprise programs in which
the year of commencement of benefits under the law is 2004 or later, unless such programs
received approval from the applicable government authority prior to December 31, 2004, in
which case the provisions of the amendment will not apply. We have one Privileged
Enterprise program, which is covered by the amendment. While we believe that we meet the
statutory conditions as set out in the amendment, there can be no assurance that the tax
authorities in Israel will concur. Should this Privileged Enterprise program not be
considered to meet the statutory conditions, our provision for income taxes will increase
materially.

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

We
do not intend to distribute any amounts of our undistributed tax exempt income as
dividends as we intend to reinvest our tax-exempt income. Accordingly, no deferred income
taxes have been provided on income attributable to our Approved or Privileged Enterprise
programs as the undistributed tax exempt income is essentially permanent in duration.

22

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Under
Israeli law, products incorporating know-how developed with grants from the OCS are
required to be manufactured in Israel, unless prior approval of a governmental committee
is obtained. As a condition to obtaining this approval, we may be required to pay to the
OCS up to 300% of the grants we received and to repay these grants on an accelerated
basis, depending on the portion of manufacturing performed outside Israel. In addition, we
are prohibited from transferring to third parties the technology developed with these
grants without the prior approval of a governmental committee and, possibly, the payment
of a fee. See Item 4, Information on the CompanyResearch and Development
in this annual report, for additional information about OCS programs.

Provisions of Israeli law may
delay, prevent or impede an acquisition of us, which could prevent a change of control.

Israeli
corporate law regulates mergers and tender offers, requires tender offers for acquisitions
of shares above specified thresholds and regulates other matters that may be relevant to
these types of transactions. Furthermore, Israeli tax considerations may make potential
transactions unappealing to us or to some of our shareholders. These provisions could
delay, prevent or impede an acquisition of us. See Item 10, Additional
InformationMergers and Acquisitions in this annual report, for additional
discussion about some anti-takeover effects of Israeli law.

Risks related to our
Ordinary Shares and ADSs

# Our share price is
volatile and may decline.

Numerous
factors, some of which are beyond our control, may cause the market price of our ordinary
shares or our ADSs, each of which represents one ordinary share, to fluctuate
significantly. These factors include, among other things, announcements of technological
innovations, development of or disputes concerning our intellectual property rights,
customer orders or new products by us or our competitors, currency exchange rate
fluctuations, earnings releases by us 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.

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

The
sales cycle for our products and services is variable, typically ranging between a few
weeks to several months, and in some extreme cases it may take even longer, from initial
contact with the potential client to the signing of a contract. Frequently, sales orders
accumulate towards the latter part of a given quarter. Looking forward, given the lead
time required by our contract manufacturer, if a large portion of sales orders are
received late in the quarter, we may not be able to deliver products within the quarter
and thus such sales will be deferred to a future quarter. There can be no assurance that
such deferrals will result in sales in the near term, or at all. Thus, delays in executing
client orders may affect our revenue and cause our operating results to vary widely.
Additionally, as a high percentage of our expenses, particularly employee compensation, is
relatively fixed, a variation in the level of sales, especially at or near the end of any
quarter, may have a material adverse impact on our quarterly operating results.

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In
addition, our quarterly operating results may be subject to significant fluctuations due
to other factors, including the timing and size of orders and shipments to customers,
variations in distribution channels, mix of products, new product introductions,
competitive pressures and general economic conditions. It is difficult to predict the
exact mix of products for any period between hardware, software and services as well as
within the product category between audio platforms and related applications, digital
video and communications intelligence. Because a significant portion of our overhead
consists of fixed costs, our quarterly results may be adversely impacted if sales fall
below managements expectations. In addition, the period of time from order to
delivery of our audio and video platforms and applications is short, and therefore our
backlog for such products is currently, and is expected to continue to be, small and
substantially unrelated to the level of sales in subsequent periods. As a result, our
results of operations for any quarter may not necessarily be indicative of results for any
future period. Due to all of the foregoing factors, in some future quarters our sales or
operating results may be below our forecasts and the expectations of public market
analysts or investors. In such event, the market price of our ordinary shares and ADSs may
be materially adversely affected.

Future sales of our ADSs may
impact the market price of our ADSs.

If
we or our shareholders sell substantial amounts of our ADSs in the public market, the
market price of our ADSs could decline. These sales also might make it more difficult for
us to sell equity or equity-related securities in the future at a time and price that we
deem appropriate. Following an acquisition, shares of our ADSs held by new holders may
become freely tradable.

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|Item 4. | Information on the Company.
|------- | ---------------------------

# History and Development
of the Company

Our
legal and commercial name is NICE-Systems Ltd. We are a company limited by shares
organized under the laws of the State of Israel. We were originally incorporated as NICE
Neptun Intelligent Computer Engineering Ltd. on September 28, 1986 and were renamed
NICE-Systems Ltd. on October 14, 1991. Our principal executive offices are located at 8
Hapnina Street, P.O. Box 690, Raanana 43107, Israel and the telephone number at that
location is +972-9-775-3030. Our agent for service in the United States is our subsidiary,
NICE Systems Inc., 301 Route 17 North, 10th Floor, Rutherford, New Jersey
07070.

For
a summary of our recent acquisitions and dispositions, please see Item 5, Operating
and Financial Review and ProspectsRecent Acquisitions and Dispositions in this
annual report.

# Business Overview

We
are a leading provider of solutions that capture, manage and analyze unstructured
multimedia content and transactional data enabling companies and public organizations to
comply with internal and governmental regulations, enhance business and operational
performance, address security threats and behave proactively. Unstructured multimedia
content includes phone calls to contact centers, trading floors, branches, home agents and
back offices, video captured by closed circuit cameras, radio communications between
emergency services personnel, internet sessions, email and instant messaging and converged
multimedia solutions for command and control centers. Our solutions include integrated,
scalable, multimedia recording platforms, software applications and related professional
services. These solutions address critical business processes and risk management,
compliance procedures and security needs of companies and public organizations. Our
solutions facilitate faster decision-making and near real-time action, improving business
and employee performance, reducing exposure to operational risk such as fraud and
compliance, and enhancing security and public safety. Our customers use our systems in a
variety of enterprises, such as financial services, telecommunications, health care,
outsourcers, retail, service providers and utilities. Our security solutions are primarily
focused on homeland security and first responder organizations, transportation
organizations, and the public and private sectors. Our solutions are deployed at over
24,000 customers, including over 85 of the Fortune 100 companies.

For
a breakdown of total revenues by products and services for each of the last three years,
please see Item 5, Operating and Financial Review and ProspectsResults of
Operations.

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Industry Background and
Trends

Increased
focus on productivity, operational performance and profitability.Companies are
increasingly focused on improving productivity and increasing profitability by creating
better-quality customer experiences and through achieving higher efficiencies across the
enterprise. These objectives require organizations to better manage their customer,
partner and employee relationships, analyze critical customer data, maximize the value of
customer interactions and execute customer-focused business processes. Considering the
high cost of acquiring new customers and the maturation of many industries, it is
increasingly important to maximize revenue from the retention and continued satisfaction
of current customers. Similarly, due to the high cost of hiring and training new
employees, it is important for organizations to address employee concerns in a timely
fashion to maximize employee retention and productivity.

The
contact center has emerged as the primary point of an enterprises interaction with
its customers, rendering it essential to improving customer satisfaction and driving
revenue. The importance of the contact center, combined with the complexity of the
requirements for its effective management, have led to a need for an ever broadening set
of management tools. Companies are seeking more advanced and more integrated solutions to
enable quality monitoring, workforce management, performance management, analysis,
feedback and coaching, to better utilize their resources.

Companies
have historically invested in business intelligence solutions and operational systems
which rely on structured transactional data contained in Customer Relationship Management
(CRM), Enterprise Resource Planning (ERP) and other application databases. Traditional
business intelligence solutions unlock value contained in these structured data by
collecting historical data, attempting to extract from it patterns which may predict
future customer behavior. Recently, however, companies have recognized the value contained
in other types of data, including the vast amounts of unstructured multimedia content that
is generated by ongoing interactions with their customers, employees or partners.
Furthermore, many operational decisions can be greatly enhanced by providing near
real-time insight into both transactions and interactions. By employing software-based
analytics on unstructured multimedia content, in combination with data from transactions,
companies are able to detect customer intent, often through interactions in which a
customer may express concerns or desires or provide other signals of their intentions.
Equipped with such an early detection system, companies can take proactive
measures to reduce customer churn, focus their marketing efforts, stop fraud, and address
employee dissatisfaction. By better understanding unstructured data, companies can develop
a more comprehensive view across the enterprise, increase revenue and improve service
quality, productivity and profitability.

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Heightened
regulatory and compliance requirements and the high cost of dispute resolution.Regulatory pressures have increased for corporations and public organizations
worldwide. Such regulation is driven by both accounting scandals (e.g., the Sarbanes-Oxley
Act) and security concerns (e.g., anti-money laundering legislation). Recent events in the
financial industry may increase regulation. The hiring of additional finance and
accounting employees and increased civil penalties and auditor expenses have raised the
financial costs of both noncompliance and ongoing compliance. In addition, it continues to
be important to be able to resolve certain communication disputes, such as between
counterparties in a securities trade, in an efficient and definitive manner and to reduce
fraud from the same trade. Existing business intelligence and other IT solutions have
addressed these growing challenges to some degree. However, companies and public
organizations require improved solutions that not only provide better compliance and fraud
detection but also more current, near real-time information with increased operational
visibility. These solutions need to reduce the costs associated with ongoing compliance,
while creating the required audit trail for regulatory purposes.

Internet
Protocol adoption driving proliferation of multimedia content.VoIP is emerging as the
standard for enterprise communications and is being deployed widely. The adoption of VoIP
is expanding the type and volume of interactions between companies and their customers,
employees and partners. This proliferation, together with businesses replacement of
legacy communications systems and related infrastructure, has created additional growth in
the need for IP-based communications solutions. To remain competitive, businesses use
email, internet and other multimedia, IP-based communications, such as VoIP, in addition
to traditional means of communications, such as mail and analog voice calls. Additionally,
VoIP has enabled enterprises to rapidly and economically deploy contact center solutions
to branch offices and other remote locations, including to agents working from their
homes. Due to these and other trends, the amount and types of communications within
businesses have increased dramatically. As a result, many businesses are faced with the
increasing challenge of better understanding the variety of unstructured multimedia
content generated by these customer, employee and partner interactions. Similarly, we
believe the security market is beginning to migrate to multimedia IP-based technologies in
an effort to respond to security threats and challenges in a cost-effective and flexible
manner.

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Security
challenges for public safety and homeland security.Terrorist attacks around the world
have significantly changed the geopolitical landscape and created long-term consequences
for public safety, security and intelligence agencies. In addition, transportation
organizations, local authorities and government-related organizations have become
increasingly aware of the benefits technology can provide in the areas of crime prevention
and public safety. These organizations face new challenges in detecting, protecting
against and effectively responding to threats to public safety and homeland security. As a
result of these global trends, these organizations face the growing challenge of storing,
managing and analyzing vast amounts of multimedia content generated by traditional and
IP-based communications captured by an increasing variety of detection devices. The
challenge is exacerbated by the proliferation of video data generated by both cameras
deployed by the organizations as well as video streamed from citizens mobile phones.
Emergency services and public organizations require increasingly sophisticated solutions
to analyze this content in order to strengthen the measures they take for public safety
and security. These solutions need to identify threats as they occur and analyze video
footage to identify suspicious objects or behavior more quickly and effectively.

Increased
focus on physical corporate security. Companies operating throughout the world have
recognized that threats to their facilities, IT networks and personnel need to be
addressed at all times. For example, many companies have determined that they need to
establish measures for personnel screening and observation, invest in enhanced physical
security measures and incident response capability, and deploy a variety of systems to
address network-based vulnerabilities. As a result of these global trends in security
needs, more companies face the growing challenge of storing and analyzing vast amounts of
content, such as voice, video and other IP-based communications, captured by an increasing
variety of detection devices, such as closed circuit television.

Increased
urbanization raises rates of crime and risks of terror attacks.Increased urbanization
in both developed and developing countries results in higher rates of various types of
crime (such as robbery, theft, murder and other assaults) and greater fears of terror
attacks in city centers and other metropolitan areas and systems (such as mass transit).
These growing concerns are driving large-scale security projects in these areas, aiming at
improving the security of the citizens. These large-scale projects include installation
and implementation of wide-scale security systems, which better synchronize and correlate
multimedia data sources in order toassist law enforcement officials to detect and
prevent crimes and terror attacks and investigate quickly in order to apprehend the
suspects.

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Our Strategy

The key elements of our strategy
include the following:

Drive
adoption of our next-generation convergence analytics in both the enterprise and security
markets. We intend to continue to address the growing unmet need to capture, manage
and analyze unstructured data in a more accurate and timely fashion in a wide variety of
business and operational environments. Furthermore, we aim to drive the combination of
such insight from unstructured information with near real-time data from transactional
systems, known as convergence analytics, to provides enterprises and organizations with a
more complete and timely view of their operations. Accordingly, we plan to continue to
target these opportunities through focused sales and marketing, by developing industry
specific applications that are enabled or greatly enhanced by convergence analytics, and
by providing value-added services that facilitate the implementation of our solutions.
Moreover, we plan to continue to invest in research and development and strategic
alliances to enhance our industry-leading solutions and deliver superior insight to drive
improved operational and business results. We will continue to leverage the technology,
operational and partnership synergies we derive from serving both the enterprise and the
security markets.

Continue
to dominant the evolution of the contact center market and expand our differentiated
end-to-end contact center solution. With the increasing strategic importance and
complexity of the contact center, customers have a growing need for comprehensive
management solutions. We believe our set of integrated and modular tools for contact
center management represents a differentiated solution for our customers. We intend to
augment and expand our offering of end-to-end solutions to maintain our industry
leadership position.

Drive
deployment of our solutions through value-added services. Our customers face diverse
business and deployment challenges. We have developed a unique professional service
organization that helps our customers capture the full value from our solutions. We help
our customers analyze their business issues and re-engineer critical processes to address
their specific needs. These value-added services should allow us to accelerate the market
penetration of our advanced solutions and expand our offering to our installed base.

Expand
and leverage our existing customer base, strategic alliances and global
infrastructure. With over 24,000 customers in more than 135 countries, including over
85 of the Fortune 100 companies, we believe there are abundant opportunities to up-sell
and cross-sell within our existing customer base by increasing their use of the full
breadth of our product portfolio and by migrating them to our next-generation solutions.
We also have strong strategic relationships with industry leaders such as Avaya Inc.,
Honeywell International Inc., IPC Systems, Inc., Motorola, Inc. and Orange Business
Services. We intend to continue to leverage those and additional relationships to increase
the value of our solutions to our end customers. We have a global infrastructure that can
support, directly or through our partners, customers around the world 24 hours a day,
seven days a week. We intend to utilize this infrastructure to address the growing needs
of our customers.

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Continue
to pursue selective acquisitions.We have a successful acquisition history spanning
nine transactions over the past six years. We intend to continue augmenting our organic
growth through additional acquisitions that broaden our product and technology portfolio,
expand our presence in selected vertical markets and geographic areas, broaden our
customer base, and increase our distribution channels and vertical market access. We
believe our acquisition strategy is aligned with our customers desire to procure
broader, higher value solutions from a smaller group of strategic vendors.

Our Solutions

We
have developed fully integrated solutions that include software applications and hardware
components that can be deployed in a modular manner. This flexibility allows our customers
to incorporate additional functions and capabilities as their business or operational
needs change.

The
key features of our solutions include:

Ability
to capture and manage vast amounts of complex, unstructured multimedia content.Our
solutions record and store a wide variety of unstructured multimedia content, allowing
both our enterprise and security customers to capture valuable interaction data. They are
designed to optimally manage the storage and retrieval of unstructured data within
centralized data storage warehouses, which maximizes the efficiency of our customers
networked environments. Our solutions can be integrated with various enterprise software
applications and storage systems. As a result, our solutions enable our customers to
capture and manage efficiently and reliably the vast amounts of unstructured data that are
generated by their daily operations. This allows our customers to gain insight, improve
profitability, enhance operational effectiveness and meet compliance and regulatory
requirements.

End-to-end
management and optimization of the contact center. We provide a set of modular tools
that provide the enterprise with a comprehensive view of the contact center and powerful
management capabilities. Our comprehensive solution enables the enterprise to address the
essential management functions required in the contact center, including quality
monitoring, workforce management, performance management, analytics and unified dashboards
and reporting. These modular applications can be deployed separately or as a single
unified solution depending on the customers needs. Our solutions enable
organizations to:

  evaluate contact center agent
performance;  identify training requirements
and other necessary improvements;  allocate the appropriate
workforce level and skills to optimize customer service; and  monitor and improve contact
center operational and business performance.

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Deriving
insights utilizing proprietary multi-dimensional analytic capabilities. We have
developed advanced multi-dimensional analytics and applications that allow our customers
to derive critical insights from the vast amounts of unstructured data that they capture.
In the enterprise sector, our multi-dimensional analytics enable the analysis of a wide
variety of attributes related to any particular voice or data interaction. For example,
our solutions can analyze context intonation, emotion level and key phrases used in a
voice interaction. This analysis enables our customers to detect early signs of customer
churn, gain valuable information about competitors, and identify critical market
information, thereby driving the opportunity for increased revenue, profitability and
productivity. Through video footage analysis provided by our solutions, our security
customers are able to identify suspicious objects or behavior more quickly and effectively
in order to better respond in real-time to threats, prevent intrusions, detect irregular
behavior, reduce crime and accelerate investigations.

Enterprise-wide
risk management platform with dozens of specific compliance, fraud prevention and money
laundering specific solutions.Our Actimize solutions are based on a scalable,
proprietary software platform and flexible applications that address hundreds of
compliance, fraud and money-laundering scenarios across an enterprise. Used by over 100
large financial services institutions, Actimize solutions monitor around a billion
transactions a day, analyzing high volumes of complex data on a real-time basis and
enabling customers to detect anomalous transactions, generate alerts and facilitate
corrective actions.

Products

Our
enterprise business solutions include recording, monitoring, quality management, workforce
management and business performance management solutions, which are designed to capture
interactions, analyze them and take action based on this analysis to drive enterprise
performance. They also help protect businesses and customers against risks posed by lost
or misinterpreted voice or data communications as well as capture and improve contact
center agent performance and the customers experience. Our workforce and performance
management solutions assist enterprises in delivering high quality of service to their
customers by assuring that employees with the right skills interact with customers and
that these interactions are measured against their objectives.

Our
security solutions are comprised of voice platforms and applications, digital video
platforms and applications, and lawful interception products. Our voice platforms and
applications offering to the security market ranges in size and complexity from small,
single-site single-recorder systems to large, multi-site, multi-recorder systems
integrated with trunked radio and computer-aided dispatch systems. We provide emergency
services and air traffic control organizations with a full range of recording features for
voice, radio and trunked radio, including on-line access to hundreds of hours of recording
for a quick response time, a choice of different types of archiving media, and a dubbing
capability to edit calls on-line for courtroom presentations. The system enables the
organizations to re-construct scenarios, investigate and improve performance. Our digital
video platforms and applications provide continuous CCTV management, recording, archiving,
analysis and debriefing capabilities that meet the needs of todays demanding
security environments. Our lawful interception products enable the interception, delivery,
monitoring, collection and advanced analysis of telecommunication interactions. These
products handle both telephony and Internet data on the same platform and are fully
compliant with the international standards defined by the European Telecommunications
Standards Institute (ETSI), under various European legislations, and the
Telecommunications Industry Association (TIA), under the Communications Assistance for Law
Enforcement Act (CALEA).

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Our
operational risk compliance, fraud detection and anti-money-laundering, or AML, solutions
for financial institutions are built on the Actimize enterprise software platform,
incorporating a graphical development interface and case management dashboard with a
real-time analytics detection engine. Our securities trading and broker sales practices
compliance applications identify high-risk activities by monitoring and correlating
various data elements that include transactions, accounts, traders and market activities.
Our fraud prevention solutions pinpoint suspicious patterns and abnormal behavior within
mountains of data to assist in the identification of financial crimes, both internal (such
as employee fraud or rogue trading) and external (such as online and call center fraud,
payment fraud, ATM fraud and more). Our AML solutions help institutions detect suspicious
money transfer activities and money laundering related issues with new accounts (customer
due diligence). Our applications include transaction monitoring and suspicious activity
reporting for all types of financial services institutions, including securities, banking,
insurance, credit card and money services industries. Our enterprise-wide platform serves
as the foundation for the packaged applications we offer to our customers in the areas of
securities trading and broker sales practices compliance, fraud prevention and AML, as
detailed below.

|Solutions              | Markets Served          | Purpose                                                                                                                                                                                                              
|---------------------- | ----------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
|NICE Perform           | Enterprise and Security | Records and analyzes customer interactions with contact center agents, financial trading floors, investment banking and enterprises, with a separate suite of applications for contact centers and investment banking
|                      
|NiceUniverse           | Enterprise and Security | Evaluates agent performance and raises the level of customer service in contact centers through advanced voice and desktop screen recording technologies                                                             
|                      
|NiceLog                | Enterprise and Security | Provides digital voice recording system, a computer telephony integrated multi-channel voice recording and retrieval system                                                                                          
|                      
|NICE VoIP Capture Unit | Enterprise and Security | Builds on NiceLog technology to provide a complete solution to audio storage in VoIP telephony                                                                                                                       

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|IEX TotalView                      | Enterprise and Security                          | Forecasts customer interactions, schedules agents with appropriate skills to manage and optimize level of customer service and resources                                                                                                             
|---------------------------------- | ------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                  
|Performix                          | Enterprise                                       | Maps enterprise business objectives to group and individual goals. Tracks and reports performance against these goals                                                                                                                                
|                                  
|NICE SmartCenter                   | Enterprise                                       | Leverages the synergies of the combined capabilities of NICE Perform, IEX TotalView and Performix                                                                                                                                                    
|                                  
|NICE Storage Center                | Enterprise and Security                          | Provides central storage option; integrates with various enterprise storage networks (SAN, NAS or DAS) for long term or medium term voice storage                                                                                                    
|                                  
|NiceCall Focus III                 | Enterprise and Security                          | Provides a competitively priced voice recording system for organizations that have a relatively small number of input channels and a cost-effective solution for branch recording with centralized management and storage                            
|                                  
|NiceUniverse Compact               | Enterprise and Security                          | Provides a competitively priced voice recording and quality management system for organizations that have a relatively small number of input channels and a cost-effective solution for small contact centers with centralized management and storage
|                                  
|Freedom Enterprise                 | Enterprise and Security                          | Provides recording and analysis of customer interactions with contact center agents                                                                                                                                                                  
|                                  
|Freedom FT                         | Enterprise and Security                          | Provides high-level fault-tolerant recording                                                                                                                                                                                                         
|                                  
|Actimize Global Trading Compliance | Enterprise - Financial Institutions - Securities | Monitors across an extensive range of products and issues to identify suspicious activities like front running, wash transactions, etc. and provides the tools needed to effectively manage investigations, workflow, reporting and audit tracking   

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|Actimize Sales Practices                | Enterprise - Financial Institutions - Securities | Ensures sales practices compliance suitability, registration, sales of mutual funds and annuities, approval levels of options and more - across the organization by monitoring transactions, accounts and sales representatives                                               
|--------------------------------------- | ------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                       
|MiFID compliance                        | Enterprise - Financial Institutions - Securities | Addresses surveillance and supervision requirements based on the European Union MiFID (Markets in Financial Instruments Directive), such as best execution, systematic internalization, transparency, client categorization, suitability, and conflicts of interest regulation
|                                       
|Actimize Employee Fraud                 | Enterprise - Financial Institutions - Fraud      | Monitors firm employees for easier to find policy violation and self dealing fraud as well as highly complex and more severe attacks                                                                                                                                          
|                                       
|Actimize Remote Banking Fraud           | Enterprise - Financial Institutions - Fraud      | Monitors remote banking (online, call center, ACH, mobile and others) activities to detect suspicious patterns                                                                                                                                                                
|                                       
|Actimize Electronic Payments Fraud      | Enterprise - Financial Institutions - Fraud      | Provides high-volume, cross-channel (ACH, external debit and others) transaction monitoring of alerting, and real-time blocking for electronic payments fraud protection                                                                                                      
|                                       
|Actimize Deposit Fraud                  | Enterprise - Financial Institutions - Fraud      | Monitors account activity and highlights deposits that have been or are at a high risk for fraud                                                                                                                                                                              
|                                       
|Actimize ATM and Debit Card Fraud       | Enterprise - Financial Institutions - Fraud      | Detects fraud from compromised debit cards and compromised ATM devices                                                                                                                                                                                                        
|                                       
|Actimize Suspicious Activity Monitoring | Enterprise - Financial Institutions - AML        | Identifies suspicious patterns and abnormal behavior to assist in the identification of money laundering activity                                                                                                                                                             
|                                       
|Actimize Watch List Filtering           | Enterprise - Financial Institutions - AML        | Compares firm accounts to external regulatory and third-party lists (like Politically Exposed Persons, Office of Foreign Assets Control, etc) to comply with AML rules                                                                                                        
|                                       
|Actimize Customer Due Diligence         | Enterprise - Financial Institutions - AML        | Provides dynamic, risk-based data collection capabilities verify client background and money source, while improving firm productivity and customer experience                                                                                                                

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|Actimize Risk Case Manager | Enterprise - Financial Institutions | Web-based graphical user interface for managing enterprise-wide transactional risks                                                                                                                                                                                                                       
|-------------------------- | ----------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                           |                                     |                                                                                                                                                                                                                                                                                                           
|Mirra-4                    | Enterprise and Security             | Provides small recording system that is suited to simple recording applications in which it can record up to 48 channels of voice traffic from a wide variety of analog and digital interfaces                                                                                                            
|                          
|NICE Inform                | Security                            | Provides information management solution for comprehensive management of multimedia interactions for security command and control centers, enables effective management of multimedia incident information from various sources, for faster incident reconstruction, greater insight and improved response
|                          
|NiceVision Net             | Security                            | Provides a complete solution for IP video security, including encoders, decoders and network video recorders                                                                                                                                                                                              
|                          
|NiceVision ControlCenter   | Security                            | Provides an advanced control room management and network-based digital video matrix                                                                                                                                                                                                                       
|                          
|NiceVision Analytics       | Security                            | Provides a set of video content analytics applications for automated detection of threats, safety and operational related events                                                                                                                                                                          
|                          
|NiceVision Digital         | Security                            | Provides a portfolio of digital video recorders for different capacities and performance requirements                                                                                                                                                                                                     

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|FAST alpha Silver | Security | Provides high quality digital video monitoring and recording solution for large to mid-size applications                         
|----------------- | -------- | ---------------------------------------------------------------------------------------------------------------------------------
|                 
|NiceTrack         | Security | Provides interception, delivery, monitoring, collection and advanced analysis of telecommunication interactions                  
|                 
|Freedom rDT       | Security | Works with the Motorola or M/A-COM trunked radio system to record radio communications dynamically and capture trunked radio data

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

On
the infrastructure level, NICE Perform introduces a comprehensive VoIP solutions
portfolio, as well as a vast integration portfolio for VoIP environments, tradition
telephony   and a mix of tradition and VoIP telephony. It allows customers to
gradually migrate from traditional to VoIP telephony, while utilizing the same application
suite. The reinforced infrastructure of NICE Perform provides unmatched scalability,
resiliency and system redundancy by ensuring the availability of all the main system
components and supporting multi-sites, datacenters and branch environments.

NICE
Perform Compliance Suite is used by investment banks for compliance purposes and dispute
resolution. Nice Perform provides an automated process and workflow to approve the
playback of a call and includes an option for interaction analytics.

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

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

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

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

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

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NICE
SmartCenter is a solution that drives performance in contact centers and the
enterprise. NICE SmartCenter leverages the synergies of the combined capabilities of NICE
Perform, IEX TotalView and Performix. It provides a holistic view of contact center
operations and business insight into market and customer dynamics. These capabilities are
offered together with NICEs structured service and implementation methodology.

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

NiceCall
Focus III is a voice recording system that records up to 48 input channels and
provides up to 50,000 hours of on-line voice storage capacity and supports a wide range of
archiving devices for long-term storage options. NiceCall Focus III offers a wide range of
connectivity to PABX and radio systems and is built on the core technology of Nice High
Density Logger. NiceCall Focus III provides organizations that have a relatively small
number of input channels, such as public safety agencies, with a competitively priced yet
technologically advanced digital recording product that offers many of the connectivity
and processing features of NiceLog. NiceCall Focus III is being targeted primarily at
public safety facilities, including 911 emergency centers, and utilities, as well as small
bank branches, financial trading sites, and contact centers.

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

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

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

Actimize
Global Trading Compliance solution enables firmstrading and sales, prime
brokerage, correspondent business, asset managers, hedge funds, and exchangesto
increase their insight into suspicious behavior and improve risk and compliance
performance. The solution monitors across an extensive range of products and issues and
provides the tools needed to effectively manage investigations, workflow, reporting, and
audit tracking.

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Actimize
Sales Practices solution ensures sales practices compliance across the organization by
monitoring transactions, accounts and sales representatives. The solution includes an
integrated case manager and covers a broad range of sales practices issues and products
such as suitability, registration, sales of mutual funds and annuities, approval levels of
options and more.

MiFID
compliance addresses surveillance and supervision requirements based on the European
Union MiFID (Markets in Financial Instruments Directive), such as best execution,
systematic internalization, transparency, client categorization, suitability, and
conflicts of interest regulation.

Actimize
Employee Fraud monitors firm employees for easier to find policy violation and
self-dealing fraud as well as highly complex and more severe attacks that could involve
data theft, collusion identity shielding and others. The solution combines out-of-the-box
detection and investigation capabilities and second tier of advanced analytic models and
profiling techniques.

Actimize
Remote Banking Fraud solution monitors remote banking activitiessuch as
on-line, telephone, call center, and other activitiesto detect suspicious patterns
and generate a unified view of potential threats.

Actimize
Electronic Payments Fraud solution provides high-volume, cross-channel transaction
monitoring, alerting, and real-time blocking.  The solution is highly accurate,
delivering comprehensive electronic payments fraud protection.

Actimize
Deposit Fraud solution monitors account activity and highlights deposits that
have been or are at a high risk for fraud. The solution provides a comprehensive
fraud monitoring system for both On-Us and deposit fraud.

Actimize
ATM and Debit Card Fraud solution detects fraud from compromised debit cards and
compromised ATM devices. Built on the Actimize fraud technology platform, the
solution leverages real-time monitoring and highly accurate fraud analytics
technologies to provide unsurpassed protection from fraud losses while
minimizing operational overhead.

Actimize
Suspicious Activity Monitoring identifies suspicious patterns and abnormal behavior to
assist in the identification of money laundering activity. This addresses key aspects of
AML compliance for the securities, banking and insurance sectors.

Actimize
Watch List Filtering compares firm accounts to lists from regulatory bodies such as
The US Office of Foreign Assets Control (OFAC), Bank of England (BOE), the European
Parliament, the United Nations, and the Financial Action Task Force on Money Laundering
(FATF) as well as third party and internal lists.

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Actimize
Customer Due Diligence provides holistic life cycle risk management  from
initial collection of customer information and verification of customer identity, to
assessing risk and efficiently investigating and managing cases.  It is the only AML
solution in the market that provides dynamic, risk-based data collection capabilities
 the Client Interview Module  taking risk scoring and analytics to the branch
level. All of these capabilities provide institutions with greater productivity and an
improved customer experience.

Actimize
Risk Case Manager, or RCM, is a Web-based graphical user interface for managing
anomalous events and workflows. RCM presents users with real-time information to formulate
tactical responses to alerts and conduct effective investigations. RCM aggregates
information from our enterprise-wide solution as well as other third-party or internally
developed solutions. This aggregation enables clients to consolidate business event
management workflow across departments and lines of business providing them with an
enterprise-wide view of operational risk. RCM includes a comprehensive repository of
resolutions and audit trail capabilities that allow customers to take coordinated
corrective action based on data from these various sources. RCM provides accountability by
ensuring that events are resolved in accordance with standard policy or escalated for
exception handling.

Mirra-4 is a small recording system that is particularly suited to simple recording
applications in which it can record up to 48 channels of voice traffic from a wide variety
of analog and digital interfaces. Mirra has been designed to be simple to install, operate
and maintain and has been sold to many local, city and state public safety organizations
that have a single site operation. Digitized voice and associated data are stored on DVD
disks that provide a robust and long-term archive medium. Mirras design avoids using
an internal hard disk for the operating system and consequently it starts-up very rapidly
and avoids the maintenance liabilities associated with hard disks.

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

NiceVision is a complete, open network video security solution. It consists of four product
families: NiceVision Net, NiceVision ControlCenter, NiceVision Analytics and NiceVision
Digital. NiceVision is a state-of-the-art digital video solution that provides management,
recording, analysis and investigation for, among others, transportation facilities,
critical facilities, city centers, Fortune 500 companies, prisons and casinos.

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

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

NiceVision
Analytics is a wide portfolio of video content analytics applications, integrated with
NiceVision Net encoders and NiceVision ControlCenter  for automated and enhanced
event detection and management.

Nicevision
Digital is a family of digital video recorders, or DVR, for different capacities and
performance levels. NiceVision Digital is managed by NiceVision ControlCenter.

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

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

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

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Strategic Relationships

We
have a dedicated sales organization for all of our products. In certain regions, most
significantly, North America, a substantial part of our sales are made directly, while in
other regions, most notably, Asia Pacific, sales are made through our distribution
channels. In addition, we partner with leading companies to deliver and support our
solutions. For our contact center customers, we have entered into global distribution
agreements as well as alliance and partnership programs with leading vendors including
Avaya, Cisco and BT. In the financial institutions market, we have established marketing,
sales and support arrangements with leading suppliers of complementary products including
BT Group PLC, IBM, IPC and Orange Business Services. These companies market and distribute
our products to their customers either as stand-alone solutions or as integrated parts of
their own solutions. In the security markets, we have formed alliances for the
co-marketing, distribution and implementation of our products with leading companies
including Anixter International Inc., CBORD Group Inc., Honeywell, M/A Com, Motorola,
PlantCML, Raytheon Company and Siemens.

# Service and Support

We
have focused on building a strong service and support organization for all our systems and
have focused on rendering the various regions in which we operate to be as self sufficient
as possible. Our partners and dealers are primarily responsible for supporting the
day-to-day requirements of the end-users, while we provide technical support to such
partners and dealers. In order to support our direct customers and partners, we
established three regional support centers, the largest of which is in Denver, Colorado,
to support our customers and partners in the Americas, as well as one in Israel to support
EMEA customers, dealers and partners, and one in India to support APAC customers, dealers
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 provide first class field services and support
worldwide. We maintain regular training sessions for our dealers and installation support
as well.

With
the offering of software applications relating to NICE SmartCenter, we have introduced a
broad professional services portfolio for the rendering of professional services in
addition to our legacy services. Such services include consultancy, implementation,
customization, special customer training and advisory. These value added services enable
our customers to improve their business processes, business analysis and the services
they provide to their customers.

Our
systems are generally sold with a warranty for repairs of hardware and software defects
and malfunctions. Our customers may purchase a renewable maintenance agreement from our
dealers or directly from us. The latest software maintenance agreements generally provide
for maintenance, upgrades of standard system software (on a when-and-if-available basis)
and on-site repair or replacement.

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Software
maintenance includes the modification of a software product after delivery to correct
faults, improve performance or other attributes, or to adapt the product to a modified
environment. Our software maintenance program includes an enhancement support program with
on going delivery of upgrade releases.

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

# Manufacturing and Source
of Supplies

Our
products are built in accordance with industry standard infrastructure and are PC
compatible. The hardware elements in our products are based primarily on standard
commercial off-the-shelf components and utilize proprietary in-house developed circuit
cards and algorithms and digital processing techniques and software. We also have
software only solutions for use on standard servers.

We
manufacture our products through subcontractors. Under a manufacturing agreement with
Flextronics Israel Ltd. (or Flextronics), a subsidiary of a global electronics
manufacturing services company, Flextronics provides us with a turnkey manufacturing
solution including order receipt 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 return
material authorization (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.

Some
of the components we use have a single approved manufacturer while others have two or more
options for purchasing. In addition, for some of the components and subassemblies we
maintain an inventory to limit the potential for interruption. We also carry out
relationships directly with some of the more significant manufacturers of our components.
Although certain components and subassemblies we use in our existing products are
purchased from a limited number of suppliers, we believe that we can obtain alternative
sources of supply in the event that such suppliers are unable to meet our requirements in
a timely manner.

Quality
control is conducted at various stages at our manufacturing outsourcers facilities
and at their subcontractors facilities. We generate reports to monitor our
operations, including statistical reports that track the performance of our products from
production to installation. This comprehensive data allows us to trace failure and to
perform corrective actions accordingly.

We
have qualified for and received the ISO-9001:2000 quality standard for all of our
products, as well as the ISO 27001 and ISO 14001:2004 certifications.

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# Research and Development

We
believe that the development of new products and the enhancement of existing products are
essential to our future success. Therefore, we intend to continue to devote substantial
resources to research and new product development, and to continuously improve our systems
and design processes in order to reduce the cost of our products. Our research and
development efforts have been financed through our internal funds and programs sponsored
through the Government of Israel and the European community. We believe our research and
development effort has been an important factor in establishing and maintaining our
competitive position. Gross expenditures on research and development in 2005, 2006 and
2007 were approximately $33.4 million, $48.0 million and $63.3 million, respectively, of
which approximately $1.7 million, $1.9 million and $2.7 million, respectively, were
derived from third-party funding, and $0.8 million, $1.2 million and $1.0 million,
respectively, were capitalized software development costs.

In
2007, we were qualified to participate in seven programs funded by the Office of the Chief
Scientist, or OCS, of the Israeli Ministry of Industry, Trade and Labor to develop generic
technology relevant to the development of our products. Such programs are approved
pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, or
the Research and Development Law, and the regulations promulgated thereunder. We were
eligible to receive grants constituting between 40% and 66% of certain research and
development expenses relating to these programs. These programs are approved under certain
Magnet consortiums and programs approved for companies with large research and development
activities. Accordingly, the grants under these programs are not required to be repaid.
However, the restrictions of the Research and Development Law described below apply to
these programs. In 2005, 2006 and 2007, we received a total of $2.2 million, $1.9 million
and $2.0 million from the described programs, respectively, and we anticipate receiving
approximately $0.8 million in 2008 from these programs.

In
addition to the above, our subsidiary, Actimize, has one OCS program, that was defined as
a standard OCS program bearing royalty obligations, under which we received $0.8 million
in 2007. Upon the acquisition of Actimize, the Company decided to end such OCS program and
on March 25, 2008, we paid the OCS an amount of $4.4 million in respect of the outstanding
royalty obligations under such program. However, the restrictions of the Research and
Development Law described below apply to this program.

We
are eligible to receive grants from the OCS under its standard programs,
usually constituting a grant of up to 50% of certain approved research and development
expenses, for the research and development of certain approved technology. Under the terms
of these programs, a grant recipient is required to pay royalties of 3% to 5% of the net
sales of products incorporating technology developed in, and related services resulting
from, a project funded by the OCS. Generally, the royalties are required to be paid
beginning with the commencement of sales of such products and ending when 100% of the
grant is repaid in NIS, linked to the U.S. dollar plus LIBOR interest. In 2005 and 2006,
we received no such grants and incurred no royalty obligations under these programs. With
respect solely to the Actimize program, grants were received that required payment of
royalties to the OCS, as noted above.

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The
Research and Development Law generally requires that the product incorporating know-how
developed under an OCS-funded program be manufactured in Israel. However, upon the
approval of the OCS, some of the manufacturing volume may be performed outside of Israel,
provided that the grant recipient pays royalties at an increased rate, which may be
substantial, and the aggregate repayment amount is increased, which increase might be up
to 300% of the grant (depending on the portion of the total manufacturing volume that is
performed outside of Israel). The OCS is authorized to approve the transfer of
manufacturing rights outside Israel in exchange for an import of different manufacturing
into Israel as a substitute, in lieu of the increased royalties However, upon notification
to the OCS, up to 10% of the grant recipients approved
Israeli manufacturing volume, measured on an aggregate basis, may
be transferred out of Israel. The Research and Development Law also allows for the
approval of grants in cases in which the applicant declares that part of the manufacturing
will be performed outside of Israel or by non-Israeli residents and the OCS is convinced
that doing so is essential for the execution of the program. This declaration will be a
significant factor in the determination of the OCS whether to approve a program and the
amount and other terms of benefits to be granted. For example, the increased royalty rate
and repayment amount will be required in such cases.

The
Research and Development Law also provides that know-how developed under an approved
research and development program may not be transferred to third parties in Israel without
the approval of the OCS. Such approval is not required for the sale or export of any
products resulting from such research or development. The Research and Development Law
further provides that the know-how developed under an approved research and development
program may not be transferred to any third parties outside Israel, except in certain
circumstances and subject to prior OCS approval. The OCS may approve the transfer of
OCS-funded know-how outside Israel in the following cases: (a) the grant recipient pays to
the OCS a portion of the sale price paid in consideration for such OCS-funded know-how
(according to certain formulas); or (b) the grant recipient receives know-how from a third
party in exchange for its OCS-funded know-how; or (c) such transfer of OCS-funded know-how
arises in connection with certain types of cooperation in research and development
activities.

The
Research and Development Law imposes reporting requirements with respect to certain
changes in the ownership of a grant recipient. The law requires the grant recipient and
its controlling shareholders and non-Israeli interested parties to notify the OCS of any
change in control of the recipient, or a change in the holdings of the means of control of
the recipient that results in a non-Israeli becoming an interested party directly in the
recipient, and requires the new interested party to undertake to the OCS to comply with
the Research and Development Law. In addition, the rules of the OCS may require prior
approval of the OCS or additional information or representations in respect of certain of
such events. For this purpose, control is defined as the ability to direct the
activities of a company other than any ability arising solely from serving as an officer
or director of the company. A person is presumed to have control if such person holds 50%
or more of the means of control of a company. Means of control refers to
voting rights or the right to appoint directors or the chief executive officer. An
interested party of a company includes a holder of 5% or more of its
outstanding share capital or voting rights, its chief executive officer and directors,
someone who has the right to appoint its chief executive officer or at least one director,
and a company with respect to which any of the foregoing interested parties owns 25% or
more of the outstanding share capital or voting rights or has the right to appoint 25% or
more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our
ordinary shares or ADSs will be required to notify the OCS that it has become an
interested party and to sign an undertaking to comply with the Research and Development
Law.

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

In
2006, we were selected to participate in the Sixth Framework Programme (FP6). FP6 is the
European Community Framework Programme for Research, Technological Development and
Demonstration, which funds and promotes research. We expect to receive EUR 329,000 during
the 30 month period of FP6. There are no royalty obligations associated with receiving
such funding. In 2006 and 2007, we received a total of $0.4 million as an advance of such
funding.

# Intellectual Property

We
currently rely on a combination of trade secret, patent, copyright and trademark law,
together with non-disclosure and non-compete agreements, to establish and/or protect the
technology used in our systems.

We
currently hold 46 U.S. patents and 64 patents issued in additional countries covering
substantially the same technology as the U.S. patents. We have over 155 patent
applications pending in the United States and other countries. We believe that the
improvement of existing products, and the development of new products are important in
establishing and maintaining a competitive advantage. We believe that the value of our
products is dependent upon our proprietary software and hardware continuing to be
trade secrets or subject to copyright or patent protection. We generally enter
into non-disclosure and non-compete agreements with our employees and subcontractors.
However, there can be no assurance that such measures will protect our technology, or that
others will not develop a similar technology or use technology in products competitive
with those offered by us. Although we believe that our products do not infringe upon the
proprietary rights of third parties, there can be no assurance that one or more third
parties will not make a contrary claim or that we will be successful in defending such
claim.

From
time to time, we receive cease and desist letters claiming patent
infringements. However, no formal claims or other actions have been filed with respect to
such alleged infringement, except for claims filed by Dictaphone (which have since been
settled and dismissed) and Witness Systems (for further information please see Item 8,
Financial InformationLegal Proceedings in this annual report). We
believe that none of these has merit. We cannot assure you, however, that we will be
successful in defending such claims, if asserted, or that infringement claims or other
claims, if asserted, will not have a material adverse effect on our business, financial
condition and results of operations. Defending infringement claims or other claims could
involve substantial costs and diversion of management resources. In addition, to the
extent we are not successful in defending such claims, we may be subject to injunctions
with respect to the use or sale of certain of our products or to liabilities for damages
and may be required to obtain licenses which may not be available on reasonable terms.

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We
own the following trademarks and/or registered trademarks in different countries:
360o View, Alpha, ACTIMIZE, Actimize logo, Customer Feedback, Dispatcher Assessment,
Encorder, eNiceLink, Executive Connect, Executive Insight, FAST, FAST alpha Blue, FAST
alpha Silver, FAST Video Security, Freedom, Freedom Connect, IEX, Interaction Capture
Unit, Insight from Interactions, Investigator, Last Message Replay, Mirra, My Universe,
NICE, NICE logo, NICE Analyzer, NiceCall, NiceCall Focus, NiceCLS, NICE Inform, NICE
Learning, NiceLog, NICE Perform, NiceScreen, NICE SmartCenter, NICE Storage Center,
NiceTrack, NiceUniverse, NiceUniverse Compact, NiceVision, NiceVision Alto, NiceVision
Analytics, NiceVision ControlCenter, NiceVision Digital, NiceVision Harmony, NiceVision
Mobile, NiceVision Net, NiceVision NVSAT, NiceVision Pro, Performix, Playback Organizer,
Renaissance, Scenario Replay, ScreenSense, Tienna, TotalNet, TotalView, Universe and
Wordnet.

# Regulation

Israeli Export
Restrictions

The
export of certain defense products from Israel, such as our NiceTrack products, requires a
permit from the Israeli Ministry of Defense. In addition, the sale of products to certain
customers, mostly armed forces, also requires a permit from the Israeli Ministry of
Defense. In 2007, only a small portion of all of our sales was subject to such permit
requirements. To date, we have encountered no difficulties in obtaining such permits.
However, the Ministry of Defense notifies us from time to time not to conduct business
with specific countries that are undergoing political unrest, violating human rights or
exhibiting hostility towards Israel. We may be unable to obtain permits for our defense
products we could otherwise sell in particular countries in the future.

European Environmental
Regulations

Our
European activities require us to comply with Directive 2002/95/EC of the European
Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and
Electronic Equipment (RoHS), which came into effect on July 1, 2006. This
directive provides that producers of electrical and electronic equipment may not place new
equipment containing lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls
and polybrominated diphenyl ethers, in amounts exceeding certain maximum concentration
values, on the market in the European Union. Our products meet the requirements of the
RoHS directive and we are making every effort in order to maintain compliance, without
adversely affecting the quality and functionalities of our products. If we fail to
maintain compliance, including by reason of failure of our suppliers to comply, we may be
restricted from conducting certain business in the European Union, which could adversely
affect our results of operations.

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Our
European activities also require us to comply with Directive 2002/96/EC of the European
Parliament on Waste Electrical and Electronic Equipment (WEEE). The WEEE
directive covers the labeling, recovery and recycling of IT/Telecommunications equipment,
electrical and electronic tools, monitoring and control instruments and other types of
equipment, devices and items, and already partly came into effect on August 13, 2005. Our
products fall within the scope of the WEEE directive, and we have set up the operational
and financial infrastructure required for collection and recycling of WEEE, as stipulated
in the WEEE directive, including product labeling, registration and the joining of
compliance schemes. We are taking and will continue to take all requisite steps to ensure
compliance with this directive. If we fail to maintain compliance, we may be restricted
from conducting certain business in the European Union, which could adversely affect our
results of operations.

# Competition

The
market for our enterprise interaction solutions is highly competitive and includes
numerous products offering a broad range of features and capabilities. As the market is
still developing, we anticipate that a number of our existing and potential competitors
will be introducing new and enhanced products. Some of our competitors in the digital
voice recording and contact center solutions include Aspect, Autonomy (formerly e-talk),
eloyalty, Genesys and Verint Systems Inc. In 2007, Verint acquired one of our other
competitors, Witness Systems, Inc.

We
believe that competition in the evolving enterprise interaction solutions market is based
on a number of factors related to the product offering and business model. With respect to
products, we consider breadth of offering, application functionality, system performance
and reliability, the ability to integrate with a variety of external computer and
communications systems and ease of use as key factors. With respect to the business model,
we consider marketing and distribution capacity, price and global service and support
capacity as key factors. We believe that NICE solutions have a competitive advantage based
on their ability to service large, multi-site, contact centers and their holistic
integration of various unstructured data sources, their ability to extract insight with a
multi-dimensional approach, their wide-range connectivity and compatibility with telephone
and computer networks and their ease of use. We believe that we have a competitive
advantage because of the strength of our installed customer base, size and capabilities of
our global distribution network, our business partners, and our global service and support
capacity.

The
market for operational and transactional risk management software for financial services
institutions, which has emerged only in recent years, is highly competitive and
fragmented. The market is influenced by the introduction of new regulations and fraud
patterns impacting the financial services industry. While no single company competes with
us across all of our solutions, we face significant competition with respect to each
solution that we offer. We believe that the principal competitive factors in this market
include our deep domain expertise, speed of development, ability to provide service across
the enterprise using one core platform and our ability to serve specific point
solutions. Our software solutions compete with software internally developed by financial
services institutions, as well as software and other solutions offered by commercial
competitors, which include Fair Isaac, Fortent, Inc., Mantas, Inc., Norkom Group plc,
Oracle Corporation, SAS Institute Inc. and Sungard Data Systems Inc.

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Traditionally,
public safety customer voice recording requirements for emergency phones and radio were
relatively basic. As the command and control center is becoming more complex and advanced
systems are being deployed, and as more trunk radio and IP-based systems are offered, the
recording system has to be integrated with these systems. Our ability to deliver a more
integrated and sophisticated recording system that can capture voice, video, data and
meta-data information from trunk radio systems and computer aided dispatch, or CAD,
systems, positions our products above the competition mainly in the large high-end
emergency centers. In addition, we believe that applications for scenario reconstruction
of an incident connecting multimedia sources (including voice), video, data, GIS and
meta-data together give us an advantage over the competition. Some of our competitors in
the public safety market include ASC Telecom, Verint Systems and Voiceprint.

There
are several competitors who have products that compete with our video platform and
applications. Our main competitors in this market are Bosch (formerly VCS), Dallmeier, GE
(formerly Visiowave), Schneider Electric (formerly Pelco) and Verint Systems. We believe
that our approach to provide a full solution based on our self-developed recording,
management software, networking devices and real-time content analysis creates a
competitive advantage in this market.

There
are a number of competitors in the telecommunications monitoring market, having products
competing with our NiceTrack system, the major ones being Raytheon Company, Siemens, ETI,
JSI and Verint Systems. We believe that our solution offers innovations that provide 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.

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# Organizational Structure

The
following is a list of all of our significant subsidiaries, including the name, country of
incorporation or residence, and the proportion of our ownership interest in each.

|Name of Subsidiary                            | Country of Incorporation
or Residence | Percentage of Ownership
Interest
|--------------------------------------------- | ------------------------------------- | --------------------------------
|
|
|
|
|Nice Systems Australia PTY Ltd.               | Australia                             | 100%                            
|NICE Systems Canada Ltd.                      | Canada                                | 100%                            
|Nice Systems S.A.R.L.                         | France                                | 100%                            
|NICE Systems GmbH                             | Germany                               | 100%                            
|NICE APAC Ltd.                                | Hong Kong                             | 100%                            
|NICE Systems Kft                              | Hungary                               | 100%                            
|Nice Interactive Solutions India Private Ltd. | India                                 | 100%                            
|Nice Technologies Ltd.                        | Ireland                               | 100%                            
|Actimize Ltd.                                 | Israel                                | 100%                            
|STS Software Systems (1993) Ltd.              | Israel                                | 100%                            
|Actimize Japan KK Limited                     | Japan                                 | 100%                            
|Nice Japan Ltd.                               | Japan                                 | 100%                            
|IEX Corporation BV                            | Netherlands                           | 100%                            
|Nice Systems (Singapore) Pte. Ltd.            | Singapore                             | 100%                            
|Nice Switzerland AG                           | Switzerland                           | 100%                            
|Actimize UK Limited                           | United Kingdom                        | 100%                            
|NICE CTI Systems UK Ltd.                      | United Kingdom                        | 100%                            
|Actimize Inc.                                 | United States                         | 100%                            
|IEX Corporation                               | United States                         | 100%                            
|Nice Systems Inc.                             | United States                         | 100%                            
|Nice Systems Latin America, Inc.              | United States                         | 100%                            

# Property, Plants and
Equipment

Our
executive offices and engineering, research and development operations are located in
Raanana, Israel, where we occupy approximately 140,000 square feet of space,
pursuant to a lease expiring in 2010. The annual rent and maintenance fee for the facility
is approximately $2.4 million, paid in NIS and linked to the U.S. consumer price index. We
also occupy additional office space in North Raanana, Israel, which is approximately
55,000 square feet, pursuant to a lease expiring in 2010. The annual rent and maintenance
fee for this additional facility is approximately $1.2 million, paid in NIS and linked to
the Israeli consumer price index. We are checking alternatives for when these leases
expire in 2010, as aforementioned.

We
have leased various other offices and facilities in Israel and several other countries.
Our material leased facilities consist of the following:

| |  | Our
office in Petach Tikva, Israel, which occupies approximately 16,730 square feet;
| | - | ------------------------------------------------------------------------------------

| |  | Our
North American headquarters in Rutherford, New Jersey, which occupy approximately 28,400
square feet. We also have offices in New York, which occupy approximately 15,000 square
feet, and a warehouse facility in Lyndhurst, New Jersey, which occupies approximately
6,000 square feet;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
office in Denver, Colorado, which occupies approximately 30,775 square feet;
| | - | --------------------------------------------------------------------------------

| |  | Our
office in Richardson, Texas, which occupies approximately 50,580 square feet.
| | - | ---------------------------------------------------------------------------------

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| |  | Our
office in Southampton, UK, which occupies approximately 34,680 square feet; and
| | - | -----------------------------------------------------------------------------------

| |  | Our
office in Hong Kong, which occupies approximately 9,506 square feet.
| | - | ------------------------------------------------------------------------

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

|Item 4A. | Unresolved Staff Comments
|-------- | -------------------------

None.

|Item 5. | Operating and Financial Review and Prospects.
|------- | ---------------------------------------------

The
following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our Consolidated Financial Statements and the related
notes and other financial information included elsewhere in this annual report. This
discussion contains certain forward-looking statements that involve risks, uncertainties
and assumptions. As a result of many factors, including those set forth under Item 3,
Key Information Risk Factors and elsewhere in this report, our actual results
may differ materially from those anticipated in these forward-looking statements. For more
information about forward-looking statements, see the Preliminary Note that precedes the
Table of Contents of this annual report.

# Overview

We
are a leading provider of solutions that capture, manage and analyze unstructured
multimedia content and transactional data enabling companies and public organizations to
comply with internal and governmental regulations, enhance business and operational
performance, address security threats and behave proactively. Unstructured multimedia
content includes phone calls to contact centers, trading floors, branches, home agents and
back offices, video captured by closed circuit cameras, radio communications between
emergency services personnel, internet sessions, email and instant messaging and converged
multimedia solutions for command and control centers. Our solutions include integrated,
scalable, multimedia recording platforms, software applications and related professional
services. These solutions address critical business processes and risk management,
compliance procedures and security needs of companies and public organizations. Our
solutions facilitate faster decision-making and near real-time action, improving business
and employee performance, reducing exposure to operational risk such as fraud and
compliance, and enhancing security and public safety. Our customers use our systems in a
variety of enterprises, such as financial services, telecommunications, health care,
outsourcers, retail, service providers and utilities. Our security solutions are primarily
focused on homeland security and first responder organizations, transportation
organizations, and the public and private sectors. Our solutions are deployed at over
24,000 customers, including over 85 of the Fortune 100 companies.

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

# Recent Acquisitions

The
following 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 income from the date of
acquisition.

On
April 8, 2008, we acquired certain assets, shares and business from Quality Plus Group
Ltd., a UK-based value-added distributor of NICEs contact center solutions, and its
affiliates (QPC), for approximately $12 million in cash. The business
acquired includes the sale, distribution, service, support, maintenance and development of
workforce management solutions and associated services as conducted by QPC in the UK,
Sweden and Australia.

On
August 30, 2007, we acquired Actimize Ltd., a global provider of operational
risk management software solutions that enable financial services institutions to manage
the challenges of regulatory compliance, internal policy enforcement and fraud prevention
and money laundering. Under the terms of the Agreement and Plan of Merger, dated
July 2, 2007 (the Merger Agreement), the consideration paid for
Actimize was approximately $281 million, approximately 80% of which was in cash and
approximately 20% of which was satisfied through the issuance of 1,501,933 of our ordinary
shares based on the market price of the securities a few days before and after the terms
of the acquisition were agreed upon and announced, and the fair value of the vested
portion of 987,104 options and restricted shares that were issued to holders of Actimize
options and restricted shares. Pursuant to the terms of the Merger Agreement, we assumed
the stock options and restricted shares granted by Actimize (for further information
please see Item 6, Directors, Senior Management and Employees in this annual
report).On September 12, 2007, as required by the Merger Agreement, we
filed a registration statement with the U.S. Securities and Exchange Commission to
register for resale the securities issued pursuant to the Merger Agreement, which we
maintained effective for approximately six months.

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

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In
May 2006, we acquired substantially all of the assets of Performix Technologies Ltd.,
among the first to recognize the potential in the area of contact center performance
management, an emerging trend in the contact center market, for approximately $13.9
million in cash, plus potential earn-outs based on performance milestones amounting to a
maximum of an additional $3.2 million payable in 2007. As the performance milestones were
not met, no additional earn out was recorded. The acquisition of Performix extends our
solutions portfolio for the contact center market. The factors that contributed to the
purchase price that resulted in recognition of goodwill included synergies, the benefits
of increased market share vertically, strategic positioning value and time-to-market
benefits.

In
January 2006, we acquired all the outstanding shares of FAST Video Security AG, a
Switzerland-based developer of innovative video systems for security and surveillance
purposes, for approximately $22 million in cash, plus earn-outs based on performance
milestones of approximately $6.2 million for 2006 and a potential maximum of $5 million
for 2008. The acquisition of FAST strengthens our position in the video security market
with smart IP-based solutions and technologies complementary to our existing digital video
offerings. Additionally, it extends our presence in the digital video security market by
increasing our footprint in the European and APAC markets with high quality distribution
channels and partners, and with new prestigious customers. By purchasing FAST, we
strategically expanded our market share both in geographical and vertical markets. The
factors that contributed to the purchase price that resulted in recognition of goodwill
included synergies, the benefits of increased market share, strategic positioning value
and time-to-market benefits.

In
September 2005, we acquired the assets and assumed certain liabilities of Hannamax Hi-Tech
Pty. Ltd. for $2 million in cash, plus earn-outs of an additional $0.5 million paid in the
second quarter of 2006 and an additional $0.5 million paid in the second quarter of 2007.
Hannamax was our distributor in Australia and New Zealand. With the acquisition of
Hannamax, we expect to further expand our customer base and presence in Australia and New
Zealand and to further expand and strengthen our support organization in the region. The
factors that contributed to the purchase price that resulted in recognition of goodwill
included the benefits of increased market share geographically, the benefits of vertical
integration and time-to-market benefits.

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

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# 2007 Public Offering

In
September and October 2007, we completed a public offering on NASDAQ of 5,175,000 ADSs,
representing 5,175,000 of our ordinary shares (which includes 675,000 ADSs issued upon the
exercise of an option by the underwriters on October 10, 2007), at a public offering price
of $35.02 per ADS. The net proceeds of the offering amounted to approximately $180.8
million.

# Off-Balance Sheet
Transactions

We
have not engaged in nor been a party to any off-balance sheet transactions.

# Critical Accounting
Policies

The
preparation of financial statements in conformity with GAAP requires management to make
judgments and estimates that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Management believes that the significant
accounting policies which affect its more significant judgments and estimates used in the
preparation of the Consolidated Financial Statements and those that are the most critical
to aid in fully understanding and evaluating our reported results include the following:

| |  | Revenue
recognition
| | - | -------------------

| |  | Allowance
for doubtful accounts
| | - | -------------------------------

| |  | Inventory
valuation
| | - | -------------------

| |  | Impairment
of long-lived assets
| | - | -------------------------------

| |  | Taxes on Income
| | - | ---------------

| |  | Contingencies
| | - | -------------

| |  | Business
combination
| | - | --------------------

| |  | Stock-based
compensation
| | - | ------------------------

| |  | Impairment
of investment in marketable securities
| | - | -------------------------------------------------

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

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

For
arrangements with multiple elements, we allocate revenue to each component of the
arrangement using the residual value method based on vendor specific objective evidence
(VSOE) of the undelivered elements. This means that we defer the arrangement fee
equivalent to the fair value of the undelivered elements until these elements are
delivered.

The
Companys policy for the establishment of VSOE of fair value of maintenance is
through the performance of a VSOE compliance test which is an analysis of actual PCS
renewals (the population used in the VSOE compliance test is only actual renewals of
maintenance).

The
Companys policy for the establishment VSOE of fair value for installation and
training is through an analysis of stand-alone sales of those services. The price charges
in the separate sales are consistent with the prices charges when the same elements are
included in multiple element arrangements.

The
Company established VSOE of fair value to the project management services based on a price
per day which is identical to price per day charged for installation services (of which
separate sales exist). These identical daily rates are VSOE of fair value for the project
management services.

Revenues
from fixed price contracts that require significant customization, integration and
installation are recognized using the percentage-of-completion method of accounting based
on the ratio of hours incurred to date to the total estimated hours of the contract. The
amount of revenue recognized is based on the total license fees under the license
agreement and the percentage of completion achieved. The revenues from such arrangements
are allocated between license revenues and professional services revenues to reflect the
portion of each revenue source separately. Estimates of total project requirements are
based on prior experience of customization, delivery and acceptance of similar contracts
and are reviewed and updated regularly by management. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are first determined, in
the amount of the estimated loss on the entire contact. As of December 31, 2007, no such
estimated losses were identified.

To
assess the probability of collection for revenue recognition, we have an established
credit policy that determines, by way of mathematical formulae based on the
customers financial statements and payment history, the credit limit that reflects
an amount that is deemed probably collectible for each customer. These credit limits are
reviewed and revised periodically on the basis of new customer financial statement
information and payment performance.

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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 adjusted.

Allowance
for Doubtful Accounts. We evaluate the collectability 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.

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

Our
manufacturing process of our audio and video product platforms is outsourced. Under the
outsourcing arrangements, we take ownership of inventories at the conclusion of the
manufacturing process, such inventories representing finished goods or spare parts. As we
largely manufacture to order, we do not tend to accumulate finished goods. We are
obligated, however, to purchase certain excess raw material and subassembly inventories
from the contract manufacturer that may be deemed obsolete or slow-moving. We monitor the
levels of the contract manufacturers relevant inventories periodically and, if
required, will write-off such deemed excess or obsolete inventory.

Impairment
of Long-Lived Assets. Our long-lived assets include property and equipment,
investment in affiliates, goodwill and other intangible assets. In assessing the
recoverability of our property and equipment and other intangible assets, we make
judgments regarding whether impairment indicators exist based on legal factors, market
conditions and operating performances of our business and products. Future events could
cause us to conclude that impairment indicators exist and that the carrying values of the
intangible assets or goodwill are impaired. Any resulting impairment loss could have a
material adverse impact on our financial position and results of operations.

The
fair value of the investment in affiliates is dependent upon the performance of the
companies in which we have invested. In assessing potential impairment of these
investments, we consider this factor as well as the forecasted financial performance of
the investees and other pertinent information. We record an investment impairment charge
when we believe that the investment has experienced a decline in value that is other than
temporary.

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SFAS
No. 142, Goodwill and Other Intangible Assets, requires that goodwill be
tested for impairment at the reporting unit level on an annual basis and between annual
tests if an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying value. These events or circumstances
could include a significant change in the business climate, legal factors, operating
performance indicators, competition or sale or disposition of a significant portion of a
reporting unit. Application of the goodwill impairment test requires judgment, including
the identification of reporting units, assignment of assets and liabilities to reporting
units, assignment of goodwill to reporting units, and determination of the fair value of
each reporting unit. The goodwill impairment test is a two-step test. Under the first
step, the fair value of the reporting unit is compared with its carrying value (including
goodwill). If the fair value of the reporting unit is less than its carrying value, an
indication of goodwill impairment exists for the reporting unit and the enterprise must
perform step two of the impairment test (measurement). Under step two, an impairment loss
is recognized for any excess of the carrying amount of the reporting units goodwill
over the implied fair value of that goodwill. If the fair value of the reporting unit
exceeds its carrying value, step two does not need to be performed. The fair value of each
reporting unit is estimated using a discounted cash flow methodology. This requires
significant judgments including estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term rate of growth for our business, the
useful life over which cash flows will occur and determination of our weighted average
cost of capital. Changes in these estimates and assumptions could materially affect the
determination of fair value and/or goodwill impairment for each reporting unit. We
allocate goodwill to reporting units based on the reporting unit expected benefit from the
acquisition. We evaluate our reporting units on an annual basis and, if required, reassign
goodwill using a relative fair value allocation approach.

We
are required to assess the impairment of long-lived assets, tangible and intangible, other
than goodwill, under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, on a periodic basis, when events or changes in circumstances
indicate that the carrying value may not be recoverable. Impairment indicators include any
significant changes in the manner of our use of the assets or the strategy of our overall
business, significant negative industry or economic trends and significant decline in our
share price for a sustained period.

Upon
determination that the carrying value of a long-lived asset may not be recoverable based
upon a comparison of aggregate undiscounted projected future cash flows to the carrying
amount of the asset, an impairment charge is recorded for the excess of fair value over
the carrying amount. We measure fair value using discounted projected future cash flows.

Taxes
on Income. We record income taxes using the asset and liability approach.
Management judgment is required in determining our provision for income taxes in each of
the jurisdictions in which we operate. The provision for income tax is calculated based on
our assumptions as to our entitlement to various benefits under the applicable tax laws in
the jurisdictions in which we operate. The entitlement to such benefits depends upon our
compliance with the terms and conditions set out in these laws. We have considered future
taxable income, prudent and feasible tax planning strategies and other available evidence
in determining the need for a valuation allowance. Although we believe that our estimates
are reasonable and that we have considered future taxable income and ongoing prudent and
feasible tax strategies in estimating our tax outcome, there is no assurance that the
final tax outcome will not be different than those which are reflected in our historical
income tax provisions and accruals. Such differences could have a material effect on our
income tax provision, net income and cash balances in the period in which such
determination is made.

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On
January 1, 2007, we adopted FIN No. 48, Accounting for Uncertainty in Income
Taxes (FIN No. 48), which contains a two-step approach to recognizing
and measuring uncertain tax positions accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS No. 109). The first step is
to evaluate the tax position taken or expected to be taken in a tax return by determining
if the weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step is to measure
the tax benefit as the largest amount that is more than 50% likely to be realized upon
ultimate settlement. Prior to January 1, 2007, we estimated our uncertain income tax
obligations in accordance with SFAS No. 109 and SFAS No. 5 Accounting for
Contingencies.

We
recorded interest on late paid taxes as financial expenses and tax related penalties as
general and administrative expenses. Our policy for interest and penalties related to
income tax exposures was not impacted as a result of the adoption of the recognition and
measurement provisions of FIN No. 48.

As
a result of the implementation of FIN No. 48, we recognized an $824,000 decrease in
liability for unrecognized tax benefits, which was accounted for as an increase to the
January 1, 2007 balance of retained earnings.

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

Business
Combination. In accordance with SFAS No. 141, Business
Combination, we are required to allocate the purchase price of acquired companies to
the tangible and intangible assets acquired, liabilities assumed, as well as in-process
research and development based on their estimated fair values. We engage independent
third-party appraisal firms to assist us in determining the fair values of assets acquired
and liabilities assumed. This valuation requires management to make significant estimates
and assumptions, especially with respect to long-lived and intangible assets. Critical
estimates in valuing certain of the intangible assets include but are not limited to:
future expected cash flows from customer contracts, customer lists, distribution
agreements and acquired developed technologies; expected costs to develop the in-process
research and development into commercially viable products and estimating cash flows from
the projects when completed; the acquired companys brand awareness and market
position, as well as assumptions about the period of time the brand will continue to be
used in the combined companys product portfolio; and discount rates.
Managements estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable. Assumptions may be
incomplete or inaccurate, and unanticipated events and circumstances may occur.

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Stock-based
Compensation. Since January 1, 2006, we account for stock-based
compensation in accordance with the provisions of SFAS No. 123(R), Share-Based
Payment. Under the fair value recognition provisions of SFAS No. 123(R), stock-based
compensation cost is estimated at the grant date based on the fair value of the award and
is recognized as expense ratably over the requisite service period of the award.
Determining the appropriate fair value model and calculating the fair value of stock-based
awards, which includes estimates of stock price volatility, forfeiture rates and expected
terms, requires judgment that could materially impact our operating results.

Impairment
of investments in marketable securities. We regularly review our investments for
factors that may indicate that a decline in the fair value of an investment below its cost
or amortized cost is other than temporary. Some factors considered in evaluating whether
or not a decline in fair value is other than temporary include: our ability and intent to
retain the investment for a period of time sufficient to allow for a recovery in value;
the duration and extent to which the fair value has been less than cost; and the financial
condition and prospects of the issuer. Such reviews are inherently uncertain in that the
value of the investment may not fully recover or may decline further in future periods
resulting in realized losses.

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# Results of Operations

The
following table sets forth our selected consolidated statements of income for the years
ended December 31, 2005, 2006 and 2007 expressed as a percentage of total revenues. Totals
may not add up due to rounding.

|                                    | 2005 | 2006 | 2007
|----------------------------------- | ---- | ---- | ----
|
|
|
|
|Revenues                            |      |      |     
|Products                            |      |      |     
|Services                            |      |      |     
|                                    |      |      |     
|                                    |      |      |     
|Cost of revenues                    |      |     
|Products*                           |      |      |     
|Services*                           |      |      |     
|                                    |      |      |     
|                                    |      |      |     
|                                    |      |     
|Gross Profit                        |      |      |     
|                                    |      |     
|Operating expenses                  |      |     
|Research and development, net       |      |      |     
|Selling and marketing               |      |      |     
|General and administrative          |      |      |     
|Amortization of acquired            |      |     
|Intangibles                         |      |      |     
|In process research and development |      |     
|write-off                           |      |      |     
|Total operating expenses            |      |      |     
|                                    |      |     
|Operating income                    |      |      |     
|Financial income, net               |      |      |     
|Other income, net                   |      |      |     
|                                    |      |      |     
|                                    |      |     
|Income before taxes                 |      |      |     
|Taxes on income                     |      |      |     
|                                    |      |      |     
|                                    |      |     
|Net income                          |      |      |     
|                                    |      |      |     

---

* Respective revenues

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Comparison of Years Ended
December 31, 2006 and 2007

Revenues

Our
total revenues rose approximately 26.3% to $517.4 million in 2007 from $409.6 million in
2006. Revenues from sales to the enterprise market were $394.5 million in 2007, an
increase of 31.1% from 2006, and revenues from sales to the security market were $122.9
million in 2007, an increase of 13.1% from 2006. Approximately 48% of the growth in
revenues is attributable to the inclusion of the results of IEX Corporation and Performix
for the entire year and the first time inclusion of Actimize Ltd beginning on August 30,
2007. The remaining 52% of the growth is due to organic growth in all our regions.

|                 | Years Ended December 31, |  |  
|---------------- | ------------------------ |  | -
|
|
|
|
|Product Revenues |                          |  | $
|Service Revenues |                          |  |  
|                 |                          |  |  
|Total Revenues   |                          |  | $

Approximately
39% of the increase in product revenues is attributable to the inclusion of the results of
IEX Corporation and Performix for the entire year and the first time inclusion of Actimize
Ltd. The remainder of the growth is due to organic growth.

Approximately
56% of the increase in service revenues in 2007 was attributable to the inclusion of the
results of IEX Corporation and Performix for the entire year and the first time inclusion
of Actimize Ltd. The remaining 44% growth in service revenue was due to an increase in our
installed customer base resulting from new sales of products to the enterprise market.
Service revenues represented approximately 39% of total revenues, as compared to
approximately 36% in the year ended December 31, 2006. Although we typically generate
lower profit margins on services than on products, our strategy is to continue to grow our
global services business, which we believe increases the competitiveness of our product
offerings, and, as a result, we expect services to represent a growing portion of total
revenues in the future.

Revenues
in 2007 in the Americas, which include the United States, Canada and Central and South
America, rose 20.3% to $290.3 million, as compared to $241.3 million in 2006.
Approximately 80% of the increase is attributable to the inclusion of the results of IEX
Corporation and Performix for the entire year and the first time inclusion of Actimize
Ltd. The remaining 20% growth is due to an increase in our products revenue and higher
post-contract service and maintenance revenue. Sales in Europe, Middle East and Africa
(EMEA) rose 36.9% to $154.0 million in 2007, as compared to $112.5 million in 2006.
Approximately 23% of the increase is attributable to the inclusion of the results of IEX
Corporation and Performix for the entire year and the first time inclusion of Actimize
Ltd. The remainder of the increase is attributable to a growth in product revenues in the
enterprise and security market. Sales to Asia-Pacific (APAC) increased 30.8% to $73.0
million in 2007, as compared to $55.8 million in 2006; approximately 14% of the increase
is attributable to the inclusion of the results of IEX Corporation and Performix for the
entire year and the first time inclusion of Actimize Ltd. The remainder of the increase is
attributable to a growth in product and service revenues in the enterprise and the
security market.

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Cost of Revenues

|                         | Years Ended December 31, |  |  
|------------------------ | ------------------------ |  | -
|
|
|
|
|
|Cost of Product Revenues |                          |  | $
|Cost of Service Revenues |                          |  |  
|                         |                          |  |  
|                         |                          | 
|Total Cost of Revenues   |                          |  | $

Cost
of product revenues increased on a dollar basis while decreasing as a percentage of
product revenues. The increase on a dollar basis is mostly due to higher amortization of
intangible assets in the amount of $11.8 million in 2007 compared to $7.3 million in 2006
and due to higher sales volume, which was partially offset by the lower cost of product
resulting from a higher proportion of software in the product mix. Cost of service
revenues increased on a dollar basis while decreasing as a percentage of service revenues.
Approximately 52% of the increase is attributable to the inclusion of the results of IEX
Corporation and Performix for the entire year and the first time inclusion of Actimize
Ltd. The decrease as a percentage of service revenues is due to a better utilization of
the service organization and a higher volume of service revenues.

Gross Profit

|                                    | Years Ended December 31, |  |  
|----------------------------------- | ------------------------ |  | -
|
|
|
|
|
|Gross Profit on Product Revenues    |                          |  | $
|as a percentage of product revenues |                          |  |  
|Gross Profit on Service Revenue     |                          |  |  
|as a percentage of service revenues |                          |  |  
|                                    |                          | 
|Total Gross Profit                  |                          |  | $
|as a percentage of total revenues   |                          |  |  

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

Operating Expenses

|                                               | Years Ended December 31, |  |  
|---------------------------------------------- | ------------------------ |  | -
|
|
|
|
|
|Research and development, net                  |                          |  | $
|Selling and marketing                          |                          |  |  
|General and administrative                     |                          |  |  
|Amortization of acquired intangible assets     |                          |  |  
|In process research and development write-off. |                          |  | $

Research
and Development, Net. Research and development expenses, before
capitalization of software development costs and government grants, increased to $63.3
million in 2007, as compared to $48.0 million in 2006 and represented 12.2% and 11.7% of
revenues in 2007 and 2006, respectively. Approximately 57% of the increase in research and
development, net is attributable to the inclusion of IEX Corporation and Performix for the
entire year and the first time inclusion of Actimize Ltd. Approximately 19% of the
increase is attributable to the increase in stock based compensation expenses the
remaining is due to a business growth.

Capitalized
software development costs were $1.0 million in 2007, as compared to $1.2 million in 2006.
Amortization of capitalized software development costs included in cost of product
revenues were $1.2 million and $1.5 million in 2007 and 2006, respectively.

Selling
and Marketing Expenses. Selling and marketing expenses increased to $120.6
million in 2007, as compared to $95.2 million in 2006 and represented 23.3% of total
revenues in 2007, as compared to 23.2% in 2006. Approximately 38% of the increase is
attributable to the inclusion of IEX Corporation and Performix for the entire year and the
first time inclusion of Actimize Ltd. Approximately 13% of the increase is attributable to
the increase in stock based compensation expenses the remaining is due to a business
growth.

General
and Administrative Expenses. General and administrative expenses
represented 16.5% of total revenues in 2007, as compared to 14.8% in 2006. Approximately
15% of the increase is attributable to the inclusion of IEX Corporation and Performix for
the entire year and the first time inclusion of Actimize Ltd. Approximately 16% of the
increase is attributable to an increase in stock based compensation expenses,
approximately 32% is due to an increase in legal expenses, primarily associated with our
patent litigations, and the remainder is due to business growth.

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Amortization
of acquired intangible assets. Amortization of
acquired intangibles included in the operating expenses represent 1.8% and 1.2% of
revenues in 2007 and 2006 respectively. The increase of $4.3 million is due to the
Actimize acquisition and the 12 month amortization of intangibles assets resulted from the
IEX and Performix acquisitions.

In
process research and development write-off. In process research and
development write-off in the amount of $3.7 million represents a one-time write-off of
Actimize in process research and development in 2007 and a one-time $12.9 million
write-off of IEX and FAST in process research and development in 2006.

Financial and Other Income

|                            | Years Ended December 31, |  |  
|--------------------------- | ------------------------ |  | -
|
|
|
|
|Financial income, net       |                          |  | $
|Other income (expense), net |                          |  |  

Financial
Income, Net. The increase in financial income, net reflects a higher
average cash balance and higher prevailing average interest rates in 2007, as compared to
2006.

Taxes
on Income. In 2007, taxes on income amounted to $10.3 million, as
compared to $8.6 million in 2006. Our effective tax rate amounted to 21.5% in 2007
compared with 27.7% in 2006. The decrease in our effective tax rate in 2007 was mainly due
to the in-process research and development write-off made in 2006 related to our
acquisition of IEX Corporation, which was a non-deductible expense for tax purposes, and
due to a decrease in valuation allowance in 2007.

The
reduction of the corporate tax rate in Israel from 34% in 2005 and 31% in 2006 to 29% in
2007 had a minor impact on our effective tax rate. This is because the majority of our
income earned in Israel benefits from the reduced tax rates applicable to us as a result
of our Approved and Privileged Enterprise programs.

Further
information with regard to our Approved and Privileged Enterprise programs can be found in
Item 3, Risk Factors under the caption We depend on the
availability of government grants and tax benefits and in Note 12 of our
Consolidated Financial Statements under the caption Taxes on Income.

As
shown in Note 12(h) of our Consolidated Financial Statements, pursuant to the adoption of
FIN No. 48 as of January 1, 2007, our taxes on income included a net $4.2 million expense
in relation to unrecognized tax benefits. Subject to unpredictable effects of any future
settlements with tax authorities, unadjusted expiration of the statute of limitations,
future changes in law or accepted practice and effects of potential mergers and
acquisitions, we expect our effective tax rate (which includes effects of FIN No. 48) to
be fairly stable in the coming years at around 20%.

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Net
Income from Continuing Operations. Net income from continuing
operations was $37.4 million in 2007, as compared to $22.4 million in 2006. The increase
in 2007 resulted primarily from the increase in revenues and an increase in the gross
margin.

Comparison of Years Ended
December 31, 2005 and 2006

Revenues

Our
total revenues rose approximately 31.7% to $409.6 million in 2006 from $311.1 million in
2005. Revenues from sales to the enterprise market were $300.9 million in 2006, an
increase of 26.8% from 2005, and revenues from sales to the security market were $108.7
million in 2006, an increase of 47.4% from 2005. Approximately 25% of the growth in
revenues is attributable to the inclusion for the first time of the results of IEX
Corporation beginning on July 7, 2006, Performix Technologies Ltd. beginning on May 22,
2006, and FAST Video Security AG beginning on January 4, 2006 (collectively referred to
below as the 2006 acquisitions), as well as the inclusion of Dictaphone CRS
results for a full year compared with seven months in 2005 and the inclusion of Hannamax
Hi-Tech Pty. Ltd. results for a full year compared to four months in 2005. Approximately
75% of the growth is due to organic growth.

|                 | Years Ended December 31, |  |  
|---------------- | ------------------------ |  | -
|
|
|
|
|
|Product Revenues |                          |  | $
|Service Revenues |                          |  |  
|                 |                          |  |  
|Total Revenues   |                          |  | $

Approximately
40% of the increase in product revenues is attributable to the inclusion for the first
time of the results of the 2006 acquisitions. The remainder of the growth is due to
organic growth.

Approximately
17% of the increase in service revenues is attributable to the inclusion for the first
time of the results of the 2006 acquisitions, the inclusion of Dictaphone CRS results for
a full year compared with seven months in 2005 and the inclusion of Hannamax Hi-Tech Pty.
Ltd. results for a full year compared to four months in 2005. The remaining 83% growth was
due to an increase in our installed customer base resulting from new product sales and
higher installation and training revenues relating mainly to the increase in product sales
to the enterprise market.

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

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

Cost of Revenues

|                         | Years Ended December 31, |  |  
|------------------------ | ------------------------ |  | -
|
|
|
|
|
|Cost of Product Revenues |                          |  | $
|Cost of Service Revenues |                          |  |  
|                         |                          |  |  
|                         |                          | 
|Total Cost of Revenues   |                          |  | $

Cost
of product revenues increased on a dollar basis while decreasing as a percentage of
product revenues. The increase on a dollar basis was mainly due to higher sales volume,
amortization of intangible assets in the amount of $7.3 million in 2006 compared to $1.3
million in 2005 and the adoption of SFAS No 123(R) for stock-based compensation in 2006 in
the amount of $0.3 million, which was partially offset by the lower cost of product
resulting from a higher proportion of software in the product mix. Cost of service
revenues increased on a dollar basis while decreasing as a percentage of service revenues.
Approximately 38% of the increase is attributable to the inclusion for the first time of
the results of the 2006 acquisitions and approximately 6% of the increase is attributable
to the adoption of SFAS No. 123(R) for stock-based compensation. The decrease as a
percentage of service revenues is due to better utilization of the service organization
and a higher volume of service revenues.

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Gross Profit

|                                    | Years Ended December 31, |  |  
|----------------------------------- | ------------------------ |  | -
|
|
|
|
|Gross Profit on Product Revenues    |                          |  | $
|as a percentage of product revenues |                          |  |  
|Gross Profit on Service Revenue     |                          |  |  
|as a percentage of service revenues |                          |  |  
|                                    |                          | 
|Total Gross Profit                  |                          |  | $
|as a percentage of total revenues   |                          |  |  

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

Operating Expenses

|                                              | Years Ended December 31, |  |  
|--------------------------------------------- | ------------------------ |  | -
|
|
|
|
|
|Research and development, net                 |                          |  | $
|Selling and marketing                         |                          |  |  
|General and administrative                    |                          |  |  
|Amortization of acquired intangible assets    |                          |  |  
|In process research and development write-off |                          |  |  

Research
and Development, Net. Research and development expenses, before
capitalization of software development costs and government grants, increased to $48.0
million in 2006, as compared to $33.4 million in 2005 and represented 11.7% and 10.7% of
revenues in 2006 and 2005, respectively. Approximately 69% of the increase is attributable
to the inclusion for the first time of the results of the 2006 acquisitions and
approximately 10% of the increase is attributable to the adoption of SFAS No 123(R) for
stock-based compensation.

Capitalized
software development costs were $1.2 million in 2006, as compared to $0.8 million in 2005.
Amortization of capitalized software development costs included in cost of product
revenues was $1.5 million and $2.4 million in 2006 and 2005, respectively.

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Selling
and Marketing Expenses. Selling and marketing expenses represented 23.2% of
total revenues in 2006, as compared to 23.4% in 2005. Approximately 43% of the increase is
attributable to the inclusion for the first time of the results of the 2006 acquisitions
and the inclusion of Hannamax Hi-Tech Pty. Ltd. results for a full year compared to four
months in 2005, approximately 15% of the increase is attributable to the adoption of SFAS
No 123(R) for stock-based compensation.

General
and Administrative Expenses. General and administrative expenses
represented 14.8% of total revenues in 2006, as compared to 12.1% in 2005. Approximately
15% of the increase is attributable to the inclusion for the first time of the results of
the 2006 acquisitions, approximately 28% of the increase is attributable to the adoption
of SFAS No 123(R) for stock-based compensation.

Amortization
of acquired intangible assets  Amortization of
acquired intangibles included in the operating expenses represent 1.2% and 0.4% of 2006
and 2005 revenues the increase is due to 2006 acquisitions.

In
process research and development write-off In process research and
development write-off represent a one time write-off of IEX Corporation and FAST Video
Security AG In process R&D.

Financial Income

|                       | Years Ended December 31, |  |  
|---------------------- | ------------------------ |  | -
|
|
|
|
|
|Financial income, net  |                          |  | $
|Other income (expense) |                          |  |  

Financial
Income, Net. The increase in financial income, net reflects a higher
average cash balance and higher prevailing average interest rates in 2006, as compared to
2005.

Taxes
on Income. In 2006, taxes on income amounted to $8.6 million, as
compared to $0.9 million in 2005. Our effective tax rate amounted to 27.7% in 2006,
compared with 2.4% in 2005 and 9.8% in 2004. First time recognition of deferred tax assets
in 2005 in the amount of $4.8 million was the principal cause of the low effective tax
rate which arose in that year. The increase in our effective tax rate in 2006 is mainly
due to the in-process research and development write-off related to our acquisition of IEX
Corporation, which is a non-deductible expense for tax purposes.

The
reduction of the corporate tax rate in Israel from 35% in 2004 to 34% in 2005 and 31% in
2006 had a minor impact on our effective tax rate. This is because the majority of our
operating income earned in Israel benefits from the reduced tax rates applicable to us as
a result of our Approved (or Privileged) Enterprise programs.

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Further
information with regard to our Approved and Privileged Enterprise programs can be found in
Item 3, Risk Factors under the caption We depend on the availability of
government grants and tax benefits and in Note 12 of our Financial Statements under
the caption Taxes on Income.

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

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

# Liquidity and Capital
Resources

In
recent years, we have financed our operations through cash generated from operations.
Generally, we invest our excess cash in instruments that are highly liquid, investment
grade securities. At December 31, 2007, we had $398.2 million of cash and cash equivalents
and short-term and long-term investments, as compared to $296.1 million at December 31,
2006 and $411.6 million at December 31, 2005.

Cash
provided by operating activities of continuing operations was $117.8 million, $87.6
million and $65.7 million in 2007, 2006 and 2005, respectively. Net cash from operations
in 2007 consisted primarily of net income of $37.4 million and adjustments for non-cash
activities including depreciation and amortization of $30.9 million, stock-based
compensation of $23.7 million, an in-process research and development write-off of $3.7
million, an increase in accrued expenses and other liabilities of $51.9 million, and a
decrease in inventories of $7.6 million, which were partially offset by an excess tax
benefit from share-based payments arrangements of $4.9 million, an increase in trade
receivables of $15.2 million, an increase in other receivables and prepaid expenses of
$9.6 million, a decrease in trade payable of $3.0 million and deferred tax of $5.3
million. Net cash from operations in 2006 consisted primarily of net income of $22.4
million and adjustments for non-cash activities including depreciation and amortization of
$21.9 million, stock-based compensation of $12.6 million, an in-process research and
development write-off of $12.9 million, an increase in accrued expenses and other
liabilities of $28.0 million, an increase in trade payable of $1.4 million and a decrease
in inventories of $5.4 million, which were partially offset by an excess tax benefit from
share-based payments arrangements of $5.7 million, an increase in trade receivables of
$6.8 million and deferred tax of $3.7 million. Net cash from operations in 2005 consisted
primarily of net income of $36.6 million and adjustments for non-cash activities including
depreciation and amortization of $13.2 million, an increase in accrued expenses and other
liabilities of $27.3 million and an increase in trade payables of $5.8 million, which were
partially offset by an increase in trade receivables of $11.5 million, an increase in
inventories of $3.9 million and deferred tax of $4.8 million

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Net
cash used in investing activities from continuing operations was $276.0 million, $318.4
million and $64.3 million in 2007, 2006 and 2005 respectively In 2007, net cash used in
investing activities consisted primarily of investment in marketable securities of $208.6
million, investment in short-term bank deposits of $39.1 million, purchase of property and
equipment of $10.9 million, payment for the acquisition of Actimize Ltd. of $210.5
million, a $5.0 million earn out payment with respect to FAST Security AG acquisition and
payment for working capital adjustment with respect to the acquisition of IEX Corporation
of $1.5 million. These were partially offset by proceeds from the maturity of marketable
securities of $170.9 million and proceeds from the sale and call of marketable securities
of $30.1 million. In 2006, net cash used in investing activities consisted primarily of
investment in marketable securities of $217.7 million, purchase of property and equipment
of $8.1 million, payment for the acquisition of IEX Corporation of $203.2 million, payment
for the acquisition of Performix Technologies Ltd. of $13.8 million and payment for the
acquisition of FAST Video Security AG of $21.3 million, which were partially offset by
proceeds from the maturity of marketable securities of $142.2 million and proceeds from
the sale and call of marketable securities of $3.0 million. In 2005, net cash used in
investing activities consisted primarily of investment in marketable securities of $218.5
million, purchase of property and equipment of $6.1 million, payment for the acquisition
of Dictaphone CRS of $39.7 million and payment for the acquisition of Hannamax Hi-Tech
Pty. Ltd. of $1.9 million, which were partially offset by proceeds from the maturity of
marketable securities of $190.7 million and proceeds from the sale and call of marketable
securities of $9.6 million.

Net
cash provided by financing activities was $206.2 million, $43.7 million and $227.0 million
in 2007, 2006 and 2005, respectively. In 2007, net cash provided from financing activities
consisted of proceeds from the issuance of shares in our public offering of $180.9
million, proceeds from the issuance of shares upon exercise of options and purchase of
shares under the employee share purchase plan of $20.3 million and an excess tax benefit
from share-based payments agreements of $4.9 million. In 2006, net cash provided from
financing activities consisted primarily of proceeds from the issuance of shares upon
exercise of options and purchase of shares under the employee share purchase plan of $39.0
million and an excess tax benefit from share-based payments agreements. In 2005, net cash
provided from financing activities consisted of proceeds from the issuance of shares in
our public offering of $201.7 million and proceeds from the issuance of shares upon
exercise of options and purchase of shares under the employee share purchase plan of $25.3
million. As of December 31, 2007, we had authorized credit lines from banks in the amount
of $312 million. As of December 31, 2007, we had no outstanding borrowings under these
credit lines; however, $12.9 million of the $312 million was utilized for bank guarantees.
Any borrowing under these credit lines will be denominated in dollars and will bear
interest at the rate of up to LIBOR + 0.45% per year. Any borrowing under three of these
credit lines, having an aggregate borrowing limit of $278 million, would be secured by our
marketable securities.

On
August 29, 2007, we entered into an unsecured loan agreement and a letter of undertaking
with Bank Hapoalim B.M., which provided for a term loan of $120 million to finance a
portion of the cash consideration for the Actimize transaction. The loan was repaid in one
installment on September 28, 2007.

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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.

# Research and Development

For
information on our research and development policies, please see Item 4, Information
on the Company in this annual report.

# Trend Information

Our
development efforts are aimed at addressing several industry trends. In the enterprise
sector, these include compliance and risk management, enhancement of operational
efficiencies, and improving customer retention and insights. In the security sector there
is a growing demand for more comprehensive and integrated solutions to provide better
safety and security to citizens. Our development efforts are also influenced by technology
trends, such as the evolvement of VoIP. We see the migration to VoIP networks as a driver
for deployment of additional systems.

Our
compliance and risk management solutions apply to contact centers, trading floors,
branches, home agents and back offices. In this area, the continuous enactment of new
regulations represents tremendous growth prospects for NICE.

We
believe that enhancing operational efficiency is especially critical to our customers. In
addition, our customers seek solutions that can improve their customer retention and
insight into their customer trends and dynamics. Thus, we are seeing growing demand to
streamline operational efficiency by deploying a more comprehensive set of our solutions,
in addition to recording. These include quality monitoring, analytics, workforce
management, performance management, customer feedback, etc. Our software applications
enable our customers to capture, store, retrieve and analyze unstructured data (multimedia
interactions) and combine them with data from other systems to create actionable knowledge
that can be distributed via reports and alerts to all relevant parties to improve
performance.

We
see an opportunity for applications that analyze the content of unstructured interactions
in contact centers for quality monitoring and contact center management as well as for
enterprise-wide process improvement and business performance management.

Governments
and corporations around the world are investing in the protection of people and assets. As
a result, there is a growing demand for more comprehensive and integrated solutions to
provide better safety and security to citizens. These large projects include installation
and implementation of wide-scale security systems, which better synchronize and correlate
multimedia data sources in order to detect, prevent and resolve crime and terror in real
time and investigate quickly in order to prosecute the persons involved. Our solutions
offer an integrated multimedia capture and management solution that combines radio,
telephony, IP data, GIS, and video.

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We
also expect video content analysis applications to become increasingly important to city
center protection, as well as various homeland security applications, mass transportation
systems, campus perimeter security, and critical facilities, to enable proactive security
management.

For
more information on trends in our industry, please see Item 4, Information on the
CompanyBusiness OverviewIndustry Background and Trends.

For
more information on uncertainties, demands, commitments or events that are reasonably
likely to have a material effect on revenue, please see Item 3, Key
InformationRisk Factors.

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Contractual Obligations

Set
forth below are our contractual obligations and other commercial commitments over the
medium term as of December 31, 2007 (in thousands of U.S. dollars):

|                                   | Payments Due by Period
|---------------------------------- | ----------------------
|
|
|
|
|Operating Leases                   |                       
|Unconditional Purchase Obligations |                       
|Severance Pay*                     |                       
|Uncertain Income Tax Positions**   |                       
|Total Contractual Cash Obligations |                       

|                                   |  | Amount of Commitment Expiration Per Period
|---------------------------------- |  | ------------------------------------------
|
|
|
|
|Standby Letters of Credit          |  |                                           
|Guarantees - continuing operations |  |                                           
|Total Commercial Commitments       |  |                                           

|* | Severance
pay relates to accrued obligation to employees as required under the labor laws. These
obligation are payable only upon termination, retirement or death of the respective
employee
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Uncertain income tax positions under FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48), are due upon settlement and
we are unable to reasonably estimate the ultimate amount or timing of settlement. See
Note 12(h) of our Consolidated Financial Statements for further information regarding our
liability under FIN No. 48.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# Qualitative and
Quantitative Disclosure About Market Risk

For
information on the market risks relating to our operations, please see Item 11,
Quantitative and Qualitative Disclosures about Market Risk in this annual
report.

# Adoption of New
Accounting Standards

In
June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No.
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS
109). This interpretation prescribes a minimum recognition threshold a tax position
is required to meet before being recognized in the financial statements. FIN No. 48 also
provides guidance on derecognition of tax positions, classification on the balance sheet,
interest and penalties, accounting in interim periods, disclosure, and transition. We
adopted FIN No. 48 effective January 1, 2007. FIN No. 48 requires significant judgment in
determining what constitutes an individual tax position as well as assessing the outcome
of each tax position. Changes in judgment as to recognition or measurement of tax
positions can materially affect the estimate of the effective tax rate and consequently,
affect our operating results.

We
have have decided to classify interest as financial expenses and penalties as general and
administrative expenses. Our policy for interest and penalties related to income tax
exposures was not impacted as a result of the adoption of the recognition and measurement
provisions of FIN No. 48.

As
a result of the implementation of FIN No. 48, the Company recognized a $0.8 million
decrease in liability for unrecognized tax benefits, which was accounted for as an
increase to the January 1, 2007 balance of retained earnings.

# Recently Issued
Accounting Pronouncements

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
standard defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. Management believes this
standard will not have a material effect on our Consolidated Financial Statements.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which permits companies to choose to measure
certain financial instruments and other items at fair value that are not currently
required to be measured at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We do not expect that the adoption of SFAS No. 159 to
have a material impact on our Consolidated Financial Statements.

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In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS No. 141R). SFAS No. 141R establishes
principles and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non controlling
interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial effects of
the business combination. SFAS No. 141R is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is prohibited. We believe that the adoption of
SFAS No. 141R could have an impact on our Consolidated Financial Statements; however, the
impact would depend on the nature, terms and magnitude of acquisitions we consummate in
the future.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51(SFAS No. 160). SFAS No. 160 establishes accounting and reporting
standards that require that the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from the parents equity;
the amount of consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated statement of
income; and changes in a parents ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently. SFAS
No. 160 is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. We do not expect thatthe adoption of
SFAS No. 160 will have a significant impact on our Consolidated Financial Statements.

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|Item 6. | Directors, Senior Management and Employees.
|------- | -------------------------------------------

# Directors and Senior
Management

The
following table sets forth, as of March 25, 2008, the name, age and position of each of
our directors and executive officers:

| | Name                   | Age | Position                                                         
| | ---------------------- | --- | -----------------------------------------------------------------
|
|
|
|
| | Ron Gutler (1)(2)      | 50  | Chairman of the Board of Directors                               
| | Joseph Atsmon(1)(3)    | 59  | Vice-Chairman of the Board of Directors                          
| | Rimon Ben-Shaoul(2)    | 63  | Director                                                         
| | Yoseph Dauber(2)(3)    | 72  | Director                                                         
| | Dan Falk(1)(2)(3)(4)   | 63  | Director                                                         
| | John Hughes(2)         | 56  | Director                                                         
| | Yocheved Dvir(1)(3)(4) | 55  | Director                                                         
| | Haim Shani             | 51  | Chief Executive Officer                                          
| | Dr. Shlomo Shamir      | 61  | President                                                        
| | Moshe Egert            | 43  | Corporate Vice President & President, Enterprise Group           
| | Israel Livnat          | 57  | Corporate Vice President & President, Security Group             
| | David Sosna            | 39  | Chief Executive Officer, Actimize Ltd.                           
| | Dafna Gruber           | 43  | Corporate Vice President and Chief Financial Officer             
| | Yechiam Cohen          | 51  | Corporate Vice President, General Counsel and Corporate Secretary
| | Eran Porat             | 45  | Corporate Vice President, Finance                                
| | Eran Liron             | 40  | Corporate Vice President, Business Development                   
| | Dan Yalon              | 36  | Corporate Vice President, Strategy & Strategic Alliance          
| | Eran Gorev             | 42  | President and Chief Executive Officer, NICE Systems Inc.         
| | Tamir Ginat            | 45  | President, EMEA                                                  
| | Doron Ben Sira         | 48  | President, Nice APAC                                             
| |                        |     |                                                                  

---

|(1)       
          Member
of the Audit Committee.    (2)       
          Member of the Compensation Committee.    (3)       
          Member of the Internal Audit Committee. 
    (4)       
          Outside Director. See Item 6, Directors, Senior Management and
          EmployeesBoard Practices - Outside Directors.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On
June 18, 2007, David Kostman resigned from our board of directors. Our board of
directors now consists of seven directors, each of whom is independent.

Effective
January 1, 2008, Ms. Yocheved Dvir was elected as a statutory outside director. Dr. Leora
Meridor completed her second term as a statutory outside director on January 1, 2008, and
did not seek re-nomination for an additional term. See Item 6, Directors, Senior
Management and EmployeesBoard Practices Outside Directors.

Set
forth below is a biographical summary of each of the above-named directors and executive
officers of NICE. Each of our directors qualifies as an independent director under the
NASDAQ rules.

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Ron
Gutler has served as one of our directors since May 2001 and Chairman of the Board
since May 2002. Mr. Gutler is currently the Chairman of G.J.E. 121 Promoting Investment
Ltd., a real estate investment company, a member of the Advisory Board of Poalim Real
Estate (part of Poalim Capital Market Group) and a director of Psagot Ofek Investment
House and Eshel Shekel Bonds Ltd. Between 2000 and 2002, he managed the Blue Border
Horizon Fund, a global macro fund. Mr. Gutler is a former Managing Director and a Partner
of Bankers Trust Company (currently part of Deutsche Bank). Between 1987 and 1999, he held
various positions with Bankers Trust, where Mr. Gutler headed its trading and sales
activities in Asia, South America and Emerging Europe. He also established and headed the
Israeli office of Bankers Trust. Mr. Gutler holds a Bachelors degree in Economics
and International Relations and a Masters degree in Business Administration, both
from the Hebrew University in Jerusalem.

Joseph
Atsmon has served as one of our directors since September 2001 and Vice-Chairman of
the Board since May 2002. Mr. Atsmon currently serves as a director of Ceragon Networks
Ltd., Radvision Ltd. and Vocaltec Communications Ltd. From 1995 until 2000, Mr. Atsmon
served as Chief Executive Officer of Teledata Communications Ltd., a public company
acquired by ADC Telecommunications Inc. in 1998. Mr. Atsmon had a twenty-year career with
Tadiran Ltd. In his last role at Tadiran Ltd., Mr. Atsmon served as Corporate VP for
business development. Prior to that, he served as President of various military
communications divisions. Mr. Atsmon holds a Bachelors degree in Electrical
Engineering from the Technion  Israel Institute of Technology.

Rimon
Ben-Shaoul has served as one of our directors since September 2001. Since 2001, Mr.
Ben-Shaoul has served as Co-Chairman, President, and CEO of Koonras Technologies Ltd., a
technology investment company controlled by Poalim Investments Ltd., a large Israeli
holding company. Mr. Ben-Shaoul also serves as Chairman of Nipson Digital Printing Systems
PLC and as a director of Dor Chemicals Ltd., MIND C.T.I. Ltd., BVR Systems Ltd., Cimatron
Ltd. and several private companies. In addition, he is the President and CEO of Polar
Communications Ltd., which manages media and communications investments. Between 1997 and
2001, Mr. Ben-Shaoul was the President and CEO of Clal Industries and Investments Ltd.,
one of the largest holding companies in Israel with substantial holdings in the high tech
industry. During that time, Mr. Ben-Shaoul also served as Chairman of the Board of
Directors of Clal Electronics Industries Ltd., Scitex Corporation Ltd., and various other
companies within the Clal Group. Mr. Ben-Shaoul also served as a director of ECI Telecom
Ltd., Fundtech Ltd., Creo Products, Inc. and Nova Measuring Instruments Ltd. From 1985 to
1997, Mr. Ben-Shaoul was President and CEO of Clal Insurance Company Ltd. and a director
of the company and its various subsidiaries. Mr. Ben-Shaoul holds a Bachelors degree
in Economics and Statistics and a Masters degree in Business Administration, both
from Tel-Aviv University.

Yoseph
Dauber has served as one of our directors since April 2002. Mr. Dauber has served in
various senior positions at Bank Hapoalim since 1973. Until June 2002, Mr. Dauber was
Deputy Chairman of the Board of Management and Joint Managing Director of Bank Hapoalim
and was responsible for the commercial division of the bank. From 1994 to June 2002, Mr.
Dauber served as Chairman of the Isracard Group. Mr. Dauber also served as Chairman of
Poalim American Express from 1995 to July 2002. From 2002 to 2003, he served as Chairman
of the Israel Maritime Bank Ltd. Mr. Dauber currently serves as a member of the Board of
Bank Hapoalim. He also serves as a director of Clal Insurance Holdings Ltd., Vocaltec
Communications Ltd., Lodzia Rotex Ltd., Afcon Industries Ltd. and Orbit/FR Inc. Mr. Dauber
holds a Bachelors degree in Economics and Statistics from the Hebrew University in
Jerusalem and a Masters degree in Law from Bar Ilan University.

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Dan
Falk has served as one of our statutory outside directors since 2001. From 1999 to
2000, Mr. Falk was President and Chief Operating Officer of Sapiens International
Corporation N.V.  From 1985 to 1999, Mr. Falk served in various positions in Orbotech
Ltd., the last of which were Chief Financial Officer and Executive Vice President. From
1973 to 1985, he served in several executive positions in the Israel Discount Bank. Mr.
Falk serves on the board of directors of Orad Hi-Tech Systems Ltd. (where he is Chairman),
Orbotech Ltd., Ormat Technologies Inc., Clicksoftware Technologies Ltd., Jacada Ltd.,
Attunity Ltd., Nova Measuring Systems Ltd., Dmateck Ltd., AVT Ltd., Amiad Filteration
Systems Ltd. and Plastopil Ltd. 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.

John
Hughes has served as one of our directors since November, 2002. Mr. Hughes is
currently the Non-Executive Chairman of Intec Telecom Systems plc and Telecity Group plc
and Non-Executive Deputy Chairman of Parity Group plc. From December 2000 to July 2004, he
held senior executive positions at Thales Group, most recently as Executive Vice President
and CEO of all civil activities for the Group. From 1997 to 2000, he held various
positions with Lucent Technologies, including President of its GSM/UMTS division. From
1991 to 1997, Mr. Hughes served as Director of Convex Global Field Operations within the
Hewlett Packard Company. Prior to that, Mr. Hughes held various positions with UK and US
companies. Mr. Hughes also serves as Non-Executive Director of Spectris plc and Barco N.V.
Mr. Hughes holds a Bachelor of Science degree in Electrical and Electronic Engineering
from the University of Hertfordshire.

Yocheved
Dvir has served as one of our statutory outside directors since January 2008. Since
2000, Ms. Dvir has served as a strategic advisor in business development affairs to
multiple companies and initiatives that were being founded. She serves on the boards of
Strauss Industries Ltd. and Phoenix Co. Until recently, she served on the boards of
Trendline Business Information & Communications Ltd., Menorah Insurance Company Ltd.,
Israel Corporation Ltd. and ECI Telecom Ltd. Between 1990 and 2000, Ms. Dvir served as
Senior VP of the Migdal Group. Ms. Dvir joined the Migdal Group in 1981 and, until late
2000, held a number of senior financial and managerial positions, including Head of the
Groups Economics Department (1986-1988), Head of the Groups Corporate Office
(1989-1992), Head of the Groups General Insurance Division and Corporate Office
(1993-1997), Group CFO (1997-1999), Head of the Groups Strategic Development
Division and Marketing Array and Risk Manager (2000). Ms. Dvir holds a Bachelors
degree in Economics and Statistics from the University of Haifa and a full second degree
study in Statistics from the Hebrew University of Jerusalem.

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Haim
Shani has served as our Chief Executive Officer since January 2001. He also served as
our President from January 2001 to April 2005 and as a director from January 2001 to
September 2005. From 1998 to 2000, he served as General Manager of the Israeli office of
Applied Materials Inc., where he headed the process diagnostic and control business group
formed following the acquisition by Applied Materials of Opal Ltd. and Orbot Instruments,
Ltd. Prior thereto, 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.

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

Moshe
Egert has served as the President of the newly-formed NICE Enterprise Group since
February 1, 2008. Prior to joining NICE, Mr. Egert spent two years as an active board
member and strategic consultant with several software companies, specializing in strategic
planning, sales and marketing, and business development. Between 1996 and 2005, Mr. Egert
served as the President of the EMEA operation for Mercury Interactive Corp. (now HP
Mercury), and between 1990 and 1996, he held a variety of business and technical positions
at Mercury. . Moshe Egert holds a Bachelors degree in Electrical Engineering from
Tel Aviv University.

Israel
Livnat has served as our Corporate Vice President & President of the Security
Group since May 2006. Prior to joining NICE, he served since 2001 as the President and CEO
of Elta Systems Ltd. Prior to his last position as the President of Elta Systems, Mr.
Livnat was heading a division in the Israeli Aircraft Industries, leading the development
of the Arrow weapons system. Before that he was VP Engineering in the same division in the
Israeli Aircraft Industries, and director for hardware engineering in Daisy Systems
Mountain View California, leading state-of-the-art developments in the hardware and
software of large computer-embedded systems. Mr. Livnat holds a B.Sc in Electrical
Engineering from the TechnionIsrael Institute of Technology, and an Executive MBA
from Stanford University California. He was awarded the prestigious Israeli Industry Prize
in 2004.

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David
Sosna is the Chief Executive Officer and a co-founder of Actimize Ltd., a NICE
company. Mr. Sosna joined the NICE management team in 2007, when Actimize was acquired by
NICE. Prior to serving as CEO of Actimize, Mr. Sosna served as its Executive Vice
President of New Business Development. Before Actimize, Mr. Sosna founded Gilon
Information Systems, which grew into Israels largest business intelligence company.
Mr. Sosna holds a Bachelors degree in Industrial Engineering and Management, from
Ben-Gurion University.

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

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

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

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

Dan
Yalon has served as our Corporate VP Strategy and Strategic Alliances since November
2007. From 2003 to 2007, Mr. Yalon held several business development positions at Amdocs
Ltd., the last of which was as the Head of Strategy and New Business Initiatives, where he
established the companys strategic planning and execution capabilities, translating
corporate vision and strategic planning into actionable growth initiatives. From 2000 to
2003, Mr. Yalon was a strategy consultant with U.S.-based firm Monitor Company and with
Israeli firm P.O.C Management Consulting. Mr. Yalon holds a Bachelors degree in Law
and a Bachelors degree in management, both from the Hebrew University of Jerusalem.

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Eran
Gorev has served as the President and Chief Executive Officer of NICE Systems Inc.
since March 2005. From 2002 to 2004, Mr. Gorev was President of the North America 
Major Clients division at Amdocs Ltd. From 2000 to 2002, he served as Corporate Vice
President and Head of Worldwide Sales at Amdocs. Prior thereto, Mr. Gorev held various
marketing and sales management positions in the information technology industry. Mr. Gorev
holds a Bachelors degree in Law from Tel Aviv University and a joint Masters
degree in Business Administration from the Kellogg School of Management of Northwestern
University and the Leon Recanati Graduate School of Business Administration of Tel Aviv
University.

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

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

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

# Compensation

The
aggregate compensation paid to or accrued on behalf of all our directors and executive
officers as a group of 21 persons during 2007 consisted of approximately $5.1 million in
salary, fees, bonus, commissions and directors fees and approximately $0.1 million
in amounts set aside or accrued to provide pension, retirement or similar benefits, but
excluding amounts we expended for automobiles made available to our officers, expenses
(including business travel, professional and business association dues and expenses)
reimbursed to our officers and other fringe benefits commonly reimbursed or paid by
companies in Israel.

During
2007, our officers and directors received, in the aggregate, options and restricted shares
with respect to 675,837 ordinary shares under our equity based compensation plans. These
options and restricted shares have an average price of $28.20 and the options will expire
six years after the date the options were granted.

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Compensation
and reimbursement for outside directors (as described below) is statutorily determined
pursuant to the Israeli Companies Law, 57591999, or the Companies Law.  In 2007
we paid our outside directors annual fees in the aggregate amount of NIS 93,132 and
meeting attendance fees in the aggregate amount of NIS 73,970, including meetings of
committees of the board of directors. We pay each of our directors who is not an outside
director an annual fee of $15,000 and a meeting attendance fee of $600, including for
meetings of committees of the board of directors as well as an annual grant of options to
purchase 5,000 of our ordinary shares. We pay each member of our audit committee,
excluding outside directors, an additional annual fee of $2,500.  In addition, during
2007, our Chairman of the Board received a special annual fee in the amount of $25,000.

Pursuant
to the requirements of the Israeli Companies Law, remuneration of our directors generally
requires shareholder approval. At our 2007 annual general meeting of shareholders, our
shareholders approved, that as of January 1, 2008, our outside directors are entitled to
compensation equal to that granted to the other members of the board of directors as
detailed above (excluding those that perform special functions, such as the Chairman of
the board of directors). Also, at our 2007 annual general meeting of shareholders, our
shareholders approved an increase of the special annual fee paid to the Chairman of the
Board by $11,000 so that commencing January 1, 2008, our Chairman of the Board receives a
special annual fee in the amount of $36,000.

# Board Practices

Corporate Governance
Practices

We
are incorporated in Israel and therefore are subject to various corporate governance
practices under the Israeli Companies Law, relating to such matters as outside directors,
the audit committee, the internal auditor and approvals of interested party transactions.
These matters are in addition to the ongoing listing conditions of
the NASDAQ and other relevant provisions of U.S. securities laws. Under the
NASDAQ rules, a foreign private issuer may generally follow its home country rules of
corporate governance in lieu of the comparable NASDAQ requirements, except for certain
matters such as composition and responsibilities of the audit committee and the
independence of its members. We follow the Israeli Companies Law, the relevant provisions
of which are summarized in this annual  report, rather than comply with the
NASDAQ requirements relating to the quorum for shareholder meetings, shareholder approval
with respect to issuance of securities under equity based compensation plans and
sending annual reports to shareholders. According to Israeli law, equity based
compensation plans, as well as their underlying pool, do not require shareholders
approval.

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General Board Practices

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

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

Outside Directors

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

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

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder.
| | - | ----------------------------

No
person may serve as an outside director if the persons position or other activities
create, or may create, a conflict of interest with the persons responsibilities as
an outside director or may otherwise interfere with the persons ability to serve as
an outside director.

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

| |  | the
majority of shares voted at the meeting shall include at least one-third of the shares of
non-controlling shareholders present at the meeting and voting on the matter (without
taking into account the votes of the abstaining shareholders); or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

84

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

Mr.
          Dan Falk was elected for a third term as an outside director and Ms. Yocheved
          Dvir was elected as an outside director for the first time at our Annual
General           Meeting held on December 24, 2007, and their election became effective
as of           January 1, 2008. An outside director is entitled to compensation as
provided in           regulations adopted under the Companies Law and is otherwise
prohibited from           receiving any other compensation, directly or indirectly, from
the company. In           accordance with such regulations, at our 2007 annual general
meeting of           shareholders, our shareholders approved that our outside directors
are to           receive compensation equal to that paid to the other members of the
board of           directors. For further information, please see Item 6, Directors,
Senior           Management and EmployeesCompensation in this annual report.

Financial and Accounting
Expertise

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

Independent Directors

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

85

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Audit Committee

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

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

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

Internal Audit Committee

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

Internal Auditor

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

86

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Compensation Committee

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

Nominations Committee

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

# Employees

At
December 31, 2007, we had approximately 2,172 employees worldwide, which represented an
increase of 22.1% from year-end 2006.

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

| |                          | At December 31,
| | ------------------------ | ---------------
|
|
|
|
| | Operations               |                
| | Customer Support         |                
| | Sales & Marketing        |                
| | Research & Development   |                
| | General & Administrative |                
| |                          |                
| | Total                    |                
| |                          |                

| | Geographic Location |  |  | 
| | ------------------- |  |  | 
|
|
|
|
| | Israel              |  |  | 
| | North America       |  |  | 
| | Europe              |  |  | 
| | Asia Pacific        |  |  | 
| |                     |  |  | 
| | Total               |  |  | 
| |                     |  |  | 
| |                     |  |  | 

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We
also utilize temporary employees in various activities. On average, we employed
approximately 15 temporary employees and obtained services from approximately 250
consultants (not included in the numbers set forth above) during 2007.

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

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

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

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

88

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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-competition and non-disclosure provisions, although the enforceability of
non-competition provisions in employment agreements under Israeli law is very limited.

# Share Ownership

As
of March 25, 2008, our directors and executive officers beneficially owned an aggregate of
835,691 ordinary shares, or approximately 1.4% of our outstanding ordinary shares. This
figure includes 773,188 unvested restricted shares and options to purchase ordinary shares
that were vested on such date or that were scheduled to vest within the following 60 days.
The restricted shares and options have an average exercise price of $19.15 per share and
the options expire between 2008 and 2013. No individual director or executive officer
beneficially owns 1% or more of our outstanding ordinary shares.

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

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, 12,000,000 ADSs for issuance under
the 1995 Plan.

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, or the Tax Ordinance.

89

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On
December 19, 2003, the board of directors resolved to elect the Capital Gains
Route (as defined in Section 102(b)(2) of the Tax Ordinance) for the grant of
options to Israeli grantees. Generally, subject to the fulfillment of the provisions of
Section 102 of the Tax Ordinance, under the Capital Gains Route gains realized from the
sale of shares issued upon exercise of options will generally be taxed at a rate of only
25% and not at the marginal income tax rate applicable to the grantee (up to 48%). In
general, all options granted to Israeli grantees, shares issued upon exercise of such
options and any bonus shares issued with respect to such shares will be held in trust for
the benefit of the grantee for at least a period equal to the shorter of 30 months from
the date of grant or two years from the end of the tax year in which the options are
granted. Following an amendment to the Tax Ordinance which came into effect on January 1,
2006, the aforementioned trust period for options granted on or after January 1, 2006 is
24 months from the date of grant. The options may not be released from the trust prior to
the payment of the grantees tax liabilities. In the event the requirements of
Section 102 for the allocation of options according to the Capital Gains Route are not
met, the applicable marginal income tax rates will apply.

The
1995 Plan is generally administered by our compensation committee, which determines the
grantees under the 1995 Plan and the number of options to be granted. As of March 25,
2008, options to purchase 78,878 ordinary shares were outstanding under the 1995 Plan at a
weighted average exercise price of $5.32.

2003 Stock Option Plan

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

Generally,
under the terms of the 2003 Plan, 25% of the stock options granted become exercisable on
the first anniversary of the date of grant and 6.25% becomes exercisable once every
quarter during the subsequent three years. Stock options expire six years after the date
of grant. Stock options are non-transferable except upon the death of the grantee. For
information regarding options granted under the 2003 Plan to our directors, please see
Item 6, Directors, Senior Management and Employees  Compensation in this
annual report.

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

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

The
2003 Plan is generally administered by our compensation committee, which determines the
grantees under the 2003 Plan and the number of options to be granted. As of March 25,
2008, options to purchase 5,758,765 ordinary shares were outstanding under the 2003 Plan
at a weighted average exercise price of $25.65.

1999 Amended and Restated
Employee Stock Purchase Plan

In
1999, we adopted the NICE-Systems Ltd. 1999 Employee Stock Purchase Plan, or ESPP, in
order to provide an incentive to our employees and the employees of our subsidiaries by
providing them with an opportunity to purchase our ordinary shares through accumulated
payroll deductions, and thereby enable such persons to share in the future growth of our
business. We amended the ESPP in December 2003 and in December 2005. We have registered,
through the filing of a registration statement on Form S-8 with SEC under the Securities
Act, 1,437,888 ADSs for issuance under the ESPP. Following the resolution of our
shareholders of September 28, 2005, to transfer 1,062,112 ordinary shares from the ESPP to
the 2003 Plan, 437,888 ADSs remain registered 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 option update price under the ESPP is
95% of the closing sales price of one ADR as quoted on NASDAQ on the semi-annual purchase
date.

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For
information on the transfer of ordinary shares reserved for issuance under the ESPP to the
2003 Plan, please see the description under the caption 2003 Stock Option Plan
above.

Actimize Ltd. 2003
Omnibus Stock Option and Restricted Stock Incentive Plan

Pursuant
to the terms of the acquisition of Actimize Ltd. in August 2007, we assumed and replaced
the stock options and restricted shares granted by Actimize.

In
2003, Actimize adopted the 2003 Omnibus Stock Option and Restricted Stock Incentive Plan,
or the 2003 Actimize Plan, to afford an incentive to employees, officers, office holders,
directors, subcontractors and consultants of Actimize or any subsidiary of Actimize, to
acquire a proprietary interest in Actimize, to increase their efforts on behalf of
Actimize and to provide the success of Actimizes business. Under the 2003 Actimize
Plan, the grantees could be granted options to acquire Actimizes ordinary shares,
restricted shares and shares. Incentive stock options to acquire ordinary shares of
Actimize were granted at an exercise price not less than the fair market value of the
ordinary shares of Actimize on the date of grant or as determined by Actimizes board
of directors or by a committee thereof. In addition, the options were granted at an
exercise price of not less than the par value of the ordinary shares of Actimize.

In
September 2007, we registered, through the filing of a registration statement on Form S-8
with the SEC under the Securities Act, an aggregate of 987,104 ADSs, which are comprised
of (i) 564,225 ADSs subject to issuance upon the exercise of stock options outstanding
under the 2003 Actimize Plan and (ii) 422,879 ADSs representing restricted ordinary shares
issued in lieu of restricted shares issued under the 2003 Actimize Plan.

Generally,
under the terms of the 2003 Actimize Plan, 25% of the options granted become exercisable
on the first anniversary of the date of grant and 6.25% become exercisable following the
lapse of every consecutive quarter thereafter during the subsequent three years. Options
generally expire ten years after the date of grant. Options are non-transferable except
upon the death of the grantee. When applicable, the options are held by, and registered in
the name of, a trustee for a period of two years after the date of grant in accordance
with Section 102 of the Israeli Income Tax Ordinance.

As
of March 25, 2008, options to purchase 496,594 ordinary shares of the NICE were
outstanding and 399,142 restricted shares were issued under the 2003 Actimize Plan at a
weighted average exercise price of $11.44 and $0.83, respectively. No additional grants
are being made under this plan following the acquisition of Actimize.

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|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 the dates stated below, with respect to each person known to us
to be the beneficial owner of 5% or more of our outstanding ordinary shares. None of our
major shareholders has any different voting rights than any other shareholder.

|                           | As of March 2, 2008 | As of May 9, 2007 | As of May 16, 2006
|-------------------------- | ------------------- | ----------------- | ------------------
|
|
|
|
|Migdal Insurance and       |                     |                   |                   
|Financing Holdings Ltd.    |                     |                   |                   
|                           |                     |                  
|Massachusetts              |                     |                  
|Financial Services Company |                     |                  
|and affiliates             |                     |                  
|500 Boylston St.           |                     |                  
|Boston, MA 02116           |                     |                   |                   

---

| | (1) | Based upon 59,957,451 ordinary shares issued and outstanding on March 2, 2008.
| | --- | ------------------------------------------------------------------------------

| | (2) | Based upon 51,903,839 ordinary shares issued and outstanding on May 9, 2007.
| | --- | ----------------------------------------------------------------------------

| | (3) | Based upon 49,296,202 ordinary shares issued and outstanding on May 16, 2006.
| | --- | -----------------------------------------------------------------------------

| | (4) | Based upon a Schedule 13G filed by Migdal Insurance and Financing Holdings
               Ltd. with the SEC on April 8, 2008, in which the filer disclaims beneficial
               ownership with respect to 3,528,812 of such shares.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Based upon a Schedule 13G for the period ended December 31, 2007, filed by
               Massachusetts Financial Services Company with the SEC on February 8, 2008.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Based upon a Form 13F for the period ended March 31, 2007, filed by
               Massachusetts Financial Services Company with the SEC on May 9, 2007.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------

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

As
of March 14, 2008, we had approximately 82 ADS holders of record in the United States,
holding approximately 67% of our outstanding ordinary shares, as reported by The Bank of
New York, the depositary for our ADSs.

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

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

As
of December 31, 2005, Bank Hapoalim funds held 925,918, or 3.8%, of our ordinary shares.
This information is based upon a Schedule 13G/A, filed by Bank Hapoalim with the SEC on
February 14, 2006, with respect to the aggregate holdings of various of its affiliated
mutual funds and provident funds. As of November 11, 2005, Bank Hapoalim informed us that
it held 967,981.75, or approximately 5%, of our ordinary shares.

As
of June 9, 2005, Bank Leumi held 875,174, or 4.6%, of our ordinary shares. This
information is based upon a report provided to us by Bank Leumi pursuant to Israeli law
with respect to the aggregate holdings of various of its affiliated mutual funds and
provident funds. As of March 31, 2004, Bank Leumi reported that it held 1,271,000, or
7.3%, of our ordinary shares. The method used to compute holdings under Israeli law does
not necessarily bear the same result as the method used to compute beneficial ownership
under SEC rules and regulations.

Between
April 28, 2004 and June 2, 2005, Thales S.A. sold 762,025ordinary shares.
Consequently, Thales SA now holds less than 5% of our ordinary shares. This information is
based upon the information contained in an amendment to Schedule 13D filed with the SEC on
June 3, 2005 by Thales SA.

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.

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# Related Party
Transactions

None.

|Item 8. | Financial Information.
|------- | ----------------------

# Consolidated Statements
and Other Financial Information

See
Item 18, "Financial Statements."

# Legal Proceedings

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

Witness Patent
Infringement Lawsuits

On
July 20, 2004, STS Software System Ltd., or STS, a wholly owned subsidiary of ours,
brought a lawsuit against Witness Systems, Inc. (currently: Verint America Inc., a wholly
owned subsidiary of Verint Systems, Inc.) asserting that Witness Systems is infringing
three U.S. patents of STS relating to voice over internet protocol, or VoIP. STS claims
that Witness Systems infringes the VoIP patents by marketing and selling products that
incorporate methods of detecting, monitoring and recording information  all fully
protected by the patents. STS is seeking a permanent injunction to prevent Witness Systems
from making, using, offering to sell or selling any product in the United States that
infringes these patents. In response, Witness Systems is asserting that the patents are
invalid and not infringed. By order of the Court on June 26, 2007, NICE-Systems Ltd.
joined as a plaintiff in the litigation. A trial took place in the U.S. District Court for
the Northern District of Georgia during the week of March 17, 2008. Prior to the trial, we
removed two U.S. patents from the litigation. A decision by the Court is expected in May,
2008.

On
August 30, 2004, Witness Systems filed a lawsuit in the United States District Court for
the Northern District of Georgia against Nice Systems Inc., a wholly owned subsidiary of
ours. Witness Systems is alleging infringement of two U.S. patents entitled Method
and Apparatus for Simultaneously Monitoring Computer User Screen and Telephone Activity
from a Remote Location and is seeking damages in an amount ranging from $17 million
to $33 million and injunctive relief. On February 24, 2005, Witness Systems filed a
similar action in the Northern District of Georgia against NICE-Systems Ltd., alleging
infringement of the same two patents. The two actions were consolidated in April 2005. We
have denied infringing these patents and are vigorously defending against Witness
Systems claims. In addition, we have asserted our right to be indemnified for losses
arising out of the claims of infringement in this litigation pursuant to an agreement
between NICE-Systems Ltd. and Netopia, Inc., our vendor. The case is currently in
discovery and no trial date has been set.

95

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On
January 19, 2006, Witness Systems filed a new patent infringement action in the United
States District Court for the Northern District of Georgia against NICE-Systems Ltd. and
Nice Systems Inc., alleging infringement of a U.S. patent relating to technology to
extract particular information from recorded telephone conversations. This technology is
used as an option with a NICE product called NicePerform. Witness Systems is requesting
unspecified damages and a permanent injunction to prevent any sale of allegedly infringing
products. We have denied all material allegations and are asserting a number of defenses.
We believe that the claims are without merit and intend to vigorously defend against them.
The case is currently in discovery and trial is expected to begin on May 12, 2008.

On
May 10, 2006, NICE-Systems Ltd. and its wholly owned subsidiary, Nice Systems Inc. filed a
new lawsuit against Witness Systems, Inc. in the United States District Court for District
of Delaware claiming that Witness Systems is infringing ten U.S. patents. These patents
cover various aspects of recording customer interaction communications and traditional
logging including event triggered call and screen recording, cradle-to-grave
recording of customer calls, traditional TDM loggers, off-site storage of calls, and
multi-stage telephone data logging. In this lawsuit, we claimed that Witness Systems
infringes our patents by marketing and selling products that use methods, products and
systems which we believe are protected by our patents. The Witness products we have
accused of infringing our patents include Impact 360®, ContactStore®, eQuality
ContactStore®, ContactStore for Communication Manager®, eQuality ContactStore for
Communication Manager® and Eyretels MediaStore®. We requested a permanent
injunction to prevent Witness Systems from making, using, or offering to sell or selling
any product in the United States which infringes these patents.  In addition, we
sought damages for Witness Systems past willful infringement of these patents.
The case went to trial before a jury on January 14, 2008. The jury deadlocked and on
January 25, 2008 a mistrial was declared. We filed a motion for a new trial date for the
case. A new trial date has not been set yet.

CipherActive Lawsuit

On
October 19, 2004, CipherActive filed an action against us in the District Court of Tel
Aviv. In this lawsuit, CipherActive claims that under a development agreement with us, it
is entitled to receive license fees in respect of certain software that it allegedly
developed for us and which has been embedded in one of our products. CipherActive claims
that it is entitled to license fees in an amount of $600,000, in addition to the amount of
$100,000 already paid toCipherActive by us in respect of such license fees. In our
statement of defense we claim that the software developed by CipherActive under the
agreement has not been successful in the market, is no longer embedded in our product and,
therefore, CipherActive is not entitled to any additional license fees. On February 1,
2007, a preliminary hearing took place, during which we suggested that the parties submit
the dispute to mediation. Although the court approved the mediation, the parties failed to
find an appropriate mediator. In a pretrial hearing that took place on May 27, 2007, the
court accepted CipherActives request to allow additional time for negotiations
between the parties. An additional pretrial hearing took place on January 20, 2008. The
Court determined that an accountant from one of the big five accounting firms will examine
the damages claimed by CipherActive and will submit an opinion within 90 days.

96

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Origin Dispute

In or around February 2005, NICE
received correspondence from Origin Data Realisation Limited (Origin),
notifying the Company of a potential claim against it in relation to an alleged breach of
the terms of a license of software and other matters. Following lengthy negotiations, the
dispute was recently settled and a new license agreement was entered into between the
parties in December 2007.

Dictaphone Corp. v.
VoicePrint.

On
July 27, 2004, Dictaphone Corp. filed an action against VoicePrint in the United States
District Court for the Central District of California asserting the infringement by
VoicePrint of the same patents as those asserted in the Mercom Systems lawsuit, which we
subsequently acquired from Dictaphone. This lawsuit has been settled in principle. The
documentation for this settlement has not been finalized and executed by the parties.

Calyon Dispute

In
December 2006, Calyon Corporate and Investment Bank filed a suit against us in the
District Court of Tel Aviv, demanding repayment of $648,144 plus accrued interest, for a
total amount of $740,395.  We had deducted this amount in January 2004 from a payment
transferred from an account of Thales maintained with Calyon to our account, at the
instruction of Thales, in connection with our acquisition of TCS from Thales. We had
notified TCS in 2004 that we had setoff such amount with respect to an overdue payment by
TCS to us. The dispute was submitted to mediation, however the mediation process failed
and the proceedings were returned to the District Court of Tel Aviv. This lawsuit is in
its initial stages and the first hearing is scheduled to take place on September 18, 2008.

Formatest Dispute

On
March 9, 2007, Formatest AG filed a claim against NICE Switzerland AG, a wholly owned
subsidiary of ours, in the Cantonal Court of Zug, Switzerland.  The claim was in the
amount of EUR 1,187,793 (plus interest at 5% per annum) and was made in connection with an
agreement dated December 10, 2004 between FAST Video Security AG (now NICE Switzerland AG)
and Formatest AG.  On June 19, 2007, NICE and Formatest AG entered into an agreement
settling all claims. We believe we are entitled to recover all or a substantial part of
the settlement amount paid to Formatest AG (with the addition of legal costs) under the
terms of indemnification provision contained in the sale and purchase agreement between
the selling shareholders of FAST Video Security AG (the Sellers) and NICE
dated November 16, 2006 (the Agreement). We blocked escrow funds from being
released to the Sellers under the Agreement in the amount of $3,000,000 and also declared
our right to set off the settlement amount paid to Formatest AG against the Sellers
first earn out payment pursuant to the Agreement. On December 18, 2007, the Sellers issued
a Notice of Arbitration in the Zurich Chamber of Commerce, claiming that NICE should pay
them an amount of $1,228,766.60 (plus late payment interest of 5% from July 2007), which
is the remaining unpaid portion  of the first earn out payment under the Agreement, release $3,000,000 (plus
accrued interest) from the escrow account pursuant to the Agreement, plus an additional
late release interest of 5%, and compensate them for loss incurred due to deteriorating
exchange rates and other related expenses. In accordance with our assessment of the
Sellers liability and in order to reduce arbitration costs, we decided to release to
the Sellers a partial payment of $1,400,000 out of the escrow funds and to pay to the
Sellers the amount of $1,228,766.60 prior to the commencement of the arbitration
proceedings. On February 20, 2008 we filed a counterclaim against the Sellers for
indemnity under the Agreement as of the time of filing to approximately $1,360,000. The
arbitration proceedings are at an initial stage and parties are in the process of jointly
designating an arbitrator.

97

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Discrimination in
Employment Disputes

On
October 26, 2007, two former employees of Nice Systems Inc. filed a lawsuit against NICE
and Nice Systems Inc., alleging violations of various laws prohibiting discrimination in
employment. The plaintiffs are seeking lost earnings and benefits, compensatory damages
for emotional injury and injury to reputation and punitive damages, as well as
attorneys fees and costs. We filed our answer and the Court has held an initial
conference and entered a scheduling order. The case is in its early stage of discovery.

On
December 19, 2007, a former employee of Nice Systems Inc. sent NICE and Nice Systems Inc.
a letter alleging engagement in prohibited discrimination in employment and retaliation in
terminating his employment. The former employee has made a settlement demand. We are
currently in the process of assessing and responding to the letter.

# Dividends

Since
our initial public offering and listing on the NASDAQ National Market (now The NASDAQ
Global Select Market) in 1996, we have not declared or paid cash dividends on our ordinary
shares or ADSs. We intend to retain our earnings for future growth and therefore do not
anticipate paying any cash dividends in the foreseeable future. Under Israeli law,
dividends may be paid only out of profits and other surplus (as defined in the law) as of
our most recent financial statements or as accrued over a period of two years, whichever
is higher, provided that there is no reasonable concern that the dividend distribution
will prevent us from meeting our existing and foreseeable obligations as they come due.
Payment of future dividends, if any, will be at the discretion of our board of directors
and will depend on various factors, such as our statutory profits, financial condition,
operating results and current and anticipated cash needs. In the event cash dividends are
declared by us, we may pay such dividends in Israeli currency. Under current Israeli
regulations, any cash dividend in Israeli currency paid in respect of ordinary shares
purchased by non-residents of Israel with non-Israeli currency may be freely repatriated
in such non-Israeli currency, at the rate of exchange prevailing at the time of
conversion.

98

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# Significant Changes

Effective
as of January 1, 2008, Ms. Yocheved Dvir was elected as a statutory outside director. Dr.
Leora Meridor completed her second term as a statutory outside director on January 1,
2008, and did not seek re-nomination for an additional term.

|Item 9. | The Offer and Listing.
|------- | ----------------------

Trading in the ADSs

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

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|                              | ADSs
|----------------------------- | ----
|
|
|
|
|Annual                        |     
|                              |     
|2003                          |     
|2004                          |     
|2005                          |     
|2006                          |     
|2007                          |     
|                              |     
|Quarterly 2006                |     
|                              |     
|First Quarter                 |     
|Second Quarter                |     
|Third Quarter                 |     
|Fourth Quarter                |     
|                              |     
|Quarterly 2007                |     
|                              |     
|First Quarter                 |     
|Second Quarter                |     
|Third Quarter                 |     
|Fourth Quarter                |     
|                              |     
|Quarterly 2008                |     
|                              |     
|First Quarter                 |     
|                              |     
|Monthly                       |     
|                              |     
|October 2007                  |     
|November 2007                 |     
|December 2007                 |     
|January 2008                  |     
|February 2008                 |     
|March 2008                    |     
|April 2008 (through April 11) |     

100

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On
April 11, 2008, the last reported price of our ADSs was $29.71 per ADS.

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

|       | Ordinary Shares
|------ | ---------------
|
|
|
|
|Annual |                
|       |                
|2003   |                
|2004   |                
|2005   |                
|2006   |                
|2007   |                

101

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|                              | Ordinary Shares
|----------------------------- | ---------------
|
|
|
|
|
|Quarterly 2006                |                
|                              |                
|First Quarter                 |                
|Second Quarter                |                
|Third Quarter                 |                
|Fourth Quarter                |                
|                              |                
|Quarterly 2007                |                
|                              |                
|First Quarter                 |                
|Second Quarter                |                
|Third Quarter                 |                
|Fourth Quarter                |                
|                              |                
|Quarterly 2008                |                
|                              |                
|First Quarter                 |                
|                              |                
|Monthly                       |                
|                              |                
|October 2007                  |                
|November 2007                 |                
|December 2007                 |                
|January 2008                  |                
|February 2008                 |                
|March 2008                    |                
|April 2008 (through April 11) |                

As
of April 11, 2008, the last reported price of our ordinary shares on the TASE was NIS
107.50 (or $29.75) per share.

102

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|Item 10. | Additional Information.
|-------- | -----------------------

# Memorandum and Articles
of Association

Organization and Register

We
are a company limited by shares organized in the State of Israel under the 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.

Directors

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

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

103

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

Fiduciary Duties of
Officers

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

Approval of Certain
Transactions

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

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.

104

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

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

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

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

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

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

According
to the Companys Articles of Association certain resolutions, such as resolutions
regarding mergers, and windings up, require approval of the holders of 75% of the shares
represented at the meeting and voting thereon.

105

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Duties of Shareholders

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

| |  | any
amendment to the articles of association;
| | - | ---------------------------------------------

| |  | an
increase of the company's authorized share capital;
| | - | ------------------------------------------------------

| |  | a
merger; or
| | - | ------------

| |  | approval
of interested party transactions which require shareholder approval.
| | - | -----------------------------------------------------------------------------

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

Exemption, Insurance and
Indemnification of Directors and Officers

Exemption of Office
Holders

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

Office Holder Insurance

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

| |  | a
breach of his duty of care to us or to another person,
| | - | --------------------------------------------------------

| |  | a
breach of his duty of loyalty to us, provided that the office holder acted in good faith
and had reasonable grounds to assume that his act would not prejudice our interests, or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

106

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Indemnification of Office
Holders

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

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

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

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

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

Limitations on Exemption,
Insurance and Indemnification

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

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

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

107

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| |  | any
act or omission done with the intent to derive an illegal personal benefit; or
| | - | ----------------------------------------------------------------------------------

| |  | 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. We have
obtained such approvals for the procurement of liability insurance covering our officers
and directors and for the grant of indemnification letters to our officers and directors.

Rights of Ordinary Shares

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

Meetings of Shareholders

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

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

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

108

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Mergers and Acquisitions

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

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

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

109

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# Material Contracts

Actimize Ltd. Acquisition

On
August 30, 2007, we acquired Actimize Ltd., a global provider of operational
risk management software solutions that enable financial services institutions to manage
the challenges of regulatory compliance, internal policy enforcement and fraud prevention
and money laundering. Under the terms of the Agreement and Plan of Merger, dated
July 2, 2007 (the Merger Agreement), the consideration paid for
Actimize was approximately $281 million, approximately 80% of which was in cash and
approximately 20% of which was satisfied through the issuance of 1,501,933 of our ordinary
shares based on the market price of the securities a few days before and after the terms
of the acquisition were agreed upon and announced. Pursuant to the terms of the Merger
Agreement, we assumed the stock options and restricted shares granted by Actimize (for
further information please see Item 6, Directors, Senior Management and
Employees in this annual report).On August 29, 2007, we entered into an
unsecured loan agreement and a letter of undertaking with Bank Hapoalim B.M., which
provided for a term loan of $120 million to finance a portion of the cash consideration
for the Actimize transaction. The loan was repaid in one installment on September 28,
2007. On September 12, 2007, as required by the Merger Agreement, we filed a
registration statement with the U.S. Securities and Exchange Commission to register for
resale the securities issued pursuant to the Merger Agreement, which we maintained
effective for approximately six months.

IEX Corporation
Acquisition

In
July 2006, pursuant to a share purchase agreement, we acquired all the outstanding shares
of IEX Corporation, a worldwide provider of contact center workforce management, strategic
planning and performance management solutions for the contact center market, for
approximately $205 million in cash.

FAST Video Security AG
Acquisition

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

# 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.

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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
shareholders. The discussion is not intended, and should not be construed, as legal or
professional tax advice and does not exhaust all possible tax considerations.

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

Israeli Tax Considerations

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

General Corporate Tax
Structure

Generally,
Israeli companies are subject to Corporate Tax on taxable income at the rate of 29% for
the 2007 tax year. Following an amendment to the Israeli Income Tax Ordinance [New
Version], 1961 (the Tax Ordinance), which came into effect on January 1,
2006, the corporate tax rate is scheduled to decrease as follows: 27% for the 2008 tax
year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli
companies are generally subject to capital gains tax at a rate of 25% for capital gains
(other than gains deriving from the sale of listed securities) derived after January 1,
2003. However, the effective tax rate payable by a company that derives income from an
Approved or Privileged Enterprise may be considerably less.

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Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959, as amended.

We
derive and expect to continue to derive significant tax benefits in Israel relating to
our Approved and Privileged Enterprise programs, pursuant to the Law for
Encouragement of Capital Investments, 1959, or the Investments Law. To be eligible for
these tax benefits, we must continue to meet certain conditions, including making certain
specified investments in fixed assets. In the event of a failure to comply with these
conditions, the benefits may be canceled and we may be required to refund the amount of
the benefits, in whole or in part, including interest and certain inflation adjustments.
As of December 31, 2007 we believe that we are in compliance with all the conditions
required by the law.

Full
details regarding our Approved and Privileged Enterprises may be found in Note 12(a)(2)
of our Consolidated Financial Statements.

Other
than by way of our complete liquidation, if we distribute dividends from the income of our
Approved Enterprises which was exempted from taxes pursuant to our
Approved Enterprise benefits, we will be taxed as if the exempt income was
subject to the regular reduced corporate tax rate arising under our Approved
Enterprise programs. Pursuant to the amendment to the Investment Law, the Company
elected for 2006 to be the commencement year for its first Privileged Enterprise program
under the amended law. Under the amendment, tax-exempt income generated under our
Privileged Enterprise, will subject the Company to taxes upon dividend distribution or
complete liquidation.

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

Income
from sources other than the Approved or Privileged Enterprises during the
period of benefits will be taxable at regular corporate tax rates.

Tax Benefits and Grants
for Research and Development

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

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

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

| |  | deductions
over an eight-year period for purchases of know-how and patents;
| | - | ---------------------------------------------------------------------------

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

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

| |  | accelerated
depreciation rates on equipment and buildings.
| | - | ----------------------------------------------------------

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

Special Provisions
Relating to Taxation Under Inflationary Conditions

The
Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law,
represents an attempt to overcome the problems presented to a traditional tax system by an
economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex.
Until December 31, 2001, we measured our Israeli taxable income in accordance with this
law, but from January 1, 2002, we have elected to measure our Israeli taxable income in
relation to changes in the U.S. dollar/NIS exchange rate rather than the Israeli inflation
index. We were permitted to make such a change pursuant to regulations published by the
Israeli Minister of Finance, which provide the conditions for so doing. A company that
elects to measure its results for tax purposes based on the U.S. dollar/NIS exchange rate
cannot change that election for a period of three years following the election. We believe
that we meet the necessary conditions and as such, continue to measure our results for tax
purposes based on the U.S. dollar/NIS exchange rate.

On
February 26, 2008, the Israeli parliament approved an amendment to the Inflationary
Adjustments Law which limits the applicability of such law so that it will cease to apply
after the 2007 tax year.

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Israeli Transfer Pricing
Regulations

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

Capital Gains Tax on
Sales of Our Ordinary Shares

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

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

Taxation of Israeli
Residents

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

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

Taxation of Non-Israeli
Residents

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

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

Taxation
of Dividends Paid on our Ordinary Shares

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

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Taxation
of Israeli Residents

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

Taxation
of Non-Israeli Residents

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

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

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

U.S. Federal Income Tax
Considerations

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

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

| |  | dealers
or traders in securities, currencies or notional principal contracts;
| | - | -----------------------------------------------------------------------------

| |  | financial
institutions;
| | - | -----------------------

| |  | insurance
companies;
| | - | --------------------

| |  | real
estate investment trusts;
| | - | ------------------------------

| |  | banks;
| | - | ------

| |  | investors
subject to the alternative minimum tax;
| | - | -------------------------------------------------

| |  | tax-exempt
organizations;
| | - | -------------------------

| |  | regulated
investment companies;
| | - | -------------------------------

| |  | investors
that actually or constructively own 10 percent or more of our voting shares;
| | - | --------------------------------------------------------------------------------------

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

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

| |  | investors
whose functional currency is not the U.S. dollar.
| | - | -----------------------------------------------------------

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

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

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

| |  | an
individual who is a citizen or a resident of the United States;
| | - | ------------------------------------------------------------------

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

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

| |  | a
trust if:
| | - | -----------

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

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

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

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

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

U.S. Taxation of ADSs

Distributions

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

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

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

Dividends
received by a U.S. holder with respect to ADSs will be treated as foreign source income
for the purposes of calculating that holders foreign tax credit limitation. Subject
to certain conditions and limitations, any Israeli taxes withheld on dividends at the rate
provided by the U.S.-Israel income tax treaty may be deducted from taxable income or
credited against a U.S. holders U.S. Federal income tax liability. The limitation on
foreign taxes eligible for the U.S. foreign tax credit is calculated separately with
respect to passive income and general income. The rules relating
to foreign tax credits and the timing thereof are complex. U.S. holders should consult
their own tax advisors regarding the availability of a foreign tax credit under their
particular situation.

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Sale
or Other Disposition of ADSs

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

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

Passive
Foreign Investment Companies

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

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

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

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

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| |  | the
amount  allocated to the year of the dividend  payment or  disposition  would be taxable
as ordinary                   income, and
| | - | --------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

121

---

---

# Backup Withholding and
Information Reporting

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

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

Sale,
Exchange or Retirement of Securities

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

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

| |  | you
are an individual, you are present in the United States for at least 183 days during the
year in which you dispose of the ADSs and have a tax home in the United
States, and certain other conditions are satisfied.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Backup
Withholding and Information Reporting

Backup
withholding and information reporting apply to non-U.S. holders as follows:

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

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

122

---

---

# Documents on Display

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

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

123

---

---

|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 as well as
other currencies. Thus, we are exposed to foreign exchange movements, primarily in UK,
European and Israeli currencies. We monitor foreign currency exposure and, from time to
time, may use various instruments to preserve the value of sales transactions and
commitments, however, this cannot assure our protection against risks of currency
fluctuations. For more information regarding foreign currency related risks, please refer
to Risks relating to Israel, on page 20. We use currency forward contracts
together with currency options to hedge payments in NIS. These transactions constitute a
future cash flow hedge. As of December 31, 2007, we had outstanding forward contracts in
the total amount of $22.5 million. These transactions were for a period of up to twelve
months.

Interest
Rate Risk. Our exposure to market risk for changes in interest rates relates
primarily to our investment in marketable securities. We invest in investment-grade
corporate bonds, US federal agency securities and U.S. treasury bills and notes. As of
December 31, 2007, 72% of our portfolio was in such securities. 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.

We
invest in dollar deposits with insured U.S. banks, dollar deposit in European Banks and
Money market funds. As of December 31, 2007, 26% of our portfolio was in such deposits.
Since these investments are for short periods, interest income is sensitive to changes in
interest rates. Up to 20% of our investment portfolio may be comprised of investment grade
Callable Range Accrual Notes whose principal is guaranteed. As of December 31, 2007, 2% of
our investment portfolio was in such notes. The notes are subject to interest rate,
liquidity and price risks. Since our policy is to hold these investments to maturity or
until called, the interest income from these notes is not expected to be affected by
changes in their market value or to liquidity risk. However, a significant increase in
prevailing interest rates may effect whether or not interest income is received for a
particular period. As of December 31, 2007, we do not have any investment in auction rate
securities.

The
average duration of the portfolio, as of December 31, 2007, is 1.22 years. The securities
in our portfolio are rated at the least as (A-) according to Standard and Poors
rating or (A3), according to Moodys rating. Securities representing 30% of the
portfolio are rated as AAA; securities representing 47% of the portfolio are rated as AA;
and securities representing 23% of the portfolio are rated as A.

124

---

---

Other
risks and uncertainties that could affect actual results and outcomes are described in
Item 3, Key InformationRisk Factors.

|Item 12. | Description of Securities Other than Equity Securities.
|-------- | -------------------------------------------------------

Not
Applicable.

# PART II

|Item 13. | Defaults, Dividend Arrearages and Delinquencies.
|-------- | ------------------------------------------------

None.

|Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds.
|-------- | -----------------------------------------------------------------------------

None.

|Item 15. | Controls and Procedures.
|-------- | ------------------------

Disclosure Controls and
Procedures

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

Managements Annual
Report on Internal Control Over Financial Reporting

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

125

---

---

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

Our
management assessed our internal control over financial reporting as of December 31, 2007.
Our management based its assessment on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, our management has concluded that, as
of December 31, 2007, our internal control over financial reporting is effective.

Our
management has excluded Actimize Ltd. from its assessment of internal control over
financial reporting as of December 31, 2007, because ownership was acquired by us during
2007. Actimize is included in the 2007 Consolidated Financial Statements of the company
since August 30, 2007 and constitutes approximately 26.12% of our consolidated total
assets and approximately 2.23% of our total revenues, as of, and for the year ended,
December 31, 2007.

Attestation Report of the
Independent Registered Public Accounting Firm

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

Changes in Internal
Control Over Financial Reporting

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

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

Our
board of directors has determined that Dan Falk meets the definition of an audit committee
financial expert, as defined in Item 401 of Regulation S-K, and is independent under the
applicable regulations.

126

---

---

|Item 16B. | Code of Ethics.
|--------- | ---------------

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

|Item 16C. | Principal Accountant Fees and Services.
|--------- | ---------------------------------------

# Fees Paid to Independent
Auditors

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

|Services Rendered | 2006 Fees | 2007 Fees
|----------------- | --------- | ---------
|
|
|
|
|Audit (1)         |           |          
|Audit-related (2) |           |          
|Tax (3)           |           |          
|Total             |           |          

---

|(1) | Audit
fees are for audit services for each of the years shown in this table,
                    including fees associated with the annual audit for 2007 (including
audit in                     accordance with section 404 of the Sarbanes-Oxley act) and
certain procedures                     regarding our quarterly financial results
submitted on Form 6-K, consultations                     on various accounting issues and
performance of local statutory audits.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

# Policies and Procedures

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

127

---

---

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

Not
applicable.

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

In 2007, neither we nor our affiliates purchased any of our own shares.

# PART III

|Item 17. | Financial Statements.
|-------- | ---------------------

Not
Applicable.

|Item 18. | Financial Statements.
|-------- | ---------------------

See
pages F-1 through F-60 of this annual report attached hereto.

128

---

---

|Item 19. | Exhibits.
|-------- | ---------

|Exhibit No. |  | Description
|----------- |  | -----------

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

|1.2 |  | Amended
and Restated Articles of Association, as approved on December 21, 2006 (filed as Exhibit
1.2 to NICE-Systems Ltd.s Annual Report on Form 20-F filed with the Commission on
June 13, 2006, and incorporated herein by reference).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.1 |  | Form
of Share Certificate (filed as Exhibit 4.1 to Amendment No. 1 to NICE-Systems Ltd.'s
                Registration Statement on Form F-1 (Registration No. 333-99640) filed
with the 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 |  | Manufacturing
Outsourcing Agreement dated January 21, 2002 by and among NICE-Systems Ltd. and
                Flextronics Israel Ltd. (filed as Exhibit 4.5 to NICE-Systems Ltd.'s
Annual Report on Form 20-F filed                 with the Commission on June 26, 2003,
and incorporated herein by reference).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Share
Purchase Agreement, dated as of November 17, 2005, between certain shareholders of FAST
Video Security AG and NICE-Systems Ltd. (filed as Exhibit 4.9 to NICE-Systems Ltd.s
Annual Report on Form 20-F filed with the Commission on May 17, 2006, and incorporated
herein by reference).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Share
Purchase Agreement, dated as of April 27, 2006, between IEX Corporation and NICE-Systems
Ltd. (filed as Exhibit 4.10 to NICE-Systems Ltd.s Annual Report on Form 20-F filed
with the Commission on May 17, 2006, and incorporated herein by reference).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Amendment
No. 2, dated as of March 27, 2006, to the Asset Purchase and Sale Agreement, dated as of
April 11, 2005, between Dictaphone Corporation and NICE-Systems Inc. (filed as Exhibit
4.11 to NICE-Systems Ltd.s Annual Report on Form 20-F filed with the Commission on
May 17, 2006, and incorporated herein by reference).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Agreement
and Plan of Merger, dated as of July 2, 2007, among Actimize Ltd., Nemo
Acquisitions Ltd. and NICE-Systems Ltd. (filed as Exhibit 99.2 to NICE-Systems Ltd.s
Report on Form 6-K filed with the Commission on August 30, 2007, and incorporated herein
by reference).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | English
Summary of Loan Agreement and Letter of Undertaking, dated August 29, 2007, between NICE
and Bank Hapoalim Ltd. (filed as Exhibit 99.10 to NICE-Systems Ltd.s Report on Form
6-K filed with the Commission on September 12, 2007, and incorporated herein by
reference).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | List
of significant subsidiaries.
|--- |  | ---------------------------------

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

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

129

---

---

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

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

|13.2 |  | Certification
by the Chief Financial Officer of NICE-Systems Ltd., pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

130

---

---

# NICE SYSTEMS LTD. AND
SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2007

# IN U.S. DOLLARS

# INDEX

|                                                         | Page       
|-------------------------------------------------------- | -----------
|
|
|
|
|Reports of Independent Registered Public Accounting Firm | F-2 - F-4  
|                                                        
|Consolidated Balance Sheets                              | F-5 - F-6  
|                                                        
|Consolidated Statements of Income                        | F-7        
|                                                        
|Statements of Changes in Shareholders' Equity            | F-8        
|                                                        
|Consolidated Statements of Cash Flows                    | F-9 - F-13 
|                                                        
|Notes to Consolidated Financial Statements               | F-14 - F-60
|                                                         |            



---

---

| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Kost Forer Gabbay & Kasierer3 Aminadav St.
Tel-Aviv 67067, Israel
Tel:  972 (3)6232525
Fax:  972 (3)5622555
www.ey.com/il

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders
and Board of Directors of

# NICE SYSTEMS LTD.

We
have audited the accompanying consolidated balance sheets of NICE Systems Ltd. and
subsidiaries (the Company) as of December 31, 2006 and 2007, and the related
consolidated statements of income, shareholders equity and cash flows for each of
the three years in the period ended December 31, 2007. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of the Company and subsidiaries
as of December 31, 2006 and 2007, and the consolidated results of their operations
and cash flows for each of the three years in the period ended December 31, 2007, in
conformity with accounting principles generally accepted in the United States.

As
discussed in Note 2 to the consolidated financial statements, in 2006 the Company adopted
Statement Financial Accounting Standards Board No. 123 (revised 2004) Share-Based
Payment.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company and subsidiaries internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated April 14, 2008 expressed an unqualified opinion
thereon.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 14, 2008   | A Member of Ernst & Young Global
|                 |                                 

F - 2

---

---

| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Kost Forer Gabbay & Kasierer3 Aminadav St.
Tel-Aviv 67067, Israel
Tel:  972 (3)6232525
Fax:  972 (3)5622555
www.ey.com/il

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders
and Board of Directors of

# NICE SYSTEMS LTD.

We
have audited Nice Systems Ltd.s (Nice or the Company)
internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Nices
management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on the Companys internal
control over financial reporting based on our audit.

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

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

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

As
indicated in Part II, Item 15 of this annual report on Form 20-F under the heading
Managements Annual Report on Internal Control Over Financial Reporting,
managements assessment of and conclusion on the effectiveness of internal control
over financial reporting did not include the internal control over financial reporting of
Actimize Ltd. (Actimize) because it was acquired during 2007. Actimize is
included in the 2007 consolidated financial statements of the Company since August 30,
2007 and constituted approximately 26% of total assets as of December 31, 2007 and 2% of
total revenues for the year then ended. Our audit of internal control over financial
reporting of the Company also did not include an evaluation of the internal control over
financial reporting of Actimize.

F - 3

---

---

| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Kost Forer Gabbay & Kasierer3 Aminadav St.
Tel-Aviv 67067, Israel
Tel:  972 (3)6232525
Fax:  972 (3)5622555
www.ey.com/il

In
our opinion, Nice maintained in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Nice and subsidiaries
as of December 31, 2006 and 2007, and the related consolidated statements of income,
changes in shareholders equity and cash flows for each of the three years in the
period ended December 31, 2007 and our report dated April 14, 2008 expressed an
unqualified opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 14, 2008.  | A Member of Ernst & Young Global
|                 |                                 

F - 4

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

|                           
|---------------------------
|CONSOLIDATED BALANCE SHEETS
|                           
|U.S. dollars in thousands  

|                                                                 | December 31,
|---------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                           |             
|                                                                 |             
|CURRENT ASSETS:                                                  |             
|Cash and cash equivalents                                        |             
|Short-term bank deposits                                         |             
|Marketable securities                                            |             
|Trade receivables (net of allowance for doubtful accounts of     |             
|$ 1,951 and $ 5,239 at December 31, 2006 and 2007, respectively) |             
|Other receivables and prepaid expenses                           |             
|Inventories                                                      |             
|Deferred tax assets                                              |             
|                                                                 |             
|                                                                 |             
|Total current assets                                             |             
|                                                                 |             
|                                                                 |             
|LONG-TERM ASSETS:                                                |             
|Marketable securities                                            |             
|Investment in affiliates                                         |             
|Severance pay fund                                               |             
|Other receivables and prepaid expenses                           |             
|Deferred tax assets                                              |             
|Property and equipment, net                                      |             
|Other intangible assets, net                                     |             
|Goodwill                                                         |             
|                                                                 |             
|                                                                 |             
|Total long-term assets                                           |             
|                                                                 |             
|                                                                 |             
|Total assets                                                     |             
|                                                                 |             
|                                                                 |             

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

F - 5

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

|                                             
|---------------------------------------------
|CONSOLIDATED BALANCE SHEETS                  
|                                             
|U.S. dollars in thousands (except share data)

|                                                                       | December 31,
|---------------------------------------------------------------------- | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                   |             
|                                                                       |             
|CURRENT LIABILITIES:                                                   |             
|Trade payables                                                         |             
|Accrued expenses and other liabilities                                 |             
|                                                                       |             
|                                                                       |             
|Total current liabilities                                              |             
|                                                                       |             
|                                                                       |             
|LONG-TERM LIABILITIES:                                                 |             
|Accrued severance pay                                                  |             
|Deferred tax liabilities                                               |             
|Other long-term liabilities                                            |             
|                                                                       |             
|                                                                       |             
|Total long-term liabilities                                            |             
|                                                                       |             
|                                                                       |             
|COMMITMENTS AND CONTINGENT LIABILITIES                                 |             
|                                                                       |             
|SHAREHOLDERS' EQUITY:                                                  |             
|Share capital-                                                         |             
|Ordinary shares of NIS 1 par value:                                    |             
|Authorized: 125,000,000 at December 31, 2006 and 2007; Issued and      |             
|outstanding: 51,091,512 and 59,412,812 shares at December 31, 2006 and |             
|2007, respectively;                                                    |             
|Additional paid-in capital                                             |             
|Accumulated other comprehensive income                                 |             
|Retained earnings                                                      |             
|                                                                       |             
|                                                                       |             
|Total shareholders' equity                                             |             
|                                                                       |             
|                                                                       |             
|Total liabilities and shareholders' equity                             |             
|                                                                       |             
|                                                                       |             

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

F - 6

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

|                                                 
|-------------------------------------------------
|CONSOLIDATED STATEMENTS OF INCOME                
|                                                 
|U.S. dollars in thousands (except per share data)

|                                              | Year ended December 31,
|--------------------------------------------- | -----------------------
|
|
|
|
|Revenues:                                     |                        
|Products                                      |                        
|Services                                      |                        
|                                              |                        
|                                              |                        
|Total revenues                                |                        
|                                              |                        
|                                              |                        
|Cost of revenues:                             |                        
|Products                                      |                        
|Services                                      |                        
|                                              |                        
|                                              |                        
|Total cost of revenues                        |                        
|                                              |                        
|                                              |                        
|Gross profit                                  |                        
|                                              |                        
|                                              |                        
|Operating expenses:                           |                        
|Research and development, net                 |                        
|Selling and marketing                         |                        
|General and administrative                    |                        
|Amortization of acquired intangibles          |                        
|In process research and development write-off |                        
|                                              |                        
|                                              |                        
|Total operating expenses                      |                        
|                                              |                        
|                                              |                        
|Operating income                              |                        
|Financial income, net                         |                        
|Other income (expenses), net                  |                        
|                                              |                        
|                                              |                        
|Income before taxes on income                 |                        
|Taxes on income                               |                        
|                                              |                        
|                                              |                        
|Net income                                    |                        
|                                              |                        
|                                              |                        
|Net earnings per share:                       |                        
|                                              |                        
|Basic                                         |                        
|                                              |                        
|                                              |                        
|Diluted                                       |                        
|                                              |                        
|                                              |                        

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

F - 7

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

|                                             
|---------------------------------------------
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|                                             
|U.S. dollars in thousands                    

|                                                               | Share
capital | Additional
paid-in
capital | Accumulated
other
comprehensive
income | Retained
earnings
(accumulated
deficit) | Total
comprehensive
income | Total
shareholders'
equity
|-------------------------------------------------------------- | ------------- | -------------------------- | -------------------------------------- | --------------------------------------- | -------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2005                                  |               |                            | $                                      | 5,464                                   |                            | $                         
|Issuance of shares upon public offering, net                   |               |                            |                                        | 1,003                                   |                            |                           
|Issuance of shares of ESPP                                     |               |                            |                                        | 37                                      |                            |                           
|Exercise of share options                                      |               |                            |                                        | 268                                     |                            |                           
|Tax Benefit in respect of exercised options                    |               |                            |                                        | -                                       |                            |                           
|Comprehensive income:                                          |               |                           
|Foreign currency translation adjustments                       |               |                            |                                        | -                                       |                            |                           
|Unrealized losses on derivative instruments, net               |               |                            |                                        | -                                       |                            |                           
|Net income                                                     |               |                            |                                        | -                                       |                            |                           
|                                                               |               |                            |                                        |                                         |                            |                           
|                                                               |               |                           
|Total comprehensive income                                     |               |                            |                                        |                                         |                            |                           
|                                                               |               |                            |                                        |                                         |                            |                           
|Balance as of December 31, 2005                                |               |                            |                                        | 6,772                                   |                            |                           
|Issuance of shares of ESPP                                     |               |                            |                                        | 2                                       |                            |                           
|Exercise of share options                                      |               |                            |                                        | 510                                     |                            |                           
|Stock-based compensation                                       |               |                            |                                        | -                                       |                            |                           
|Tax benefit in respect of offering expenses                    |               |                            |                                        | -                                       |                            |                           
|Excess tax benefit from share based payment arrangements       |               |                            |                                        | -                                       |                            |                           
|Stock split effected as stock dividend                         |               |                            |                                        | 5,470                                   |                            |                           
|Comprehensive income:                                          |               |                           
|Foreign currency translation adjustments                       |               |                            |                                        | -                                       |                            |                           
|Unrealized losses on derivative instruments, net               |               |                            |                                        | -                                       |                            |                           
|Net income                                                     |               |                            |                                        | -                                       |                            |                           
|                                                               |               |                            |                                        |                                         |                            |                           
|                                                               |               |                           
|Total comprehensive income                                     |               |                            |                                        |                                         |                            |                           
|                                                               |               |                            |                                        |                                         |                            |                           
|Balance as of December 31, 2006                                |               |                            |                                        | 12,754                                  |                            |                           
|Issuance of shares upon public offering, net                   |               |                            |                                        | 1,283                                   |                            |                           
|Issuance of shares of ESPP                                     |               |                            |                                        | 4                                       |                            |                           
|Exercise of share options                                      |               |                            |                                        | 393                                     |                            |                           
|Stock-based compensation                                       |               |                            |                                        | -                                       |                            |                           
|Tax benefit in respect of offering expenses                    |               |                            |                                        | -                                       |                            |                           
|Excess tax benefit from share based payment arrangements       |               |                            |                                        | -                                       |                            |                           
|Issuance of shares and options for the acquisition of          |               |                           
|Actimize                                                       |               |                            |                                        | 365                                     |                            |                           
|Restricted shares vesting in respect of Actimize               |               |                           
|acquisition                                                    |               |                            |                                        | 2                                       |                            |                           
|FIN 48 opening balance adjustment                              |               |                            |                                        | -                                       |                            |                           
|Comprehensive income:                                          |               |                           
|Foreign currency translation adjustments                       |               |                            |                                        | -                                       |                            |                           
|Unrealized gains on derivative instruments, net                |               |                            |                                        | -                                       |                            |                           
|Net income                                                     |               |                            |                                        | -                                       |                            |                           
|                                                               |               |                            |                                        |                                         |                            |                           
|                                                               |               |                           
|Total comprehensive income                                     |               |                            |                                        |                                         |                            |                           
|                                                               |               |                            |                                        |                                         |                            |                           
|Balance as of December 31, 2007                                |               |                            | $                                      | 14,801                                  |                            | $                         
|                                                               |               |                            |                                        |                                         |                            |                           
|                                                               |               |                           
|Accumulated unrealized gains on derivative instruments         |               |                            |                                        |                                         |                            |                           
|Accumulated foreign currency translation adjustments           |               |                            |                                        |                                         |                            |                           
|                                                               |               |                            |                                        |                                         |                            |                           
|Accumulated other comprehensive income as of December 31, 2007 |               |                            |                                        |                                         |                            |                           
|                                                               |               |                            |                                        |                                         |                            |                           
|                                                               |               |                            |                                        |                                         |                            |                           

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

F - 8

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

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

|                                                                     | Year ended December 31,
|-------------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from operating activities:                                |                        
|                                                                     |                        
|Net income                                                           |                        
|                                                                     |                        
|                                                                     |                        
|Adjustments required to reconcile net income to net cash provided    |                        
|by operating activities:                                             |                        
|Depreciation and amortization                                        |                        
|Stock-based compensation                                             |                        
|Excess tax benefit from share-based payments arrangements            |                        
|Tax benefit from exercised options                                   |                        
|In-process research and development write-off                        |                        
|Accrued severance pay, net                                           |                        
|Amortization of premium (accretion of discount) and accrued          |                        
|interest on held-to-maturity marketable securities                   |                        
|Deferred taxes, net                                                  |                        
|Increase in trade receivables                                        |                        
|Decrease (increase) in other receivables and prepaid expenses        |                        
|Decrease (increase) in inventories                                   |                        
|Increase (decrease) in trade payables                                |                        
|Increase in accrued expenses and other liabilities                   |                        
|Other                                                                |                        
|                                                                     |                        
|                                                                     |                        
|Net cash provided by operating activities from continuing operations |                        
|Net cash provided by operating activities from discontinued          |                        
|operation                                                            |                        
|                                                                     |                        
|                                                                     |                        
|Net cash provided by operating activities                            |                        
|                                                                     |                        
|                                                                     |                        
|Cash flows from investing activities:                                |                        
|                                                                     |                        
|Purchase of property and equipment                                   |                        
|Proceeds from sale of property and equipment                         |                        
|Investment in marketable securities                                  |                        
|Proceeds from maturity of marketable securities                      |                        
|Proceeds from sale and call of held-to-maturity marketable           |                        
|securities                                                           |                        
|Investment in short-term bank deposits                               |                        
|Proceeds from short-term bank deposits                               |                        
|                                                                     |                        

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

F - 9

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

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

|                                                                 | Year ended December 31,
|---------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from investing activities (cont.):                    |                        
|                                                                 |                        
|Refund (payment) for the acquisition of certain assets and       |                        
|liabilities of Dictaphone CRS division (a)                       |                        
|Payment for the acquisition of certain assets and liabilities of |                        
|Hannamax Hi-Tech Pty. Ltd. (b)                                   |                        
|Payment for the acquisition of FAST (c)                          |                        
|Payment for the acquisition of Performix (d)                     |                        
|Payment for the acquisition of IEX (e)                           |                        
|Payment for the acquisition of Actimize (f)                      |                        
|Decrease in accrued acquisition costs                            |                        
|Proceeds in respect of TCS acquisition                           |                        
|Capitalization of software development costs                     |                        
|Deferred acquisition costs                                       |                        
|Other                                                            |                        
|                                                                 |                        
|                                                                 |                        
|Net cash used in investing activities                            |                        
|                                                                 |                        
|                                                                 |                        
|Cash flows from financing activities:                            |                        
|                                                                 |                        
|Proceeds from issuance of shares upon public offering, net       |                        
|Proceeds from issuance of shares upon exercise of options and    |                        
|ESPP, net                                                        |                        
|Receipt of short-term bank loan                                  |                        
|Repayment of short-term bank loan                                |                        
|Excess tax benefit from share-based payments arrangements        |                        
|Decrease in accrued offering expenses                            |                        
|Decrease in short-term bank credit assumed in the acquisition of |                        
|FAST                                                             |                        
|                                                                 |                        
|                                                                 |                        
|Net cash provided by financing activities                        |                        
|                                                                 |                        
|                                                                 |                        
|Effect of exchange rate changes on cash                          |                        
|                                                                 |                        
|                                                                 |                        
|Increase (decrease) in cash and cash equivalents                 |                        
|Cash and cash equivalents at the beginning of the year           |                        
|                                                                 |                        
|                                                                 |                        
|Cash and cash equivalents at the end of the year                 |                        
|                                                                 |                        
|                                                                 |                        
|Supplemental disclosure of cash flows activities:                |                        
|                                                                 |                        
|Cash paid during the year for:                                   |                        
|                                                                 |                        
|Income taxes                                                     |                        
|                                                                 |                        
|                                                                 |                        
|Interest                                                         |                        
|                                                                 |                        
|                                                                 |                        

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

F - 10

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

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

|    |                                                               | Year ended December 31,
|--- | ------------------------------------------------------------- | -----------------------
|
|
|
|
|(a) | Payment (refund) for the acquisition of certain assets and    |                        
|    | liabilities of Dictaphone CRS division:                       |                        
|    |                                                               |                        
|    | Fair value of assets acquired and liabilities assumed at the  |                        
|    | acquisition date:                                             |                        
|    |                                                               |                        
|    | Working capital deficit (excluding cash and cash equivalents) |                        
|    | Property and equipment                                        |                        
|    | Other intangible assets                                       |                        
|    | Goodwill                                                      |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    | Less - accrued acquisition costs                              |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|(b) | Payment for the acquisition of certain assets and             |                        
|    | liabilities of Hannamax Hi-Tech Pty. Ltd.                     |                        
|    |                                                               |                        
|    | Fair value of assets acquired and liabilities assumed at the  |                        
|    | acquisition date:                                             |                        
|    |                                                               |                        
|    | Working capital deficit (excluding cash and cash equivalents) |                        
|    | Property and equipment                                        |                        
|    | Other intangible assets                                       |                        
|    | Goodwill                                                      |                        
|    | Other long-term liabilities                                   |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    | Less - accrued acquisition costs                              |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|(c) | Payment for the acquisition of FAST:                          |                        
|    |                                                               |                        
|    | Estimated fair value of assets acquired and liabilities       |                        
|    | assumed at the acquisition date:                              |                        
|    |                                                               |                        
|    | Working capital deficit (excluding cash and cash equivalents) |                        
|    | Property and equipment                                        |                        
|    | In-process research and development                           |                        
|    | Other intangible assets                                       |                        
|    | Goodwill                                                      |                        
|    | Long-term deferred tax liability                              |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    | Less - decrease in deferred acquisition costs                 |                        
|    | Less - accrued earn out payment                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        

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

F - 11

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

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

|    |                                                               | Year ended December 31,
|--- | ------------------------------------------------------------- | -----------------------
|
|
|
|
|(d) | Payment for the acquisition of Performix:                     |                        
|    |                                                               |                        
|    | Estimated fair value of assets acquired and liabilities       |                        
|    | assumed at the acquisition date:                              |                        
|    |                                                               |                        
|    | Working capital deficit (excluding cash and cash equivalents) |                        
|    | Property and equipment                                        |                        
|    | Other intangible assets                                       |                        
|    | Goodwill                                                      |                        
|    | Long-term deferred tax liability                              |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    | Less - accrued acquisition costs                              |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|(e) | Payment for the acquisition of IEX:                           |                        
|    |                                                               |                        
|    | Estimated fair value of assets acquired and liabilities       |                        
|    | assumed at the acquisition date:                              |                        
|    |                                                               |                        
|    | Working capital deficit (excluding cash and cash equivalents) |                        
|    | Property and equipment                                        |                        
|    | In-process research and development                           |                        
|    | Other intangible assets                                       |                        
|    | Goodwill                                                      |                        
|    | Long-term deferred tax liabilities                            |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    | Payment (provision) on account of purchase price              |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        

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

F - 12

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

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

|    |                                                               | Year ended December 31,
|--- | ------------------------------------------------------------- | -----------------------
|
|
|
|
|(f) | Payment for the acquisition of Actimize:                      |                        
|    |                                                               |                        
|    | Estimated fair value of assets acquired and liabilities       |                        
|    | assumed at the acquisition date:                              |                        
|    |                                                               |                        
|    | Working capital deficit (excluding cash and cash equivalents) |                        
|    | Property and equipment                                        |                        
|    | Severance pay fund                                            |                        
|    | Long-term other receivables and prepaid expenses              |                        
|    | In-process research and development                           |                        
|    | Other intangible assets                                       |                        
|    | Goodwill                                                      |                        
|    | Long-term deferred tax liabilities                            |                        
|    | Other long-term liabilities                                   |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    | Less - accrued acquisition costs                              |                        
|    | Less - amount acquired by issuance of shares and options,     |                        
|    | net of issuance expenses                                      |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|(g) | Non-cash activities:                                          |                        
|    |                                                               |                        
|    | Tax benefit on offering expenses                              |                        
|    |                                                               |                        
|    |                                                               |                        
|    | Accrued offering expenses                                     |                        
|    |                                                               |                        
|    |                                                               |                        

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

F - 13

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

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

|NOTE 1: |  | GENERAL
|------- | - | -------

| | a. | General:
| | -- | --------

| | NICE
Systems Ltd. (NICE) and subsidiaries (collectively  the Company)
develop, market and support integrated, scalable multimedia digital recording platforms,
enhanced software applications, operational risk management software solutions and
related professional services. These solutions capture and analyze unstructured
(non-transaction) data and convert it 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. The Companys solutions are offered to various vertical markets in two major
sectors: (1) the Enterprise Interaction Solutions Sector  contact centers and
trading floors and (2) the Public Safety and Security Sector  safety organizations,
transportation, corporate security, gaming and correctional facilities and government and
intelligence agencies.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Actimize
Ltd., the Companys subsidiary, offers operational risk management software
solutions to the sector of financial services institutions, enabling them to manage the
challenges of regulatory compliance, internal policy enforcement, fraud prevention and
anti-money laundering.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, the Middle East
and Africa (EMEA) and Asia Pacific (APAC).
| | ------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company relies upon a number of independent distributors to market, sell and service its
products in certain markets. If the Company is unable to effectively manage and maintain
relationships with its distributors, or to enter into similar relationships with others,
its ability to market and sell its products in these markets will be affected. In
addition, a loss of a major distributor, or any event negatively affecting such
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 14c.
| | -----------------------------------------

F - 14

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

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

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

| | b. | Acquisitions:
| | -- | -------------

| | 1. | Acquisition
of Dictaphones Communications Recording Systems           (CRS):
| | -- | -------------------------------------------------------------------------------

| | On
June 1, 2005, the Company consummated an agreement to acquire the assets and assume
certain liabilities of Dictaphones Communications Recording Systems (CRS)
business for $ 40,000 (including acquisition costs). Dictaphones CRS business
is a leading provider of liability and quality management systems for first responders,
critical facilities, contact centers and financial trading floors.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 27, 2006, the Company and Dictaphone agreed to amend the CRSs purchase
agreement, according to which, Dictaphone paid to the Company $ 2,000 as a final
adjustment to the purchase price under the purchase agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition of CRS expanded the Companys customer base, presence in the U.S and
Europe markets, and its network of distributors and partners. Additionally, the Company
broadened its product offerings and global professional services team.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
acquisition was accounted for by the purchase method and accordingly, the purchase price
has been allocated according to the estimated fair value of the assets acquired and
liabilities assumed of CRS. The results of the CRSs operations have been included
in the consolidated financial statements since June 1, 2005 (the consummation date).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                                        | 
| | -------------------------------------- | 
|
|
|
|
| | Trade receivables                      | 
| | Other receivables and prepaid expenses | 
| | Inventories                            | 
| | Property and equipment                 | 
| | Trademarks                             | 
| | Core technology                        | 
| | Distribution network                   | 
| | Goodwill                               | 
| |                                        | 
| |                                        | 
| | Total assets acquired                  | 
| |                                        | 
| |                                        | 
| | Trade payables                         | 
| | Accrued expenses and other liabilities | 
| |                                        | 
| |                                        | 
| | Total liabilities assumed              | 
| |                                        | 
| |                                        | 
| | Net assets acquired                    | 
| |                                        | 
| |                                        | 

F - 15

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

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

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

| | Trademarks,
core technology and distribution network in the amount of $ 15,400 are amortized
using the straight-line method at an annual weighted average rate of 19.5%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 2. | Acquisition
of Hannamax Hi-Tech Pty. Ltd, (Hannamax):
| | -- | -------------------------------------------------------

| | On
September 1, 2005, the Company consummated an agreement to acquire the assets and assume
certain liabilities of Hannamax Hi-Tech Pty. Ltd, (Hannamax) business for $ 2,011
(including acquisition costs), with potential earn out cash payment of up to $ 1,000
based on certain financial performance criteria covering years 2005 through 2006. In the
second quarter of 2006 and in the second quarter of 2007, the Company paid additional
consideration in the amounts of $ 500 and $ 500, respectively due to meeting
the performance criteria relating to years 2005 and 2006. Accordingly, the Company
recorded additional goodwill in the total amount of $ 1,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Hannamax
was NICEs distributor in the Australia and New Zealand markets. With the
acquisition of Hannamax, the Company expanded its customer base and presence in Australia
and New Zealand and expanded and strengthened the Companys support organization in
the region.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
acquisition was accounted for by the purchase method and accordingly, the purchase price
has been allocated according to the estimated fair value of the assets acquired and
liabilities assumed of Hannamax. The results of Hannamaxs operations have been
included in the consolidated financial statements since September 1, 2005 (the
consummation date).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

NICE SYSTEMS LTD. AND SUBSIDIARIES

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

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

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

| |                                        | 
| | -------------------------------------- | 
|
|
|
|
| | Trade receivables                      | 
| | Other receivables and prepaid expenses | 
| | Inventories                            | 
| | Property and equipment                 | 
| | Customer relationships                 | 
| | Goodwill                               | 
| |                                        | 
| |                                        | 
| | Total assets acquired                  | 
| |                                        | 
| |                                        | 
| | Trade payables                         | 
| | Accrued expenses and other liabilities | 
| | Other long-term liabilities            | 
| |                                        | 
| |                                        | 
| | Total liabilities assumed              | 
| |                                        | 
| |                                        | 
| | Net assets acquired                    | 
| |                                        | 
| |                                        | 

| | Customer
relationships in the amount of $ 930 are amortized using the straight-line method at
an annual rate of 10%.
| | --------------------------------------------------------------------------------------------------------------------

| | 3. | Acquisition
of FAST Video Security AG (FAST):
| | -- | -----------------------------------------------

| | On
January 4, 2006, the Company consummated an agreement to acquire all of the outstanding
shares of FAST, a Switzerland-based developer of innovative video systems for security
and surveillance purposes. Under the agreement, the Company acquired FAST for $ 21,650
in cash (including acquisition costs), with potential earn out based on performance
milestones amounting to a maximum of $ 12,000 payable based on certain financial
performance criteria covering years 2006 and 2008 (of which $ 7,000 in respect of
2006 and $ 5,000 in respect of 2008).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the fourth quarter of 2006 the Company estimated that an additional consideration for
earn out in the amount of approximately $ 6,233 would be paid by the Company on
account of 2006 earn out; accordingly, the Company recorded additional goodwill in this
amount. See also Note 10(c)(6).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

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

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

| | The
acquisition of FAST strengthens the Companys position in the video security market
with smart IP-based solutions and technologies complementary to the Companys
existing digital video offerings. Additionally, the Company extends its presence in the
digital video security market by increasing its footprint in Europe and APAC markets with
high quality distribution channels and partners, and with new prestigious customers.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
acquisition was accounted for by the purchase method and accordingly, the purchase price
has been allocated according to the estimated fair value of the assets acquired and
liabilities assumed of FAST. The results of FASTs operations have been included in
the consolidated financial statements since January 4, 2006 (the consummation date).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                                        | 
| | -------------------------------------- | 
|
|
|
|
| | Cash                                   | 
| | Trade receivables                      | 
| | Other receivables and prepaid expenses | 
| | Inventories                            | 
| | Property and equipment                 | 
| | Trademarks                             | 
| | Core technology                        | 
| | In-process research and development    | 
| | Customer relationships                 | 
| | Goodwill                               | 
| |                                        | 
| |                                        | 
| | Total assets acquired                  | 
| |                                        | 
| |                                        | 
| | Short-term bank credit                 | 
| | Trade payables                         | 
| | Accrued expenses and other liabilities | 
| | Long-term deferred tax liabilities     | 
| |                                        | 
| |                                        | 
| | Total liabilities assumed              | 
| |                                        | 
| |                                        | 
| | Net assets acquired                    | 
| |                                        | 
| |                                        | 

F - 18

---

---

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

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

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

| | Trademarks,
core technology and customer relationships in the amount of $ 11,753 are amortized
using the straight-line method at an annual weighted average rate of 20%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Acquisition
of Performix:
| | -- | -------------------------

| | On
May 22, 2006, the Company consummated an agreement to acquire all of the outstanding
shares of Performix Software Limited and to acquire the assets and assume certain
liabilities of Performix Holdings Inc. and its subsidiaries (collectively Performix).
Under the agreement, the Company acquired Performix for a total purchase price of $ 13,910
in cash (including acquisition costs). According to the agreement the purchase price may
increase by up to an additional $ 3,150 based on certain performance criteria for
the twelve month period ending July 1, 2007. Since the performance criteria have not been
met, no additional payment was made in 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Performix
was among the first to recognize the potential in the area of contact center performance
management (CCPM), an emerging trend in the contact center market. The acquisition of
Performix extends NICEs solutions portfolio for the contact center market.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
factors that contributed to the purchase price that resulted in recognition of goodwill
included synergies, the benefits of increased market share vertically, strategic
positioning value and time-to-market benefits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition was accounted for by the purchase method and accordingly, the purchase price
has been allocated according to the estimated fair value of the assets acquired and
liabilities assumed of Performix. The results of Performixs operations have been
included in the consolidated financial statements since May 22, 2006 (the
consummation date).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

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

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

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

| |                                                 | 
| | ----------------------------------------------- | 
|
|
|
|
| | Cash                                            | 
| | Trade receivables                               | 
| | Other receivables and prepaid expenses          | 
| | Property and equipment                          | 
| | Trade name                                      | 
| | Core technology                                 | 
| | Customer relationships and distribution network | 
| | Goodwill                                        | 
| |                                                 | 
| |                                                 | 
| | Total assets acquired                           | 
| |                                                 | 
| |                                                 | 
| | Trade payables                                  | 
| | Accrued expenses and other liabilities          | 
| | Long-term deferred tax liability                | 
| |                                                 | 
| |                                                 | 
| | Total liabilities assumed                       | 
| |                                                 | 
| |                                                 | 
| | Net assets acquired                             | 
| |                                                 | 

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

| | 5. | Acquisition
of IEX:
| | -- | -------------------

| | On
July 7, 2006, the Company consummated an agreement to acquire all of the outstanding
shares of IEX Corporation (IEX), a worldwide provider of contact center
workforce management solutions. Under the agreement, the Company acquired the shares of
IEX, a wholly owned subsidiary of Tekelec, for approximately $ 204,900 in cash
(including acquisition costs).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition of IEX allows NICE to offer its customers and partners a more extensive
product portfolio in the industries in which NICE operates. IEX is a leading vendor in
workforce management, strategic planning and performance management solutions for the
contact center market. IEX provides a high-end centralized solution that compiles data
seamlessly across the enterprise, enabling more accurate and effective forecasting,
planning and scheduling.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 20

---

---

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

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

| | 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 IEX. The results of the IEX operations have been included in the
consolidated financial statements since July 7, 2006 (the consummation date).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                                        | 
| | -------------------------------------- | 
|
|
|
|
| | Cash                                   | 
| | Trade receivables                      | 
| | Other receivables and prepaid expenses | 
| | Inventories                            | 
| | Short-term deferred tax assets         | 
| | Property and equipment                 | 
| | Trade name                             | 
| | Core technology                        | 
| | In-process research and development    | 
| | Customer relationships                 | 
| | Goodwill                               | 
| |                                        | 
| |                                        | 
| | Total assets acquired                  | 
| |                                        | 
| |                                        | 
| | Trade payables                         | 
| | Accrued expenses and other liabilities | 
| | Short-term deferred tax liabilities    | 
| | Long-term deferred tax liabilities     | 
| |                                        | 
| |                                        | 
| | Total liabilities assumed              | 
| |                                        | 
| |                                        | 
| | Net assets acquired                    | 
| |                                        | 

| | The
$ 12,670 assigned to in-process research and development was written off at the
acquisition date in accordance with FASB Interpretation (FIN) No. 4, Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Trade
name, core technology and customer relationships in the amount of $ 78,170 are
amortized using the straight-line method at an annual weighted average rate of 12%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

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

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

| | 6. | Acquisition
of Actimize Ltd. (Actimize):
| | -- | ------------------------------------------

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

| |                                            | 
| | ------------------------------------------ | 
|
|
|
|
| | Cash                                       | 
| | Shares *)                                  | 
| | Options and Restricted Shares Awards **)   | 
| | Acquisition related transaction costs ***) | 
| |                                            | 
| |                                            | 
| | Total purchase price                       | 
| |                                            | 

| | *) | Represents
the fair value of 1,501,933 American Depositary Shares           (ADSs) of
NICE issued to Actimize shareholders upon           consummation of the
acquisition, valued based on the market price of the           securities a few days
before and after the terms of the acquisition were agreed           to and announced, in
accordance with EITF 99-12.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

F - 22

---

---

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

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

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

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

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

| |                                                   | 
| | ------------------------------------------------- | 
|
|
|
|
| | Cash                                              | 
| | Marketable securities                             | 
| | Trade receivables                                 | 
| | Short-term other receivables and prepaid expenses | 
| | Short-term deferred tax assets                    | 
| | Property and equipment                            | 
| | Severance pay fund                                | 
| | Long-term other receivables and prepaid expenses  | 
| | Trade name                                        | 
| | Core technology                                   | 
| | In-process research and development               | 
| | Customer relationships                            | 
| | Goodwill                                          | 
| |                                                   | 
| |                                                   | 
| | Total assets acquired                             | 
| |                                                   | 
| |                                                   | 
| | Trade payables                                    | 
| | Accrued expenses and other liabilities            | 
| | Short-term deferred tax liabilities               | 
| | Long-term deferred tax liabilities                | 
| | Other long-term liabilities                       | 
| |                                                   | 
| |                                                   | 
| | Total liabilities assumed                         | 
| |                                                   | 
| |                                                   | 
| | Net assets acquired                               | 
| |                                                   | 

F - 23

---

---

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

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

| | The
$ 3,710 assigned to in-process research and development was written off at the
acquisition date in accordance with FASB Interpretation (FIN) No. 4, Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Trade
name, core technology and customer relationships in the amount of $ 71,300 are
amortized using the straight-line method at an annual weighted average rate of 19%.
Amortization expense for the above-mentioned intangible assets for the five years ending
December 31, 2012 is estimated to be $ 63,433.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
following represents the unaudited pro forma condensed results of operations for the
years ended December 31, 2005, 2006 and 2007, assuming that the acquisitions of CRS and
Hannamax occurred on January 1, 2005, the acquisitions of FAST, Performix and IEX
occurred on January 1, 2005 and 2006 and the acquisition of Actimize occurred on January
1, 2006 and 2007. The pro forma information is not necessarily indicative of the results
of operations, which actually would have occurred had the acquisitions been consummated
on those dates, nor does it purport to represent the results of operations for future
periods.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In-process
research and development write offs in respect of the acquisitions of FAST, IEX and
Actimize were not included in the pro forma condensed results of operation since they are
non-recurring charges.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                | Year ended December 31,
| | ------------------------------ | -----------------------
|
|
|
|
| | Revenues                       |                        
| |                                |                        
| |                                |                        
| | Net income                     |                        
| |                                |                        
| |                                |                        
| | Basic net earnings per share   |                        
| |                                |                        
| |                                |                        
| | Diluted net earnings per share |                        
| |                                |                        

F - 24

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES
|------- | - | -------------------------------

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

| | a. | Use
of estimates:
| | -- | -----------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect 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 certain
subsidiaries are conducted is the U.S. dollar (dollar); thus, the dollar is
the functional currency of NICE and certain subsidiaries.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | NICE
and certain subsidiaries transactions and balances denominated in dollars are
presented at their original amounts. Non-dollar transactions and balances have been
remeasured to dollars in accordance with 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 income as financial income or expenses, as appropriate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
those subsidiaries whose functional currency has been determined to be their local
currency, assets and liabilities are translated at year-end exchange rates and statement
of income items are translated at average exchange rates prevailing during the year. Such
translation adjustments are recorded as a separate component of accumulated other
comprehensive income 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
convertible into cash, purchased with original 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 - 25

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | f. | Marketable
securities:
| | -- | ----------------------

| | The
Company accounts for investments in debt securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. 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 cost
of held-to-maturity securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization, accretion, decline in value judged to be other
than temporary, and interest are included in financial income or expenses, as appropriate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Impairment
losses are recognized as realized or when the Company has determined that an
other-than-temporary decline in fair value has occurred. FASB Staff Position (FSP)
No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investment (FSP 115-1) and SAB Topic 5M, Other Than
Temporary Impairment of Certain Investments in Debt and Equity Securities provide
guidance for determining when an investment is considered impaired, whether impairment is
other-than temporary, and measurement of an impairment loss. An investment is considered
impaired if the fair value of the investment decreased below its cost in an other than
temporary manner. If, after consideration of all available evidence to evaluate the
realizable value of its investment, impairment is determined to be other than temporary,
then an impairment loss should be recognized equal to the difference between the
investments cost and its fair value. FSP 115-1 nullifies certain provisions of
Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF
03-1) while retaining the disclosure requirements of EITF 03-1.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | 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 costs charged by third party manufacturer.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inventory
provisions are provided to cover risks arising from slow-moving items, technological
obsolescence, excess inventories, and discontinued products and for market prices lower
than cost. Inventory provisions for 2005, 2006 and 2007 were $ 4,646, $ 5,095
and $ 2,716, respectively, and have been included in cost of revenues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Investment
in affiliates:
| | -- | -------------------------

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

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

| | 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

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

F - 27

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | j. | Other
intangible assets, net:
| | -- | -----------------------------

| | Intangible
assets 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                                                 | Weighted average
%
| | ----------------------------------------------- | ------------------
|
|
|
|
| | Capitalized software development costs (see n)  |                   
| | Core technology                                 |                   
| | Trademarks                                      |                   
| | Customer relationships and distribution network |                   
| | Maintenance contracts                           |                   
| |                                                 |                   

| | k. | Impairment
of long-lived assets:
| | -- | --------------------------------

| | The
Companys long-lived assets and identifiable intangibles that are subject to
amortization are reviewed for impairment in accordance with 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 the assets to the future undiscounted cash flows expected to be generated by
the assets. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. In 2005, 2006 and 2007, no impairment indicators
have been identified.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Goodwill:
| | -- | ---------

| | Goodwill
represents the excess of the cost over the fair value of the net assets of businesses
acquired. Under SFAS No. 142, goodwill is not amortized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 142 requires goodwill to be tested for impairment at least annually or between annual
tests in certain circumstances, and written down when impaired. Goodwill is tested for
impairment by comparing the fair value of the reporting unit with its carrying value.
Fair value is determined using discounted cash flows and market capitalization.
Significant estimates used in the fair value methodologies include estimates of future
cash flows, future growth rates and the weighted average cost of capital of the reporting
unit. The Company performed annual impairment tests during the fourth quarter of 2005,
2006 and 2007 and did not identify any impairment losses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | m. | Revenue
recognition:
| | -- | --------------------

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

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

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

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

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

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

F - 29

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Revenues
from fixed price contracts that require significant customization, integration and
installation are recognized 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 ratio of hours incurred to
date to the total estimated hours of the contract. The amount of revenue recognized is
based on the total license fees under the license agreement and the percentage of
completion achieved. The revenues from such arrangements are allocated between products
and services revenues to reflect the portion of each revenue source separately. Estimates
of total project requirements are based on prior experience of customization, delivery
and acceptance of similar contracts and are reviewed and updated regularly by management.
Provisions for estimated losses on uncompleted contracts are made in the period in which
such losses are first determined, in the amount of the estimated loss on the entire
contact. As of December 31, 2007, no such estimated losses were identified.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company maintains a provision for product returns in accordance with SFAS No. 48, Revenue
Recognition When Right of Return Exists. The provision is estimated based on the
Companys past experience and is deducted from revenues. As of December 31, 2005,
2006 and 2007 provision for product returns amounted $ 1,155, $ 1,975, and $ 2,823,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | n. | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 30

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | o. | 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 the amount that is more likely than not to be realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is
to measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has decided to classify interest as financial expenses and penalties as general
and administrative expenses. The Companys policy for interest and penalties related
to income tax exposures was not impacted as a result of the adoption of the recognition
and measurement provisions of FIN No. 48.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the implementation of FIN No. 48, the Company recognized a $ 824
decrease in the liability for unrecognized tax benefits, which was accounted for as an
increase to the January 1, 2007 balance of retained earnings.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Government
grants:
| | -- | ------------------

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

| | q. | Concentrations
of credit risk:
| | -- | ------------------------------

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

| | The
Companys cash and cash equivalents and short-term bank deposits are invested in
deposits mainly in dollars with major international banks.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
Companys trade receivables are derived from sales to customers located primarily in
North America, EMEA 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, based on the length of time the receivables are past due.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities include investment in U.S. corporate debentures,
U.S. government debentures and structured notes. The Companys investment policy
limits the amount the Company may invest in any one type of investment or issuer, thereby
reducing credit risk concentrations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 2x below).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Severance
pay:
| | -- | --------------

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

| | The
deposited funds include profits accumulated up to the balance sheet date. The deposited
funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israels
Severance Pay Law or labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies and includes immaterial profits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
pay expense for 2005, 2006 and 2007 amounted to $ 3,622, $ 4,305 and $ 5,680,
respectively.
| | -----------------------------------------------------------------------------------------------------

| | The
Company has a 401(K) defined contribution plan covering certain employees in the U.S. All
eligible employees may elect to contribute up to 6%, but generally not greater than $ 15
per year, (for certain employees over 50 years of age the maximum contribution is $ 20
per year) of their annual compensation to the plan through salary deferrals, subject to
IRS limits. The Company matches 50% of employee contributions to the plan up to a limit
of 6% of their eligible compensation. In the years 2005, 2006, and 2007 the Company
recorded an expense for matching contributions in the amount of $ 812, $ 1,176
and $ 1,769 respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | s. | Basic
and diluted net earnings per share:
| | -- | -----------------------------------------

| | Basic
net earnings per share are computed based on the weighted average number of Ordinary
shares outstanding during each year. Diluted net earnings per share are computed based on
the weighted average number of Ordinary shares outstanding during each year plus dilutive
potential equivalent Ordinary shares considered outstanding during the year, in
accordance with SFAS No. 128, Earnings Per Share.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average number of shares related to outstanding antidilutive options and
restricted shares excluded from the calculations of diluted net earnings per share was
1,937,222, 705,589 and 1,817,895 for the years 2005, 2006 and 2007, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Accounting
for Stock-based compensation:
| | -- | ----------------------------------------

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

| | Prior
to January 1, 2006, the Company accounted for options granted to employees and directors
under the recognition and measurement provisions of APB 25 as permitted by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123) whereby compensation expenses is equal to the excess, if any of the quoted
market price of the stock over the exercise price at the grant date of the award. During
the year ended December 31, 2005 the Company did not recognize any stock-based
compensation expense related to employee stock options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2006, the Company adopted the fair value recognition provisions of SFAS
123(R), using the modified prospective transition method. Under that transition method,
compensation cost recognized in the years ended December 31, 2006 and 2007, includes: (a)
compensation cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R). Results for prior periods have not been
restated.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

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

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

| | The
fair value of the Companys stock options granted to employees and directors for the
years ended December 31, 2006 and 2007 was estimated using the following assumptions:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                             | 2006        | 2007       
| | --------------------------- | ----------- | -----------
|
|
|
|
| | Expected volatility         | 33.9%-40.6% | 32.5%-37.9%
| | Weighted average volatility | 40.0%       | 37.5%      
| | Risk free interest rate     | 4.6%-4.9%   | 3.3%-4.6%  
| | Expected dividend           | 0           | 0          
| | Expected term (in years)    | 2.3-3.7     | 2.5-3.7    
| |                             |             |            

| | A
summary of the Companys stock options activity and related information for the year
ended December 31, 2007, is as follows:
| | ------------------------------------------------------------------------------------------------------------------------------

| |                                  | Number of
options | Weighted-average
exercise
price | Weighted-
average
remaining
contractual
term (in
years) | Aggregate
intrinsic value
| | -------------------------------- | ----------------- | ------------------------------- | ------------------------------------------------------- | -------------------------
|
|
|
|
| | Outstanding at January 1, 2007   |                   |                                 |                                                         | 5,657,656                
| | Granted *)                       |                   |                                 |                                                         | 2,883,725                
| | Exercised **)                    |                   |                                 |                                                         | 1,618,286                
| | Forfeited                        |                   |                                 |                                                         | 462,500                  
| |                                  |                   |                                 |                                                         |                          
| |                                  |                   |                                
| | Outstanding at December 31, 2007 |                   |                                 |                                                         | 6,460,595                
| |                                  |                   |                                 |                                                         |                          
| |                                  |                   |                                
| | Exercisable at December 31, 2007 |                   |                                 |                                                         | 1,759,757                
| |                                  |                   |                                 |                                                         |                          

| | *) | Includes
564,225 options issued upon the acquisition of Actimize.
| | -- | -----------------------------------------------------------------

| | **) | The
weighted-average grant-date fair value of options granted during the years
          2005, 2006 and 2007 was $ 6.73, $ 9.20 and $ 11.8, respectively.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
total intrinsic value of options exercised during the years 2006 and 2007 was $ 41,
249 and $ 40,735, respectively.
| | -----------------------------------------------------------------------------------------------------------------------

| | A
summary of the Companys Restricted Stock Awards (RSA) activity and
related information for the year ended December 31, 2007, is as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Number of RSA | Weighted-average
exercise price
| | -------------------------------- | ------------- | -------------------------------
|
|
|
|
| | Outstanding at January 1, 2007   |               |                                
| | Issued upon Actimize acquisition |               |                                
| | Vested                           |               |                                
| |                                  |               |                                
| |                                  |               |                                
| | Outstanding at December 31, 2007 |               |                                
| |                                  |               |                                
| |                                  |               |                                

| | As
of December 31, 2007, there was approximately $ 25,789 and $ 10,152 of
unrecognized compensation expense related to non-vested stock options and restricted
stock awards, respectively, expected to be recognized over four years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options outstanding under the Companys Stock Option Plans as of December 31, 2007
have been separated into ranges of exercise price as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | Ranges of
exercise price | Options
outstanding
as of
December 31,
2007 | Weighted
average
remaining
contractual
term | Weighted
average
exercise
price | Options
exercisable
as of
December 31,
2007 | Weighted
Average
Exercise
price of
Options
Exercisable
| | ------------------------ | ------------------------------------------- | ------------------------------------------- | ------------------------------- | ------------------------------------------- | ------------------------------------------------------
|
|
|
|
| | $                        | 0.02                                        |                                             |                                 | 4,692                                       |                                                       
| |                          | 2.46-2.89                                   |                                             |                                 | 110,994                                     |                                                       
| |                          | 3.91-5.57                                   |                                             |                                 | 63,902                                      |                                                       
| |                          | 6.00-8.28                                   |                                             |                                 | 212,708                                     |                                                       
| |                          | 9.66-14.04                                  |                                             |                                 | 729,425                                     |                                                       
| |                          | 14.60-20.63                                 |                                             |                                 | 1,912,600                                   |                                                       
| |                          | 22.33-32.31                                 |                                             |                                 | 1,192,562                                   |                                                       
| |                          | 34.78-38.44                                 |                                             |                                 | 2,233,712                                   |                                                       
| |                          |                                             |                                             |                                 |                                             |                                                       
| |                          |                                             |                                            
| |                          |                                             |                                             |                                 | 6,460,595                                   |                                                       
| |                          |                                             |                                             |                                 |                                             |                                                       

F - 35

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

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

| |                          | 
| | ------------------------ | 
|
|
|
|
| | Expected volatility      | 
| | Dividend yield           | 
| | Risk free interest rate  | 
| | Expected term (in years) | 

| |                                                                               | Year ended
December 31,
2005
| | ----------------------------------------------------------------------------- | ----------------------------
|
|
|
|
| | Net income as reported                                                        |                             
| | Deduct: Total stock-based employee compensation expense determined under fair |                             
| | value based method for all awards, net of related tax effects                 |                             
| |                                                                               |                             
| |                                                                               |                             
| | Pro forma net income                                                          |                             
| |                                                                               |                             
| |                                                                               |                             
| | Basic net earnings per share as reported                                      |                             
| |                                                                               |                             
| |                                                                               |                             
| | Diluted net earnings per share as reported                                    |                             
| |                                                                               |                             
| |                                                                               |                             
| | Pro forma basic net earnings per share                                        |                             
| |                                                                               |                             
| |                                                                               |                             
| | Pro forma diluted net earnings per share                                      |                             
| |                                                                               |                             
| |                                                                               |                             

| | u. | 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, trade
receivables and trade payables approximates their fair value due to the short-term
maturities of such instruments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
fair value of derivative instruments is estimated by obtaining quotes from brokers.
| | ---------------------------------------------------------------------------------------

F - 36

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | v. | Legal
contingencies:
| | -- | --------------------

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

| | w. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
expenses are charged to expense as incurred. Advertising expenses for the years 2005,
2006 and 2007 were $ 3,798, $ 5,918 and $ 6,479, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company entered into derivative instrument arrangements to hedge a portion of 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 derivative instruments is included in payroll expenses in the statements
of income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2007, the Company expects to reclassify $ 482 of net gains on
derivative instruments from accumulated other comprehensive income to earnings during the
next twelve months.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | y. | Reclassification:
| | -- | -----------------

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

F - 37

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | z. | New
accounting pronouncement:
| | -- | -----------------------------

| | In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 157, Fair Value Measurements (SFAS No. 157). This
Standard defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair value
measurements. The provisions of SFAS No. 157 are effective for the Company
beginning January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the
effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial
liabilities, except for those items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The Company does not expect the adoption will
have material impact on its consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159
permits companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on items for
which the fair value option has been elected be reported in earnings. The provisions of
SFAS No. 159 are effective for the Company beginning January 1, 2008. The
Company does not expect the adoption of SFAS No. 159 will have an impact on its
consolidated financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any non controlling interest
in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after December 15,
2008. Earlier adoption is prohibited. The Company believes that the adoption of SFAS 141R
could have an impact on its consolidated financial statements; however, the impact would
depend on the nature, terms and magnitude of acquisitions it consummates in the future.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51 (SFAS No. 160).
SFAS No. 160 establishes accounting and reporting standards that require that the
ownership interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parents equity; the amount of consolidated net
income attributable to the parent and to the non-controlling interest be clearly
identified and presented on the face of the consolidated statement of income; and changes
in a parents ownership interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The Company does not expect the
adoption of SFAS No. 160 will have significant impact on its consolidated financial
statement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

---

---

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

|NOTE 3: |  | MARKETABLE SECURITIES
|------- | - | ---------------------

| | a. | Held-to-maturity
| | -- | ----------------

| | The
following table summarizes amortized costs, gross unrealized gains and losses and
estimated fair values of held-to-maturity marketable securities as of December 31, 2006
and 2007:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                      | Amortized cost | Gross unrealized
gains | Gross unrealized
losses | Estimated fair value
| | -------------------- | -------------- | ---------------------- | ----------------------- | --------------------
|
|
|
|
| | Corporate debentures |                |                        | $                       | 102,597             
| | U.S Government       |                |                       
| | debentures           |                |                        |                         | 93,820              
| | Structured notes     |                |                        |                         | 9,680               
| |                      |                |                        |                         |                     
| |                      |                |                       
| |                      |                |                        | $                       | 206,097             
| |                      |                |                        |                         |                     

| | The
following table shows the gross unrealized losses and fair value of Companys
investments with unrealized losses that are not deemed to be other-than-temporarily
impaired, aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at December 31, 2007:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                      | December 31, 2007
| | -------------------- | -----------------
|
|
|
|
| | Corporate debentures |                  
| | U.S Government       |                  
| | debentures           |                  
| | Structured notes     |                  
| |                      |                  
| |                      |                  
| |                      |                  
| |                      |                  

| | The
contractual cash flows of these investments are either guaranteed by the U.S. government
or an agency of the U.S. government or were issued by highly rated corporations.
Accordingly, it is expected that the securities would not be settled at a price less than
the amortized cost of the Companys investment. Based on the small severity of the
impairments and the ability and intent of the Company to hold these investments to
maturity, the bonds were not considered to be other than temporarily impaired at December
31, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2007 the Company sold debt securities, which were classified as held-to-maturity, due to
a rating decrease, in consideration of $ 5,736. As a result of the sale, the Company
recorded a loss of $ 203. In 2005 and 2006, the Company did not sell any securities
prior to their maturity and accordingly, did not realize any gains or losses on
held-to-maturity securities in these years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

---

---

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

|NOTE 3: |  | MARKETABLE SECURITIES (Cont.)
|------- | - | -----------------------------

| | During
2006 and 2007, held-to-maturity marketable securities in the amount of $ 3,000 and $ 24,364
respectively, were called by the issuers prior to maturity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
scheduled maturities of held-to-maturity marketable securities at December 31, 2007 were
as follows:
| | --------------------------------------------------------------------------------------------------------

| |                                        | Amortized
cost | Estimated
fair value
| | -------------------------------------- | -------------- | --------------------
|
|
|
|
| | Held-to-maturity:                      |                |                     
| |                                        |                |                     
| | Due within one year                    |                |                     
| | Due after one year through five years  |                |                     
| | Due after five years through ten years |                |                     
| |                                        |                |                     
| |                                        |                |                     
| |                                        |                |                     
| |                                        |                |                     
| |                                        |                |                     

| | b. | Available-for-sale
| | -- | ------------------

| | The
following table summarizes amortized costs, gross unrealized gains and losses and
estimated fair values of available for sale investments as of December 31, 2006 and 2007:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                           | Amortized cost | Gross unrealized
gains | Gross unrealized
losses | Estimated fair value
| | ------------------------- | -------------- | ---------------------- | ----------------------- | --------------------
|
|
|
|
| | U.S Government debentures |                |                        | $                       | -                   
| | Auction Rate              |                |                       
| | Securities                |                |                        |                         | 22,572              
| |                           |                |                        |                         |                     
| |                           |                |                       
| |                           |                |                        | $                       | 22,572              
| |                           |                |                        |                         |                     
| |                           |                |                        |                         |                     

| | The
scheduled maturity of available-for-sale securities at December 31, 2007 is within one
year.
| | ------------------------------------------------------------------------------------------------

|NOTE 4: |  | SHORT-TERM OTHER RECEIVABLES AND PREPAID EXPENSES
|------- | - | -------------------------------------------------

| |                                  | December 31,
| | -------------------------------- | ------------
|
|
|
|
| | Government authorities           |             
| | Interest receivable              |             
| | Prepaid expenses                 |             
| | Assets of discontinued operation |             
| | Other                            |             
| |                                  |             
| |                                  |             
| |                                  |             
| |                                  |             
| |                                  |             

F - 40

---

---

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

|NOTE 5: |  | INVENTORIES
|------- | - | -----------

| |                  | December 31,
| | ---------------- | ------------
|
|
|
|
| | Raw materials    |             
| | Work-in-progress |             
| | Finished goods   |             
| |                  |             
| |                  |             
| |                  |             
| |                  |             

|NOTE 6: |  | PROPERTY AND EQUIPMENT, NET
|------- | - | ---------------------------

| |                                    | December 31,
| | ---------------------------------- | ------------
|
|
|
|
| | Cost:                              |             
| | Computers and peripheral equipment |             
| | Office furniture and equipment     |             
| | Leasehold improvements             |             
| |                                    |             
| |                                    |             
| |                                    |             
| |                                    |             
| | Accumulated depreciation:          |             
| | Computers and peripheral equipment |             
| | Office furniture and equipment     |             
| | Leasehold improvements             |             
| |                                    |             
| |                                    |             
| |                                    |             
| |                                    |             
| |                                    |             
| | Depreciated cost                   |             
| |                                    |             

| | Depreciation
expense totaled $ 7,941, $ 8,244 and $ 8,740 for the years 2005, 2006 and
2007, respectively.
| | ----------------------------------------------------------------------------------------------------------

F - 41

---

---

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

|NOTE 7: |  | OTHER INTANGIBLE ASSETS, NET
|------- | - | ----------------------------

| | a. | Other
intangible assets:
| | -- | ------------------------

| |                                                 | December 31,
| | ----------------------------------------------- | ------------
|
|
|
|
| | Original amounts:                               |             
| | Capitalized software development costs          |             
| | Core technology                                 |             
| | Trademarks                                      |             
| | Customer relationships and distribution network |             
| | Maintenance contracts                           |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| | Accumulated amortization:                       |             
| | Capitalized software development costs          |             
| | Core technology                                 |             
| | Trademarks                                      |             
| | Customer relationships and distribution network |             
| | Maintenance contracts                           |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| |                                                 |             
| | Other intangible assets, net                    |             
| |                                                 |             

| | b. | Amortization
expense amounted to $ 5,211, $ 13,675 and $ 22,186           for the years
2005, 2006 and 2007, respectively.
| | -- | --------------------------------------------------------------------------------------------------------------------------

| | c. | Estimated
amortization expense for the years ended (excluding amortization of           capitalized
software development costs):
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| |                     | 
| | ------------------- | 
|
|
|
|
| | December 31,        | 
| |                     | 
| | 2008                | 
| | 2009                | 
| | 2010                | 
| | 2011                | 
| | 2012                | 
| | 2013 and thereafter | 
| |                     | 
| |                     | 
| |                     | 
| |                     | 

F - 42

---

---

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

|NOTE 8: |  | GOODWILL
|------- | - | --------

| | The
changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2007
are as follows:
| | -------------------------------------------------------------------------------------------------------------

| |                                                           | December 31,
| | --------------------------------------------------------- | ------------
|
|
|
|
| | Goodwill, beginning of the year                           |             
| | Additions in respect of acquisitions                      |             
| | Adjustment to goodwill in respect of settlement  with CRS |             
| | Foreign currency translation adjustments                  |             
| |                                                           |             
| |                                                           |             
| | Goodwill, end of year                                     |             
| |                                                           |             

|NOTE 9: |  | ACCRUED EXPENSES AND OTHER LIABILITIES
|------- | - | --------------------------------------

| |                                               | December 31,
| | --------------------------------------------- | ------------
|
|
|
|
| | Employees and payroll accruals                |             
| | Accrued expenses                              |             
| | Deferred revenues and advances from customers |             
| | Other                                         |             
| |                                               |             
| |                                               |             
| |                                               |             
| |                                               |             

F - 43

---

---

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

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES
|-------- | - | --------------------------------------

| | a. | Lease
commitments:
| | -- | ------------------

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

| | 1. | The
Companys office space and office equipment are rented under several
          operating leases.
| | -- | ----------------------------------------------------------------------------------------------------

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

| |                     | 
| | ------------------- | 
|
|
|
|
| | 2008                | 
| | 2009                | 
| | 2010                | 
| | 2011                | 
| | 2012                | 
| | 2013 and thereafter | 
| |                     | 
| |                     | 
| |                     | 
| |                     | 

| | Rent
expenses for the years 2005, 2006 and 2007 were approximately $ 6,317, $ 8,668
and $ 10,531, respectively.
| | ---------------------------------------------------------------------------------------------------------------

| | 2. | The
Company leases its motor vehicles under cancelable operating lease           agreements.
| | -- | --------------------------------------------------------------------------------------------

| | The
minimum payment under these operating leases, upon cancellation of these lease agreements
was $ 932 as of December 31, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------

| | Lease
expenses for motor vehicles for the years 2005, 2006 and 2007 were $ 2,552, $ 2,865
and $ 4,041, respectively.
| | --------------------------------------------------------------------------------------------------------------------

| | b. | Other
commitments:
| | -- | ------------------

| | The
Company is obligated under certain agreements with its suppliers to purchase goods and
under an agreement with its manufacturing subcontractor to purchase projected inventory
and excess inventory. Non cancelable obligations, net of provisions, as of December 31,
2007, were $ 3,801. These obligations will be fulfilled during 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Legal
proceedings:
| | -- | ------------------

| | 1. | On
October 19, 2004, CipherActive filed an action against the Company in the
          District Court of Tel Aviv, State of Israel. In this lawsuit, CipherActive
          claims that under a development agreement with the Company, it is entitled to
          receive license fees in respect of certain software that it allegedly developed
          for the Company and which has been embedded in one of the Companys
          products. CipherActive claims that it is entitled to license fees in the amount
          of $ 600 in addition to the amount of $ 100 already paid to
          CipherActive by the Company in respect of such license fees.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 44

---

---

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

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | In
the Companys statement of defense it claims that the software developed by
CipherActive under the agreement has not been successful in the market, is no longer
embedded in the Companys product and, therefore, CipherActive is not entitled to
any additional license fees. On February 1, 2007, a preliminary hearing took place,
during which the Company suggested that the parties submit the dispute to mediation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Although
the Court approved the mediation, the parties failed to find an appropriate mediator. In
a pretrial hearing that took place on May 27, 2007, the Court accepted CipherActives
request to allow additional time for negotiations between the parties. An additional
pretrial hearing took place on January 20, 2008. The Court determined that an accountant
from one of the big five accounting firms will examine the damages claimed by
CipherActive and will submit an opinion within 90 days. The Company is currently unable
to evaluate the probability of a favorable or unfavorable outcome.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
July 20, 2004, STS Software System Ltd. (STS), a wholly owned
          subsidiary of the Company, brought a lawsuit against Witness Systems, Inc.
          (currently: Verint America Inc., a wholly owned subsidiary of Verint Systems,
          Inc.) (Witness Systems) asserting that Witness Systems is
infringing           three U.S. patents of STS relating to Voice over Internet Protocol
          (VoIP). STS claims that Witness Systems infringes the VoIP patents
          by marketing and selling products that incorporate methods of detecting,
          monitoring and recording information  all fully protected by the patents.
          STS is seeking a permanent injunction to prevent Witness Systems from making,
          using, offering to sell or selling any product in the United States that
          infringes these patents. In response, Witness Systems is asserting that the
          patents are invalid and not infringed. By order of the Court on June 26, 2007,
          the Company joined as a plaintiff in the litigation. A trial took place in the
          U.S. District Court for the Northern District of Georgia during the week of
          March 17, 2008. Prior to the trial the Company removed two U.S patents from the
          litigation. A decision by the court is expected in May 2008.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 30, 2004, Witness Systems filed a lawsuit in the United States District Court for
the Northern District of Georgia against Nice Systems Inc., a wholly owned subsidiary of
the Company. Witness Systems is alleging infringement of two U.S. patents entitled Method
and Apparatus for Simultaneously Monitoring Computer User Screen and Telephone Activity
from a Remote Location and is seeking damages in an amount ranging between $ 17,000
and $ 33,000 and an injunctive relief. On February 24, 2005, Witness Systems filed a
similar action in the Northern District of Georgia against the Company alleging
infringement of the same two patents. The two actions were consolidated in April 2005.
The Company has denied infringing these patents and is vigorously defending against
Witness Systems claims. In addition, the Company has asserted its right to be
indemnified for losses arising out of the claims of infringement in this litigation
pursuant to an agreement between the Company and Netopia, Inc., the Companys
vendor. The case is currently in discovery and no trial date has been set.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 45

---

---

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

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | On
January 19, 2006, Witness Systems filed a new patent infringement action in the United
States District Court for the Northern District of Georgia against the Company and its
wholly owned subsidiary, Nice Systems Inc., alleging infringement of a U.S. patent
relating to technology to extract particular information from recorded telephone
conversations. This technology is used as an option with a Company product called
NicePerform. Witness Systems is requesting unspecified damages and a permanent injunction
to prevent any sale of allegedly infringing products. The Company has denied all material
allegations and is asserting a number of defenses. The Company believes that the claims
are without merit and intends to vigorously defend against them. The case is currently in
discovery and trial is expected to begin on May 12, 2008.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 10, 2006, the Company and its wholly owned subsidiary, Nice Systems Inc. filed a new
lawsuit against Witness Systems, Inc. in the United States District Court for District of
Delaware claiming that Witness Systems is infringing ten U.S. patents. These patents
cover various aspects of recording customer interaction communications and traditional
logging including event triggered call and screen recording, cradle-to-grave recording
of customer calls, traditional TDM loggers, off-site storage of calls, and multi-stage
telephone data logging. In this lawsuit, the Company claimed that Witness Systems
infringes the Companys patents by marketing and selling products that use methods,
products and systems which the Company believes are protected by Companys patents.
The Witness products the Company has accused of infringing its patents include Impact 360®,
ContactStore®, eQuality ContactStore®, ContactStore for Communication Manager®,
eQuality ContactStore for Communication Manager® and Eyretels MediaStore®.
The Company requested a permanent injunction to prevent Witness Systems from making,
using, or offering to sell or selling any product in the United States which infringes
these patents. In addition, the Company sought damages for Witness Systems past
willful infringement of these patents. The case went to trial before a jury on
January 14, 2008. The jury deadlocked and on January 25, 2008 a mistrial was declared.
The Company has filed a motion for a new trial date for the case. A new trial date has
not been set yet.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the above-mentioned legal proceedings, the Company currently is not able to evaluate the
probability for favorable or unfavorable outcome with any degree of certainty.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 46

---

---

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

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | 3. | In
or about February 2005, the Company received correspondence from Origin Data
          Realisation Limited (Origin), notifying the Company of a potential
          claim against it in relation to an alleged breach of the terms of a license of
          software and other matters. Following lengthy negotiations, the dispute was
          recently settled and a new license agreement was entered into between the
          parties in December 2007.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | On
July 27, 2004, Dictaphone Corp. filed an action against VoicePrint in the
          United States District Court for the Central District of California asserting
          the infringement by VoicePrint of two U.S patents, which the Company
          subsequently acquired from Dictaphone. This lawsuit has been settled in
          principle, but the documentation for this settlement has not been finalized and
          executed by the parties.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | In
December 2006, Calyon Corporate and Investment Bank (Calyon)           filed
a suit against the Company in the District Court of Tel Aviv, demanding
          repayment of $ 648 plus accrued interest, in the total amount of
          $ 740. The Company deducted this amount in January 2004 from a payment
          transferred from an account of Thales maintained with Calyon to the
          Companys account, at the instruction of Thales, in connection with the
          acquisition of Thales Contact Solutions (TCS) from Thales. The
          Company had notified TCS in 2004 that it had setoff such amount with respect to
          an overdue payment by TCS to the Company. The dispute was submitted to
          mediation, however the mediation process failed and the proceedings were
          returned to the District Court of Tel Aviv. This lawsuit is in its initial
          stages and the first hearing is scheduled to take place on September 18, 2008.
          The Company is currently unable to evaluate the probability of a favorable or
          unfavorable outcome.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | On
March 9, 2007, Formatest AG filed a claim against NICE Switzerland AG, a           wholly
owned subsidiary of the Company, in the Cantonal Court of Zug,           Switzerland. The
claim is in the amount of approximately $ 1,600           ( 1,187,793),
plus interest at 5% per annum, and is made in           connection with an agreement
dated December 10, 2004 between FAST Video Security           AG (now NICE Switzerland
AG) and Formatest AG. On June 19, 2007, the           Company and Formatest AG
entered into an agreement settling all claims. The           Company believes it is
entitled to recover all or a substantial part of the           settlement amount paid to
Formatest AG (with the addition of legal costs), under           the terms of
indemnification provision contained in the sale and purchase           agreement between
the selling shareholders of FAST Video Security AG (the           Sellers)
and the Company dated November 16, 2006 (the           Agreement). The
Company blocked escrow funds from being released to           the Sellers under the
Agreement in the amount of $ 3,000 and also declared           its right to set off
of the settlement amount paid to Formatest AG against the           Sellers first
earn out payment pursuant to the Agreement. On December 18,           2007, the Sellers
issued a Notice of Arbitration in the Zurich Chamber of           Commerce, claiming that
the Company should pay them an amount of $ 1,229           (plus late payment
interest of 5% from July 2007), which is the remaining unpaid           portion of the
first earn out payment under the Agreement, release $ 3,000           (plus accrued
interest) from the escrow account pursuant to the Agreement, plus           an additional
late release interest of 5%, and compensate them for loss incurred           due to
deteriorating exchange rates and other related expenses.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 47

---

---

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

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | In
accordance with its assessment of the Sellers liability and in order to reduce
arbitration costs, the Company decided to release to the Sellers a partial payment of $ 1,400
out of the escrow funds and to pay to the Sellers the amount of $ 1,229 prior to the
commencement of the arbitration proceedings. On February 20, 2008 the Company filed a
counterclaim against the Sellers for indemnity under the Agreement as of the time of
filing to approximately $ 1,360. The arbitration proceedings are at an initial stage
and parties are in the process of jointly designating an arbitrator.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | On
October 26, 2007, two former employees of Nice Systems Inc. filed a lawsuit
          against the Company and Nice Systems Inc, alleging violations of various laws
          prohibiting discrimination in employment. The plaintiffs are seeking lost
          earnings and benefits, compensatory damages for emotional injury and injury to
          reputation and punitive damages, as well as attorneys fees and costs. The
          Company has filed its answer and the Court has held an initial conference and
          entered a scheduling order. The case is in its early stage of discovery. The
          Company is currently unable to evaluate the probability of a favorable or
          unfavorable outcome.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8. | On
December 19, 2007, a former employee of Nice Systems Inc. sent the Company           and
Nice Systems Inc. a letter alleging engagement in prohibited discrimination           in
employment and retaliation in terminating his employment. The former employee
          has made a settlement demand. The Company is currently in the process of
          assessing and responding to the letter. The Company is currently unable to
          evaluate the probability of a favorable or unfavorable outcome.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9. | The
Company is involved in various other legal proceedings arising in the           normal
course of its business. Based upon the advice of counsel, the Company           does not
believe that the ultimate resolution of these matters will have a           material
adverse effect on the Companys consolidated financial position,           results
of operations or cash flows.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 11: |  | CREDIT LINES
|-------- | - | ------------

| | As
of December 31, 2007, the Company had authorized credit lines from banks in the amount of
approximately $ 312,000. When utilized, the credit lines will be denominated in
dollars and will bear interest at the rate of up to LIBOR + 0.45%. An amount of
approximately $ 278,000 out of the total credit lines is secured by the Companys
cash and cash equivalents and marketable securities. As of December 31, 2007, $ 12,857
of the $ 312,000 referred to above was used for bank guarantees (of which $ 10,857
is for continuing operations and $ 2,000 is for letters of credit). The Company has
no financial covenants to secure the above credit lines.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---

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

|NOTE 12: |  | TAXES ON INCOME
|-------- | - | ---------------

| | a. | Israeli
taxation:
| | -- | -----------------

| | 1. | Corporate
tax rates in Israel:
| | -- | ------------------------------

| | Taxable
income of Israeli companies is subject to tax at the rate of 29% in 2007, 27% in 2008,
26% in 2009 and 25% in 2010 and thereafter.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Tax
benefits under the Israel Law for the Encouragement of Capital Investments,
          1959 (the Law):
| | -- | -----------------------------------------------------------------------------------------------------------

| | The
Law empowers the Israeli Investment Center to grant Approved Enterprise status to capital
investments in production facilities that meet certain relevant criteria (Approved
Enterprise). In general, such capital investments will receive Approved Enterprise
status if the enterprise is expected to contribute to the development of the productive
capacity of the economy, absorption of immigrants, creation of employment opportunities,
or improvement in the balance of payments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax benefits derived from any such Approved Enterprise relate only to taxable income
attributable to the specific program of investment to which the status was granted. To
the extent that NICE has been granted Approved Enterprise status and operates under more
than one approval, or that its capital investments are only partly approved, its
effective corporate tax rate will be the result of a weighted combination of the various
rates applicable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Certain
production facilities of NICE have been granted the status of an Approved Enterprise
under the Law, in four separate investment programs. For all such Approved Enterprises,
the Company elected to apply for alternative tax benefits (Alternative Package),
waiving Government grants in return for a tax exemption.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
derived from the first and second program was tax-exempt for a period of four years,
commencing 1999 and 1997, respectively, and is taxed at the reduced corporate tax rate of
10%-25% (based on the percentage of foreign ownership in each taxable year) for an
additional period of six years. Income derived from the third and fourth programs are
tax-exempt for a period of two years, commencing 2005, and will be taxed at the reduced
corporate tax rate of 10%-25% (based on the percentage of foreign ownership in each
taxable year) for an additional period of eight years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
above mentioned tax benefits are scheduled to expire by 2014 in a gradual manner.
| | -------------------------------------------------------------------------------------

| | The
Companys wholly owned subsidiary, Actimize Ltd., has received approval as an
Approved Enterprise in Israel under the Law, for two investment programs and is therefore
eligible for Israeli tax benefits. Pursuant to these benefits, Actimize Ltd. may enjoy a
tax exemption from Israeli taxes on income derived during the first two years in which
each investment program produces taxable income, subject to certain timing restrictions,
provided that it does not distribute such income as a dividend. In addition, Actimize
Ltd. will enjoy a reduced tax rate of 10%  25%, (based on the percentage of foreign
ownership in each taxable year) for an additional period of eight years. The benefit
periods have not yet commenced.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 49

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | In
the event of distribution of dividends from the said tax-exempt income, the amount
distributed will be subject to corporate tax at the rate ordinarily applicable to the
Approved Enterprises income. The tax-exempt income attributable to the Approved
Enterprise programs mentioned above can be distributed to shareholders without
subjecting the Company to taxes only upon the complete liquidation of NICE.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
duration of tax benefits, for each of the Programs is subject to limitations of the
earlier of 12 years from completion of the investment or commencement of production, or
14 years from receipt of approval, as an Approved Enterprise under the Law.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon the Companys fulfilling the
conditions stipulated by the Law and regulations published thereunder. Should the Company
fail to meet such requirements in the future, income attributable to its Approved
Enterprise programs could be subject to the statutory Israeli corporate tax rate and the
Company could be required to refund a portion of the tax benefits already received, with
respect to such programs. As of December 31, 2007, management believes that the Company
is in compliance with all the conditions required by the Law.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the Law came into effect (the Amendment) and
has significantly changed the provisions of the Law. The Amendment limits the scope of
enterprises which may be approved by the Investment Center by setting criteria for the
approval of a facility as a Privileged Enterprise (rather than the previous
terminology of Approved Enterprise), such as a provision requiring that at least 25% of
the Privileged Enterprises income will be derived from export. Additionally, the
Amendment enacted major changes in the manner in which tax benefits are awarded under the
Law so that companies are no longer required for Investment Center approval in order to
qualify for tax benefits. The period of tax benefits for a new Privileged Enterprise
commences in the Year of Commencement. This year is the later of: (1) the
year in which taxable income is first generated by the Company, or (2) a year selected by
the company for commencement, on the condition that the Company meets certain provisions
provided by the Law (Year of Election).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
a company requested the Alternative Package of benefits for an Approved Enterprise under
the old law before the 2005 amendment, it is precluded from filing a Year of Election
notice for a Privileged Enterprise for three years after the year in which the Approved
Enterprise was activated.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Law provides that terms and benefits included in any certificate of
approval already granted will remain subject to the provisions of the law as they were on
the date of such approval. Therefore, the four existing Approved Enterprises will not be
subject to the provisions of the Amendment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company determined 2006 as the Year of Election for the purposes of commencing the
Privileged Enterprises first program benefits under the Amendment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

F - 50

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | As
a result of the Amendment, tax-exempt income generated under the Companys
Privileged Enterprise program, will subject the Company to taxes upon dividend
distribution or complete liquidation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | As
of December 31, 2007, approximately $ 116,000 is tax-exempt attributable to its
various Approved and Privileged Enterprise programs. If such tax exempt income is
distributed (other than in respect of the first four programs upon the complete
liquidation of the Company), it would be taxed at the reduced corporate tax rate
applicable to such profits (between 10%-25%) and an income tax liability of up to
approximately $ 21,700 would be incurred as of December 31, 2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than an Approved or a Privileged Enterprise is subject to tax at
regular Israeli corporate tax rate.
| | ------------------------------------------------------------------------------------------------------------------------------

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

| | NICE
is an Industrial Company as defined and, as such, is entitled to certain tax
benefits including accelerated depreciation, deduction of public offering expenses in
three equal annual installments and amortization of other intangible property rights for
tax purposes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Income
taxes on non-Israeli subsidiaries:
| | -- | -----------------------------------------

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

| | c. | Net
operating loss carryforward:
| | -- | --------------------------------

| | As
of December 31, 2007, the Company had carryforward tax losses totaling approximately $ 46,500
which can be carried forward and offset against taxable income with expiration dates
ranging from 2008 and onwards. Approximately $ 28,300 of these carryforward tax
losses have no expiration date. The balance expires between 2008 and 2027.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 51

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

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

| | Of
the Companys total carry forward tax losses, approximately $ 35,600 were
inherited at the time of the acquisition of certain of the Companys subsidiaries. A
valuation allowance of $ 4,200 has been applied thereto. Any subsequent reduction of
this valuation allowance and the recognition of the associated tax benefit will be
applied to reduce goodwill.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Deferred
tax assets and liabilities:
| | -- | ------------------------------------

| | Deferred
taxes reflect the net tax effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts recorded for tax
purposes. Significant components of the Companys deferred tax assets and
liabilities are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                | December 31,
| | ---------------------------------------------- | ------------
|
|
|
|
| | Deferred tax assets:                           |             
| | Net operating losses carryforward              |             
| | Acquired intangibles                           |             
| | Other                                          |             
| |                                                |             
| |                                                |             
| | Deferred tax assets before valuation allowance |             
| | Valuation allowance                            |             
| |                                                |             
| |                                                |             
| | Deferred tax assets                            |             
| |                                                |             
| | Deferred tax liabilities:                      |             
| | Acquired intangibles                           |             
| |                                                |             
| |                                                |             
| | Deferred tax liabilities, net                  |             
| |                                                |             

| | The
Company has provided valuation allowances in respect of certain deferred tax assets
resulting from tax loss carry forwards and other reserves and allowances due to
uncertainty concerning realization of these deferred tax assets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Decrease
in the valuation allowance in 2007 amounted to $ 395 resulted from an increase of $ 978
related to business combinations, and a decrease of $ 1,373 related to operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 52

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

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

| |                                                 | Year ended December 31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | Income before taxes on income, as reported in   |                        
| | the consolidated statements of income           |                        
| |                                                 |                        
| |                                                 |                        
| | Statutory tax rate in Israel                    |                        
| | Approved and Privileged Enterprise benefits *)  |                        
| | Changes in valuation allowance                  |                        
| | Earnings taxed under foreign law                |                        
| | Acquired in-process research and development    |                        
| | Permanent items and other                       |                        
| |                                                 |                        
| |                                                 |                        
| | Effective tax rate                              |                        
| |                                                 |                        
| |                                                 |                        
| | *) Net earnings per Ordinary share - amounts of |                        
| | the benefit resulting from the "Approved and    |                        
| | Privileged Enterprise" status                   |                        
| | Basic                                           |                        
| |                                                 |                        
| |                                                 |                        
| | Diluted                                         |                        
| |                                                 |                        

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

| |            | Year ended December 31,
| | ---------- | -----------------------
|
|
|
|
| | Domestic   |                        
| | Foreign *) |                        
| |            |                        
| |            |                        
| |            |                        
| |            |                        

| | *) | The
loss before taxes in 2006 arose as a result of write off of acquired           in-process
research and development of approximately $ 13,000.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------

F - 53

---

---

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

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | g. | Taxes
on income are comprised as follows:
| | -- | -----------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Current  |                        
| | Deferred |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | h. | Uncertain
tax positions:
| | -- | ------------------------

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

| |                                             | 
| | ------------------------------------------- | 
|
|
|
|
| | Balance at January 1, 2007                  | 
| | Increases in tax positions for prior years  | 
| | Decreases in tax positions for prior years  | 
| | Increases in tax positions for current year | 
| | Settlements                                 | 
| |                                             | 
| |                                             | 
| | Balance at December 31, 2007 *)             | 
| |                                             | 

| | *) | Unrecognized
tax benefits included $ 14,307 of tax benefits, which if           recognized, would
reduce the Companys annual effective tax rate. The           unrecognized tax
benefits included an immaterial accrued interest as of December           31, 2007.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, the Company is subject to Israeli income tax audits for the tax
years 2002 through 2007, to U.S. federal income tax audits for the tax years of 2003
through 2007 and to other income tax audits for the tax years of 2002 through 2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 54

---

---

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

|NOTE 13: |  | SHAREHOLDERS EQUITY
|-------- | - | --------------------

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

| | In
September and October 2007 the Company completed a secondary public offering of its ADSs
on NASDAQ. The Company issued 5,175,000 shares (including 675,000 ADS issued upon the
exercise of an option by the underwriters on October 10, 2007) at a price of $ 35.02
per share before issuance expenses. Total net proceeds from the issuance amounted to
approximately $ 180,829.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 30, 2007 the Company acquired all of the outstanding shares of Actimize Ltd. (Actimize).
As part of the acquisition, the Company issued 1,501,933 American Depositary Shares (ADSs)
of NICE, valued at $ 53,217  see Note 1(b)(6).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2005, the Company effected a secondary public offering of its ADS on NASDAQ. The
Company issued 9,200,000 shares at a price of $ 23.13 per share before underwriting
and issuance expenses. Total net proceeds from the issuance amounted to approximately $ 201,724.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 only be
determined by the Board of Directors of the Company, are granted at an exercise price,
subject to certain exceptions, of not less than the fair market value of the Ordinary
shares on the grant date. 16,691,132 options of the 1995 Option Plan were granted.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options generally vest gradually over a four-year period from the date of grant. As of
February 15, 2000, the Board of Directors of the Company adopted a resolution amending
the exercise terms for any option granted subsequent to February 15, 2000 under the 1995
Option Plan whereby 25% of the stock options granted become exercisable on the first
anniversary of the date of grant and 6.25% become exercisable once every quarter during
the subsequent three years. The options expire no later than 6 years from the date of
grant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2001, the Company adopted the 2001 Stock Option Plan (the 2001 Option Plan).
The options to acquire Ordinary shares, which may only be determined by the Board of
Directors of the Company, are granted at an exercise price, of not less than the fair
market value of the Ordinary shares on the grant date. 5,919,500 options of the 2001
Option Plan were granted.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Unless
otherwise determined by the Companys Board of Directors as of the date of grant,
the stock options expire six years after the date of grant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

F - 55

---

---

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

|NOTE 13: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | In
2003, the Company adopted the 2003 Stock Option Plan (the 2003 Option Plan).
Under the 2003 option plan, employees and officers of the Company may be granted options
to acquire Ordinary shares. The options to acquire Ordinary shares, which may only be
determined by the Board of Directors of the Company, are granted at an exercise price,
subject to certain exceptions, of not less than the fair market value of the Ordinary
shares on the grant date. Generally, Under the terms of the 2003 Plan, 25% of the stock
options granted become exercisable on the first anniversary of the date of grant and
6.25% becomes exercisable once every quarter during the subsequent three years. Stock
options expire six years after the date of grant. 9,058,500 options of the 2003 Option
Plan were granted. Unless otherwise determined by the Companys Board of Directors
as of the date of grant, the stock options expire six years after the date of grant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
September 2007, the Company registered, through the filing of a registration statement on
Form S-8 with the Securities and Exchange Commission (SEC) under the
Securities Act, an aggregate of 987,104 ADS, which are comprised of: (i) 564,225 ADS
subject to issuance upon the exercise of stock options outstanding under the 2003
Actimize Plan; and (ii) 422,879 ADS representing restricted Ordinary shares issued in
lieu of restricted shares issued under the 2003 Actimize Plan.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Employee
Stock Purchase Plan (ESPP):
| | -- | --------------------------------------

| | 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. Up to
2006, the price of Ordinary shares purchased under the Purchase Plan was equal to 85% of
the lower of the fair market value of the Ordinary shares on the commencement date of
each offering period or on the semi-annual purchase date. In December 2005, the Board of
Directors amended the plan effective January 1, 2006, so that the price of Ordinary
shares purchased under the Purchase Plan will equal to 95% of Ordinary share price fair
market value of the Ordinary shares on the semi-annual purchase date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2005, 2006 and 2007, employees purchased 334,090, 8,570 and 16,041 shares at average
prices of $ 12.94, $ 26.73 and $ 31.08 per share, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

F - 56

---

---

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

|NOTE 13: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | d. | Stock
split:
| | -- | ------------

| | On
May 17, 2006, the Company affected a two-for-one stock split on its Ordinary shares which
was affected in the form of a 100% stock dividend. Shareholders of record at the close of
business on May 30, 2006, the record date, received one additional Ordinary share/ADR for
each Ordinary share/ADR held. All Ordinary share options and per share amounts have been
adjusted to give retroactive effect to the stock split for all periods presented.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Dividends:
| | -- | ----------

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

|NOTE 14: |  | REPORTABLE SEGMENTS, PRODUCT LINES AND MAJOR CUSTOMER DATA
|-------- | - | ----------------------------------------------------------

| | a. | Reportable
segments:
| | -- | --------------------

| | In
2006, following the expansion of the operations in certain regions, the Company
determined that it operates under several reportable segments and provided summarized
financial information as set forth below. The following tables present the financial
information of the Companys reportable segments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | Year ended December 31, 2007
| | ----------------------- | ----------------------------
|
|
|
|
| | Revenues                |                             
| |                         |                             
| |                         |                             
| | Gross profit (loss)     |                             
| |                         |                             
| |                         |                             
| | Operating expenses      |                             
| |                         |                             
| |                         |                             
| | Operating income (loss) |                             
| |                         |                             

| |                         | Year ended December 31, 2006
| | ----------------------- | ----------------------------
|
|
|
|
| | Revenues                |                             
| |                         |                             
| |                         |                             
| | Gross profit (loss)     |                             
| |                         |                             
| |                         |                             
| | Operating expenses      |                             
| |                         |                             
| |                         |                             
| | Operating income (loss) |                             
| |                         |                             

| | *) | Includes
Europe, the Middle East (including Israel) and Africa
| | -- | --------------------------------------------------------------

| | **) | Includes
Asia Pacific
| | --- | ---------------------

F - 57

---

---

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

|NOTE 14: |  | REPORTABLE SEGMENTS, PRODUCT LINES AND MAJOR CUSTOMER DATA (Cont.)
|-------- | - | ------------------------------------------------------------------

| | The
following presents long-lived assets of December 31, 2006 and December 31, 2007:
| | ------------------------------------------------------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Americas |                        
| | EMEA     |                        
| | APAC     |                        
| | Actimize |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | b. | Product
lines:
| | -- | --------------

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

| |                                       | Year ended December 31,
| | ------------------------------------- | -----------------------
|
|
|
|
| | Enterprise interaction solutions      |                        
| | Public safety and security sector     |                        
| | Operational risk management solutions |                        
| |                                       |                        
| |                                       |                        
| |                                       |                        
| |                                       |                        

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

| |            |  |  | 
| | ---------- |  |  | 
|
|
|
|
| | Customer A |  |  | 
| |            |  |  | 

|NOTE 15: |  | SELECTED STATEMENTS OF INCOME DATA
|-------- | - | ----------------------------------

| | a. | Research
and development, net:
| | -- | ------------------------------

| |                                               | Year ended December 31,
| | --------------------------------------------- | -----------------------
|
|
|
|
| | Total costs                                   |                        
| | Less - grants and participations              |                        
| | Less - capitalization of software development |                        
| | costs                                         |                        
| |                                               |                        
| |                                               |                        
| |                                               |                        
| |                                               |                        

F - 58

---

---

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

|NOTE 15: |  | SELECTED STATEMENTS OF INCOME DATA (Cont.)
|-------- | - | ------------------------------------------

| | b. | Financial
income, net:
| | -- | ----------------------

| |                                           | Year ended December 31,
| | ----------------------------------------- | -----------------------
|
|
|
|
| | Financial income:                         |                        
| | Interest and amortization/accretion of    |                        
| | premium/discount on marketable securities |                        
| | Interest                                  |                        
| | Foreign currency translation              |                        
| |                                           |                        
| |                                           |                        
| |                                           |                        
| |                                           |                        
| | Financial expenses:                       |                        
| | Interest                                  |                        
| | Foreign currency translation              |                        
| | Other                                     |                        
| |                                           |                        
| |                                           |                        
| |                                           |                        
| |                                           |                        
| |                                           |                        
| |                                           |                        
| |                                           |                        

| | c. | Net
earnings per share:
| | -- | -----------------------

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

| | 1. | Numerator:
| | -- | ----------

| |                                  | Year ended December 31,
| | -------------------------------- | -----------------------
|
|
|
|
| | Net income available to Ordinary |                        
| | shareholders                     |                        
| |                                  |                        

| | 2. | Denominator
(in thousands):
| | -- | ---------------------------

| |                                          |  |  | 
| | ---------------------------------------- |  |  | 
|
|
|
|
| | Denominator for basic net earnings per   |  |  | 
| | share -                                  |  | 
| | Weighted average number of shares        |  |  | 
| |                                          |  | 
| | Effect of dilutive securities:           |  | 
| | Add - Employee stock options and RSA     |  |  | 
| | Add - ESPP                               |  |  | 
| |                                          |  |  | 
| |                                          |  | 
| | Denominator for diluted net earnings per |  | 
| | share - adjusted weighted average        |  | 
| | shares                                   |  |  | 
| |                                          |  |  | 

F - 59

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

|NOTE 16: |  | SUBSEQUENT EVENT
|-------- | - | ----------------

| | On
April 8, 2008, the Company acquired certain assets, shares and business from Quality Plus
Group Ltd., a UK-based value-added distributor of NICEs contact center solutions,
and its affiliates (QPC), for approximately $12,300 in cash. The business
acquired includes the sale, distribution, service, support, maintenance and development
of workforce management solutions and associated services as conducted by QPC in the UK,
Sweden and Australia.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 60

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# SIGNATURES

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

| |  | NICE-SYSTEMS LTD.By: /s/ Haim Shani
Haim ShaniChief Executive Officer
| |  | -----------------------------------------------------------------------------------

Date: April 14, 2008

131

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