As filed with the United States Securities
  and Exchange Commission on May 17, 2006

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|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|WASHINGTON,
  D.C. 20549          
|                                  
|FORM 20-F                         

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

For the fiscal year ended December 31, 2005

Commission file number 0-27466

|                                                                                                          
|----------------------------------------------------------------------------------------------------------
|NICE-SYSTEMS LTD.                                                                                         
|                                                                                                          
|(Exact name of Registrant as specified in its charter and translation
  of Registrants name into English)
|                                                                                                          
|Israel                                                                                                    
|                                                                                                          
|(Jurisdiction of incorporation or organization)                                                           
|                                                                                                          
|8 Hapnina Street, P.O. Box 690, Raanana
  43107, Israel                                                  
|                                                                                                          
|(Address of principal executive offices)                                                                  

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

|                      |  |                                            
|--------------------- |  | -------------------------------------------
|Title of Each
  Class |  | Name of Each Exchange
  On Which Registered
|                      |  |                                            
|                      |  |                                            
|None                  |  | None                                       
|                      |  |                                            

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

|                                                                                            
|--------------------------------------------------------------------------------------------
|American Depositary Shares, each
  representing                                             
|one Ordinary Share, par value one                                                           
|New Israeli Shekel per share                                                                
|                                                                                            
|(Title of Class)                                                                            
|                                                                                            
|Securities for which there is a reporting obligation pursuant to
  Section 15(d) of the Act:
|                                                                                            
|None                                                                                        
|                                                                                            
|(Title of Class)                                                                            

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

24,137,643 Ordinary Shares, par value NIS
1.00 Per Share

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---



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

xYesoNo

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

oYes
xNo

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

Yes  x   No  o

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 filerx | Accelerated filero | Non-accelerated filero

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

Item 17 o          Item
18 x

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

oYes
xNo

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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
partners, one of which constitutes 21% of our revenues; the financial strength
of our key distribution partners; 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, Nice Systems Inc., NICE Systems GmbH, NICE
Systems Canada Ltd., NICE CTI Systems UK Ltd., STS Software Systems (1993)
Ltd., NiceEye BV, NICE Systems S.A.R.L., NICE APAC Ltd., NiceEye Ltd., Racal
Recorders Systems Ltd., NICE Interactive Solutions India Private Ltd.,
Nice Systems Latin America, Inc., Nice Japan Ltd., Nice Systems (Singapore)
Pte. Ltd., Nice Systems Australia PTY Ltd., Nice Switzerland AG, Fast Video
Security GmbH and Fast Video Security (UK) Ltd.

---

---



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

---

---



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                                                     | 21  
|Item 4A                         | Unresolved Staff Comments                                                      | 42  
|Item 5.                         | Operating and Financial Review and Prospects                                   | 43  
|Item 6.                         | Directors, Senior Management and Employees                                     | 63  
|Item 7.                         | Major Shareholders and Related Party Transactions                              | 80  
|Item 8.                         | Financial Information                                                          | 81  
|Item 9.                         | The Offer and Listing                                                          | 85  
|Item 10.                        | Additional Information                                                         | 88  
|Item 11.                        | Quantitative and Qualitative Disclosures About Market Risk                     | 111 
|Item 12.                        | Description of Securities Other than Equity Securities                         | 111 
|                               
|                                | PART II                                                                        |     
|Item 13.                        | Defaults, Dividend Arrearages and Delinquencies                                | 111 
|Item 14.                        | Material Modifications to the Rights of Security Holders and Use of
  Proceeds | 112 
|Item 15.                        | Controls and Procedures                                                        | 112 
|Item 16A.                       | Audit Committee Financial Expert                                               | 112 
|Item 16B.                       | Code of Ethics                                                                 | 112 
|Item 16C.                       | Principal Accountant Fees and Services                                         | 113 
|Item 16D.                       | Exemptions from the Listing Standards for Audit Committees                     | 113 
|Item 16E.                       | Purchases of Equity Securities by the Issuer and Affiliated
  Purchasers       | 113 
|                               
|                                | PART III                                                                       |     
|Item 17.                        | Financial Statements                                                           | 114 
|Item 18.                        | Financial Statements                                                           | 114 
|Item 19.                        | Exhibits                                                                       | 115 
|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, 2004 and 2005
and for the years ended December 31, 2003, 2004 and 2005 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, 2001, 2002 and 2003 and for the years ended
December 31, 2001 and 2002 has 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,                               |        
|                                                                                                       |  |                                                         |        
|                                                                                                       |  | 2001                                                    |         | 2002 |   | 2003    |   | 2004 |         | 2005 |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |  
|                                                                                                       |  | (in
  thousands of U.S. dollars, except per share data) |        
|                                                                                                       |  |                                                         |        
|OPERATING DATA:                                                                                        |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Revenues                                                                                               |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Products                                                                                               |  | $                                                       | 99,395  |      | $ | 127,896 |   | $    | 168,055 |      | $ | 182,616 |  | $ | 206,355 |  
|Services                                                                                               |  |                                                         | 14,474  |      |   | 27,445  |   |      | 56,203  |      |   | 70,027  |  |   | 104,755 |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Total revenues                                                                                         |  |                                                         | 113,869 |      |   | 155,341 |   |      | 224,258 |      |   | 252,643 |  |   | 311,110 |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Cost of revenues                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Products                                                                                               |  |                                                         | 47,781  |      |   | 55,453  |   |      | 64,231  |      |   | 64,432  |  |   | 67,543  |  
|Services                                                                                               |  |                                                         | 19,446  |      |   | 26,054  |   |      | 42,084  |      |   | 49,876  |  |   | 68,683  |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Total cost of revenues                                                                                 |  |                                                         | 67,227  |      |   | 81,507  |   |      | 106,315 |      |   | 114,308 |  |   | 136,226 |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Gross profit                                                                                           |  |                                                         | 46,642  |      |   | 73,834  |   |      | 117,943 |      |   | 138,335 |  |   | 174,884 |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Operating expenses:                                                                                    |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Research and development,
net                                                                          |  |                                                         | 18,843  |      |   | 17,122  |   |      | 22,833  |      |   | 24,866  |  |   | 30,896  |  
|Selling and marketing                                                                                  |  |                                                         | 33,683  |      |   | 38,685  |   |      | 53,351  |      |   | 61,855  |  |   | 72,829  |  
|General and
administrative                                                                             |  |                                                         | 23,410  |      |   | 23,806  |   |      | 29,840  |      |   | 31,269  |  |   | 37,742  |  
|Amortization of acquired
intangible assets                                                             |  |                                                         | 3,414   |      |   | 58      |   |      | 350     |      |   | 317     |  |   | 1,331   |  
|Other special charges                                                                                  |  |                                                         | 17,862  |      |   | 29,092  |   |      | 7,082   |      |   | -       |  |   | -       |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Total operating expenses                                                                               |  |                                                         | 97,212  |      |   | 108,763 |   |      | 113,456 |      |   | 118,307 |  |   | 142,798 |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Operating income (loss)                                                                                |  |                                                         | (50,570 | )    |   | (34,929 | ) |      | 4,487   |      |   | 20,028  |  |   | 32,086  |  
|Financial income, net                                                                                  |  |                                                         | 4,254   |      |   | 3,992   |   |      | 2,034   |      |   | 3,556   |  |   | 5,398   |  
|Other income (expenses), net                                                                           |  |                                                         | (4,846  | )    |   | (4,065  | ) |      | 292     |      |   | 54      |  |   | (13     | )
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Income (loss) before taxes on income                                                                   |  |                                                         | (51,162 | )    |   | (35,002 | ) |      | 6,813   |      |   | 23,638  |  |   | 37,471  |  
|Taxes on income                                                                                        |  |                                                         | 198     |      |   | 350     |   |      | 1,205   |      |   | 2,319   |  |   | 902     |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Net income (loss) from continuing
  operations                                                         |  |                                                         | (51,360 | )    |   | (35,352 | ) |      | 5,608   |      |   | 21,319  |  |   | 36,569  |  
|Net income (loss) from discontinuing
  operations                                                      |  |                                                         | 4,565   |      |   | 1,370   |   |      | 1,483   |      |   | 3,236   |  |   | -       |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Net income (loss)                                                                                      |  | $                                                       | (46,795 | )    | $ | (33,982 | ) | $    | 7,091   |      | $ | 24,555  |  | $ | 36,569  |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Basic earnings (loss) per
share:                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Continuing operations                                                                                  |  | $                                                       | (3.94   | )    | $ | (2.56   | ) | $    | 0.35    |      | $ | 1.22    |  | $ | 1.91    |  
|Discontinued operations                                                                                |  |                                                         | 0.35    |      |   | 0.10    |   |      | 0.09    |      |   | 0.18    |  |   | -       |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Net earnings (loss)                                                                                    |  | $                                                       | (3.59   | )    | $ | (2.46   | ) | $    | 0.44    |      | $ | 1.40    |  | $ | 1.91    |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Weighted average number of shares used in
  computing basic earnings (loss) per share (in thousands)   |  |                                                         | 13,047  |      |   | 13,795  |   |      | 16,038  |      |   | 17,497  |  |   | 19,121  |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Diluted earnings (loss) per share:                                                                     |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Continuing operations                                                                                  |  | $                                                       | (3.94   | )    | $ | (2.56   | ) | $    | 0.33    |      | $ | 1.14    |  | $ | 1.77    |  
|Discontinued operations                                                                                |  |                                                         | 0.35    |      |   | 0.10    |   |      | 0.09    |      |   | 0.17    |  |   | -       |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Net earnings (loss)                                                                                    |  | $                                                       | (3.59   | )    | $ | (2.46   | ) | $    | 0.42    |      | $ | 1.31    |  | $ | 1.77    |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Weighted average number of shares used in
  computing diluted earnings (loss) per share (in thousands) |  |                                                         | 13,047  |      |   | 13,795  |   |      | 16,781  |      |   | 18,703  |  |   | 20,646  |  
|                                                                                                       |  |                                                         |         |      |   |         |   |      |         |      |   |         |  |   |         |  

3

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|                     |  |                   |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|-------------------- |  | ----------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                     |  | At
  December 31, |        
|                     |  |                   |        
|                     |  | 2001              |         | 2002 |   | 2003    |  | 2004 |         | 2005 |  
|                     |  |                   |         |      |   |         |  |      |         |      |  
|                     |  |                   |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|BALANCE SHEET DATA:  |  |                   |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Working capital      |  | $                 | 70,572  |      | $ | 79,583  |  | $    | 56,174  |      | $ | 51,428  |  | $ | 274,708 | 
|Total assets         |  |                   | 210,012 |      |   | 236,288 |  |      | 249,415 |      |   | 298,311 |  |   | 617,250 | 
|Total debt           |  |                   | -       |      |   | 24      |  |      | -       |      |   | -       |  |   | -       | 
|Shareholders equity |  |                   | 167,018 |      |   | 154,536 |  |      | 176,831 |      |   | 222,871 |  |   | 487,041 | 

Risk Factors

General
Business Risks Relating to Our Business Portfolio and Structure

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

We
are operating in several markets, each characterized by rapidly changing
technology, new product introductions and evolving industry standards. The
introduction of products embodying new technology and the emergence of new
industry standards can render existing products obsolete and unmarketable and
can exert price pressures on existing products. We anticipate that a number of
existing and potential competitors will be introducing 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 entities operating in the contact
center, trading floor, public safety and air traffic control segments to
capture, store, retrieve and analyze recorded data. The market for our Voice
Platforms and Applications is, 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 where we operate, will be a critical factor in
our ability to grow and be competitive. As a result, we expect to continue to
make significant expenditures on research and development, particularly with
respect to new software applications, which are continuously required in all
our business areas. The convergence of voice and data networks and wired and
wireless communications could require substantial modification and
customization of our current products and business models, as well as the
introduction of new products. Further, customer acceptance of these new
technologies may be slower than we anticipate. We cannot assure you that the
market or demand for our products will grow as rapidly as we expect, or if at
all, that we will successfully develop new products or introduce new
applications for existing products, that such new products and applications
will achieve market acceptance or that the introduction of new products or
technological developments by others will not render our products obsolete. 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.

4

---

---





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 have
made minority investments in complementary businesses, products or
technologies. We frequently evaluate the tactical or strategic opportunity
available related to complementary businesses, products or technologies. The
process of integrating an acquired companys business into our operations
and/or of investing in new technologies, may result in unforeseen operating
difficulties and large expenditures and may absorb significant management
attention that would otherwise be available for the ongoing development of our
business. Other risks commonly encountered with acquisitions include the effect
of the acquisition on our financial and strategic position and reputation, the
failure of the acquired business to further our strategies, the inability to
successfully integrate or commercialize acquired technologies or otherwise
realize anticipated synergies or economies of scale on a timely basis and the
potential impairment of acquired assets. Moreover, there can be no assurance
that the anticipated benefits of any acquisition or investment will be
realized. Future acquisitions or investments contemplated and/or consummated
could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities, 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.

5

---

---



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

We
have established a sales and service infrastructure in India by recruiting
sales 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 our acquisition of
Thales Contact Solutions (or TCS). The growth in our business in the EMEA
region is still in its early stage, and in particular, we are just beginning to
develop our digital video business in the EMEA region. We expect continued
growth, particularly in connection with the enhancement and expansion of our
operations in the EMEA region, as well as in the Asia Pacific region. We may
establish additional operations within these regions or in other regions where
growth opportunities are projected to warrant the investment. However, we
cannot assure you that our revenues will increase as a result of this expansion
or that we will be able to recover the expenses we incurred in effecting the
expansion. Our failure to effectively manage our expansion of our sales,
marketing, service and support organizations could have a negative impact on
our business. To accommodate our global expansion, we are continuously
implementing new or expanded business systems, procedures and controls. There
can be no assurance that the implementation of such systems, procedures,
controls and other internal systems can be completed successfully.

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 professional support 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 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.

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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,
or Flextronics. 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
covered all our products. In addition, in connection with the acquisition of
Dictaphone Corporations (or Dictaphone) Communications Recordings Systems
division (or CRS), we assumed a contract manufacturing agreement with
Dictaphones EMS (EMS) division pursuant to which EMS manufactures all ex-CRS
products. As a result of these arrangements, we are now fully dependent on
Flextronics and EMS to process orders and manufacture our products.
Consequently, the manufacturing process of our products is not in our control.

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

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

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

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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.

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, comes
into effect on July 1, 2006. The RoHS directive lists a number of substances
including, among others, lead, mercury, cadmium and hexavalent chromium, which
must either be removed or reduced to within maximum permitted concentrations in
any products containing electrical or electronic components that are sold
within the European Union. Our products fall within the scope of the RoHS
directive and we are making every effort in order to ensure that all of our
products sold in the European Union after July 1, 2006, will comply with the
RoHS directive, without otherwise adversely affecting the quality and
functionalities of such products. We, alongside other manufacturers, will be
dependent on our suppliers for certain components and sub-system modules to
comply with these requirements.

Compliance
with the RoHS directive, especially with respect to the requirement that
products be lead free, will require us to undertake significant expenses with
respect to the redesign of our products. In addition, we may be required to pay
higher prices for components that comply with this directive. We may not be
able to pass these higher component costs or redesign costs on to our
customers. We cannot at this point estimate the expense that will be required
to redesign our products in order to include environmentally friendly
components. We cannot be sure that we will be able to comply with these
regulations in a timely manner, that we will be able to comply on a cost
effective basis or that a sufficient supply of compliant components will be
available to us. Our inability or failure to comply with these regulations 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. In addition, manufacturers of components that we use in our
products that do not comply with these regulations may decide to stop
manufacturing these components prior to the July 2006 compliance date. These
actions by manufacturers
of components could result in a shortage of components that could adversely
affect our business and results of operations.

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A
further directive on Waste Electrical and Electronic Equipment, or WEEE,
approved by the European Union in 2003, promotes waste recovery with a view to
reducing the quantity of waste for disposal and saving natural resources, in
particular by reuse, recycling and recovery of waste electrical and electronic
equipment. The WEEE directive covers all electrical and electronic equipment
used by consumers and electronic equipment intended for professional use. The
directive, which partly came into effect in August 2005, requires that all new
electrical and electronic equipment placed for sale in the European Union 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 are
taking and will continue to take all requisite steps to ensure compliance. The
WEEE directive is required to be implemented by each member country of the
European Union through its own national legislation. Accordingly, we cannot at
this time be certain that we will be able to comply with the specific
regulations which will be enacted to implement the WEEE directive in each of
the individual countries in the European Union.

The
countries of the European Union, as a single market for our products, accounted
in 2005 for approximately 23% 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.

If we lose a major customer or support
contract, our business may suffer.

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

Risks associated with our distribution
channels 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. Our top channel partner accounted for
approximately 21%, 19% and 20% of our revenues in 2005, 2004 and 2003,
respectively. Our financial results could be materially adversely affected if
our contracts with channel partners were terminated, if our relationship with
channel partners were to deteriorate or if the financial condition of our
channel partners were to weaken. Additionally, our competitors ability to
penetrate our strategic relationships, particularly our relationship with Avaya
Inc., our largest global
distribution partner and one of the leading global providers of enterprise
business communication platforms in voice, e-business and data, may result in a
significant reduction of sales through that partner.

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As
our market opportunities change, our reliance on particular channel 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 channel partners are suppliers of
telecommunication infrastructure equipment. There can be no assurance that our
channel partners will not develop or market VoIP, software applications and
storage products and services in competition with us in the future.

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

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

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
in a period will have an impact, and perhaps a material impact, on our gross
profit and net income in that period.

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, 2005, approximately 26% of our employees were devoted to
research and product development and 23% 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.

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Operating internationally exposes us to
additional and unpredictable risks.

We
sell our products throughout the world and intend to continue to increase our
penetration of international markets. In 2001, 2002, 2003, 2004 and 2005,
approximately 98%, 98%, 99%, 99% and 99%, respectively, of our total sales were
derived from sales to customers outside of Israel, and approximately 48%, 52%,
50%, 44%, and 53%, 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.

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 29 U.S. patents and 20 patents issued in additional countries
covering the same technology as the U.S. patents. We have over 128 patent
applications pending in the United States and other countries. We currently
rely on a combination of patent, trade secret, copyright and trademark law,
together with non-disclosure and non-competition agreements, as well as third
party licenses to establish and protect the technology used in our systems.
However, we cannot assure you that such measures will be adequate to protect
our proprietary technology, that competitors will not develop products with
features based upon, or otherwise similar to our systems, or that third party
licenses will be available to us or that we will prevail in any proceeding
instituted by us in order to enjoin competitors from selling similar products.
Although we believe that our products do not infringe upon the proprietary
rights of third parties, we cannot assure you that one or more third parties
will not make a contrary claim or that we will be successful in defending such
claim.

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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 Witness Systems, Inc. (described
under 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.

We face potential product liability claims
against us.

Our
products focus specifically on organizations business-critical operations. We
may be subject to claims that our products are defective or that some function
or malfunction of our products caused or contributed to property, bodily or
consequential damages. We minimize this risk by incorporating provisions into
our distribution and standard sales agreements that are designed to limit our
exposure to potential claims of liability. We carry product liability insurance
in the amount of $20,000,000 per occurrence and $20,000,000 overall per annum.
No assurance can be given that all claims will be covered either by the
contractual provisions limiting liability or by the insurance, or that the
amount of any individual claim or all claims will be covered by the insurance
or that the amount of any individual claim or all claims in the aggregate will
not exceed policy coverage limits. 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 customers 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. Although to date we have
not experienced any material problems in our performance of government
contracts, or in the receipt of payments in full under such contracts, we
cannot assure you that we will not experience problems in the future.

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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 and related services, in general, is highly
competitive. Additionally, some of our principal competitors such as Witness
Systems, Inc. and Verint Systems, Inc. may have significantly greater resources
and larger customer bases than do we. We have seen evidence of deep price
reductions by our competitors and expect to continue to see such behavior in
the future, which, if we are required to match such discounting, will adversely
affect our gross margins and results of operations. To date, we have been able
to manage our product design and component costs. However, there can be no
assurance that we will be able to continue to achieve reductions in component
and product design costs. Further, the relative and varying rates of increases
or decreases in product price and cost could have a material adverse impact on
our earnings.

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

The
recent expansion of Voice over Internet Protocol (or VoIP) into contact centers
and trading floors may allow one or more of our competitors to take a
leadership position with respect to this new technology. Strategic partners may
change their vendor preference as a result or may develop embedded VoIP
recording as part of the VoIP switch or networking infrastructure. We cannot
assure you that our products or existing partnerships will ensure sustainable
leadership.

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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.

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.

Continuing adverse conditions in the
information technology sector may lead to a decreased demand for our voice
platforms and applications and may harm our business, financial condition and
results of operations.

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

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

We
are dependent on the success of the NiceLog system and related products to
maintain profitability. In 2003, 2004 and 2005, approximately 75%, 78% and 78%,
respectively, of our revenues were generated from sales of NiceLog systems and
related products and we anticipate that such products will continue to account
for a significant portion of our sales in the next several years. A significant
decline in sales of NiceLog systems and related products, or a significant
decrease in the profit margin on such products, could have a material adverse
effect on our business, financial condition or results of operations.

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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.

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 United States 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 and that we
will be positioned to benefit from the potential opportunities.

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

The
occurrence of 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.

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

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

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Risks Relating to
Israel

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

Exchange
rate fluctuations between the United States 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. We cannot predict any future trends in the rate of
inflation in Israel or the rate of devaluation of the NIS against the U.S.
dollar. If the U.S. dollar cost of our operations in Israel increases, our
dollar-measured results of operations will be adversely affected. In addition,
exchange rate fluctuations in currency exchange rates in countries other than
Israel where we operate and do business may also negatively affect our
earnings.

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

Our
headquarters, research and development and main manufacturing facilities are
located in the State of Israel, and we are directly affected by the political,
economic and military conditions to which Israel is subject. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors. A state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Since October 2000, there has been a high level of violence between
Israel and the Palestinians, and in January 2006, Hamas, an Islamic movement
responsible for many attacks against Israelis, won the majority of the seats in
the Parliament of the Palestinian Authority. The election of a majority of
Hamas-supported candidates is expected to be a major obstacle to relations
between Israel and the Palestinian Authority, as well as to the stability in
the Middle East as a whole. 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. 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.

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

Service
of process upon our directors and officers, most of whom reside outside the
United States, may be difficult to obtain within the United States.
Furthermore, since the majority of our assets and most of our directors and
officers are located outside the United States, any judgment obtained in the
United States against us or these individuals or entities may not be
collectible within the United States.

There
is doubt as to the enforceability of civil liabilities under the Securities Act
of 1933, as amended, or the Securities Act, and the Securities Exchange Act of
1934, as amended, or the Exchange Act, in original actions instituted in
Israel. However, subject to certain time limitations and other conditions,
Israeli courts may enforce final judgments of United States courts for
liquidated amounts in civil matters, including judgments based upon the civil
liability provisions of those Acts.

We depend on the availability of government
grants and tax benefits.

We
derive and expect to continue to derive significant benefits from various
programs and laws in Israel including tax benefits relating to our Approved
Enterprise programs and certain grants from the Office of the Chief Scientist
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
Enterprises, our business, financial condition and results of operations could
be materially adversely affected.

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 in some cases is referred to as a Benefiting Enterprise following such
amendment). The amendment will apply to Approved Enterprise programs in which
the year of commencement of benefits under the law is 2004 or later, unless such programs
received approval from the applicable government authority prior to December
31, 2004, in which case the provisions of the amendment will not apply.

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As a result
of the amendment, where we benefit from tax-exempt income pursuant to the new
Benefiting Enterprise regime, we will be subject to taxes upon the distribution
of such tax-exempt income or upon our liquidation. Accordingly, we may be
required to record a deferred tax liability with respect to such tax-exempt
income. We are currently evaluating the impact of the amendment on us. Based on
our preliminary analysis, it may materially increase our provision for income
taxes in future years.

We may be required to pay stamp duty on
agreements executed by us between June 1, 2003 and December 31, 2005. This
would increase our taxes.

The
Israeli Stamp Duty on Documents Law, 1961 (the Stamp Duty Law), provided that
most documents signed by Israeli companies were subject to a stamp duty,
generally at a rate of between 0.4% and 1% of the value of the subject matter
of such document. De facto, it was common practice in Israel not to pay such
stamp duty unless a document was filed with a governmental authority or with
the courts. As a result of an amendment to the Stamp Duty Law that came into
effect on June 1, 2003, the Israeli tax authorities have approached many
companies in Israel (including us) and requested the disclosure of all
agreements signed by such companies after June 1, 2003 with the aim of
collecting stamp duty on such agreements. Based on advice from our Israeli
counsel, we believe that we may only be required to pay stamp duty on documents
signed on or after August 2004. However, we cannot give any assurance that the
tax authorities or the courts will accept such view. At this stage it is not
yet possible to evaluate the effect, if any, on us of the 2003 amendment to the
Stamp Duty Law.

Under
an order published in December 2005, the said requirement to pay stamp duty was
cancelled with respect to documents signed on or after January 1, 2006.

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.

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

In
addition, our quarterly operating results may be subject to significant
fluctuations due to other factors, including the timing and size of orders and
shipments to customers, variations in distribution channels, mix of products,
new product introductions, competitive pressures and general economic
conditions. It is difficult to predict the exact mix of products for any period
between hardware, software and services as well as within the product category
between audio platforms and related applications, 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.

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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 enabling companies and public organizations to
enhance business and operational performance, address security threats and take
proactive actions. Unstructured multimedia content includes phone calls to
contact centers and back offices, video captured by closed circuit television
cameras, radio communications between emergency services personnel, email and
instant messaging. Our solutions include integrated, scalable, multimedia
recording platforms, enhanced software applications and related professional
services. These solutions address critical business processes and risk
management, compliance procedures and security needs of corporations or
government agencies. Our solutions facilitate faster decision-making and near
real-time action, improving business and employee performance, and enhancing
security and public safety. Our customers use our systems in a variety of
enterprises, such as financial services, health care, outsourcers, retail,
service providers, telecommunications, and utilities. Our public safety and
security customers include air traffic control, correctional facilities, emergency
services, gaming facilities, government intelligence agencies, homeland
security and public transportation. Our solutions are deployed at over 23,000
customers, including over 75 of the Fortune 100 companies, across over 40,000
sites around the world.

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 business productivity, operational
performance and customer 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. Given the high cost of acquiring additional customers and
the maturation of many once fast growing industries, it is increasingly
important to convert potential customers to new customers and to maximize
revenue from the retention and continued satisfaction of current customers.
Similarly, due to the high cost of hiring and training new employees, it is
important for organizations to address employee concerns in a timely fashion to
maximize employee retention and productivity.

In
the past, companies have 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 related application databases. Traditional business intelligence
solutions unlock value contained in these structured data by describing what
has happened in any given transaction, and then, by examining patterns in
historical data, attempting to 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. By
employing software-based analytics on unstructured multimedia content,
companies are able to detect customer intent, often through near real-time
interactions where a customer may express concerns, 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 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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Increased regulatory and compliance requirements and
the high cost of dispute resolution. Regulatory pressures have
increased for corporations and public organizations worldwide, especially in
the wake of recent well-publicized accounting scandals. For example,
regulations such as the Sarbanes-Oxley Act of 2002 and the pending financial
guidelines established by the International Financial Reporting Standards Board
have heightened the complexity of corporate and governmental compliance. In
addition, 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. Moreover, it continues to be
important to be able to resolve certain communication disputes, such as between
counterparties in a securities trade, in an efficient and definitive manner.
Existing business intelligence and other IT solutions have addressed these
growing challenges to some degree. However, companies and public organizations
require improved solutions that not only provide better compliance but also
more current, near real-time information with increased operational visibility.
These solutions need to reduce the costs associated with ongoing compliance,
while creating the required audit trail for regulatory purposes.

Internet
Protocol adoption driving proliferation of multimedia content.
Over the last several years, the growth of Internet Protocol (IP) based
communications have expanded the types of interactions between companies and
their customers, employees and partners. This proliferation, together with
businesses replacement of legacy communications systems, has created
additional growth in the need for IP-based communications solutions. To remain
competitive, businesses offer email, Internet and other multimedia, IP-based
transmissions, such as Voice-over-Internet-Protocol (VoIP), in addition to traditional
means of communications, such as mail and analog voice calls. We believe public
safety organizations are also increasingly adopting the flexibility and lower
cost of IP-based technologies in their efforts to respond to public safety and
security threats. 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.

Increased focus on physical corporate security.
Companies operating throughout the world have recognized that threats to their
physical 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.

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New
challenges for public safety and homeland security.
Recent terrorist attacks around the world have significantly changed the
geopolitical landscape and created long-term consequences for public safety,
security and intelligence agencies. These agencies face new challenges in
detecting, protecting and effectively responding to threats to public safety
and homeland security. As a result of these global trends, security
organizations face the growing challenge of storing and analyzing vast amounts
of multimedia content generated by traditional and IP-based communications
captured by an increasing variety of detection devices. 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.

Our Solutions

We
have developed fully integrated solutions that include software applications
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 are:

Ability to capture and manage vast amounts of complex,
unstructured content. Our solutions record and store a wide variety
of unstructured content, allowing both our enterprise and public safety and
security customers to capture valuable existing and new customer 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.

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Near
real-time insights, utilizing proprietary analytic capabilities.
We have developed advanced analytics and applications that allow our customers
to derive critical insights from the vast amounts of unstructured data that
they capture. Our solutions provide valuable insights into important, but
previously unscrutinized, interactions and the unstructured content generated
by these interactions. For example, our contact center customers are able to
immediately review and react to interactions with their callers. Our solutions
enable our enterprise customers to detect early signs of customer churn, gain
valuable information about competitors, and identify critical market
information during these interactions. Our solutions enable our public safety
and security customers to identify threats as they occur, and analyze video
footage to identify suspicious objects or behavior more quickly and
effectively. Based on these insights, our customers are better equipped to
adapt and respond to changes in the market or their safety environment. Our
business customers are able to increase revenue, maintain a complete view
across the enterprise, and improve quality, productivity and profitability.
Similarly, by extracting intelligence and insight from captured voice and video
content, our solutions enable public safety and security organizations to
better respond to threats, prevent intrusions, detect irregular behavior,
reduce crime and accelerate investigations.

Our Strategy

The key
elements of our strategy include the following:

Drive
market adoption of next-generation business intelligence solutions in both the
enterprise and public safety and security markets. We
believe there is a growing unmet need to capture, manage and analyze
unstructured data in a wide variety of business and operational environments.
Accordingly, we plan to continue to target this market through focused sales,
marketing and customer education efforts. Moreover, we plan to continue to invest
in research and development and strategic alliances to enhance our
industry-leading solutions, delivering superior insight into driving improved
operational and business results. We will continue to leverage the technology,
operational and partnership synergies we derive from serving both the
enterprise and public safety and security markets.

Increase
market share through our strategic alliances. We have
strong strategic relationships with industry leaders such as Avaya, IPC, SAS,
Motorola, Siemens and BT. We intend to continue to leverage those and
additional relationships to increase the value of our solutions to our end
customers. For example, we have recently signed a strategic alliance with SAS
to jointly offer a next generation business intelligence solution. This
solution allows enterprises to link their billing, CRM, ERP and other systems
transactional data with their unstructured multimedia interaction data, thereby
providing a more complete view of their customers needs and potential revenue
expansion opportunities.

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Expand
and leverage our position within our existing customer base.
Our solutions are deployed at over 23,000 customers, including over 75 of the
Fortune 100 companies, across over 40,000 sites around the world. Many
customers are still using previous generations of our products. Through our
market leading position in the most demanding environments, including trading
floors, emergency services and transportation authorities, we believe there are
abundant opportunities to expand within this customer base and migrate it to
our next-generation solutions.

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

Deliver
integrated end-to-end solutions to new and existing customers.
We believe there is a growing need for vendors that can deliver a complete
offering, both in the enterprise and in the public safety and security markets.
With one of the largest service organizations in the industry, we are well
positioned to deliver such offerings. These offerings include the provisioning
of services in designing a solution around the customers needs, the deployment
of those solutions and the ongoing delivery of maintenance services following
such implementations. We intend to continue to increase our direct sales force
to expand the sale of these solutions, which provides increased services
revenues and closer customer relationships.

Products

Our
enterprise business intelligence solutions include recording, monitoring,
quality 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
transmissions as well as capture and improve contact center agent performance
and the customers experience.

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Our public
safety and 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 public safety
and 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, recording, archiving, and debriefing
capabilities that meet the needs of todays demanding security environments.
Our lawful interception products enable the interception, delivery, monitoring,
collection and advanced analysis of telecommunication interactions. These
products handle both telephony and Internet data on the same platform and are
fully compliant with the international standards defined by the European
Telecommunications Standards Institute (ETSI), under various European
legislations, and the Telecommunications Industry Association (TIA), under the
Communications Assistance for Law Enforcement Act (CALEA).

|                         |  |                                             |  |                                                                                                                                                             
|------------------------ |  | ------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Products                 |  | Markets
  Served                            |  | Purpose                                                                                                                                                     
|                        
|                         |  |                                             |  |                                                                                                                                                             
|NICE Perform             |  | Enterprise
  and
  Public Safety & Security |  | Records and
  analyzes customer interactions with contact center agents                                                                                     
|                         |  |                                             |  |                                                                                                                                                             
|NiceUniverse             |  | Enterprise
  and
  Public Safety & 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
  Public Safety & Security |  | Provides
  digital voice recording system, a computer telephony integrated multi-channel
  voice recording and retrieval system                             
|                         |  |                                             |  |                                                                                                                                                             
|NICE VoIP
  Capture Unit |  | Enterprise
  andPublic Safety & Security    |  | Builds on
  NiceLog technology to provide a complete solution to audio storage in VoIP
  telephony                                                          
|                         |  |                                             |  |                                                                                                                                                             
|NICE Storage
  Center    |  | Enterprise
  and
  Public Safety & Security |  | Provides
  central storage option; integrates with various enterprise storage networks
  (SAN, NAS or DAS) for long term or medium term voice storage       

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|                       |  |                                             |  |                                                                                                                                                                                                                                                              
|---------------------- |  | ------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NiceCall
  Focus III   |  | Enterprise
  and
  Public Safety & 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
  Public Safety & 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
  Public Safety & Security |  | Provides
  recording and analysis of customer interactions with contact center agents                                                                                                                                                                        
|                       |  |                                             |  |                                                                                                                                                                                                                                                              
|Freedom FT             |  | Enterprise
  and
  Public Safety & Security |  | Provides
  high-level fault-tolerant recording                                                                                                                                                                                                               
|                       |  |                                             |  |                                                                                                                                                                                                                                                              
|Mirra                  |  | Enterprise
  and
  Public Safety & Security |  | Provides
  small recording system that is suited to simple recording applications in
  which it can record up to 32 channels of voice traffic from a wide variety of
  analog and digital interfaces                                                         
|                       |  |                                             |  |                                                                                                                                                                                                                                                              
|NiceVision
  Pro       |  | Public
  Safety & Security                  |  | Provides
  premium solution designed for high-end applications requiring high-frame rate
  and/or a large number of cameras in a campus environment                                                                                                          
|                       |  |                                             |  |                                                                                                                                                                                                                                                              
|NiceVision
  Harmony   |  | Public
  Safety & Security                  |  | Provides
  mid-range digital video recording solution designated for sites accommodating
  a large number of cameras yet requiring a variety of frame rates per channel                                                                                      
|                       |  |                                             |  |                                                                                                                                                                                                                                                              
|NiceVision
  Alto      |  | Public
  Safety & Security                  |  | Provides
  mid-range digital video recording solution                                                                                                                                                                                                        
|                       |  |                                             |  |                                                                                                                                                                                                                                                              
|NiceVision
  NVSAT     |  | Public
  Safety & Security                  |  | Provides
  small scale digital video recording solution                                                                                                                                                                                                      
|                       |  |                                             |  |                                                                                                                                                                                                                                                              
|FAST alpha
  Silver    |  | Public
  Safety & Security                  |  | Provides
  high quality digital video monitoring and recording solution for large to
  mid-size applications                                                                                                                                                 

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|                  |  |                            |  |                                                                                                                                      
|----------------- |  | -------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|FAST alpha
  Blue |  | Public
  Safety & Security |  | Provides
  all in one solution for high quality video monitoring and recording for
  small to mid-size applications                
|                  |  |                            |  |                                                                                                                                      
|NiceTrack         |  | Public
  Safety & Security |  | Provides
  interception, delivery, monitoring, collection and advanced analysis of
  telecommunication interactions                  
|                  |  |                            |  |                                                                                                                                      
|Freedom rDT       |  | Public
  Safety & 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,
emotion detection, talk pattern analysis, customer surveys, Computer Telephony
Integration (CTI) analysis, application activities and business data. With a
set of advanced engines, NICE Perform provides multi-dimensional analytics of
these data sources. State-of-the-art visualization techniques help enable
analysts and executives to quickly and easily identify trends, deviations and
situations requiring immediate action. While providing critical statistical
data, NICE Perform goes beyond the scope of transactional analytics to help
decision makers understand customer intent and market dynamics, identify
current and future trends early enough for proactive management of challenges,
opportunities and changes, and enhance corporate governance throughout the
enterprise. NICE Perform also contains the contact center quality management
capabilities of NiceUniverse. In addition, NICE Perform includes advanced
online coaching capabilities that enable supervisors to coach the contact
center agents in order to improve their skills and to empower them and cover
matters as needed by different departments, such as marketing or order
administration.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The NiceTrack product line 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 agencies 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.

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 (APAC), sales are
made through our distribution channels. In addition, we partner with leading
companies to deliver and support our solutions. In the financial institutions
market, we have established marketing, sales and support arrangements with
leading suppliers of complementary products including BT, Etrali and IPC. These
companies market and distribute our products to their customers either as
stand-alone solutions or as integrated parts of their own solutions. For our
contact center customers, we have entered into global distribution agreements
as well as alliance and partnership programs with leading vendors including
Avaya, BT, SAS and Siemens. In the public safety and security markets, we have
formed alliances for the co-marketing and distribution of our products with
leading companies including Anixter, Diebold, Motorola, Siemens, Thales, Tyco
and Honeywell.

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 U.S.
customers and partners, as well as one in the United Kingdom to support EMEA
customers, dealers and partners, and
one in Hong Kong 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, as well as additional service engineers
located in our offices in the United States, EMEA and APAC, provide first class
field services and support worldwide. We maintain regular training sessions for
our dealers and installation support as well.

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Our
systems are generally sold with a warranty for repairs of hardware and software
defects and malfunctions, the term of which is usually one year after shipment.
Longer warranty periods are applicable to sales in certain international and
government markets. Extended warranty and service coverage is provided in
certain instances and is usually made available to customers through our
distributors on a contractual basis for an additional charge. Our customers may
purchase a renewable maintenance agreement from our dealers or directly from
us. The maintenance agreements generally provide for maintenance, upgrades of
standard system software and on-site repair or replacement.

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

Manufacturing and Source of Supplies

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

We
manufacture our products through subcontractors. Under a contract manufacturing
agreement with Flextronics Israel Ltd., a subsidiary of a global electronics
manufacturing services (or EMS) 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 RMA. We believe this outsourcing
agreement provides us with a number of cost advantages due to Flextronics
large-scale purchasing power, and greater supply chain flexibility. We also
have a contract manufacturing agreement with Dictaphones EMS division entered
into by us simultaneously with the acquisition of CRS. Under this agreement EMS
is the manufacturer of all ex-CRS products. This manufacturing facility is
located in the United States.

Some
of the components we use have a single approved manufacturer while others have
two or more options for purchasing. In addition, for some of the components and
subassemblies we maintain an inventory to limit the potential for interruption.
We also carry out relationships directly with some of the more significant
manufacturers of our components. 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.

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We
had a manufacturing agreement with Instem Technologies Ltd., a U.K. company,
which was entered into by Thales Contact Solutions (or TCS) prior to its
acquisition by us. On September 22, 2005, the manufacturing agreement with
Instem was terminated due to Instems entering into bankruptcy. Our ex-TCS
products are now manufactured for us by Flextronics.

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.

Research and Development

We
believe that the development of new products and the enhancement of existing
products are essential to our future success. Therefore, we intend to continue
to devote substantial resources to research and new product development, and to
continuously improve our systems and design processes in order to reduce the
cost of our products. Our research and development efforts have been financed
through our internal funds and programs sponsored through the Government of
Israel. We believe our research and development effort has been an important
factor in establishing and maintaining our competitive position. Gross
expenditures on research and development in 2003, 2004 and 2005 were
approximately $26.4 million, $27.5 million and $33.4 million, respectively, of
which approxi­mately $1.3 million, $1.3 million and $1.7 million, respectively,
were derived from third-party funding, and $2.3 million, $1.3 million and $0.8
million, respectively, were capitalized software development costs.

In
2005, 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 are eligible to receive
grants constituting between 20% and 66% of certain research and development
expenses relating to these programs. These programs include programs approved
under certain Magnet consortiums and programs approved for companies with large
research and development activities. Accordingly, as opposed to the standard
type of OCS grants (described below), 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 2003, 2004 and
2005, we received a total of $1.4 million, $0.8 million and $2.2 million,
respectively, and we anticipate receiving approximately $0.4 million in 2006
from these programs.

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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 approved technology.
Under the terms of these programs, a grant recipient is required to pay
royalties of 3% to 5% of the net sales of products incorporating technology
developed in, and related services resulting from, a project funded by the OCS.
Generally, the royalties are required to be paid beginning with the
commencement of sales of such products and ending when 100% of the grant is
repaid in New Israeli Shekels, or NIS, linked to the U.S. dollar plus LIBOR
interest. In 2003, 2004 and 2005, we received no such grants and incurred no
royalty obligations under these programs, and we have no further royalty obligations
to the OCS.

The
Research and Development Law generally requires that the product 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. 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.

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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 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.

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
January 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. FP6 funds and promotes research.
We anticipate that our program will commence in May 2006 and will be in effect
for a period of approximately 2.5 years. FP6 will give us funding of
approximately EUR 325,000 during this period. There are no royalty obligations
associated with receiving such funding.

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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 29 U.S. patents and 20 patents issued in additional countries
covering the same technology as the U.S. patents. We have over 128 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. 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.

We
own the following trademarks in different countries: Insight from
Interactions, 3600 View, Executive Connect®, Executive Insight,
Freedom®, Investigator®, Mirra®, Universe®, My Universe, NICE®, NiceCall®,
NiceCall Focus, NiceCLS, NICE Learning, eNiceLink, NiceLog®, Playback Organizer,
Renaissance®, ScreenSense, NiceScreen, NICE Storage Center, NiceTrack,
NiceUniverse®, NiceVision®, NiceVision Harmony, NiceVision Mobile, NiceVision
Pro, NiceVision NVSAT, NiceVision Alto, Scenario Replay, Tienna®, Wordnet®,
NICE Perform, NICE Inform, NICE Analyzer, Last Message Replay, NiceUniverse
Compact, Customer Feedback, Interaction Capture Unit, Dispatcher
Assessment, Encorder, Freedom Connect®, FAST®, FAST Alpha Silver, FAST Alpha
Blue and Alpha®. Applications to register certain of these marks have been
filed in certain countries, including Australia, Brazil, the European Union,
Germany, Great Britain, Israel, Japan, Mexico, Argentina and the United States.
Some of such applications have matured to registrations.

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Regulation

Israeli Export
Restrictions

The
export of certain defense products from Israel, such as our NiceTrack products,
requires a permit from the Defense Sales and Exports branch of the Israeli
Ministry of Defense, or SIBAT. In addition, the sale of products to
certain customers, mostly armed forces, also requires a permit from the Israeli
Ministry of Defense. In 2005, 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 toward Israel. We may be unable to obtain permits for our defense
products we could otherwise sell in particular countries in the future.

New
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 (the RoHS Directive), which
will take effect on July 1, 2006. This directive provides that producers of
electrical and electronic equipment may not place new equipment containing
lead, mercury and certain other materials deemed to be hazardous, in amounts
exceeding any relevant set maximum concentration values, on the market in the
European Union. Certain of our hardware products that include our business solutions
may need to be modified to meet this regulation. Some of our suppliers may be
required to comply with these new rules and may be unable to do so on a timely
basis. Complying with this directive may impose some additional costs and
administrative burden on us. If we fail to achieve compliance, including by
reason of a delay or failure of our suppliers to comply, we may be restricted
from conducting certain business in the European Union, which could adversely
affect our results of operations.

Our
European activities also require us to comply with Directive 2002/96/EC of the
European Parliament on Waste Electrical and Electronic Equipment, or the WEEE
Directive. 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 are taking and will continue to take
all requisite steps to ensure compliance. The WEEE directive is required to be
implemented by each member country of the European Union through its own
national legislation. Accordingly, we cannot at this time be certain that we
will be able to comply with the specific regulations which will be enacted to
implement the WEEE directive in each of the individual countries in the
European Union. If we fail to achieve compliance, including by reason of a
delay or failure 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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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 quality management for
contact center agent monitoring businesses include Autonomy (formerly e-talk),
Verint Systems Inc. (formerly Comverse Infosys), a subsidiary of Comverse
Technology Inc., and 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 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
Perform applications have a competitive advantage based on 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 size and
capabilities of our global distribution network, our business partners, and our
global service and support capacity.

Traditionally,
public safety customer voice recording requirements for emergency phones and
radio were relatively basic. As the command and control center is becoming more
complex and advanced systems are being deployed, and as more trunk radio and IP-based
systems are offered, the recording system has to be integrated with these
systems. Our ability to deliver a more integrated and sophisticated recording
system that can capture voice, video, data and meta-data information from trunk
radio systems and computer aided dispatch, or CAD, systems, positions our
products above the competition mainly in the large high-end emergency centers.
In addition, we believe that applications for scenario reconstruction of an
incident connecting voice, video, data and meta-data together give us an
advantage over the competition. Some of our competitors in the public safety
market include ASC Telecom, Mercom 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), 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
  Inc.                             |  | United States                             |  | 100%                                
|NICE Systems
  GmbH                             |  | Germany                                   |  | 100%                                
|NICE Systems
  Canada Ltd.                      |  | Canada                                    |  | 100%                                
|NICE CTI
  Systems UK Ltd.                      |  | United
  Kingdom                          |  | 100%                                
|STS Software
  Systems (1993) Ltd.              |  | Israel                                    |  | 100%                                
|NICE APAC
  Ltd.                                |  | Hong Kong                                 |  | 100%                                
|NiceEye BV                                      |  | Netherlands                               |  | 100%                                
|NiceEye Ltd.                                    |  | Israel                                    |  | 100%                                
|Nice Systems
  S.A.R.L.                         |  | France                                    |  | 100%                                
|Racal
  Recorders Systems Ltd.                  |  | United
  Kingdom                          |  | 100%                                
|Nice
  Interactive Solutions India Private Ltd. |  | India                                     |  | 100%                                
|Nice Japan
  Ltd.                               |  | Japan                                     |  | 100%                                
|Nice Systems
  Latin America, Inc.              |  | United States                             |  | 100%                                
|Nice Systems
  (Singapore) Pte. Ltd.            |  | Singapore                                 |  | 100%                                
|Nice Systems
  Australia PTY Ltd.               |  | Australia                                 |  | 100%                                
|Nice
  Switzerland AG                           |  | Switzerland                               |  | 100%                                
|Fast Video
  Security GmbH                      |  | Germany                                   |  | 100%                                
|Fast Video
  Security (UK) Ltd.                 |  | United
  Kingdom                          |  | 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 2008.  This lease may be terminated by us at any time from the year
2006, subject to certain conditions. The annual rent and maintenance fee for
the facility is approximately $2.9 million linked to the changes in the U.S.
consumer price index.  We have leased
various offices and other facilities in North America and in several other
countries, as described below.

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| |                                                                                                     |                                                                                                                                                                                                                            
| | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our North
American facilities consist of:                                                          
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our North
  American headquarters in Rutherford, New Jersey, which occupy approximately
  28,400 square feet. We also have a warehouse facility in Lyndhurst, New
  Jersey, which occupies approximately 6,000 square feet;
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in San Diego, California, which occupies approximately 6,250 square feet
  (subleased in its entirety to a third party);                                                                                      
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Chicago, Illinois, which occupies approximately 1,000 square feet;                                                                                                                                         
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Denver, Colorado, which occupies approximately 30,775 square feet;                                                                                                                                         
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in New York, New York, which occupies approximately 4,300 square feet;                                                                                                                                        
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Melbourne, Florida, which occupies approximately 5,000 square feet;                                                                                                                                        
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Stratford, Connecticut, which occupies 19 workstations; and                                                                                                                                                
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Herndon, Virginia, which occupies approximately 3,900 square feet.                                                                                                                                         
| |                                                                                                     |                                                                                                                                                                                                                            
| | Our
  international facilities consist of:                                                         
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Frankfurt, Germany, which occupies approximately 2,850 square feet;                                                                                                                                        
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Friedrichaphen, Germany, which occupies approximately 8,370 square feet;                                                                                                                                   
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Hunenberg, Switzerland, which occupies approximately 5,490 square feet;                                                                                                                                    
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in London, UK, which occupies 3 workstations;                                                                                                                                                                 
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Southampton, UK, which occupies approximately 34,870 square feet;                                                                                                                                          
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Watford, UK, which occupies 30 workstations;                                                                                                                                                               
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Paris, France which occupies approximately 3,175 square feet;                                                                                                                                              
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Hong Kong, which occupies approximately 4,810 square feet;                                                                                                                                                 
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Tokyo, which occupies approximately 1,778 square feet;                                                                                                                                                     
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Bangalore, which occupies approximately 1,047 square feet;                                                                                                                                                 
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Singapore, which occupies approximately 2,232 square feet;                                                                                                                                                 
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Sydney, Australia, which occupies approximately 2,755 square feet; and                                                                                                                                     
| |                                                                                                     |                                                                                                                                                                                                                            
| |                                                                                                    | Our office
  in Melbourne, Australia, which occupies approximately 170 square feet.                                                                                                                                        
| |                                                                                                     |                                                                                                                                                                                                                            
| | We believe
  that our existing facilities are adequate to meet our current and foreseeable
  needs.

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

None.

42

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|        |                                              
|------- | ---------------------------------------------
|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 3D, Key
Information -- Risk Factors and elsewhere in this report, our actual results
may differ materially from those anticipated in these forward-looking statements.  For more information about forward-looking
statements, see the Preliminary Note that precedes the Table of Contents of
this Annual Report on Form 20-F.

Overview

We
are a leading provider of solutions that capture, manage and analyze unstructured
multimedia content enabling companies and public organizations to enhance
business and operational performance, address security threats and take
proactive actions. Unstructured multimedia content includes phone calls to
contact centers and back offices, video captured by closed circuit television
cameras, radio communications between emergency services personnel, email and
instant messaging. Our solutions include integrated, scalable, multimedia
recording platforms, enhanced software applications and related professional
services. These solutions address critical business processes and risk
management, compliance procedures and security needs of corporations or
government agencies. Our solutions facilitate faster decision-making and near
real-time action, improving business and employee performance, and enhancing
security and public safety. Our customers use our systems in a variety of
enterprises, such as financial services, health care, outsourcers, retail,
service providers, telecommunications, and utilities. Our public safety and
security customers include air traffic control, correctional facilities,
emergency services, gaming facilities, government intelligence agencies,
homeland security and public transportation. Our solutions are deployed at over
23,000 customers, including over 75 of the Fortune 100 companies, across over
40,000 sites around the world.

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 20%, 19% and 21% of revenues in 2003, 2004 and 2005,
respectively.

Recent Acquisitions
and Dispositions

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 operations from the date of acquisition. The disposed business was
accounted for as a discontinued operation as of the date of its disposition.

43

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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 $21 million in cash, plus potential
earn-outs based on performance milestones amounting to a maximum of an
additional $12 million payable over the next three years.

In
September 2005, we acquired the assets and assumed certain liabilities of Hannamax Hi-Tech
Pty. Ltd. for $1.8 million. Hannamax was our distributor in Australia and New Zealand.
With the acquisition of Hannamax, we expect to expand our customer base and presence in
Australia and New Zealand and to expand and strengthen our support organization in the
region. Under the terms of the acquisition agreement, in the second quarter of 2006, an
additional $0.5 million was paid, and in 2007 a contingent cash payment of up to $0.5
million will be due if certain financial performance criteria are met, as part of a
two-year earn-out provision. Should any contingent payment be made under the agreement in
the future, the additional consideration will increase the aggregate purchase price and,
as a result, we will record additional goodwill.

In
June 2005, we acquired the assets and assumed certain liabilities of Dictaphone
Corporations Communications Recording Systems business (Dictaphone CRS) for
approximately $38.5 million. Dictaphone CRS provides liability and quality management
systems for emergency services, critical facilities, contact centers and financial trading
floors. The parties have signed an amendment to the aforementioned asset purchase
agreement with Dictaphone, according to which a final adjustment will be made to the
audited closing balance sheet, which will reduce the purchase price under the asset
purchase agreement by $2 million. In addition, the parties agreed that we are entitled to
all previously undistributed interest and other investment income earned with respect to
such escrow funds.

In
March 2004, we sold the assets and liabilities of our COMINT/DF
military-related business to ELTA Systems Ltd. for $4.0 million. The assets and
liabilities sold included the intellectual property, fixed assets, inventory,
and contracts related to the COMINT/DF product line, which included high
performance spectral surveillance and direction finding systems that detect,
identify, locate, monitor and record transmission sources. In 2002, 2003 and
2004, the COMINT/DF business generated revenues of approximately $7.2 million,
$6.5 million and $0.8 million, respectively, and net income of approximately
$1.4 million, $1.5 million and $3.2 million (including gain on disposition),
respectively.

2005 Public Offering

In
December 2005, we completed a public offering on Nasdaq of 4,600,000 ADSs,
representing 4,600,000 of our ordinary shares, at a public offering price of
$46.25 per ADS.  The proceeds of the
offering, net of underwriting discount and other related expenses, amounted to
approximately $201.7 million.

44

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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
| |  | Provision
  for income taxes     
| |  | Contingencies                    

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, consulting and training revenue. Revenue
related to sales of our products is generally recognized when persuasive
evidence of an agreement exists, the product has been delivered and title and
risk of loss have passed to the buyer, the sales price is fixed or
determinable, no further obligations exist, and collectibility is probable.
Sales agreements with specific acceptance terms are not recognized as revenue
until the customer has confirmed that the product or service has been accepted.
Revenues from maintenance and professional services are recognized ratably over
the contract period or as services are performed.

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

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.

45

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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 increased.

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

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

During
2002 we completed the outsourcing of the manufacture of our audio and video
product platforms. Under this arrangement, we take ownership of inventories at
the conclusion of the manufacturing process, such inventories representing
finished goods or spare parts. As we largely manufacture to order, we do not
tend to accumulate finished goods. We are 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.
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.
During 2002, we recognized $229,000 of impairment losses related to our
investment in affiliates. As of December 31, 2005, the carrying value of our
investments in affiliate was $1.2 million.

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

46

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

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

47

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Following
these analyses, we compared the carrying amount of goodwill to the implied fair
value of the goodwill and determined that an impairment loss existed. A
non-cash charge totaling $28.3 million was recorded in the fourth quarter of
2002 to write down goodwill to its fair value under the caption Goodwill
impairment. The valuation of long-lived assets requires significant estimates
and assumptions. These estimates contain managements best estimates, using
appropriate and customary assumptions and projections at the time. If different
estimates or projections were used, it is reasonably possible that our analysis
would have generated materially different results.

In
the fourth quarter of 2005, we performed our annual test on the remaining
goodwill pursuant to the SFAS No. 142 requirements, applying the same
methodologies as those used in the prior year. No additional impairment was
found to exist. We will continue to perform an impairment test at least
annually and on an interim basis should circumstances indicate that an
impairment loss may exist. The outcome of such testing may lead to the
recognition of an impairment loss.

Taxes on
Income. We record income taxes using the asset
and liability approach. Managements judgment is required in determining our
income tax expense in each of the jurisdictions in which we operate. The
provision for income tax is calculated based on our estimates for our exposure
to current taxes, which is based on assumptions as to our entitlement to various
benefits pursuant to applicable tax laws in the jurisdictions in which we
operate, together with our assessment of temporary differences resulting from
differing treatment of certain items for accounting and tax purposes. We have
recognized a deferred tax asset for net operating losses (less a valuation
allowance), acknowledging our belief that our future income for tax purposes is
expected to be reduced as a result of these net operating losses. We have
considered future taxable income, future expected tax benefits, prudent and
feasible tax planning and transfer pricing 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, possibly after audit
by the relevant tax authorities, 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.

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.

48

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Results of Operations

The
following table sets forth our selected consolidated statement of operations
for the years ended December 31, 2003, 2004 and 2005 expressed as a percentage
of total revenues. Totals may not add up due to rounding.

|                                                                                 |  |      |       |      |  |       |   |  |       |  
|-------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ----- | - |  | ----- | -
|                                                                                 |  | 2003 |       | 2004 |  | 2005  |  
|                                                                                 |  |      |       |      |  |       |  
|Revenues                                                                         |  |      |       |      |  |       |   |  |       |  
|Products                                                                         |  |      | 74.9  | %    |  | 72.3  | % |  | 66.3  | %
|Services                                                                         |  |      | 25.1  |      |  | 27.7  |   |  | 33.7  |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|                                                                                 |  |      | 100.0 |      |  | 100.0 |   |  | 100.0 |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|Cost
  of revenues                                                               |  |      |       |      |  |       |   |  |       |  
|Products*                                                                        |  |      | 38.2  |      |  | 35.3  |   |  | 32.7  |  
|Services*                                                                        |  |      | 74.9  |      |  | 71.2  |   |  | 65.6  |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|                                                                                 |  |      | 47.4  |      |  | 45.2  |   |  | 43.8  |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|Gross
  Profit                                                                   |  |      | 52.6  |      |  | 54.8  |   |  | 56.2  |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|Operating
  expenses                                                             |  |      |       |      |  |       |   |  |       |  
|Research and development, net                                                    |  |      | 10.2  |      |  | 9.8   |   |  | 9.9   |  
|Selling and marketing                                                            |  |      | 23.8  |      |  | 24.6  |   |  | 23.5  |  
|General and administrative                                                       |  |      | 13.3  |      |  | 12.4  |   |  | 12.1  |  
|Restructuring, in-process research and
  development, legal settlement and other |  |      | 3.1   |      |  | 0.0   |   |  | 0.0   |  
|Amortization of acquired intangibles                                             |  |      | 0.2   |      |  | 0.1   |   |  | 0.4   |  
|Total
  operating expenses                                                       |  |      | 50.6  |      |  | 46.9  |   |  | 45.9  |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|Operating
  income (loss)                                                        |  |      | 2.0   |      |  | 7.9   |   |  | 10.3  |  
|Financial
  income, net                                                          |  |      | 0.9   |      |  | 1.4   |   |  | 1.7   |  
|Other
  income (expenses), net                                                   |  |      | 0.1   |      |  | 0.0   |   |  | 0.0   |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|Income
  before taxes                                                            |  |      | 3.0   |      |  | 9.3   |   |  | 12.0  |  
|Taxes
  on income                                                                |  |      | 0.5   |      |  | 0.9   |   |  | 0.3   |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|Net
  income from continuing operations                                          |  |      | 2.5   |      |  | 8.4   |   |  | 11.7  |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|Net
  income from discontinued operations                                        |  |      | 0.7   |      |  | 1.3   |   |  | 0.0   |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  
|Net
  income                                                                     |  |      | 3.2   |      |  | 9.7   |   |  | 11.7  |  
|                                                                                 |  |      |       |      |  |       |   |  |       |  



---

* percent of
related revenue


49

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Comparison
of Years Ended December 31, 2004 and 2005

Revenues

Our
total revenues rose approximately 23.1% to $311.1 million in 2005 from $252.6
million in 2004. Revenues from sales to the enterprise market were $237.4
million in 2005, an increase of 22.3% from 2004, and revenues from sales to the
public safety and security market were $73.7 million in 2005, an increase of
26.0% from 2004. Our growth in revenues was due primarily to the inclusion of
the results of Dictaphone CRS beginning on June 1, 2005, market share gains in
these markets and market growth.

|                   |  |                          |       |      |   |                 |  |                     |      |  |  |      |  
|------------------ |  | ------------------------ | ----- | ---- | - | --------------- |  | ------------------- | ---- |  |  | ---- | -
|                   |  | Years Ended December 31, |       |      |   |                 |  |                     |     
|                   |  |                          |       |      |   |                 |  |                     |     
|                   |  | 2004                     |       | 2005 |   | Dollar
  Change |  | Percentage
  Change |     
|                   |  |                          |       |      |   |                 |  |                     |     
|                   |  |                          |       |      |   |                 |  |                     |      |  |  |      |  
|Product
  Revenues |  | $                        | 182.6 |      | $ | 206.4           |  | $                   | 23.8 |  |  | 13.0 | %
|Service
  Revenues |  |                          | 70.0  |      |   | 104.7           |  |                     | 34.7 |  |  | 49.6 |  
|                   |  |                          |       |      |   |                 |  |                     |      |  |  |      |  
|Total
  Revenues   |  | $                        | 252.6 |      | $ | 311.1           |  | $                   | 58.5 |  |  | 23.2 |  

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

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

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

50

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Cost of
Revenues

|                           |  |                          |       |                 |   |                  |  |   |      |  |  |      |  
|-------------------------- |  | ------------------------ | ----- | --------------- | - | ---------------- |  | - | ---- |  |  | ---- | -
|                           |  | Years Ended December 31, |       |                 |   |                  | 
|                           |  |                          |       |                 |   |                  | 
|                           |  |                          |       | Dollar
  Change |   | PercentageChange | 
|2004                       |  | 2005                    
|                           |  |                          |       |                 |   |                  |  |   |     
|                           |  |                          |       |                 |   |                  |  |   |      |  |  |      |  
|Cost of
  Product Revenues |  | $                        | 64.4  |                 | $ | 67.5             |  | $ | 3.1  |  |  | 4.8  | %
|Cost of
  Service Revenues |  |                          | 49.9  |                 |   | 68.7             |  |   | 18.8 |  |  | 37.7 |  
|                           |  |                          |       |                 |   |                  |  |   |      |  |  |      |  
|                           |  |                          |       |                 |   |                  |  |   |      |  |  |      |  
|Total Cost of Revenues     |  | $                        | 114.3 |                 | $ | 136.2            |  | $ | 21.9 |  |  | 19.2 |  

Cost
of product revenues increased slightly on a dollar basis while decreasing as a
percentage of product revenues. The slight increase on a dollar basis was due
mainly to the higher sales volume. Cost of services revenues increased on a
dollar basis while decreasing as a percentage of service revenues. The increase
on a dollar basis was due principally to higher labor, subcontractor and material
costs associated with the growth in product installations and maintenance
contracts.

Gross Profit

|                                    |  |                          |       |                 |   |                  |   |   |      |  |  |      |  
|----------------------------------- |  | ------------------------ | ----- | --------------- | - | ---------------- | - | - | ---- |  |  | ---- | -
|                                    |  | Years Ended December 31, |       |                 |  
|                                    |  |                          |       |                 |  
|                                    |  |                          |       | Dollar
  Change |   | PercentageChange |  
|2004                                |  | 2005                    
|                                    |  |                          |       |                 |   |                  |   |   |     
|                                    |  |                          |       |                 |   |                  |   |   |      |  |  |      |  
|Gross Profit
  on Product Revenues  |  | $                        | 118.2 |                 | $ | 138.8            |   | $ | 20.6 |  |  | 17.4 | %
|as a percentage of product revenues |  |                          | 64.7  | %               |   | 67.3             | % |   |      |  |  |      |  
|Gross Profit
  on Service Revenue   |  |                          | 20.1  |                 |   | 36.1             |   |   | 16.0 |  |  | 79.6 |  
|as a percentage of service revenues |  |                          | 28.8  | %               |   | 34.4             | % |   |      |  |  |      |  
|                                    |  |                          |       |                 |   |                  |   |   |      |  |  |      |  
|Total Gross Profit                  |  | $                        | 138.3 |                 | $ | 174.9            |   | $ | 36.6 |  |  | 26.5 |  
|as a percentage of total revenues   |  |                          | 54.8  | %               |   | 56.2             | % |   |      |  |  |      |  

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

51

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Operating Expenses

|                                             |  |                          |      |              |   |                     |  |   |      |  |  |      |  
|-------------------------------------------- |  | ------------------------ | ---- | ------------ | - | ------------------- |  | - | ---- |  |  | ---- | -
|                                             |  | Years Ended December 31, |      |              |   |                     | 
|                                             |  |                          |      |              |   |                     | 
|                                             |  |                          |      | DollarChange |   | Percentage
  Change | 
|2004                                         |  | 2005                    
|                                             |  |                          |      |              |   |                     |  |   |     
|                                             |  |                          |      |              |   |                     |  |   |      |  |  |      |  
|Research and
  development, net              |  | $                        | 24.9 |              | $ | 30.9                |  | $ | 6.0  |  |  | 24.1 | %
|Selling
  and marketing                      |  |                          | 61.8 |              |   | 72.8                |  |   | 11.0 |  |  | 17.8 |  
|General
  and administrative                 |  |                          | 31.3 |              |   | 37.7                |  |   | 6.4  |  |  | 20.4 |  
|Amortization
  of acquired intangible assets |  |                          | 0.3  |              |   | 1.3                 |  |   | 1.0  |  |  | 333  |  

Research
and Development, Net. Research and development
expenses, before capitalization of software development costs and government
grants, increased to $33.4 million in 2005, as compared to $27.5 million in
2004 and represented 10.7% and 10.9% of revenues in 2005 and 2004,
respectively. The increase in these expenses was due mainly to the increase in
research and development labor costs.

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

Selling
and Marketing Expenses. The increase in selling
and marketing expenses was due primarily to the inclusion of Dictaphone CRS
beginning on June 1, 2005 and higher sales commissions resulting mainly from
the increase in sales. Selling and marketing expenses represented 23.4% of
total revenues in 2005, as compared to 24.6% in 2004.

General
and Administrative Expenses. The increase in
general and administrative expenses in 2005 was due principally to an increase
in legal expenses associated with pending litigation and labor costs. General
and administrative expenses represented 12.1% of total revenues in 2005, as
compared to 12.4% in 2004.

Financial Income

|                         |  |                          |     |                 |   |                     |   |   |      |   |  |      |  
|------------------------ |  | ------------------------ | --- | --------------- | - | ------------------- | - | - | ---- | - |  | ---- | -
|                         |  | Years Ended December 31, |     |                 |   |                     |  
|                         |  |                          |     |                 |   |                     |  
|                         |  |                          |     | Dollar
  Change |   | Percentage
  Change |  
|2004                     |  | 2005                    
|                         |  |                          |     |                 |   |                     |   |   |     
|                         |  |                          |     |                 |   |                     |   |   |      |   |  |      |  
|Financial
  income, net  |  | $                        | 3.6 |                 | $ | 5.4                 |   | $ | 1.8  |   |  | 50   | %
|Other
  income (expense) |  |                          | 0.1 |                 |   | (0.0                | ) |   | (0.1 | ) |  | (100 | )

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

52

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Taxes
on Income.In 2005, we recorded a provision for income taxes
of $0.9 million, as compared to $2.3 million in 2004. The decrease was
primarily related to $4.8 million of net deferred tax assets, recognized for the first time. We expect that our effective corporate tax rate
will continue to increase into the high-teens mainly due to an increase in
financial income, the reversal of our deferred tax assets, the possible
recognition of deferred tax liabilities on tax-exempt income, a geographic
change in the jurisdictions in which our profits are earned and as a result of
any future possible acquisitions of companies which operate in a high-tax
environment.

Net
Income from Continuing Operations. Net income from
continuing operations was $36.6 million in 2005, as compared to $21.3 million
in 2004. The increase in 2005 resulted primarily from the increase in revenues
and gross margin.

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

Comparison
of Years Ended December 31, 2003 and 2004

Revenues

Our
total revenues increased approximately 13% to $252.6 million in 2004 from
$224.3 million in 2003. Revenues from sales to the enterprise market were
$194.1 million in 2004, an increase of 13% from the prior year, and revenues
from sales to the public safety and security market were $58.5 million, an
increase of 11% from the prior year. Our growth in revenues was due principally
to market share gains in these markets and market growth.

|                   |  |                          |       |              |   |                     |  |   |      |  |  |      |  
|------------------ |  | ------------------------ | ----- | ------------ | - | ------------------- |  | - | ---- |  |  | ---- | -
|                   |  | Years Ended December 31, |       |              |   |                     | 
|                   |  |                          |       |              |   |                     | 
|                   |  |                          |       | DollarChange |   | Percentage
  Change | 
|2003               |  | 2004                    
|                   |  |                          |       |              |   |                     |  |   |     
|                   |  |                          |       |              |   |                     |  |   |      |  |  |      |  
|Product
  Revenues |  | $                        | 168.1 |              | $ | 182.6               |  | $ | 14.5 |  |  | 8.6  | %
|Service
  Revenues |  |                          | 56.2  |              |   | 70.0                |  |   | 13.8 |  |  | 24.6 |  
|                   |  |                          |       |              |   |                     |  |   |      |  |  |      |  
|                   |  |                          |       |              |   |                     |  |   |      |  |  |      |  
|Total Revenues     |  | $                        | 224.3 |              | $ | 252.6               |  | $ | 28.3 |  |  | 12.6 |  

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

The
increase in services revenues was generated partly by the increase in our
installed customer base resulting from new product sales, and higher
installation and training revenues related mainly to the increase in product
sales to the enterprise market. Service revenues for 2004 represented 28% of
total revenues compared with approximately 25% in 2003.

53

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Revenues
in 2004 in the Americas, which includes the United States, Canada and Central
and South America, rose 3% to $121.6 million from $118.6 million in 2003. The
increase was largely attributable to higher post-contract support. Sales to
EMEA rose 26% to $93.2 million in 2004 from $73.8 million in 2003. The increase
was due mainly to higher sales to the enterprise market and post-contract
service and maintenance. Sales to APAC increased 19% to $37.8 million in 2004
from $31.8 million in 2003 due mainly to higher sales to the enterprise market
in the region.

Cost
of Revenues

|                           |  |                          |       |                 |   |                     |  |   |     |  |  |      |  
|-------------------------- |  | ------------------------ | ----- | --------------- | - | ------------------- |  | - | --- |  |  | ---- | -
|                           |  | Years Ended December 31, |       |                 |   |                     | 
|                           |  |                          |       |                 |   |                     | 
|                           |  |                          |       | Dollar
  Change |   | Percentage
  Change | 
|2003                       |  | 2004                    
|                           |  |                          |       |                 |   |                     |  |   |    
|                           |  |                          |       |                 |   |                     |  |   |     |  |  |      |  
|Cost of
  Product Revenues |  | $                        | 64.2  |                 | $ | 64.4                |  | $ | 0.2 |  |  | 0.3  | %
|Cost
  of Service Revenues |  |                          | 42.1  |                 |   | 49.9                |  |   | 7.8 |  |  | 18.5 |  
|                           |  |                          |       |                 |   |                     |  |   |     |  |  |      |  
|                           |  |                          |       |                 |   |                     |  |   |     |  |  |      |  
|Total
  Cost of Revenues   |  | $                        | 106.3 |                 | $ | 114.3               |  | $ | 8.0 |  |  | 7.5  |  

The
slight increase in cost of product revenues was due mainly to the higher sales
volume. The increase in cost of services revenue was due principally to higher
labor, subcontractor and material costs associated with the growth in product
installations and maintenance contracts.

Gross
Profit

|                                    |  |                          |       |                 |   |                     |   |   |      |  |  |      |  
|----------------------------------- |  | ------------------------ | ----- | --------------- | - | ------------------- | - | - | ---- |  |  | ---- | -
|                                    |  | Years Ended December 31, |       |                 |   |                     |  
|                                    |  |                          |       |                 |   |                     |  
|                                    |  |                          |       | Dollar
  Change |   | Percentage
  Change |  
|2003                                |  | 2004                    
|                                    |  |                          |       |                 |   |                     |   |   |     
|                                    |  |                          |       |                 |   |                     |   |   |      |  |  |      |  
|Gross Profit
  on Product Revenues  |  | $                        | 103.9 |                 | $ | 118.2               |   | $ | 14.3 |  |  | 13.8 | %
|as a percentage of product revenues |  |                          | 61.8  | %               |   | 64.7                | % |   |      |  |  |      |  
|Gross Profit
  on Service Revenues  |  |                          | 14.1  |                 |   | 20.1                |   |   | 6.0  |  |  | 42.6 |  
|as a percentage of service revenues |  |                          | 25.1  | %               |   | 28.8                | % |   |      |  |  |      |  
|                                    |  |                          |       |                 |   |                     |   |   |      |  |  |      |  
|Total Gross Profit                  |  | $                        | 117.9 |                 | $ | 138.3               |   | $ | 20.4 |  |  | 17.3 |  
|as a percentage of total revenues   |  |                          | 52.6  | %               |   | 54.8                | % |   |      |  |  |      |  

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

54

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Operating
Expenses

|                                       |  |                          |      |                 |   |                   |  |   |      |   |  |      |  
|-------------------------------------- |  | ------------------------ | ---- | --------------- | - | ----------------- |  | - | ---- | - |  | ---- | -
|                                       |  | Years Ended December 31, |      |                 |   |                   | 
|                                       |  |                          |      |                 |   |                   | 
|                                       |  |                          |      | Dollar
  Change |   | Percentage Change | 
|2003                                   |  | 2004                    
|                                       |  |                          |      |                 |   |                   |  |   |     
|                                       |  |                          |      |                 |   |                   |  |   |      |   |  |      |  
|Research and
  development, net        |  | $                        | 22.8 |                 | $ | 24.9              |  | $ | 2.1  |   |  | 9.2  | %
|Selling and
  marketing                |  |                          | 53.4 |                 |   | 61.8              |  |   | 8.4  |   |  | 15.7 |  
|General
  and administrative           |  |                          | 29.8 |                 |   | 31.3              |  |   | 1.5  |   |  | 5.0  |  
|Amortization
  of acquired intangibles |  |                          | 0.4  |                 |   | 0.3               |  |   | (0.1 | ) |  | (25  | )

Research
and Development, Net. Research and development
expense, before capitalization of software development costs and grants,
increased to $27.5 million in 2004 from $26.4 million in 2003 and represented
10.9% and 11.8% of revenues in 2004 and 2003, respectively. The increase in
gross outlays was due mainly to the increase of research and development labor
costs.

Capitalized
software development costs were $1.3 million in 2004, as compared to $2.3
million in 2003. Amortization of capitalized software development costs,
included in cost of product revenues, was $4.1 million and $5.7 million in 2004
and 2003, respectively.

Selling
and Marketing Expenses. The increase in selling
and marketing expenses was due primarily to an increase in our corporate and
regional sales and marketing efforts and higher sales commissions resulting
mainly from the increase in sales. Selling and marketing expenses represented
24.8% of total revenues in 2004 compared with 23.9% in 2003.

General
and Administrative Expenses. The increase in
general and administrative expenses in 2004 was due principally to increases in
labor costs and depreciation expenses. General and administrative expenses
represented 12.4% of total revenues in 2004 compared with 13.3% in 2003.

Other
Special Charges

|                              |  |                          |     |                  |   |     |  |  |      |   
|----------------------------- |  | ------------------------ | --- | ---------------- | - | --- |  |  | ---- | --
|                              |  | Years Ended December 31, |     |                  |  
|                              |  |                          |     |                  |  
|                              |  |                          |     | PercentageChange |  
|2003                          |  | 2004                    
|                              |  |                          |     |                  |   |     | 
|                              |  |                          |     |                  |   |     |  |  |      |   
|Restructuring                 |  | $                        | 1.9 |                  | $ | 0.0 |  |  | (100 | )%
|Legal Settlement              |  |                          | 5.2 |                  |   | 0.0 |  |  | (100 | ) 
|                              |  |                          |     |                  |   |     |  |  |      |   
|Total
  other special charges |  | $                        | 7.1 |                  | $ | 0.0 |  |  | (100 | )%

55

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Restructuring.
In December 2002, we adopted a restructuring plan, which involved the phased
reduction of approximately 75 of our 1,077 staff members and consolidation of
certain offices. Some of the involuntary reductions were effected in December
2002 and, in accordance with SFAS No. 146, a liability of $282,000 was recorded
as of December 31, 2002 in connection with those terminations. This liability
was utilized as of June 30, 2003. The remaining reductions in personnel and
facility closures were implemented during 2003. We included in our results for
2003 costs of approximately $1.9 million, which related primarily to
involuntary terminations and facility closures.

Legal
Settlement. In June 2000, Dictaphone Corporation,
one of our competitors, filed a patent infringement claim relating to certain
technology embedded in some of our products. The claim was for damages for past
infringement and enjoinment of any continued infringement of Dictaphone
patents. In the fourth quarter of 2003, we reached a settlement with Dictaphone
in which both parties agreed to dismiss all claims and counterclaims connected
with the patent infringement claim. The terms of the settlement required us to
pay Dictaphone $10.0 million, of which approximately $4.8 million was paid by
our insurance carrier in December 2003 and the balance was paid by us. As a
result, a charge of approximately $5.2 million was recorded in the last quarter
of 2003. We and Dictaphone also agreed to grant each other a worldwide,
royalty-free, perpetual license to certain of their patents including the disputed
patents. We and Dictaphone further agreed to enter into enforcement proceedings
with respect to both companies patent portfolios and to share any proceeds
from these actions. As a result of our acquisition of Dictaphone CRS in June
2005, the agreement with respect to patents was terminated since we acquired
the relevant patents.

Financial
and Other Income

|                         |  |                          |     |              |   |                     |  |   |      |   |  |       |  
|------------------------ |  | ------------------------ | --- | ------------ | - | ------------------- |  | - | ---- | - |  | ----- | -
|                         |  | Years Ended December 31, |     |              |   |                     | 
|                         |  |                          |     |              |   |                     | 
|                         |  |                          |     | DollarChange |   | Percentage
  Change | 
|2003                     |  | 2004                    
|                         |  |                          |     |              |   |                     |  |   |     
|                         |  |                          |     |              |   |                     |  |   |      |   |  |       |  
|Financial
  income       |  | $                        | 2.0 |              | $ | 3.6                 |  | $ | 1.6  |   |  | 80.0  | %
|Other
  income (expense) |  |                          | 0.3 |              |   | 0.1                 |  |   | (0.2 | ) |  | (66.7 | )

Financial
Income, Net. The increase in financial income, net
reflects a higher average cash balance and higher prevailing average interest
rates in 2004 compared with 2003.

Other
Income, Net. Other income, net was $0.1 million in
2004 compared with $0.3 million in 2003. In 2003, we recorded $0.3 million of
income reflecting amounts received from our insurance carrier in respect of the
settlement of a litigation in connection with the April 2000 acquisition of
Centerpoint Solutions Inc. In 2004, other income represented a capital gain
recognized upon the disposal of fixed assets.

Taxes
on Income. In 2004, we recorded a provision for
income taxes of $2.3 million compared with $1.2 million in 2003. The increase
was primarily related to operating profits recorded at certain distribution
subsidiaries.

56

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Net
Income (Loss) from Continuing Operations. Net
income from continuing operations was $21.3 million in 2004 compared with $5.6
million in 2003. The increase in 2004 resulted primarily from the increase in
revenues and gross margin.

Net
Income from Discontinued Operations. As discussed
above under Recent Acquisitions and Dispositions, on March 31, 2004 we sold
the assets and liabilities of our COMINT/DF military-related business to ELTA
for $4.0 million in cash. Net income from this discontinued operation was
approximately $3.2 million (including gain on disposition) and $1.5 million for
2004 and 2003, respectively.

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, 2005, we had $411.6
million of cash and cash equivalents and short-term and long-term investments,
as compared to $165.9 million at December 31, 2004 and $107.3 million at
December 31, 2003. The increase in 2005 is primarily attributable to
approximately $201.7 million of proceeds we received from a public offering of
4,600,000 ADSs, representing 4,600,000 of our ordinary shares, which we
completed in December 2005. In addition, the increase in 2005 was due to
an increase in our net income and the proceeds from the issuance of shares upon
the exercise of stock options and under our employee share purchase plan, which
was partially offset by cash payments made in respect of the purchase of
Dictaphone CRS and the Hannamax Hi-Tech Pty. Ltd. businesses.

Cash
provided by operating activities of continuing operations was $65.7 million and
44.3 million in 2005 and 2004, respectively, compared with $36.9 million in
2003. The improvement in 2005 was primarily attributable to higher net
operating income and an increase in current liabilities.

Net
cash used in investing activities from continuing operations was $64.3 million
and $72.3 million in 2005 and 2004, respectively, compared with $39.8 million
in 2003. In June 2005, we paid $39.7 million for Dictaphone CRS (including $1.2
million of acquisition-related costs). In September 2005, we paid $1.8 million
for the Hannamax Hi-Tech Pty. Ltd. business. Capital expenditures were $6.1
million in 2005, $6.7 million in 2004 and $5.5 million in 2003. Capital
expenditures in 2005 and 2004 included investment in back-office IT systems,
equipment for research and development and testing purposes, and general
computer equipment. As of December 31, 2005, we had no material commitments for
capital expenditures.

Net
cash provided by financing activities was $226.9 million, $19.9 million and
$12.1 million in 2005, 2004 and 2003, respectively, of which $201.7 million
represents the net proceeds of our public offering of ADSs in December 2005 and
the balance represents the net proceeds from the issuance of shares upon the
exercise of stock options and under our employee share purchase plan. As of
December 31, 2005, we had authorized credit lines from banks in the amount of
$353 million. As of December 31, 2005, we have no outstanding borrowings under
these credit lines; however, $6.3 million of the $353 million were 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 + 0.7% per year. Any
borrowing under two of these credit lines, having an aggregate borrowing limit
of $328 million, would be secured by our marketable securities. One of our
credit lines contains a negative pledge covenant and one contains covenants
requiring us to maintain a minimum amount of cash and shareholders equity.

57

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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. This belief takes into consideration the steps we have taken to
limit certain customer-related risks through insuring a significant portion of
our accounts receivable and achieving ISO 9000-2001 certification to help
ensure the quality of our products and services, which in turn lowers our
exposure to certain commercial risks.

Research and Development

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

Trend Information

Our
development efforts for our recording platforms are aimed at addressing several
trends we see developing in the industry. The trend towards the proliferation
of voice over IP-based networks is leading to a greater requirement for VoIP
recording capabilities in financial trading, contact centers, public safety
environments and telecommunications monitoring. The continued trend towards
replacing analog video recording with digital video recording is leading to the
need for network applications in the video recording area.

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

We
also see the migration to VoIP network as a driver for additional recording
system for centralized branch recording and manage services.

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.

58

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There
is growing demand from our customers for software applications that will
leverage the wealth of unstructured data captured by the recording platform to
improve overall performance. In turn, as these enhanced software applications
are being added, customers are considering our systems mission critical. We
see an opportunity for applications that analyze the content of unstructured
interactions in contact centers for quality monitoring and contact center
management as well as for enterprise-wide process improvement and business
performance management. We see a trend towards more software applications in
the financial trading environment for compliance monitoring and dispute
management to improve business performance. We see similar trends happening in
digital video recording. We expect video content analysis applications to become
increasingly important to building, campus, city center, and infrastructure
perimeter security, loss prevention in casinos, retail and warehousing, as well
as various homeland security applications to enable proactive security
management.

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

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

Contractual Obligations

Set
forth below are our contractual obligations and other commercial commitments
over the medium term as of December 31, 2005 (in thousands of U.S. dollars):

|                                   |  |                        |  |                    |  |            |  |             |  |                       | 
|---------------------------------- |  | ---------------------- |  | ------------------ |  | ---------- |  | ----------- |  | --------------------- | 
|                                   |  | Payments Due by Period | 
|                                   |  |                        | 
|Contractual Obligations            |  | Total                  |  | Less than
  1 year |  | 1- 3 years |  | 3-5
  years |  | More
  than 5
  years | 
|                                   |  |                        |  |                    |  |            |  |             |  |                       | 
|Long-Term Debt                     |  |                        |  |                    |  |            |  |             |  |                       | 
|Capital Lease Obligations          |  |                        |  |                    |  |            |  |             |  |                       | 
|Operating Leases                   |  | 11,584                 |  | 5,636              |  | 5,948      |  |             |  |                       | 
|Unconditional Purchase Obligations |  | 4,108                  |  | 2,225              |  | 1,646      |  | 237         |  |                       | 
|Other Long-Term Obligations        |  |                        |  |                    |  |            |  |             |  |                       | 
|Total Contractual Cash Obligations |  | 15,692                 |  | 7,861              |  | 7,594      |  | 237         |  |                       | 

59

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|                                    |                    |                             |                                              |       |             |     |                     |    |  |       | 
|----------------------------------- | ------------------ | --------------------------- | -------------------------------------------- | ----- | ----------- | --- | ------------------- | -- |  | ----- | 
|Other Commercial Commitments        |                    | Total
  Amounts
  Committed | Amount of Commitment Expiration Per
  Period |      
|                                   
|                                    | Less than
  1 year |                             | 1- 3
  years                                 |       | 3-5
  years |     | More than
  5 years
|                                    |                    |                             |                                              |       |             |     |                     |    |  |       | 
|Lines of Credit                     |                    |                             |                                              |       |             |     |                     |    |  |       | 
|Standby Letters of Credit           |                    |                             |                                              |       |             |     |                     |    |  |       | 
|Guarantees  continuing operations  |                    | 2,844                       |                                              | 1,566 |             | 241 |                     | 15 |  | 1,022 | 
|Guarantees  discontinued operation |                    | 3,430                       |                                              | 3,430 |             |     |                     |    |  |       | 
|Standby Repurchase Obligations      |                    |                             |                                              |       |             |     |                     |    |  |       | 
|Other Commercial Commitments        |                    | 22                          |                                              | 22    |             |     |                     |    |  |       | 
|Total Commercial Commitments        |                    | 6,296                       |                                              | 5,018 |             | 241 |                     | 15 |  | 1,022 | 

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.

Recently Issued or Adopted Accounting
Pronouncements

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (revised 2004), Share-Based Payment. SFAS No. 123(R) will provide
investors and other users of financial statements with more complete and
neutral financial information by requiring that the compensation cost relating
to share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability instruments
issued. SFAS No. 123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. SFAS No.
123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB No. 25, Accounting for Stock Issued to Employees. SFAS No.
123, as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that statement permitted entities the option of continuing to apply
the guidance in APB No. 25, as long as the footnotes to financial statements
disclosed what net income would have been had the preferable fair-value-based
method been used. We will be required to apply SFAS No. 123(R) as of the first
annual reporting period that begins after June 15, 2005. As
permitted by SFAS No. 123, we currently account for share-based payments to
employees using APB No. 25s intrinsic value method.

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Accordingly,
the adoption of SFAS No. 123(R)s fair value method will have a significant
impact on our result of operations, although it will have no impact on our
overall financial position. We plan to adopt SFAS No. 123(R) using the
modified prospective method. The modified prospective method requires
compensation cost to be recognized beginning with the effective date (a) based
on the requirements of SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS No. 123 for
all awards granted to employees prior to the effective date of SFAS No. 123(R)
that remain unvested on the effective date. The impact of adoption of SFAS No.
123(R) on future periods cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had we
adopted SFAS No. 123(R) in prior periods, the impact of that standard would
have approximated the impact of SFAS No. 123 as described in the disclosure of
pro forma net income and earnings per share in Note 2(t) to the financial
statements.

In
December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions (APB No. 29), is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. APB No. 29 included certain exceptions to
that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary assets
exchanges occurring in fiscal periods beginning after June 15, 2005. We do not
expect that the adoption of SFAS No. 153 will have any material effect on our
financial position or results of operations.

In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB No. 20, Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. APB No. 20 previously required that most voluntary changes
in accounting principles be recognized by including in net income for the
period of the change, the cumulative effect of changing to the new accounting
principle. SFAS No. 154 requires retroactive application to prior periods
financial statements of a voluntary change in accounting principles unless it
is impracticable. SFAS 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. As of
December 31, 2005, adoption of SFAS No. 154 will not have a material impact on
our financial position or results of operation.

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In
November 2005, the FASB issued FSP FAS 115-1. The FSP addresses the
determination as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss.
The FSP also includes accounting considerations subsequent to the recognition
of other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance in this FSP amends SFAS No. 115,
Accounting for Certain Investments in Debt and Equity. The FSP replaces the
impairment evaluation guidance of EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
with references to the existing other-than-temporary impairment guidance. The
FSP clarifies that an investor should recognize an impairment loss no later
than when the impairment is deemed other-than-temporary, even if a decision to
sell an impaired security has not been made. The guidance in this FSP is to be
applied to reporting periods beginning after December 15, 2005. As of December
31, 2005, adoption of FSP FAS 115-1 will not have a material impact on our
financial position or results of operations.

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

Directors and Senior Management

The
following table sets forth, as of May 16, 2006, the name, age and position of
each of our directors and executive officers:

| |                              |     |                                                                         
| | ---------------------------- | --- | ------------------------------------------------------------------------
| | Name                         | Age | Position                                                                
| |                              |     |                                                                         
| | Ron Gutler (1)(2)            | 48  | Chairman of
  the Board of Directors                                    
| |                              |     |                                                                         
| | Joseph
  Atsmon(1)           | 57  | Vice-Chairman
  of the Board of Directors                               
| |                              |     |                                                                         
| | Rimon
  Ben-Shaoul(2)        | 61  | Director                                                                
| |                              |     |                                                                         
| | Yoseph
  Dauber(2)(3)        | 70  | Director                                                                
| |                              |     |                                                                         
| | Dan Falk(1)(2)(3)(4)         | 61  | Director                                                                
| |                              |     |                                                                         
| | John Hughes                  | 54  | Director                                                                
| |                              |     |                                                                         
| | David
  Kostman              | 41  | Director                                                                
| |                              |     |                                                                         
| | Dr. Leora
  Meridor(1)(3)(4) | 58  | Director                                                                
| |                              |     |                                                                         
| | Haim Shani                   | 49  | Chief
  Executive Officer                                               
| |                              |     |                                                                         
| | Dr. Shlomo
  Shamir          | 59  | President                                                               
| |                              |     |                                                                         
| | Ran Oz                       | 39  | Corporate
  Vice President and Chief Financial Officer                  
| |                              |     |                                                                         
| | Koby
  Huberman              | 48  | Corporate
  Vice President, Strategic Alliances & Business Development  
| |                              |     |                                                                         
| | Yechiam
  Cohen              | 49  | Corporate
  Vice President, General Counsel and Corporate Secretary     
| |                              |     |                                                                         
| | Eran Porat                   | 43  | Corporate
  Vice President, Finance                                     
| |                              |     |                                                                         
| | Zvi Baum                     | 49  | Corporate
  Vice President & President, Enterprise Interaction Solutions
| |                              |     |                                                                         
| | Israel
  Livnat              | 55  | Corporate
  Vice President & President, Security Group                  
| |                              |     |                                                                         
| | Yoav
  Zaltzman              | 48  | Corporate
  Vice President & President, Intelligence Solutions          
| |                              |     |                                                                         
| | Doron
  Eidelman             | 51  | Corporate
  Executive Vice President & President, NiceVision            
| |                              |     |                                                                         
| | Jim Park                     | 50  | Corporate
  Vice President & General Manager, Public Safety             
| |                              |     |                                                                         
| | Eran Gorev                   | 41  | President
  and Chief Executive Officer, NICE Systems Inc.              
| |                              |     |                                                                         
| | Tamir Ginat                  | 43  | President,
  EMEA                                                       
| |                              |     |                                                                         
| | Doron Ben
  Sira             | 47  | 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.

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

Ron
Gutler has served as one of our directors since May
2001 and Chairman of the Board since May 2002. Mr. Gutler is currently the
Chairman of G.J.E. 121 Promoting Investment Ltd., a real estate investment
company, and a member of the Advisory Board of Poalim Real Estate (part of
Poalim Capital Market Group). 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. 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 to 2000, Mr. Atsmon served as Chief
Executive Officer of Teledata Communications Ltd., a public company acquired by
ADC Telecommunications Inc. in 1998. Mr. Atsmon had a twenty-year career with
Tadiran Ltd. In his last role at Tadiran Ltd., Mr. Atsmon served as Corporate
Vice President for Business Development. Prior to that, he served as President
of various of its military communications divisions. Mr. Atsmon holds a
Bachelors degree in Electrical Engineering from the Technion  Israel
Institute of Technology.

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Rimon
Ben-Shaoul has served as one of our directors since
September 2001. Since 2001, Mr. Ben-Shaoul has served as Co-Chairman,
President, and Chief Executive Officer 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. and MIND C.T.I. Ltd., BVR
Systems Ltd., Cimatron Ltd. and several private companies. In addition, he is
the President and Chief Executive Officer of Polar Communications Ltd., which
manages media and communications investments. Between 1997 and 2001, Mr.
Ben-Shaoul was the President and Chief Executive Officer 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 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, Chief Executive Officer and a director of Clal
Insurance Company Ltd. 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, he was Deputy Chairman of the Board of Management and
joint Managing Director of Bank Hapoalim and was responsible for the commercial
division of the bank. Between 1994 and 1996 and until June 2002, Mr. Dauber
served as Chairman of Poalim American Express and of the Isracard Group. From
2002 to 2003, he served as Chairman of the Israel Maritime Bank Ltd. He
currently serves as a director of Bank Hapoalim. He also serves as a director
of Clal Insurance Holding Ltd., Vita Pri Galil Ltd., Lodzia Rotex Ltd., Afcon
Industries Ltd. and Orbit Alchut Technologies Ltd. Mr. Dauber holds a
Bachelors degree in Economics and Statistics from the Hebrew University in
Jerusalem and a Masters degree in Law from Bar Ilan University.

Dan
Falk has served as one of our directors since January
2002. Mr. Falk also serves as a director of Orbotech Ltd., Attunity Ltd., Orad
Hi Tech Systems Ltd., Netafim Ltd., Plastopil Ltd., Nova Measuring Instruments
Ltd., ClickSoftware Technologies Ltd., Dmatek Ltd., Jacada Ltd., Poalim Ventures
1 Ltd. and Ormat Technology Inc. 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 Israel Discount Bank. Mr. Falk
holds a Bachelors degree in Economics and Political Science and a Masters
degree in Business Administration from the Hebrew University in Jerusalem. Mr.
Falk qualifies as an outside director under Israeli law.

John
Hughes has served as one of our directors since
November 2002. Mr. Hughes is currently Chairman of Intec Telecom Systems plc
and Executive 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 Chief Executive Officer 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. Mr. Hughes holds a Bachelor of Science degree in Electrical and
Electronic Engineering from the University of Hertfordshire.

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David
Kostman has served as one of our directors since
January 2000. Mr. Kostman is currently the Chief Executive Officer of Delta
Galil USA Inc., a subsidiary of Delta Galil Industries Ltd., a Nasdaq-listed
apparel manufacturer. From April 2003 to April 2005, he was Chief Operating
Officer of Delta Galil USA. From 2000 to 2002 he was the Chief Operating
Officer of VerticalNet, Inc., a Nasdaq-listed software company. Prior thereto,
Mr. Kostman was a Managing Director in the investment banking division of
Lehman Brothers Inc., which he joined in 1994. Mr. Kostman holds a Bachelors
degree in Law from Tel Aviv University and a Masters degree in Business
Administration from INSEAD, France.

Dr.
Leora (Rubin) Meridor has served as one of our
directors since January 2002. Since 2001, Dr. Meridor has been a financial and
business consultant. From 2001 to 2005, she served as Chair of Bezeq
International and Walla Telecommunication. From 2001 to 2004, Dr. Meridor
served as Chair of Poalim Capital Markets. From 1996 to 2000, she served as
Senior Vice President, Head of the Credit and Risk Management Division of the
First International Bank of Israel. From 1983 to 1996, Dr. Meridor held various
positions in the Bank of Israel, the last of which was Head of the Research
Department. Dr. Meridor is a director of Teva Pharmaceutical Industries Ltd.,
Isrotel Ltd., G.J.E. 121 Promoting Investment Ltd. and Gilat Satellite Networks
Ltd. She has held various teaching positions with the Hebrew University in
Jerusalem and holds a Bachelors degree in Mathematics and Physics, a Masters
degree in Mathematics and a Doctoral degree in Economics from the Hebrew
University in Jerusalem. She qualifies as an outside director under Israeli
law.

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 Musiness 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.

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Ran
Oz has served as our Corporate Vice President and
Chief Financial Officer since September 2004. Prior thereto, he worked for
Ceragon Networks Ltd., an international fixed wireless company, where he was
Chief Financial Officer from 2001 to 2004. From 1995 to 2001, he worked for
Jacada Ltd., an international software company, where he held a variety of
positions in finance and operations, most recently as General Manager of the
parent company and Corporate Chief Financial Officer. Mr. Oz is a certified
public accountant and holds a Bachelors degree in Accounting and Economics and
a Masters degree in Business Administration and economics from the Hebrew
University in Jerusalem.

Koby
Huberman has served as one of our Corporate Vice
Presidents since January 2000 and currently serves as Corporate Vice President,
Business Development and Strategic Planning. From 1998 to January 2000, Mr.
Huberman served as Vice President of Marketing for the Enterprise
Internetworking Systems Group of Lucent Technologies Ltd. and, from 1995 to
1998, he was Vice President of Global Marketing and Business Development for
Lannet Data Communications Ltd., which was acquired by Lucent in 1998. Prior
thereto, Mr. Huberman was the Managing Director of ServiceSoft Europe, a
pan-European vendor of artificial intelligence and knowledge-based software for
call center and customer service applications. Mr. Huberman serves voluntarily
as chairman and board member of several non-profit organizations in the field
of education and civil society community development. Mr. Huberman holds a
Bachelors degree in Economics and Business Administration from the Leon
Recanati Graduate School of Business Administration of 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 2005. From March 2000 to 2005, 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.

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Zvi
Baum has served as our Corporate Vice President and
President, Enterprise Interaction Solutions since April 2005. He previously
served in the positions of General Manager of the Product Division, Director of
Product Management in the EIS Division and Corporate Vice President
of Marketing. Before joining us in January 2002, Mr. Baum served as the
Managing Director of Call Vision Israel Ltd., a company that specialized in the
development of advanced web-based quality monitoring solutions for call
centers. Prior thereto, he served as the Vice President of International Sales
and Marketing at STS Software Systems, which developed recording solutions and
was acquired by us at the end of 1999. From 1987 to 1998, Mr. Baum worked for a
number of American and European companies in several areas, including technical
management, marketing and channel management. Mr. Baum holds a Bachelors
degree in Engineering from the Technion  Israel Institute of Technology and a
Masters degree in Computer Science and a Masters degree in Business Administration,
both from the University of California in Los Angeles.

Israel
Livnat will serve as Corporate Vice President &
President Security Group as of May 15, 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, and an Executive MBA from Stanford
University California. He was awarded the prestigious Israeli Industry Prize in
2004.

Yoav
Zaltzman has served as our Corporate Vice President
and President, Intelligence Solutions since 2003. He previously served in the
position of Corporate Vice President, Business Operations. Before joining us in
May 2001, Mr. Zaltzman served as Senior Director of Sales for Applied Materials
(Israel) from 1997. From 1994 to 1997, Mr. Zaltzman served as General Manager
of Orbot Instruments in Europe, based in Brussels, which was acquired by
Applied Materials in 1997. From 1987 to 1992, Mr. Zaltzman held various sales
and marketing positions for Oracle in Israel. Mr. Zaltzman holds a Bachelors degree
in Computer Sciences and a Masters degree in Business Administration, both
from Tel Aviv University.

Doron
Eidelman has served as our Corporate Executive Vice
President and President, NiceVision since May 2002. Prior thereto, he was the
Chief Operating Officer of AudioCodes Ltd., a telecommunications company. From
1992 to 2001, Mr. Eidelman was Executive Vice President and President of the
Display Division of Orbotech and from 1987 to 1992, he held various positions
in Optrotech, the last of which was Vice President. Mr. Eidelman served in an
elite intelligence unit in the IDF and was awarded the prestigious Israel
Defense Award. He holds a Bachelors degree in Electronic Engineering from the
Technion  Israel Institute of Technology and a Masters degree in Electronic
Engineering from Tel Aviv University.

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Jim
Park serves as our Corporate Vice President &
President, Public Safety. Mr. Park previously served as the President of NICE
Systems CTI UK Ltd., our wholly owned subsidiary and corporate headquarters in
EMEA. Prior thereto, he was the Chief Executive Officer of Thales Contact
Solutions (previously Racal Recorders), which we acquired in 2002. Prior to
joining Racal in 1998, Mr. Park held various senior management positions at Mitel
Telecom. From 1996 to
1998, he served as General Manager for Mitels EMEA switching business, from
1994 to 1996 he was Vice President of Business Development, from 1991 to 1994
he was Director of Marketing, and from 1982 to 1991 he held various sales
management roles in Europe, the Middle East and Africa. Mr. Parks early career
was spent in various engineering roles with Siemens UK (1979 to 1982) and
British Telecom (1974 to 1979), who sponsored him through college.

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. 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-Sira has 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 (22 persons) during 2005 consisted of
approximately $4.9 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.

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During
2005, our officers and directors received, in the aggregate, options to purchase
up to 466,000 ordinary shares under our 2003 Stock Option Plan. These options
have an average exercise price of $37.35 and will expire six years after the
date the options were granted.

Compensation
and reimbursement for Outside Directors (as described below) is statutorily
determined pursuant to the Israeli Companies Law, 57591999, or the Companies
Law. The statutory rates for Outside Directors are approximately NIS 46,000 per
annum and approximately NIS 1,800 per meeting. We pay each of our directors who
is not an Outside Director an annual fee of $15,000 and a meeting attendance
fee of $600, including for meetings of committees of the board of directors. We
pay each member of our audit committee, excluding Outside Directors, an
additional annual fee of $2,500. The chairman of the Board receives 150%
of the annual  amount and the vice  chairman of the Board  receives 137.5%
of the annual  amount. The  chairman was also entitled to an additional
monthly fee of approximately $4,000 through September 2005.

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.

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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.                                                              

The
term of an outside director will be three years and may be extended for an
additional term of three years. Each committee of a companys board of
directors which is empowered to exercise any of the boards powers is required
to include at least one outside director.

Our
outside directors were elected for a second term at our Annual General Meeting
held on October 19, 2004. 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.

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
at least one outside director must be such an expert and that all other 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 be designated as a financial expert having accounting or
related financial expertise. Our board of directors has designated Dan Falk as
our audit committee financial expert.

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Independent Directors

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

Audit Committee

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

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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.

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 requires 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 and Gutler.

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, 2005, we had approximately 1,416 employees worldwide, which
represented an increase of 32.7% from year-end 2004.

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

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|                         |  |                 |       |      |  |       |  |  |       | 
|------------------------ |  | --------------- | ----- | ---- |  | ----- |  |  | ----- | 
|                         |  | At December 31, |      
|Category
  of Activity   |  | 2003            |       | 2004 |  | 2005  | 
|                         |  |                 |       |      |  |       | 
|                        
|Operations               |  |                 | 90    |      |  | 86    |  |  | 105   | 
|Customer
  Support       |  |                 | 312   |      |  | 316   |  |  | 466   | 
|Sales &
  Marketing      |  |                 | 252   |      |  | 261   |  |  | 327   | 
|Research
  & Development |  |                 | 260   |      |  | 273   |  |  | 361   | 
|General & Administrative |  |                 | 137   |      |  | 131   |  |  | 157   | 
|                         |  |                 |       |      |  |       | 
|Total                    |  |                 | 1,051 |      |  | 1,067 |  |  | 1,416 | 
|                         |  |                 |       |      |  |       | 

|                    |  |  |       |  |  |       |  |  |       | 
|------------------- |  |  | ----- |  |  | ----- |  |  | ----- | 
|Geographic Location |  |  |       |  |  |       |  |  |       | 
|                    | 
|Israel              |  |  | 516   |  |  | 518   |  |  | 625   | 
|North
  America     |  |  | 333   |  |  | 339   |  |  | 526   | 
|Europe              |  |  | 183   |  |  | 179   |  |  | 195   | 
|Asia Pacific        |  |  | 19    |  |  | 31    |  |  | 70    | 
|                    |  |  |       |  |  |       | 
|Total               |  |  | 1,051 |  |  | 1,067 |  |  | 1,416 | 
|                    |  |  |       |  |  |       | 

We
also utilize temporary employees in various activities. On average, we employed
approximately 39 such temporary employees and 136 contractor employees (not
included in the numbers set forth above) during 2005.

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

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

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Israeli
law generally requires the payment by employers of severance pay upon the death
of an employee, his retirement or upon termination of employment by the
employer without due cause. We currently fund our ongoing severance obligations
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 United States Social Security Administration. These
contributions entitle the employees to benefits in periods of unemployment,
work injury, maternity leave, disability, reserve military service and
bankruptcy or winding-up of the employer. Since January 1, 1995, such amount
also includes payments for national health insurance. The payments to the
National Insurance Institute are equal to approximately 16.25% of an employees
wages (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%.

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 May 16, 2006, our directors and executive officers beneficially owned an aggregate of
642,400 ordinary shares, or approximately 2.5% of our outstanding ordinary shares, which
amount includes options to purchase 608,994 ordinary shares that were vested on such date
or that were scheduled to vest within the following 60 days. The options have an average
exercise price of $34.16 per share and expire between 2006 and 2011. As of May 16, 2006,
our chief executive officer, Mr. Haim Shani, beneficially owned 251,633 ordinary shares,
or approximately 1.0% of our outstanding ordinary shares, which includes options to
purchase 251,189 ordinary shares that were vested on such date or that were scheduled to
vest within the following 60 days, and 444 ordinary shares owned by him. Of the 251,189
options, 242,600 options have an exercise price of $55.5 per share and expire on October
22, 2006. The remaining 8,589 options have exercises prices ranging from $12.1 per share
to $23.4 per share, and expire between May 2007 and December 2009. No other individual
director or executive officer beneficially owns 1% or more of our outstanding ordinary
shares.

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

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1995 Stock Option Plan

In
1995, we adopted the NICE-Systems Ltd. 1995 Stock Option Plan, or 1995 Plan, to
attract, motivate and retain talented employees by rewarding performance and
encouraging behavior that will improve our profitability. Under the 1995 Plan,
our employees and officers may be granted options to acquire our ordinary
shares. The options to acquire ordinary shares are granted at an exercise price
of not less than the fair market value of the ordinary shares on the date of
the grant, subject to certain exceptions which may be determined by our board
of directors. We have registered, through the filing of registration statements
on Form S-8 with SEC under the Securities Act of 1933, 6,000,000 ADSs for
issuance under the 1995 Plan.

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.

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 49%). 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 which is 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 April 30, 2006, options to purchase 751,114 ordinary shares were
outstanding under the 1995 Plan at a weighted average exercise price of $36.95.

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1997 Executive Share Option Plan

In
1996, we adopted the NICE-Systems Ltd. 1997 Executive Share Option Plan, or
1997 Plan, to provide an incentive to our officers and to our directors who are
also officers by enabling them to share in the future growth of our business.
We have registered, through the filing of registration statements on Form S-8
with SEC under the Securities Act, 2,000,000 ADSs for issuance under the 1997
Plan.

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

The
1997 Plan is generally administered by our compensation committee, which
determines the grantees under the 1997 Plan and the number of options to be
granted. As of April 30, 2006, there were no outstanding options to purchase
ordinary shares under the 1997 Plan. All of the outstanding options under this
plan have expired.

2001 Stock Option Plan

In
2001, we adopted the NICE-Systems Ltd. 2001 Stock Option Plan, or 2001 Plan,
for the purpose of providing an incentive to certain employees, directors,
officers and consultants in order to further the advancement our business. The
options to acquire our ordinary shares are granted at an exercise price equal
to the closing price of our ADSs as quoted on the Nasdaq National Market on the
most recent date prior to the date of the resolution of our board of directors
to grant the option for which the price was quoted. We have registered, through
the filing of a registration statement on Form S-8 with SEC under the
Securities Act, 4,000,000 ADSs for issuance under the 2001 Plan.

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Under
the terms of the 2001 Plan, one-third of the stock options granted became
exercisable ten months after the date of grant and the remaining two-thirds
will become exercisable on the first and second anniversaries of the first date
of exercise so long as the grantee is, subject to certain exceptions, employed
by us at the date the stock option becomes exercisable. The third portion of
the options granted under this plan may be exercised at the end of the second
anniversary of the first date of exercise if we meet a pre-tax profit target of
20%, as determined by our board of directors in its discretion. Unless
otherwise determined by our board of directors as of the date of grant, stock
options expire six years after the date of grant. Stock options are non-transferable
except upon the death of the grantee. When applicable, the options are held by,
and registered in the name of, a trustee for a period of two years after the
date of grant in accordance with Section 102 of the Israeli Income Tax
Ordinance.

The
2001 Plan is generally administered by our compensation committee which
determines the grantees under the 2001 Plan and the number of options to be
granted. As of April 30, 2006, options to purchase 243,114 ordinary shares were
outstanding under the 2001 Plan at a weighted average exercise price of $12.1.

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, 2,000,000 ADSs for issuance under the 2003
Plan.

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

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

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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. Accordingly, 200,000
ordinary shares remain reserved under the ESPP, and the balance of
approximately 600,000 ordinary shares were transferred to the 2003 Plan. The
ESPP provides for an annual addition of 250,000 ordinary shares to the pool of
ordinary shares. Those additional shares will be transferred to the 2003 Plan
each year until calendar year 2009.

The
2003 Plan is generally administered by our compensation committee, which
determines the grantees under the 2003 Plan and the number of options to be
granted. As of April 30, 2006, options to purchase 2,734,843 ordinary shares
were outstanding under the 2003 Plan at a weighted average exercise price of
$32.94.

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, 2,250,000
ADSs for issuance under the ESPP.

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

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.

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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.

|                                                              |     |                                      |  |                           |   |            |   |  | 
|------------------------------------------------------------- | --- | ------------------------------------ |  | ------------------------- | - | ---------- | - |  | 
|                                                              |     |                                      |  | Shares Beneficially Owned |  
|                                                              |     |                                      |  |                           |  
|Name and Address                                              |     |                                      |  | Number                    |   | Percent(1) |  
|                                                              |     |                                      |  |                           |   |            |  
|                                                             
|FMR Corp.                                                     | and | Fidelity
  International Limited (2) |  | 3,073,708                 |   | 12.5       | % | 
|82
  Devonshire Street                                        |     | P.O. Box HM
  670                    |  |                           |   |            |   |  | 
|Boston, MA
  02109                                            |     | Hamilton
  HMCX, Bermuda             |  |                           |   |            |   |  | 
|                                                              |     |                                      |  |                           |   |            |   |  | 
|Massachusetts
  Financial Services Company and affiliates (3) |     | 2,143,057                            |  | 8.7                       | % |           
|500 Boylston
  St.                                            |     |                                      |  |                           |   |            |   |  | 
|Boston, MA
  02116                                            |     |                                      |  |                           |   |            |   |  | 



---

|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(1) | Based upon 24,648,101
  ordinary shares issued and outstanding on May 16, 2006.                            
|    |                                                                                                            
|(2) | Based upon information
  provided to us by FMR Corp. and Fidelity International Limited as of May 10, 2006.
|    |                                                                                                            
|(3) | Based upon information
  provided to us by MFS Investment Management as of February 20, 2006.              

As
of April 3, 2006, we had 78 ADS holders of record in the United States, holding
approximately 76% of our outstanding ordinary shares, as reported by The Bank
of New York, the depositary for our ADSs.

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.

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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.

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.

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 to
CipherActive 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. The
lawsuit is in its initial stages.

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Witness Patent Infringement Lawsuits

On
July 20, 2004, STS Software System Ltd., or STS, a wholly owned subsidiary of
ours, brought a lawsuit against Witness Systems, Inc. asserting that Witness
Systems is infringing three U.S.
patents of STS relating to voice over internet protocol, or VoIP. STS claims
that Witness Systems infringes the VoIP patents by marketing and selling
products that incorporate methods of detecting, monitoring and recording
information  all fully protected by the patents. STS is seeking an 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. The case,
which is pending in the U.S. District Court for the Northern District of
Georgia, is in discovery and claims construction stage and no trial date has
been set.

On
August 30, 2004, Witness Systems filed a lawsuit in the United States District
Court for the Northern District of Georgia against Nice Systems Inc., a wholly
owned subsidiary of ours. Witness Systems is alleging infringement of two U.S.
patents entitled Method and Apparatus for Simultaneously Monitoring Computer
User Screen and Telephone Activity from a Remote Location and is seeking
unspecified damages and injunctive relief. On February 24, 2005, Witness
Systems filed a similar action in the Northern District of Georgia against us
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. The case is currently in
discovery and no trial date has been set.

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 an injunction to prevent any sale of allegedly infringing products. We have
denied all material allegations and are asserting a number of defenses. This
lawsuit is in its early stages. We believe that the claims are without merit
and intend to vigorously defend against them.

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

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Origin Dispute

The
Company is currently in dispute with Origin Data Realisation Limited relating
to the terms of a license of software supplied by Origin and incorporated
within our Wordnet Series 3 voice recorder and certain other matters. We and
Origin agreed to submit the disputes to mediation and, accordingly, attended a
mediation session on July 25, 2005. The mediation did not result in a
resolution of the disputes, but the parties have continued to negotiate with
the aim of reaching a settlement. To date, no formal legal proceedings have
been instituted by either side.

Dictaphone Corp. v. Mercom Systems, Inc.

On
July 28, 2004, Dictaphone Corp. filed an action against Mercom Systems, Inc. in
the United States District Court for the Southern District of New York
asserting that Mercom Systems is infringing two U.S. patents, which we
subsequently acquired from Dictaphone. Pursuant to the terms of our agreement
with Dictaphone, we succeeded to the right to enforce these patents and to
control this litigation. In response, Mercom Systems is asserting that the
patents are invalid and not infringed, including alleging that our previous
defense of an action by Dictaphone against us in which we challenged the
validity of one of the patents at issue in this action, estopped us from making
the claim of infringement. We and Mercom Systems have reached an agreement in
principle to settle the action. It is expected that the documentation for this
agreement will be shortly concluded.

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. Similar
to the Mercom Systems lawsuit, this lawsuit has also been settled in principle.
The documentation for this settlement is expected to be completed and signed
shortly.

Calyon Dispute

In April 2006, the Company received a
letter from Calyon Corporate and Investment Bank (Calyon), demanding that the Company pay
an amount of $648,144 to Calyton. This amount was deducted by the Company in January 2004
from an amount transferred by Calyon to the Companys account at the instruction of
Thales, in connection with the acquisition of Thales Contact Solutions (TCS). Calyon now
claims it was not done rightfully. The Company notified TCS in 2004 that it had setoff
such amount with respect to an overdue payment by TCS. The Company had previously notified
Calyon that it had sent TCS a setoff notice to that effect, and therefore, believes that
Calyons claim is not justified.

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Evesham School District Investigation

The
U.S. Consumer Product Safety Commission has brought to our attention and
provided us an opportunity to comment on an alleged incident of a fire
allegedly involving a NICE product used in a school building in the Evesham New
Jersey School District. We have retained special counsel and engineering
consultants who have investigated this matter and concluded that the fire was
not the result of failure in design, manufacturing, installation, service or
abuse on our part and that the fire was caused by a third party commercial
off-the-shelf product. We have been advised, based on the results of the
investigation, that a formal response to the Commission is not necessary. The
Commission is not conducting a formal investigation of us and therefore, this
is not a pending case.

Dividends

Since
our initial public offering on Nasdaq in 1996, we have not declared or paid
dividends on our ordinary shares. We intend to retain our earnings for future
growth and therefore do not anticipate paying any cash dividends in the
foreseeable future.

Significant Changes

In
April 2006,  we signed a  definitive  agreement  to acquire  Performix  Technologies
 Ltd.,  a pioneer of contact  center  performance  management.  Under  the terms of the
 definitive  agreement,  we will  acquire Performix for a total  purchase  price of $13.2
million in cash. The purchase price may increase by up to an additional  $6.15  million
 (of  which  up to $3  million  may be  payable  at  closing)  based  on  certain
performance  criteria.  The transaction is subject to the satisfaction of customary
 closing  conditions and is anticipated to close towards the end of the second or the
beginning of the third quarter of 2006.

For
a description of additional significant changes that occurred in 2006, please see Item 10, Additional
InformationMaterial ContractsIEX Corporation Acquisition and FAST Video Security AG Acquisition.

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

Trading in the ADSs

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

|               |                           |  |      |       |     |   |       | 
|-------------- | ------------------------- |  | ---- | ----- | --- | - | ----- | 
|               |                           |  | ADSs |      
|               |                           |  |      |      
|               |                           |  | High |       | Low |  
|               |                           |  |      |       |     |  
|Annual         |                           |  |      |       |     |   |      
|               | 2001                      |  | $    | 27.75 |     | $ | 8.88  | 
|               | 2002                      |  |      | 17.04 |     |   | 6.70  | 
|               | 2003                      |  |      | 25.35 |     |   | 8.34  | 
|               | 2004                      |  |      | 31.39 |     |   | 17.88 | 
|               | 2005                      |  |      | 49.86 |     |   | 29.66 | 
|               |                           |  |      |       |     |   |       | 
|Quarterly 2004 |                           |  |      |       |     |   |      
|               |                           |  |      |       |     |   |       | 
|               | First
  Quarter           |  | $    | 29.88 |     | $ | 22.56 | 
|               | Second
  Quarter          |  |      | 25.75 |     |   | 21.16 | 
|               | Third
  Quarter           |  |      | 23.38 |     |   | 17.88 | 
|               | Fourth Quarter            |  |      | 31.39 |     |   | 21.04 | 
|               |                           |  |      |       |     |   |       | 
|Quarterly 2005 |                           |  |      |       |     |   |      
|               |                           |  |      |       |     |   |       | 
|               | First
  Quarter           |  | $    | 35.03 |     | $ | 29.66 | 
|               | Second
  Quarter          |  |      | 39.85 |     |   | 30.57 | 
|               | Third
  Quarter           |  |      | 48.00 |     |   | 39.50 | 
|               | Fourth
  Quarter          |  |      | 49.86 |     |   | 40.67 | 
|               |                           |  |      |       |     |   |       | 
|Quarterly 2006 |                           |  |      |       |     |   |      
|               |                           |  |      |       |     |   |       | 
|               | First Quarter             |  | $    | 54.48 |     | $ | 47.19 | 
|               |                           |  |      |       |     |   |       | 
|Monthly        |                           |  |      |       |     |   |      
|               |                           |  |      |       |     |   |       | 
|               | November
  2005           |  | $    | 46.82 |     | $ | 43.34 | 
|               | December
  2005           |  |      | 49.86 |     |   | 44.36 | 
|               | January 2006              |  |      | 52.80 |     |   | 47.19 | 
|               | February
  2006           |  |      | 53.90 |     |   | 48.71 | 
|               | March 2006                |  |      | 54.48 |     |   | 49.99 | 
|               | April 2006                |  |      | 54.80 |     |   | 46.80 | 
|               | May 2006 (through May 15) |  |      | 57.25 |     |   | 54.50 | 

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On May 15, 2006, the
last reported sale price of our ADSs was $ 54.50 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 last reported prices of our
ordinary shares (in NIS and dollars) on the TASE. The translation into dollars
is based on the daily representative rate of exchange published by the Bank of
Israel.

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|               |                           |  |                 |        |     |  |       |  |   |        |  |  |       | 
|-------------- | ------------------------- |  | --------------- | ------ | --- |  | ----- |  | - | ------ |  |  | ----- | 
|               |                           |  | Ordinary Shares |       
|               |                           |  |                 |       
|               |                           |  | High            |        | Low | 
|               |                           |  |                 |        |     | 
|               |                           |  | NIS             |        | $   |  | NIS   |  | $ |       
|               |                           |  |                 |        |     |  |       |  |   |       
|Annual         |                           |  |                 |        |     |  |       |  |   |        |  |  |      
|               | 2001                      |  |                 | 97.90  |     |  | 23.68 |  |   | 39.19  |  |  | 9.27  | 
|               | 2002                      |  |                 | 75.50  |     |  | 16.81 |  |   | 32.02  |  |  | 6.63  | 
|               | 2003                      |  |                 | 113.30 |     |  | 25.04 |  |   | 37.96  |  |  | 8.01  | 
|               | 2004                      |  |                 | 137.70 |     |  | 31.10 |  |   | 79.51  |  |  | 17.52 | 
|               | 2005                      |  |                 | 229.20 |     |  | 49.60 |  |   | 130.40 |  |  | 29.56 | 
|               |                           |  |                 |        |     |  |       |  |   |        |  |  |      
|Quarterly 2004 |                           |  |                 |        |     |  |       |  |   |        |  |  |      
|               | First
  Quarter           |  |                 | 137.70 |     |  | 31.10 |  |   | 100.80 |  |  | 22.36 | 
|               | Second
  Quarter          |  |                 | 117.90 |     |  | 25.99 |  |   | 97.56  |  |  | 21.43 | 
|               | Third
  Quarter           |  |                 | 107.10 |     |  | 23.90 |  |   | 79.51  |  |  | 17.52 | 
|               | Fourth
  Quarter          |  |                 | 131.90 |     |  | 30.40 |  |   | 92.79  |  |  | 20.74 | 
|               |                           |  |                 |        |     |  |       |  |   |        |  |  |       | 
|Quarterly 2005 |                           |  |                 |        |     |  |       |  |   |        |  |  |      
|               | First
  Quarter           |  |                 | 151.30 |     |  | 34.90 |  |   | 130.40 |  |  | 29.56 | 
|               | Second Quarter            |  |                 | 177.40 |     |  | 38.78 |  |   | 135.40 |  |  | 30.96 | 
|               | Third
  Quarter           |  |                 | 213.70 |     |  | 47.73 |  |   | 181.00 |  |  | 39.50 | 
|               | Fourth
  Quarter          |  |                 | 229.20 |     |  | 49.60 |  |   | 190.10 |  |  | 41.10 | 
|               |                           |  |                 |        |     |  |       |  |   |        |  |  |       | 
|Quarterly 2006 |                           |  |                 |        |     |  |       |  |   |        |  |  |      
|               | First
  Quarter           |  |                 | 254.80 |     |  | 54.28 |  |   | 214.00 |  |  | 46.24 | 
|               |                           |  |                 |        |     |  |       |  |   |        |  |  |       | 
|Monthly        |                           |  |                 |        |     |  |       |  |   |        |  |  |      
|               |                           |  |                 |        |     |  |       |  |   |        |  |  |      
|               | November
  2005           |  |                 | 218.40 |     |  | 46.61 |  |   | 203.80 |  |  | 43.92 | 
|               | December
  2005           |  |                 | 229.20 |     |  | 49.60 |  |   | 206.60 |  |  | 44.39 | 
|               | January 2006              |  |                 | 243.50 |     |  | 52.28 |  |   | 214.00 |  |  | 46.24 | 
|               | February
  2006           |  |                 | 248.50 |     |  | 52.96 |  |   | 227.70 |  |  | 48.52 | 
|               | March 2006                |  |                 | 254.80 |     |  | 54.28 |  |   | 235.40 |  |  | 50.29 | 
|               | April 2006                |  |                 | 246.10 |     |  | 54.65 |  |   | 220.70 |  |  | 47.98 | 
|               | May 2006 (through May 15) |  |                 | 254.80 |     |  | 57.32 |  |   | 244.90 |  |  | 54.47 | 

As of May 15, 2006, the
last reported price of our ordinary shares on the TASE was NIS 247.50 (or $ 55.51) per share.

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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.

In
our annual general meeting of shareholders held on September 28, 2005, we
increased our authorized share capital to 75 million ordinary shares and
adopted amended and restated articles of association.

Objects and Purposes

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

Directors

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

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

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Subject
to the Companies law, the board may appoint a committee of the board and
delegate to such committee all or any of the powers of the board, as it deems
appropriate. Under the Companies Law the board of directors must appoint an
internal audit committee, comprised of at least three directors and including
both of the outside directors. The function of the internal audit committee is
to review irregularities in the management of the Companys business and
recommend remedial measures. The committee is also required, under the
Companies Law to approve certain related party transactions. Notwithstanding
the foregoing, the board may, at any time, amend, restate or cancel the
delegation of any of its powers to any of its committees. The board has
appointed an internal audit committee which has three members, an audit
committee 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. 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.

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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.

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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
association do not allow us to do
so.

Office Holder Insurance

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

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

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Indemnification of Office Holders

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

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | reasonable
  litigation expenses, including attorneys fees, expended by the office holder
  as a result of an investigation or proceeding instituted against him by a
  competent authority, provided that such investigation or proceeding concluded
  without the filing of an indictment against him and either (A) concluded
  without the imposition of any financial liability in lieu of criminal
  proceedings or (B) concluded with the imposition of a financial liability in
  lieu of criminal proceedings but relates to a criminal offense that does not
  require proof of criminal intent; and
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | reasonable
  litigation expenses, including attorneys fees, expended by the office holder
  or charged to him by a court, in proceedings instituted against him by or on
  our behalf or by another person, or in a criminal charge from which he was
  acquitted, or a criminal charge in which he was convicted for a criminal
  offense that does not require proof of intent, in each case relating to an
  act performed in his capacity as an office holder.                                                                                                                                            

We
have undertaken to indemnify our directors and officers pursuant to applicable
law. We have obtained 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;                                                                                                                                          
| |   |                                                                                                                                                                                                                                                    
| |  | any act or
  omission done with the intent to derive an illegal personal benefit; or                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                    
| |  | any fine
  levied against the office holder.                                                                                                                                                                                                       

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Required Approvals

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

Rights of Ordinary Shares

Our
Ordinary Shares confer upon our shareholders the right to receive notices of,
and to attend, shareholder meetings, the right to one vote per Ordinary Share
at all shareholders meetings for all purposes, and to share equally, on a per
share basis, in such dividends as may be declared by our 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.

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Mergers and Acquisitions

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

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

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

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Material Contracts

IEX Corporation Acquisition

In
April 2006, we signed a definitive agreement to acquire IEX Corporation,
a worldwide provider of contact center workforce management solutions.
Under the terms of the definitive agreement, we
will acquire the shares of IEX, a wholly owned subsidiary of Tekelec, for approximately
$200 million in cash. The transaction is subject to the satisfaction of
customary closing conditions and is anticipated to close towards the end of the
second or the beginning of the third quarter of 2006.

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 $21 million in cash, with potential earn-outs based on
performance milestones amounting to a maximum of $12 million payable over the
next three years.

Settlement Agreement with Dictaphone

In
June 2000, Dictaphone Corporation, one of our competitors, filed a patent
infringement claim relating to certain technology embedded in some of our
products. The claim was for damages for past infringement and enjoinment of any
continued infringement of Dictaphone patents. On December 11, 2003, we agreed
with Dictaphone to dismiss all claims and counterclaims in connection with
Dictaphones patent infringement claim against us. Under the terms of the
settlement we were required to pay Dictaphone $10 million, of which
approximately $4.8 million was paid by our insurance carrier in December 2003
and the balance was paid by us. Each of the companies was to grant the other a
worldwide, royalty-free, perpetual license to certain of their respective
patents including the disputed patents. The two companies further agreed to
enter into enforcement proceedings with respect to both companies patent
portfolios and to share any proceeds from these actions.

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Dictaphone Acquisition

On
June 1, 2005, we consummated an agreement to acquire the assets and assume
certain liabilities of Dictaphones Communications Recording Systems (CRS)
business for approximately $38.5 million. 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.

Among
the assets we acquired in the transaction are all of Dictaphones rights to
receive any damage award or other economic benefit with respect to a violation
of any of the rights related to the intellectual property of Dictaphones CRS
business arising prior to the closing of the transaction.

The
parties signed an amendment to the aforementioned asset purchase agreement with
Dictaphone, according to which a final adjustment will be made to the audited closing
balance sheet, which will reduce the purchase price under the asset purchase agreement by
$2.0 million. In addition, the parties agreed, that we are entitled to all previously
undistributed interest and other investment income earned with respect to such escrow
funds. 

TCS Acquisition

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

In
the fourth quarter of 2002, we recorded a current liability of $2.8 million and
a long-term liability of $13.5 million reflecting obligations under a long-term
contract we assumed in the TCS acquisition. In the second quarter of 2003 we
completed negotiations to terminate this contract as of November 2004 and to
amend the terms in the interim. Under the terms of the amended contract, the
cost to the Company was $5.2 million less than the amount provided at the
acquisition date and consequently, TCS acquisition goodwill was reduced by this
amount.

Under
the terms of the agreement, the cash portion of the purchase price was subject
to downward adjustment based on the value of net assets at closing and the full
year 2002 sales of TCS. Based on our calculation of the actual value of net
assets acquired and 2002 sales of TCS, we reduced the cash portion of the
purchase price as of December 31, 2002 by $12.8 million. This amount was
presented on our balance sheet as a Related Party Receivable as of December 31,
2002.Thus, the adjusted purchase
price paid, including $4.5 million of capitalized acquisition costs, was
recorded as $39.7 million. Of the $12.8 million adjustment referred to above,
Thales paid us $6.6 million in March 2003.

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Thales
disputed our calculation of the net asset value at closing and the matter was
submitted in September 2003 to binding arbitration by an Independent
Accountant, in accordance with the terms of the acquisition agreement. The Independent
Accountant determined a higher net asset value at closing than our calculation
of the actual value of net assets acquired in the amount of $2.2 million. Also,
under the terms of the agreement, the cash portion of the purchase price was
subject to adjustment mechanisms and indemnities related to the assets sold to
us. On September 8, 2004, we notified Thales of claims in respect of such price
adjustment mechanisms. NICE and Thales signed a settlement agreement in respect
of such claims on February 24, 2005, according to which Thales paid us a total
indemnity amount of $2.6 million.

Sale of Comint/DF Business to Elta

On
March 31, 2004, we sold the net assets of our COMINT/DF military-related
business to ELTA Systems Ltd (ELTA) for $4 million in cash. The net assets
sold include the intellectual property, fixed assets, inventory, and contracts
related to the COMINT/DF product line which includes high performance spectral
surveillance and direction finding systems that detect, identify, locate,
monitor and record transmission sources. The COMINT/DF business is therefore
treated as a discontinued operation in our financial statements.

In
2002, 2003 and 2004, the COMINT/DF business generated revenues of approximately
$7.2 million, $6.5 million and $0.8 million, respectively, and net income of
approximately $1.4 million, $1.5 million and $3.2 million (including gain on
disposition), respectively.

Exchange Controls

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

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

Taxation

The
following is a discussion of Israeli and United States tax consequences
material to our 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.

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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
contains a discussion of the material Israeli tax consequences to purchasers of
our ordinary shares or ADSs. 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. For a discussion of certain Israeli government programs
benefiting various Israeli businesses, including us, please see Item 5,
Operating and Financial Review and Prospects.

General Corporate Tax Structure

Generally,
Israeli companies are subject to Corporate Tax on taxable income at the rate of
34% for the 2005 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:
31% for the 2006 tax year, 29% for the 2007 tax year, 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 Enterprise may be
considerably less.

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

We derive and
expect to continue to derive significant tax benefits in Israel relating to our
Approved 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. As of
December 31, 2005, we believe that we are in compliance with all the conditions
required by the law.

Income
from two of our Approved Enterprises is exempt from income tax for two years.
Following this two-year period, income from the Approved Enterprise will be
subject to corporate tax at a reduced rate of 10-25% (based on the percentage
of foreign ownership in each taxable year) for the following eight years.
Income from our other two Approved Enterprises is tax exempt for four years.
Following this four-year period, income from these Approved Enterprises will
be subject to corporate tax at a reduced rate of 10-25% (based on the
percentage of foreign ownership in each taxable year) for the following six
years.

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If
we distribute dividends from the income 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 corporation taxes arising under our
Approved Enterprise programs. We intend to reinvest the total amount of our
tax-exempt income and not to distribute this income to shareholders. The
tax-exempt income attributable to an Approved Enterprise can be distributed
to shareholders without subjecting us to taxes only upon our complete
liquidation.

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

On
April 1, 2005, an amendment to the Investments Law came into force. Pursuant to
the amendment, a companys facility will be granted the status of Approved
Enterprise only if it is proven to be an industrial facility (as defined in such
law) that contributes to the economic independence of the Israeli economy and
is a competitive facility that contributes to the Israeli gross domestic
product. The amendment incorporates certain changes to both the criteria and
procedure for obtaining Approved Enterprise status for an investment program,
and changes to the tax benefits afforded in certain circumstances to Approved
Enterprises under such law (which in some cases is referred to as a Benefiting
Enterprise following such amendment). The amendment will apply to Approved
Enterprise programs in which the year of commencement of benefits under the law
is 2004 or later, unless such programs received approval from the applicable
government authority prior to December 31, 2004 in which case the provisions of
the amendment will not apply.

As
a result of the amendment, where we benefit from tax-exempt income pursuant to
the new Benefiting Enterprise regime, we will be subject to taxes upon the
distribution of such tax-exempt income or upon our liquidation. Accordingly, we
may be required to record a deferred tax liability with respect to such
tax-exempt income. We are currently evaluating the impact of the amendment on
us. Based on our preliminary analysis, it may materially increase our provision
for income taxes in future years.

Stamp Duty

The
Israeli Stamp Duty on Documents Law, 1961 (the Stamp Duty Law), provides that
any document (or part thereof) that is signed in Israel or that is signed
outside of Israel and refers to an asset or other thing in Israel or to an
action that is executed or will be executed in Israel, is subject to a stamp
duty, generally at a rate of between 0.4% and 1% of the value of the subject
matter of such document. De facto, it has been common practice in Israel not to
pay such stamp duty unless a document is filed with a governmental authority.
An amendment to the Stamp Duty Law that came into effect on June 1, 2003,
determines, among other things, that stamp duty on most agreements shall be paid
by the parties that signed such agreement, jointly or severally, or by the
party that undertook under such agreement to pay the stamp duty. As a result of
the aforementioned amendment to the Stamp Duty Law, the Israeli tax authorities
have approached many companies in Israel and requested disclosure of all
agreements signed by such companies after June 1, 2003, with the aim of
collecting stamp duty on such agreements.

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Based
on advice from our Israeli counsel, we believe that we may only be required to
pay stamp duty on documents signed on or after August 2004. However, we cannot
give any assurance that the tax authorities or the courts will accept such
view. At this stage it is not yet possible to evaluate the effect, if any, on
us of the 2003 amendment to the Stamp Duty Law.

Under
an order published in December 2005, the said requirement to pay stamp duty was
cancelled with respect to documents signed on or after January 1, 2006

Tax Benefits and Grants for Research and
Development

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

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

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

| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | deductions
  over an eight-year period for purchases of know-how and patents;                                                                                                                                         
| |   |                                                                                                                                                                                                                       
| |  | deductions over a three-year period of
  expenses involved with the issuance and listing of shares on the Tel Aviv
  Stock Exchange or, on or after January 1, 2003, on a recognized stock market
  outside of Israel;
| |   |                                                                                                                                                                                                                       
| |  | the right to
  elect, under specified conditions, to file a consolidated tax return with
  other related Israeli Industrial Companies; and                                                                            
| |   |                                                                                                                                                                                                                       
| |  | accelerated depreciation rates on equipment
  and buildings.                                                                                                                                                          

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

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Special Provisions Relating to Taxation Under
Inflationary Conditions

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

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 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

Generally,
up until the 2006 tax year, capital gains tax was imposed on Israeli resident
individuals at a rate of 15% on real gains derived on or after January 1, 2003,
from the sale of shares in, among others, (i) Israeli companies publicly traded
on Nasdaq or on a recognized stock market in a country that has a treaty for
the preventions of double taxation with Israel, or (ii) companies dually traded
on both the Tel Aviv Stock Exchange and Nasdaq or a recognized stock market
outside of Israel (such as NICE). This tax rate was contingent upon the
shareholders not claiming a deduction for financing expenses in connection with
such shares (in which case the gain was generally taxed at a rate of 25%), and
did not apply to: (i) the sale of shares by dealers in securities; (ii) the
sale of shares by shareholders that report in accordance with the Income Tax
Law (Inflationary Adjustments), 1985, referred to as the Inflationary
Adjustments Law (that were generally taxed at Corporate Tax rates for corporations and at
marginal tax rates for individuals); or (iii) the sale of shares by shareholders who
acquired their shares prior to an initial public offering (that may be subject
to a different tax arrangement).

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As of
January 1, 2006, the tax rate applicable to 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 shares, unless such
companies were not subject to the Adjustments Law (or certain regulations) at
the time of publication of the aforementioned amendment to the Tax Ordinance,
in which case the applicable tax rate is 25%. However, different tax rates may
apply to dealers in securities and shareholders who acquired their shares prior
to an initial public offering.

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

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 an Israeli resident (i)
has a controlling interest of 25% or more in such non-Israeli corporation, or
(ii) is the beneficiary or is entitled to 25% or more of the revenues or
profits of such non-Israeli corporation, whether directly or indirectly.

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

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Taxation
of Dividends Paid on our Ordinary Shares

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

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 following
rates: (i) for dividends distributed prior to January 1, 2006 - 25%; (ii) for
dividends distributed on or after January 1, 2006 - 20%, or 25% for a
shareholder that is considered a Material Shareholder at any time during the
12-month period preceding such distribution. Dividends paid from income derived
from our Approved 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 Benefiting Enterprise) are subject to a 15% withholding
tax under Israeli law. The U.S.-Israel Tax Treaty further provides for a 12.5%
Israeli dividend withholding tax on dividends paid by an Israeli company to a
United States corporation owning at least 10% or more of such Israeli companys
issued voting power for, in general, the part of the tax year which precedes
the date of payment of the dividend and the entire preceding tax year, provided
such United States corporation meets certain limitations concerning the amount
of its dividend and interest income. The lower 12.5% rate applies only to
dividends from income not derived from an Approved Enterprise (or Benefiting
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.

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

U.S. Federal
Income Tax Considerations

The
following is a summary of certain 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 in effect as of the date of this annual report, all of which are
subject to change at any time, possibly with retroactive effect. This summary
does not address all tax considerations that may be relevant with respect to an
investment in ADSs.

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
  liable for 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.                                                                                                                                                                

104

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

You
are urged to consult your tax advisors regarding the foreign and U.S. Federal,
state and local 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, for U.S. Federal income tax purposes, 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.       

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 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 holders, each described
below, could be affected by actions taken by parties to whom the ADSs are
released.

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U.S. Taxation
of ADSs

Distributions

Subject
to the discussion under Passive Foreign Investment Companies below, the gross
amount of any distribution, including the amount of any Israeli taxes withheld
from these distributions, 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
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.

Under
the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the 2003 Act)
enacted on May 28, 2003, 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 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 corporation (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, 2008, 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 may be deducted from taxable income or credited against a
U.S. holders U.S. Federal income tax liability. The limitation on foreign
taxes eligible for the U.S. foreign tax credit is calculated separately with
respect to specific classes of 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. Under the 2003 Act, the amount of the
qualified dividend income paid by us to a U.S. holder that is subject to the
reduced dividend income tax rate and that is taken into account for purposes of
calculating the U.S. holders U.S. foreign tax credit limitation must be reduced
by the rate differential portion of such dividend. Each qualified U.S. holder
is urged to consult its own tax advisor regarding the possible applicability of
the reduced rate under the 2003 Act and the related restrictions and special
rules.

106

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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
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 losses recognized 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,

107

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

108

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Backup Withholding and Information Reporting

Payments
of dividends with respect to ADSs and the proceeds from the sale, retirement,
or other disposition of ADSs made by a U.S. paying agent or other U.S.
intermediary will be reported to the IRS and to the U.S. holder as may be
required under applicable U.S. Treasury regulations. We, or an agent, a broker,
or any paying agent, as the case may be, may be required to withhold tax,
currently at the rate of 28% (the backup withholding tax), if a non-corporate
U.S. holder that is not otherwise exempt fails to provide an accurate taxpayer
identification number and comply with other IRS requirements concerning
information reporting. Certain U.S. holders (including, among others,
corporations and tax-exempt organizations) are not subject to backup
withholding. Backup withholding is not an additional tax. 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 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 certain other conditions are
  satisfied.

Backup Withholding and Information Reporting

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

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

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

109

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Documents on Display

We
are subject to certain of the information reporting requirements of the
Securities and Exchange Act of 1934, as amended. We, as a foreign private
issuer are exempt from the rules and regulations under the Securities Exchange
Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting
and short-swing profit recovery provisions contained in Section 16 of the
Securities Exchange Act, with respect to their purchase and sale of our shares.
In addition, we are not required to file reports and financial statements with
the SEC as frequently or as promptly as U.S. companies whose securities are
registered under the Securities Exchange Act. Nasdaq rules generally require
that companies send an annual 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 Stock Market, so our reports and other
information can be inspected at the offices of the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.

110

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|         |                                                            
|-------- | -----------------------------------------------------------
|Item 11. | Quantitative and Qualitative Disclosures About Market Risk.

General

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

Foreign Currency Risk. 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 Israel currencies. We monitor foreign currency exposure and,
from time to time, may enter into various contracts to preserve the value of
sales transactions and commitments.

Interest Rate Risk. We invest in
investment-grade U.S.
corporate bonds and dollar deposits with FDIC-insured US banks. At least 80% of
our securities investments are in corporate and US government agency bonds.
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. Up to 20% of our
investment portfolio may be made in investment grade Callable Range Accrual
Notes whose principal is guaranteed. As of December 31, 2005, 3.4% 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 will not be
effected by changes in their market value or to liquidity risk. However, a
significant increase in prevailing interest rates may effect whether or not
interest income is received for a particular period. As of December 31 2005, we
did not invest in auction rate securities.

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.

111

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

None.

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

An
evaluation was performed under the supervision and with the participation
NICEs management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the NICEs disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and 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 these disclosure controls and procedures were effective.
There has been no change in NICEs internal control over financial reporting
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the NICEs 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.

|          |                
|--------- | ---------------
|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 waivers 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.

112

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

Fees Paid to Independent Auditors

Ernst
& Young, has served as our independent auditor for the fiscal years ended
December 31, 2004 and 2005. Fees billed or expected to be billed by Ernst &
Young for professional services for each of the last two fiscal years were as
follows:

|                    |  |           |         |           |   |         | 
|------------------- |  | --------- | ------- | --------- | - | ------- | 
|Services
  Rendered |  | 2004 Fees |         | 2005 Fees |  
|                    |  |           |         |           |  
|Audit (1)           |  | $         | 495,000 |           | $ | 620,000 | 
|Audit-related (2)   |  |           | 54,000  |           |   | 224,000 | 
|Tax (3)             |  |           | 207,000 |           |   | 112,000 | 
|Total               |  | $         | 756,000 |           | $ | 956,000 | 

|    |                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Audit fees consist of
  services that would normally be provided in connection with statutory and
  regulatory filings or engagements, including services that generally only the
  independent accountant can reasonably provide.                                    
|    |                                                                                                                                                                                                                                                                       
|(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.
|    |                                                                                                                                                                                                                                                                       
|(3) | Tax fees relate to tax
  compliance, planning, advice and preparation of transfer pricing
  documentation.                                                                                                                                                            

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 independent registered public
accounting firm, Ernst & Young. The policy generally requires the Audit
Committees approval of the scope of the engagement of our independent auditor
or on an individual basis. The policy prohibits retention of the independent
auditors to perform the prohibited non-audit functions defined in Section 201
of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers
whether proposed services are compatible with the independence of the public
auditors.

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

Not
applicable.

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

In 2005,
neither we nor our affiliates purchased any of our own shares.

113

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PART III

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

Not
Applicable.

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

See
pages F-1 through F-39, incorporated herein by reference.

114

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|            |           |             |                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | --------- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 19.    | Exhibits.
|            |           |            
|Exhibit No. |           | Description
|            |           |            
|            |           |             |                                                                                                                                                                                                                                                                                                                                                                                  
|            | 1.1       |             | Amended and
  Restated Memorandum of Association of NICE-Systems Ltd. (English translation)
  (filed as Exhibit 3.1 to NICE-Systems Ltd.s Registration Statement on Form
  F-3/A (Registration No. 333-127883) filed with the Commission on October 14,
  2005, and incorporated herein by reference).                                                                          
|            |           |             |                                                                                                                                                                                                                                                                                                                                                                                  
|            | 1.2       |             | Amended and
  Restated Articles of Association of NICE-Systems Ltd. approved by the Annual
  General Meeting of the Companys shareholders held on September 28, 2005
  (filed as Exhibit 3.2 to NICE-Systems Ltd.s Registration Statement on Form
  F-3/A (Registration No. 333-127883) filed with the Commission on October 14,
  2005, 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).                                                                                                                 
|            |           |             |                                                                                                                                                                                                                                                                                                                                                                                  
|            | 4.3       |             | Sales and
  Purchase Agreement dated July 30, 2002 by and among NICE-Systems Ltd., NICE
  CTI Systems UK Ltd., NICE Systems SARL, NICE Systems GmbH, Nice Systems Inc.
  and Thales SA. (filed as Exhibit 4.3 to NICE-Systems Ltd.s Annual Report on
  Form 20-F filed with the Commission on June 26, 2003, and incorporated herein
  by reference).                           
|            |           |             |                                                                                                                                                                                                                                                                                                                                                                                  
|            | 4.4       |             | Registration
  Rights Agreement between NICE-Systems Ltd. and Thales SA. (filed as Exhibit
  4.4 to NICE-Systems Ltd.s Annual Report on Form 20-F filed with the
  Commission on June 26, 2003, and incorporated herein by reference).                                                                                                                                          
|            |           |             |                                                                                                                                                                                                                                                                                                                                                                                  
|            | 4.5       |             | 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).                                                                                         

115

---

---



| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.6  |  | Settlement
  Agreement, dated February 24, 2005, among Thales SA, NICE-Systems Ltd., NICE
  CTI Systems UK Ltd., NICE Systems SARL, NICE Systems GmbH and Nice Systems
  Inc. (filed as Exhibit 4.7 to NICE-Systems Ltd.s Annual Report on Form 20-F
  filed with the Commission on June 29, 2005, and incorporated herein by
  reference).
| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | 4.7  |  | Asset
  Purchase and Sale Agreement, dated as of April 11, 2005, between Dictaphone
  Corporation and NICE Systems Inc. (filed as Exhibit 4.8 to NICE-Systems
  Ltd.s Annual Report on Form 20-F filed with the Commission on June 29, 2005,
  and incorporated herein by reference).                                                      
| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | 4.8  |  | Amendment
  No. 1, dated as of May 31, 2005, to the Asset Purchase and Sale Agreement,
  dated as of April 11, 2005, between Dictaphone Corporation and NICE Systems
  Inc. (filed as Exhibit 4.9 to NICE-Systems Ltd.s Annual Report on Form 20-F
  filed with the Commission on June 29, 2005, and incorporated herein by
  reference).  
| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | 4.9  |  | Share
  Purchase Agreement, dated as of November 17, 2005, between certain
  shareholders of FAST Video Security AG and NICE-Systems Ltd.                                                                                                                                                                                                   
| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | 4.10 |  | Share
  Purchase Agreement, dated as of April 27, 2006, between IEX Corporation and
  NICE-Systems Ltd.                                                                                                                                                                                                                                     
| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | 4.11 |  | 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.                                                                                                                                                                     
| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | 8.1  |  | List of
  significant subsidiaries                                                                                                                                                                                                                                                                                                          
| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | 10.1 |  | Consent of
  Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global.                                                                                                                                                                                                                                                              
| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | 12.1 |  | Certification
  by Haim Shani, the Chief Executive Officer of NICE-Systems Ltd., pursuant to
  Section 302 of the Sarbanes-Oxley Act 2002.                                                                                                                                                                                                  
| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | 12.2 |  | Certification
  by Ran Oz, the Chief Financial Officer of NICE-Systems Ltd., pursuant to
  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                   
| |      |  |                                                                                                                                                                                                                                                                                                                                             
| | 13.1 |  | Certification
  by Haim Shani, 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 Ran Oz, 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.                                                                                                                                                  

116

---

---

# NICE-SYSTEMS LTD. AND
SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2005

# IN U.S. DOLLARS

# INDEX

|                                              | Page       
|--------------------------------------------- | -----------
|
|
|
|
|Report of Registered Public Accounting Firm   | F-2        
|Consolidated Balance Sheets                   | F-3 - F-4  
|Consolidated Statements of Operations         | F-5        
|Statements of Changes in Shareholders' Equity | F-6        
|Consolidated Statements of Cash Flows         | F-7 - F-9  
|Notes to Consolidated Financial Statements    | F-10 - F-43

F - 1

---

---



| | n | Kost Forer Gabbay & Kasierer           | n | Phone: 972-3-6232525
| | - | -------------------------------------- | - | --------------------
| |   | 3 Aminadav St. 
Tel-Aviv 67067, Israel |   | Fax: 972-3-5622555  

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# NICE SYSTEMS LTD.

We
have audited the accompanying consolidated balance sheets of NICE Systems Ltd. (the
Company) and subsidiaries as of December 31, 2004 and 2005, and the related
consolidated statements of income, shareholders equity and cash flows for each of
the three years in the period ended December 31, 2005. 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. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
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, 2004 and 2005, and the consolidated results of their operations
and cash flows for each of the three years in the period ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|February 8, 2006 | A Member of Ernst & Young Global

F - 2

---

---

|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  $ 2,661 and $ |             
|2,214 at December 31, 2004 and 2005, 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 - 3

---

---

|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: 50,000,000 and 75,000,000 shares at December 31, 2004 and |             
|2005, respectively; Issued and outstanding: 18,180,260 and 24,137,643 |             
|shares at December 31, 2004 and 2005, respectively;                   |             
|Additional paid-in capital                                            |             
|Accumulated other comprehensive income                                |             
|Retained earnings (accumulated deficit)                               |             
|                                                                      |             
|                                                                      |             
|Total shareholders' equity                                            |             
|                                                                      |             
|                                                                      |             
|Total liabilities and shareholders' equity                            |             
|                                                                      |             

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

F - 4

---

---

|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                |                        
|Restructuring expenses and settlement of litigation |                        
|                                                    |                        
|                                                    |                        
|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 discontinued operation              |                        
|                                                    |                        
|                                                    |                        
|Net income                                          |                        
|                                                    |                        
|                                                    |                        
|Net earnings per share:                             |                        
|Basic:                                              |                        
|Continuing operations                               |                        
|Discontinued operation                              |                        
|                                                    |                        
|                                                    |                        
|Net earnings                                        |                        
|                                                    |                        
|Diluted:                                            |                        
|Continuing operations                               |                        
|Discontinued operation                              |                        
|                                                    |                        
|                                                    |                        
|Net earnings                                        |                        
|                                                    |                        

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

F - 5

---

---

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

|                                                       | Sharecapital | Additionalpaid-incapital | Deferred stockcompensation | Accumulatedothercomprehensiveincome | Retainedearnings(accumulateddeficit) | Totalcomprehensiveincome | Totalshareholders'equity
|------------------------------------------------------ | ------------ | ------------------------ | -------------------------- | ----------------------------------- | ------------------------------------ | ------------------------ | ------------------------
|
|
|
|
|Balance as of January 1, 2003                          |              |                          | $                          | 4,908                               |                                      | $                        | 213,003                 
|Issuance of shares of ESPP                             |              |                          |                            | 49                                  |                                      |                          | 1,470                   
|Amortization of deferred stock compensation            |              |                          |                            | -                                   |                                      |                          | -                       
|Exercise of share options                              |              |                          |                            | 185                                 |                                      |                          | 10,382                  
|Comprehensive income:                                  |              |                         
|Foreign currency translation adjustments               |              |                          |                            | -                                   |                                      |                          | -                       
|Unrealized gains on derivative instruments, net        |              |                          |                            | -                                   |                                      |                          | -                       
|Net income                                             |              |                          |                            | -                                   |                                      |                          | -                       
|                                                       |              |                          |                            |                                     |                                      |                          |                         
|                                                       |              |                         
|Total comprehensive income                             |              |                          |                            |                                     |                                      |                          |                         
|                                                       |              |                          |                            |                                     |                                      |                          |                         
|Balance as of December 31, 2003                        |              |                          |                            | 5,142                               |                                      |                          | 224,855                 
|Issuance of shares of ESPP                             |              |                          |                            | 31                                  |                                      |                          | 2,234                   
|Exercise of share options                              |              |                          |                            | 291                                 |                                      |                          | 17,311                  
|Comprehensive income:                                  |              |                         
|Foreign currency translation adjustments               |              |                          |                            | -                                   |                                      |                          | -                       
|Unrealized gains on derivative instruments, net        |              |                          |                            | -                                   |                                      |                          | -                       
|Net income                                             |              |                          |                            | -                                   |                                      |                          | -                       
|                                                       |              |                          |                            |                                     |                                      |                          |                         
|                                                       |              |                         
|Total comprehensive income                             |              |                          |                            |                                     |                                      |                          |                         
|                                                       |              |                          |                            |                                     |                                      |                          |                         
|Balance as of December 31, 2004                        |              |                          |                            | 5,464                               |                                      |                          | 244,400                 
|Issuance of shares upon public offering, net           |              |                          |                            | 1,003                               |                                      |                          | 201,377                 
|Issuance of shares of ESPP                             |              |                          |                            | 37                                  |                                      |                          | 4,285                   
|Exercise of share options                              |              |                          |                            | 268                                 |                                      |                          | 21,640                  
|Tax Benefit in respect of exercised options            |              |                          |                            | -                                   |                                      |                          | 1,501                   
|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                               |                                      | $                        | 473,203                 
|                                                       |              |                          |                            |                                     |                                      |                          |                         
|Accumulated unrealized gains on derivative instruments |              |                          |                            |                                     |                                      |                          |                         
|Accumulated foreign currency translation adjustments   |              |                          |                            |                                     |                                      |                          |                         
|                                                       |              |                          |                            |                                     |                                      |                          |                         
|                                                       |              |                         
|Accumulated other comprehensive income as of           |              |                         
|December 31, 2005                                      |              |                          |                            |                                     |                                      |                          |                         
|                                                       |              |                          |                            |                                     |                                      |                          |                         

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

F - 6

---

---

|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                                                           |                        
|Less: net income from discontinued operation                         |                        
|                                                                     |                        
|                                                                     |                        
|Net income from continuing operations                                |                        
|Adjustments required to reconcile net income from continuing         |                        
|operations to net cash provided by operating activities from         |                        
|continuing operations:                                               |                        
|Depreciation and amortization                                        |                        
|Amortization of deferred stock compensation                          |                        
|Accrued severance pay, net                                           |                        
|Amortization of premium (accretion of discount) and accrued          |                        
|interest on held-to-maturity marketable securities                   |                        
|Tax benefit in respect of exercised options                          |                        
|Deferred taxes, net                                                  |                        
|Decrease (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                   |                        
|Increase in long-term liabilities related to legal settlement        |                        
|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                            |                        
|                                                                     |                        

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

F - 7

---

---

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

|                                                                 | Year ended December 31,
|---------------------------------------------------------------- | -----------------------
|
|
|
|
|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                           |                        
|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)                                   |                        
|Decrease in accrued acquisition costs                            |                        
|Payments and proceeds in respect of  TCS acquisition             |                        
|Capitalization of software development costs                     |                        
|Deferred acquisition costs                                       |                        
|                                                                 |                        
|                                                                 |                        
|Net cash used in investing activities from continuing operations |                        
|Net cash provided by (used in) investing activities from         |                        
|discontinued operation                                           |                        
|                                                                 |                        
|                                                                 |                        
|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                                                        |                        
|Short-term bank credit, net                                      |                        
|                                                                 |                        
|                                                                 |                        
|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                                                     |                        
|                                                                 |                        

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,
|------------------------------------------------------------------------- | -----------------------
|
|
|
|
|(a)    Payment for the acquisition of certain assets and liabilities of   |                        
|Dictaphone CRS Division                                                   |                        
|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                                                                  |                        
|Less - accrued acquisition costs                                          |                        
|                                                                          |                        
|                                                                          |                        
|                                                                          |                        
|                                                                          |                        
|(b)    Payment for the acquisition of certain assets and liabilities of   |                        
|Hannamax Hi-Tech Pty. Ltd.                                                |                        
|Estimated fair value of assets acquired and liabilities assumed at        |                        
|the acquisition date:                                                     |                        
|                                                                          |                        
|Working capital deficit (excluding cash and cash equivalents)             |                        
|Property and equipment                                                    |                        
|Other intangible assets                                                   |                        
|Goodwill                                                                  |                        
|Other long-term liabilities                                               |                        
|Less - accrued acquisition costs                                          |                        
|                                                                          |                        
|                                                                          |                        
|                                                                          |                        
|                                                                          |                        
|Non-cash activities:                                                      |                        
|                                                                          |                        
|(i)    Adjustments of goodwill in respect of TCS acquisition:             |                        
|Related party receivables                                                 |                        
|Accrued expenses and other liabilities                                    |                        
|Other long-term liability                                                 |                        
|                                                                          |                        
|                                                                          |                        
|                                                                          |                        
|                                                                          |                        
|                                                                          |                        
|(ii)    Adjustment of goodwill in respect of discontinued operation sale  |                        
|                                                                          |                        
|                                                                          |                        
|(iii)    Deferred tax benefit on offering expenses                        |                        
|                                                                          |                        
|                                                                          |                        
|(iv)    Accrued offering expenses                                         |                        
|                                                                          |                        
|                                                                          |                        
|(v)    Receivables on account of shares in respect of exercise of options |                        
|                                                                          |                        

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

F - 9

---

---

|NICE SYSTEMS LTD. AND SUBSIDIARIES        
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

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

| | 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, EMEA and the Far East.
| | ------------------------------------------------------------------------------------

| | 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 15c.
| | -----------------------------------------

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

F - 10

---

---

|NICE SYSTEMS LTD. AND SUBSIDIARIES        
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

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

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

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

| | The
following table summarizes the estimated 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                    | 
| |                                        | 

| | 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%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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). Hannamax is NICEs distributor in Australia and
New Zealand.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 the Hannamaxs operations have been
included in the consolidated financial statements since September 1, 2005 (the
closing date).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
the acquisition of Hannamax, the Company expects to expand its customer base and presence
in Australia and New Zealand and to expand and strengthen the Companys support
organization in the region.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

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

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

| | Under
the terms of the acquisition agreement (the agreement), contingent cash
payments of up to $ 500 in 2006 and $ 500 in 2007 would be due if certain financial
performance criteria are met as part of a two-year earn-out provision covering 2005
through 2006. 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. For subsequent event see Note 17.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Distribution
network in the amount of $ 930 is amortized using the straight-line method at an annual
rate of 10%.
| | -----------------------------------------------------------------------------------------------------------------

| | 3. | Acquisition
of Thales Contact Solutions (TCS):
| | -- | ------------------------------------------------

| | In
November 2002, the Company consummated an agreement to acquire certain assets and
liabilities of TCS, a developer of customer-facing technology for public safety,
financial trading and customer contact centers, based in the United Kingdom. TCS was a
unit of Thales Group, one of Europes premier electronics companies. In connection
with the acquisition, the Company paid an initial $ 29,900 in cash and issued 2,187,500
ordinary shares to Thales Group at a fair market value of $ 18,100 calculated at the date
of closing.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2002, the Company recorded a current liability of $ 2,800 and a long-term liability of $
13,500 reflecting obligations under a long-term contract the Company assumed in the TCS
acquisition. In 2003, the Company completed negotiations to terminate this contract as of
November 2004 and to amend the terms in the interim. Under the terms of the amended
contract, the cost to the Company was approximately $ 5,200 less than the amount provided
at the acquisition date and consequently, TCS acquisition goodwill was reduced by this
amount.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|NICE SYSTEMS LTD. AND SUBSIDIARIES        
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

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

| | Under
the terms of the agreement, the cash portion of the purchase price was subject to
downward adjustment based on the value of net assets at closing and the full year 2002
sales of TCS. Based on our calculation of the actual value of net assets acquired and
2002 sales of TCS, the Company reduced the cash portion of the purchase price as of
December 31, 2002 by $12,800. Of the $12,800 adjustment referred to above, Thales
paid the Company approximately $ 6,600 in 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Thales
disputed the Companys calculation of the net asset value at closing and the matter
was submitted in September 2003 to binding arbitration by an Independent Accountant, in
accordance with the terms of the acquisition agreement. The Independent Accountant
determined a higher net asset value at closing than our calculation of the actual value
of net assets acquired in the amount of approximately $ 2,200. This additional
amount was recorded as additional goodwill in 2003. The remaining related party
receivable of approximately $ 4,000 was paid in 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the agreement, the cash portion of the purchase price was subject to
adjustment mechanisms and indemnities related to the assets sold to the Company. In
September 2004, the Company notified Thales of claims in respect of such price adjustment
mechanisms, mainly relating to uncollected receivables and inventory. NICE and Thales
signed a settlement agreement in respect of such claims on February 24, 2005,
according to which Thales paid the Company a total indemnity amount of approximately $
2,600.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Unaudited
Pro-forma condensed results of operations:
| | -- | ----------------------------------------------------

| | The
following represents the unaudited pro-forma condensed results of operations for the
years ended December 31, 2004 and 2005, assuming that the acquisitions of CRS and
Hannamax occurred on January 1, 2004 and 2005. The pro-forma information is not
necessarily indicative of the results of operations, which actually would have occurred
if the acquisition had been consummated on that dates, nor does it purport to represent
the results of operations for future periods.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

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

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

| |                                        | Year ended December 31,
| | -------------------------------------- | -----------------------
|
|
|
|
| | Revenues                               |                        
| |                                        |                        
| |                                        |                        
| | Net income (loss) from continuing      |                        
| | operations                             |                        
| |                                        |                        
| |                                        |                        
| | Net income (loss)                      |                        
| |                                        |                        
| |                                        |                        
| | Basic net earnings (loss) per share    |                        
| | from continuing operations             |                        
| |                                        |                        
| |                                        |                        
| | Basic net earnings (loss) per share    |                        
| |                                        |                        
| |                                        |                        
| | Diluted net earnings  (loss) per share |                        
| | from continuing operations             |                        
| |                                        |                        
| |                                        |                        
| | Diluted net earnings (loss) per share  |                        
| |                                        |                        

| | c. | Disposal
by sale of the COMINT/DF operation:
| | -- | --------------------------------------------

| | In
the fourth quarter of 2003, the Company reached a definitive agreement to sell the assets
and liabilities of its COMINT/DF military-related business to ELTA Systems Ltd. for $ 4,000
in cash. On March 31, 2004, the Company completed the sale of the COMINT/DF operation.
The COMINT/DF business was treated as a discontinued operation in the financial
statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys balance sheets at December 31, 2004 and 2005 reflect the assets of the
COMINT/DF operation, as assets of the discontinued operation within current assets. The
balance of $ 644 and $ 646 at December 31, 2004 and 2005, respectively consist of trade
receivables, net of a provision for warranty of $ 8 and $ 6, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Summarized
selected financial information of the discontinued operation is as follows:
| | --------------------------------------------------------------------------------------

| |            | Year ended December 31,
| | ---------- | -----------------------
|
|
|
|
| | Revenues   |                        
| |            |                        
| |            |                        
| | Net income |                        
| |            |                        

| | *) | Includes
gain from the sale in the amount of $ 3,286.
| | -- | -----------------------------------------------------

F - 14

---

---

|NICE SYSTEMS LTD. AND SUBSIDIARIES        
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|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 operations as financial income or expenses, as appropriate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
those subsidiaries whose functional currency has been determined to be their local
currency, assets and liabilities are translated at year-end exchange rates and statement
of operations items are translated at average exchange rates prevailing during the year.
Such translation adjustments are recorded as a separate component of accumulated other
comprehensive income 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 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 - 15

---

---

|NICE SYSTEMS LTD. AND SUBSIDIARIES        
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

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

| | Auction
rate securities are classified as available-for-sale and accordingly, these securities
are stated at fair value. Realized gains and losses on sales of securities, as determined
on a specific identification basis, are included in the consolidated statement of income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, discontinued products and for market prices lower than
cost. Inventory provisions for 2003, 2004 and 2005 were $ 2,368, $ 2,822 and $ 4,646,
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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|NICE SYSTEMS LTD. AND SUBSIDIARIES        
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | i. | Property
and equipment, net:
| | -- | ----------------------------

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

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

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

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

| | 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) | 33                
| | Core technology                                | 32                
| | Trademarks                                     | 34                
| | Distribution network                           | 11                
| | Maintenance contracts                          | 33                

| | k. | Impairment
of long-lived assets:
| | -- | --------------------------------

| | The
Companys long-lived assets and certain identifiable intangibles are reviewed for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of 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, no impairment indicators have been identified.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|NICE SYSTEMS LTD. AND SUBSIDIARIES        
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | 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, rather than amortized as
previous accounting standards required. Goodwill is tested for impairment by comparing
the fair value of the reporting unit with its carrying value. Fair value is determined
using discounted cash flows 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 2003, 2004 and 2005 and did not identify
any impairment losses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. | Revenue
recognition:
| | -- | --------------------

| | The
Company generates revenues from sales of products, which include hardware and software,
software licensing, professional services and maintenance. 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 license agreements are recognized when all criteria
outlined in Statement Of Position (SOP) 97-2, Software Revenue
Recognition (as amended by SOP 98-9) are met. Revenue from products and license
fees is recognized when persuasive evidence of an agreement exists, delivery of the
product has occurred, the fee is fixed or determinable, no further obligations exist and
collectibility is probable. Sales agreements with specific acceptance terms are not
recognized until the customer has confirmed that the product or service has been accepted.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company maintains a provision for product returns in accordance with SFAS No. 48, Revenue
Recognition When Right of Return Exists. The provision is estimated based on the
Companys past experience and is deducted from revenues. Trade receivables as of
December 31, 2004 and 2005, are presented net of provision for product returns in the
amounts of $ 1,617 and $ 1,155 respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 18

---

---

|NICE SYSTEMS LTD. AND SUBSIDIARIES        
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | 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 or working
model and the point at which the product is ready for general release have been
capitalized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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 their estimated realizable value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. Such deposits in the United
States may be in excess of insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions that hold the Companys
investments are financially sound and, accordingly, low credit risk exists with respect
to these investments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

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

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
Company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. Management believes that the portfolio is
well diversified, and accordingly, minimal credit risk exists with respect to those
marketable securities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 and the increase/decrease in fair value of non-dollar
liabilities/assets. The derivative instruments effectively hedge the Companys
non-dollar currency exposure (see Note 10).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Severance
pay:
| | -- | --------------

| | The
Companys liability for severance pay for its Israeli employees is calculated
pursuant to Israeli severance pay law based on the most recent 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 Israeli
severance pay law or labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies and includes immaterial profits.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
pay expense for 2003, 2004 and 2005 was $ 2,745, $ 2,956 and $ 3,622 respectively.
| | --------------------------------------------------------------------------------------------

| | 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 excluded
from the calculations of diluted net earnings per share was 1,935,692, 1,094,775 and
968,611 for the years ended December 31, 2003, 2004 and 2005, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|NICE SYSTEMS LTD. AND SUBSIDIARIES        
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | t. | Stock-based
compensation:
| | -- | -------------------------

| | The
Company has elected to follow APB No. 25, Accounting for Stock Issued to Employees and
FIN No. 44, Accounting for Certain Transactions Involving Stock Compensation in
accounting for its employee stock option plan. Under APB No. 25, when the exercise price
of the Companys options is less than the market value of the underlying shares on
the date of grant, compensation expense is recognized and amortized ratably over the
vesting period of the options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted the disclosure provisions of SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, which amended certain
provisions of SFAS No. 123. The Company continues to apply the provisions of APB No. 25,
in accounting for stock-based compensation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro
forma information regarding net income (loss) and net earnings (loss) per share is
required by SFAS No. 123, Accounting for Stock-Based Compensation, and has
been determined as if the Company had accounted for its employee options under the fair
value method prescribed by that statement. The fair value for these options was estimated
at the date of grant using the Black-Scholes option pricing model with the following
assumptions:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                              | Year ended December 31,
| | ---------------------------- | -----------------------
|
|
|
|
| | Risk free interest rate      |                        
| | Dividend yield               |                        
| | Volatility factor            |                        
| | Expected life of the options |                        

| | Black-Scholes
pricing-model also was used to estimate the fair value of the ESPP compensation;
assumptions are not provided due to the immateriality of the ESPP portion.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

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

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Pro
forma information under SFAS No. 123:
| | -----------------------------------------

| |                                                 | Year ended December 31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | Net income as reported                          |                        
| | Add: Stock-based compensation expense included  |                        
| | in the determination of net income as           |                        
| | reported                                        |                        
| | Deduct: Stock-based compensation expense        |                        
| | determined under fair value method for all      |                        
| | awards                                          |                        
| |                                                 |                        
| |                                                 |                        
| | Pro forma net  income (loss)                    |                        
| |                                                 |                        
| |                                                 |                        
| | Basic net earnings per share as                 |                        
| | reported                                        |                        
| |                                                 |                        
| |                                                 |                        
| | Diluted net earnings per share as reported      |                        
| |                                                 |                        
| |                                                 |                        
| | Pro forma basic net  earnings  (loss) per share |                        
| |                                                 |                        
| | Pro forma diluted net earnings (loss) 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).
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
expenses are charged to expense as incurred. Advertising expenses for the years 2003,
2004 and 2005 were $ 2,077, $ 2,621 and $ 3,222, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---



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

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | w. | Derivatives
and hedging activities:
| | -- | -----------------------------------

| | SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities requires
the Company to recognize all of its derivative instruments as either assets or
liabilities on the balance sheet at fair value. The accounting for changes in the fair
value (i.e., gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and further, on the type of
hedging relationship. For those derivative instruments that are designated and qualify as
hedging instruments, a company must designate the hedging instrument, based upon the
exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
derivative instruments that are designated and qualify as a fair value hedge (i.e.,
hedging the exposure to changes in the fair value of an asset or a liability or an
identified portion thereof that is attributable to a particular risk), the gain or loss
on the derivative instrument as well as the offsetting loss or gain on the hedged item
attributable to the hedged risk are recognized in the line item associated with the
hedged item in earnings during the period of the change in fair values. For derivative
instruments that are designated and qualify as a cash flow hedge (i.e., hedging the
exposure to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative instrument
is reported as a component of 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | x. | Impact
of recently issued accounting standards:
| | -- | -----------------------------------------------

| | In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (revised 2004), Share-Based Payment. SFAS No. 123(R) will provide
investors and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. SFAS No. 123(R)
covers a wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights and employee
share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB No. 25, Accounting for Stock
Issued to Employees. SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment transactions
with employees. However, that Statement permitted entities the option of continuing to
apply the guidance in APB No. 25, as long as the footnotes to financial statements
disclosed what net income would have been had the preferable fair-value-based method been
used. The Company will be required to apply SFAS No. 123(R) as of the first annual
reporting period that begins after June 15, 2005. As permitted by SFAS No. 123, the
Company currently accounts for share-based payments to employees using APB No. 25s
intrinsic value method.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---



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

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Accordingly,
the adoption of SFAS No. 123(R)s fair value method will have a significant impact
on the Companys result of operations, although it will have no impact on its
overall financial position. The Company plans to adopt SFAS No. 123(R) using the modified
prospective method. The modified prospective method requires
compensation cost to be recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based payments granted after the effective
date and (b) based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123(R) that remain unvested on the
effective date. The impact of adoption of Statement 123(R) on future periods cannot be
predicted at this time because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the
impact of that standard would have approximated the impact of SFAS No. 123 as described
in the disclosure of pro forma net income and earnings per share in Note 2(t) to the
financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29, Accounting for
Nonmonetary Transactions (APB No. 29), is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of the assets
exchanged. APB No. 29 included certain exceptions to that principle. SFAS No. 153 amends
APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary assets that
do not have commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for nonmonetary assets exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company does not expect that the adoption of
SFAS No. 153 will have any material effect on its financial position or results of
operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections,
a replacement of APB No. 20, Accounting Changes and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. SFAS No. 154 provides guidance
on the accounting for and reporting of accounting changes and error corrections. APB No.
20 previously required that most voluntary changes in accounting principles be recognized
by including in net income for the period of the change, the cumulative effect of
changing to the new accounting principle. SFAS No. 154 requires retroactive application
to prior periods financial statements of a voluntary change in accounting
principles unless it is impracticable. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. As of
December 31, 2005, adoption of SFAS No. 154 will not have a material impact on the Companys
financial position or results of operation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---



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

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | In
November 2005, the FASB issued FSP FAS 115-1. The FSP addresses the determination as to
when an investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. The FSP also includes accounting
considerations subsequent to the recognition of other than-temporary impairment and
requires certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance in this FSP amends SFAS No. 115,
Accounting for Certain Investments in Debt and Equity. The FSP replaces the impairment
evaluation guidance of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, with references to the
existing other-than-temporary impairment guidance. The FSP clarifies that an investor
should recognize an impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell an impaired security has not been made.
The guidance in this FSP is to be applied to reporting periods beginning after December
15, 2005. As of December 31, 2005, adoption of FSP FAS 115-1 will not have a material
impact on the Companys financial position or results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|NOTE 3: |  | MARKETABLE
SECURITIES
|------- | - | ---------------------

| | a. | The
following table summarizes amortized costs, gross unrealized gains and           losses
and estimated fair values of held-to-maturity marketable securities as of
          December 31, 2004 and 2005:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                            | Amortized cost | Gross unrealized
gains | Gross unrealized
losses | Estimated fair value
| | -------------------------- | -------------- | ---------------------- | ----------------------- | --------------------
|
|
|
|
| | U.S. corporate  debentures |                |                        | $                       | 37,968              
| | U.S government             |                |                       
| | debentures                 |                |                        |                         | 74,805              
| | Structured
  notes         |                |                        |                         | 12,680              
| |                            |                |                        |                         |                     
| |                            |                |                       
| |                            |                |                        | $                       | 125,453             
| |                            |                |                        |                         |                     

F - 25

---

---



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

|NOTE 3: |  | MARKETABLE
SECURITIES (Cont.)
|------- | - | -----------------------------

| | 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, 2005:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                | December 31, 2005
| | -------------- | -----------------
|
|
|
|
| | U.S. corporate |                  
| | debentures     |                  
| |                |                  
| | U.S government |                  
| | debentures     |                  
| |                |                  
| |                |                  
| |                |                  
| |                |                  

| | The
unrealized losses in the Companys investments in held-to-maturity marketable
securities were caused by interest rate increases. The contractual cash flows of these
investments are either guaranteed by the U.S. government or an agency of the U.S.
government or were issued by highly rated corporations. Accordingly, it is expected that
the securities would not be settled at a price less than the amortized cost of the Companys
investment. Based on the immaterial severity of the impairments and the ability and
intent of the Company to hold these investments to maturity, the bonds were not
considered to be other than temporarily impaired at December 31, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004 and 2005, all the Companys U.S. corporate debentures, U.S.
government debentures and structured notes were classified as held-to-maturity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2004 the Company sold debt securities, which were classified as held-to-maturity, due to
a rating decrease, in consideration of $ 911. As a result of the sale, the Company
recorded a loss of $ 14. In 2005, the Company did not sell any securities prior to their
maturity and accordingly, did not realize any gains or losses on held-to-maturity
securities in that year.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2004 and 2005, held-to-maturity marketable securities in the amount of $ 40,434 and $ 9,630
respectively, were called by the issuers prior to maturity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
scheduled maturities of held-to-maturity marketable securities at December 31, 2005 are
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 |                |                     
| |                                        |                |                     
| |                                        |                |                     
| |                                        |                |                     
| |                                        |                |                     

F - 26

---

---



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

|NOTE 3: |  | MARKETABLE
SECURITIES (Cont.)
|------- | - | -----------------------------

| | b. | Auction
rate securities in the amount of $ 13,700 as of December 31, 2004, were
          classified as available-for-sale marketable securities and were presented as
          short-term marketable securities. As of December 31, 2005, no auction rate
          securities were held by the Company.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 4: |  | SHORT-TERM
OTHER RECEIVABLES AND PREPAID EXPENSES
|------- | - | -------------------------------------------------

| |                                  | December 31,
| | -------------------------------- | ------------
|
|
|
|
| | Government authorities           |             
| | Interest receivable              |             
| | Prepaid expenses                 |             
| | Assets of discontinued operation |             
| | Other                            |             
| |                                  |             
| |                                  |             
| |                                  |             
| |                                  |             

|NOTE 5: |  | INVENTORIES
|------- | - | -----------

| |                  |  | 
| | ---------------- |  | 
|
|
|
|
| | Raw materials    |  | 
| | Work-in-progress |  | 
| | Finished goods   |  | 
| |                  |  | 
| |                  |  | 
| |                  |  | 
| |                  |  | 

|NOTE 6: |  | PROPERTY
AND EQUIPMENT, NET
|------- | - | ---------------------------

| |                                    |  | 
| | ---------------------------------- |  | 
|
|
|
|
| | Cost:                              |  | 
| | Computers and peripheral equipment |  | 
| | Office furniture and equipment     |  | 
| | Leasehold improvements             |  | 
| | Motor Vehicles                     |  | 
| |                                    |  | 
| |                                    |  | 
| |                                    |  | 
| |                                    |  | 
| | Accumulated depreciation:          |  | 
| | Computers and peripheral equipment |  | 
| | Office furniture and equipment     |  | 
| | Leasehold improvements             |  | 
| | Motor Vehicles                     |  | 
| |                                    |  | 
| |                                    |  | 
| |                                    |  | 
| |                                    |  | 
| |                                    |  | 
| | Depreciated cost                   |  | 
| |                                    |  | 

| | Depreciation
expense totaled $ 10,547, $ 8,603 and $ 7,941 for the years ended December 31, 2003,
2004 and 2005, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---



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

|NOTE 7: |  | OTHER
INTANGIBLE ASSETS, NET
|------- | - | ----------------------------

| | a. | Other
intangible assets:
| | -- | ------------------------

| |                                        | December 31,
| | -------------------------------------- | ------------
|
|
|
|
| | Original amounts:                      |             
| | Capitalized software development costs |             
| | Core technology                        |             
| | Trademarks                             |             
| | Distribution Network                   |             
| | Maintenance contracts                  |             
| |                                        |             
| |                                        |             
| |                                        |             
| |                                        |             
| | Accumulated amortization:              |             
| | Capitalized software development costs |             
| | Core technology                        |             
| | Trademarks                             |             
| | Distribution Network                   |             
| | Maintenance contracts                  |             
| |                                        |             
| |                                        |             
| |                                        |             
| |                                        |             
| |                                        |             
| | Other intangible assets, net           |             
| |                                        |             

| | b. | Amortization
expense amounted to $ 7,070, $ 5,190 and $ 5,211 for the           years ended
December 31, 2003, 2004 and 2005, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Estimated
amortization expense for the years ended (excluding amortization of           capitalized
software development costs):
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| |            | December 31,
| | ---------- | ------------
|
|
|
|
| | 2006       |             
| | 2007       |             
| | 2008       |             
| | 2009       |             
| | 2010       |             
| | Thereafter |             
| |            |             
| |            |             
| |            |             
| |            |             

F - 28

---

---



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

|NOTE 8: |  | GOODWILL
|------- | - | --------

| | The
changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2005
are as follows:
| | -------------------------------------------------------------------------------------------------------------

| |                                                              | 
| | ------------------------------------------------------------ | 
|
|
|
|
| | Balance as of January 1, 2004                                | 
| | Applied against sale of discontinued operation               | 
| | Foreign currency translation adjustments                     | 
| |                                                              | 
| |                                                              | 
| | Balance as of December 31, 2004                              | 
| | Adjustment to goodwill in respect of settlement              | 
| | Additions in respect of the acquisitions of CRS and Hannamax | 
| | Foreign currency translation adjustments                     | 
| |                                                              | 
| |                                                              | 
| | Balance as of December 31, 2005                              | 
| |                                                              | 

|NOTE 9: |  | ACCRUED
EXPENSES AND OTHER LIABILITIES
|------- | - | --------------------------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Employees and payroll accruals |             
| | Accrued expenses               |             
| | Restructuring accrual          |             
| | Deferred revenues              |             
| | Other                          |             
| |                                |             
| |                                |             
| |                                |             
| |                                |             

|NOTE 10: |  | DERIVATIVE
INSTRUMENTS
|-------- | - | ----------------------

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

| | The
Company entered into derivative instrument 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company entered into derivative instruments to hedge certain trade
receivables, trade payable payments, expected payments under fixed price contracts
denominated in foreign currency, liabilities to employees and other long-term liability.
The purpose of the Companys foreign currency hedging activities is to protect the
Company from changes in the foreign currency exchange rate to the dollar.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2005, the Company expects to reclassify $ 48 of net gains on derivative
instruments from accumulated other comprehensive income to earnings during the next
twelve months.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---



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

|NOTE 11: |  | 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:
| | -----------------------------------------------------------------------------------------------------------------------

| |      | 
| | ---- | 
|
|
|
|
| | 2006 | 
| | 2007 | 
| | 2008 | 
| | 2009 | 
| |      | 
| |      | 
| |      | 
| |      | 

| | Rent
expenses for the years ended December 31, 2003, 2004 and 2005 were approximately $ 6,554,
$ 6,107 and $ 6,317, 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 $ 749 as of December 31, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------

| | Lease
expenses of vehicles for the years ended December 31, 2003, 2004 and 2005 were $ 2,124, $
2,396 and $ 2,552, 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 excess inventory. Non
cancelable obligations as of December 31, 2005, were approximately as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |      | 
| | ---- | 
|
|
|
|
| | 2006 | 
| | 2007 | 
| | 2008 | 
| | 2009 | 
| | 2010 | 
| |      | 
| |      | 
| |      | 
| |      | 

F - 30

---

---



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

|NOTE 11: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | 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
          claimed 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 $ 600,000 in addition to the amount of $ 100,000 already paid to
CipherActive           by the Company in respect of such license fees. In the Companys
statement           of defense it claims that the software developed by CipherActive
under the           agreement has not been successful in the market, is no longer
embedded in the           Companys product and, therefore, CipherActive is not
entitled to any           additional license fees. The lawsuit is in its initial stages.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
July 20, 2004, STS Software System Ltd. (STS), a wholly owned
          subsidiary of the Company, brought a lawsuit against Witness Systems, Inc.
          asserting that Witness Systems is infringing three U.S. patents of STS relating
          to Voice over Internet Protocol (VoIP). STS claims that Witness
          Systems infringes the VoIP patents by marketing and selling products that
          incorporate methods of detecting, monitoring and recording information           all
fully protected by the patents. STS is seeking an 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. The case, which is
          pending in the U.S. District Court for the Northern District of Georgia, is in
          discovery and claims construction stage and no trial date has been set.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 unspecified damages and injunctive relief. On
February 24, 2005, Witness systems filed a similar action in the Northern District of
Georgia against the Company alleging infringement of the same two patents. The two
actions were consolidated in April 2005. The Company has denied infringing these patents
and is vigorously defending against Witnesss claims. The case is currently in
discovery and no trial date has been set.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, Inc. is
requesting unspecified damages and an injunction to prevent any sale of allegedly
infringing products. The Company has denied all material allegations and is asserting a
number of defenses. This lawsuit is in its early stages. The Company believes that the
claims are without merit and intends to vigorously defend against them.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---



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

|NOTE 11: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | On
May 10, 2006, NICE Systems, Ltd. and its wholly owned subsidiary, NICE Systems, Inc.
filed a 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 claims that Witness Systems
infringes 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 Company is seeking an 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 is seeking damages for Witness Systemspast
willful infringement of these patents.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
Company is currently in dispute with Origin Data Realisation Limited
               (Origin) relating to the terms of a license of software supplied by Origin
and                incorporated within the Companys Wordnet Series 3 voice recorder
and                certain other matters. Origin and the Company agreed to submit the
disputes to                mediation and, accordingly, attended a mediation session on
July 25, 2005. The                mediation did not result in a resolution of the
disputes but the parties have                continued to negotiate with the aim of
reaching a settlement. To date, no formal                legal proceedings have been
instituted by either side.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | On July 28, 2004, Dictaphone Corp.
filed an action against Mercom Systems, Inc. in the United States District Court for the
Southern District of New York asserting that Mercom Systems is infringing two U.S.
patents, which the Company subsequently acquired from Dictaphone. Pursuant to the terms of
the Companys agreement with Dictaphone, the Company succeeded to the right to
enforce these patents and to control this litigation. In response, Mercom Systems is
asserting that the patents are invalid and not infringed, including alleging that the
Companys previous defense of an action by Dictaphone against the Company in which
the Company challenged the validity of one of the patents at issue in this action,
estopped the Company from making the claim of infringement. The Company and Mercom Systems
have reached an agreement in principle to settle the action. It is expected that the
documentation for this agreement will be shortly concluded.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | 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 the Company subsequently acquired from
Dictaphone. Similar to the Mercom Systems lawsuit, this lawsuit has also been settled in
principle. The documentation for this settlement is expected to be completed and signed
shortly.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---



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

|NOTE 11: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | 6. | In
April 2006, the Company received a letter from Calyon Corporate and
               Investment Bank (Calyon), demanding that the Company pay an
amount                of $ 648 to Calyon. This amount was deducted by the Company in
January 2004 from                an amount transferred by Calyon to the Companys
account at the instruction                of Thales, in connection with the acquisition
of Thales Contact Solutions                (TCS). Calyon now claims it was
not done rightfully. The Company                notified TCS in 2004 that it had setoff
such amount with respect to an overdue                payment by TCS. The Company had
previously notified Calyon that it had sent TCS                a setoff notice to that
effect, and therefore, believes that Calyons claim                is not justified.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 12: |  | CREDIT
LINES
|-------- | - | ------------

| | As
of December 31, 2005, the Company had authorized credit lines from banks in the amount of
approximately $ 353,000. When utilized, the credit lines will be denominated in
dollars and will bear interest at the rate of up to LIBOR + 0.7 %. An amount of
approximately $ 328,000 out of the total credit lines is secured by the Companys
cash and cash equivalents and marketable securities. As of December 31, 2005, $ 6,296 of
the $ 353,000 referred to above was used for bank guarantees.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | One
of the Companys credit lines contains a negative pledge covenant and one contains
covenants requiring the Company to maintain a minimum amount of cash and shareholders equity.
As of December 31, 2005, the Company is in compliance with the covenants.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 13: |  | TAXES
ON INCOME
|-------- | - | ---------------

| | a. | Measurement
of taxable income:
| | -- | ------------------------------

| | Results
for tax purposes are measured in real terms, in accordance with the changes in the
Israeli Consumer Price Index (CPI) or changes in the exchange rate of the NIS
against the dollar for a foreign investors company. NICE has elected to
measure its results for tax purposes on the basis of the changes in the exchange rate of
NIS against the dollar.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Tax
benefits under the Israel Law for the Encouragement of Capital Investments,
          1959 (the Law):
| | -- | -----------------------------------------------------------------------------------------------------------

| | Certain
production facilities of NICE have been granted the status of an Approved Enterprise under
the Law, in four separate investment programs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the provisions of the Law, NICE elected the alternative benefits and
waived 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---



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

|NOTE 13: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | 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
period of tax benefits detailed above is subject to a limit of the earlier of 12 years
from the commencement of production or 14 years from receiving the approval.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon NICE fulfilling the conditions
stipulated by the above Law, regulations published thereunder and the certificates of
approval for the specific investments in an Approved Enterprise. In the event
of failure to comply with these conditions, the benefits may be canceled and NICE may be
required to refund the amount of the benefits, in whole or in part, including interest.
As of December 31, 2005, management believes that NICE is in compliance with all the
conditions required by the Law.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax-exempt income attributable to an Approved Enterprise can be distributed
to shareholders without subjecting NICE to taxes only upon the complete liquidation of
NICE.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2005, approximately $ 26,272 was derived from tax-exempt profits
earned by NICEs Approved Enterprises. NICE has decided not to declare
dividends out of such tax-exempt income. Accordingly, no deferred tax liabilities have
been provided on income attributable to NICEs Approved Enterprises. If
this net retained tax exempt income is distributed in a manner other than in the complete
liquidation of NICE, it would be taxed at the corporate tax rate applicable to such
profits as if NICE had not elected the alternative tax benefits (currently 20% of the
gross dividend) and an income tax liability would be incurred of approximately $ 6,568
as of December 31, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
of NICE from sources other than the Approved Enterprise during the period of
benefits will be taxable at regular corporate tax rates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | A
recent amendment to the Law, effective April 1, 2005 (the Amendment) changed
certain provisions of the Law. The Amendment allowed tax benefits to be awarded pursuant
to the Law so that companies no longer require Investment Center pre-approval in order to
qualify for tax benefits. The Companys existing Approved Enterprises will generally
not be covered by the Amendment. As a result of the Amendment, where NICE benefits from
tax-exempt income pursuant to the new regime, any such tax-exempt income generated will
be subject to taxes on its distribution or upon liquidation of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---



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

|NOTE 13: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | d. | Corporate
tax rates in Israel:
| | -- | ------------------------------

| | Taxable
income of Israeli companies is subject to tax at the rate of 34% in 2005, 31% in 2006,
29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Net
operating loss carryforward:
| | -- | --------------------------------

| | As
of December 31, 2005, the Company had carry forward tax losses totaling approximately $ 19,878,
most of which can be carried forward and offset against taxable income with expiration
dates from 2006 to 2025. 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 Sate provisions. The annual limitation may
result in the expiration of net operating losses increasing taxes before utilization.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | 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 carry forward             |             
| | Other                                          |             
| |                                                |             
| |                                                |             
| | Deferred tax assets before valuation allowance |             
| | Valuation allowance                            |             
| |                                                |             
| |                                                |             
| | Deferred tax assets                            |             
| |                                                |             
| |                                                |             
| | Deferred tax liabilities                       |             
| |                                                |             
| |                                                |             
| | Deferred tax assets, 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---



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

|NOTE 13: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | g. | 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 enterprise benefits                                                          |                        
| | Changes in valuation allowance                                                        |                        
| | Other                                                                                 |                        
| |                                                                                       |                        
| |                                                                                       |                        
| | Effective tax rate                                                                    |                        
| |                                                                                       |                        
| |                                                                                       |                        
| | Net earnings per ordinary share - amounts of                                          |                        
| | the benefit resulting from the "Approved                                              |                        
| | Enterprise" status                                                                    |                        
| | Basic                                                                                 |                        
| |                                                                                       |                        
| |                                                                                       |                        
| | Diluted                                                                               |                        
| |                                                                                       |                        

| | h. | Income
before taxes on income is comprised as follows:
| | -- | ------------------------------------------------------

| |          |  |  |  
| | -------- |  |  | -
|
|
|
|
| | Domestic |  |  | $
| | Foreign  |  |  |  
| |          |  |  |  
| |          |  | 
| |          |  |  | $
| |          |  |  |  

| | i. | Taxes
on income are comprised as follows:
| | -- | -----------------------------------------

| |          |  |  |  
| | -------- |  |  | -
|
|
|
|
| | Current  |  |  | $
| | Deferred |  |  |  
| |          |  |  |  
| |          |  | 
| |          |  |  | $
| |          |  |  |  
| |          |  | 
| | Domestic |  |  | $
| | Foreign  |  |  |  
| |          |  |  |  
| |          |  | 
| |          |  |  | $
| |          |  |  |  

F - 36

---

---



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

|NOTE 14: |  | 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
December 2005 the Company effected a secondary public offering of its ADSs on
NASDAQ. The Company issued 4,600,000 shares at a price of $ 46.25 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. 8,345,566 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
1996, the Company adopted the 1997 Executive Share Option Plan (the 1997 Option Plan).
Under the terms of the 1997 Option Plan, stock options will be exercisable during a
60-day period ending four years after grant. The plan met the definition of Time
Accelerated Restricted Stock Award Options Plan (TARSAP). The TARSAP includes
an acceleration feature based on the following: if the year-end earnings per share of the
Company shall reach certain defined targets, 40% of such stock options shall become
exercisable; if earnings per share shall reach certain higher defined targets, an
additional 30% of such stock options shall become exercisable; and if earnings per share
shall reach certain higher defined targets, an additional 30% of such stock options shall
become exercisable, provided that with respect to all of the above-referenced periods,
the operating profit of the Company shall not be less than 10% of revenues and earnings
per share shall exclude any non-recurring expenses related to mergers and acquisitions.
Notwithstanding the foregoing, none of the stock options shall be exercisable before the
expiration of two years from the date of issuance. 950,000 options of the 1997 Option
Plan were granted. As of December 31, 2005, none of the targets specified under the
TARSAP were met and accordingly there was no acceleration of options.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---



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

|NOTE 14: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | 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. 2,959,750 options of the 2001
Option Plan were granted. Under the terms of the 2001 Option Plan, a one third of the
stock options granted became exercisable ten months after the grant date and the
remaining two thirds will become exercisable on the first and second anniversaries of the
first date of exercise so long as the grantee is, subject to certain exceptions, employed
by the Company at the date the stock option becomes exercisable. The third portion of the
options may be exercised at the end of the second year following the first date of
exercise, if the Company meets a pre-tax profit target of 20% of revenues. 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. 2,707,000 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the Companys stock options activity and related information for the
years ended December 31, 2003, 2004 and 2005, is as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| |                           | 2003 | 2004 | 2005
| | ------------------------- | ---- | ---- | ----
|
|
|
|
| | Outstanding at the        |      |      |     
| | beginning of the year     |      |      |     
| | Granted                   |      |      |     
| | Exercised                 |      |      |     
| | Forfeited                 |      |      |     
| |                           |      |      |     
| | Outstanding at the end of |      |     
| | the year                  |      |      |     
| |                           |      |      |     
| |                           |      |     
| | Exercisable at the end of |      |     
| | the year                  |      |      |     
| |                           |      |      |     

F - 38

---

---



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

|NOTE 14: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | The
options outstanding as of December 31, 2005, have been separated into exercise price
categories as follows:
| | ---------------------------------------------------------------------------------------------------------------

| | Ranges of
exercise price | Options
outstanding
as of
December 31,
2005 | Weighted
average
remaining
contractual
life | Weighted
average
exercise
price | Options
exercisable
as of
December 31,
2005 | Weighted
average
exercise
price of
options
exercisable
| | ------------------------ | ------------------------------------------- | ------------------------------------------- | ------------------------------- | ------------------------------------------- | ------------------------------------------------------
|
|
|
|
| | 7.83-11.14               |                                             |                                             | 181,925                         |                                             |                                                       
| | 12.00-16.81              |                                             |                                             | 657,225                         |                                             |                                                       
| | 19.33-28.07              |                                             |                                             | 1,219,277                       |                                             |                                                       
| | 30.33-45.5               |                                             |                                             | 1,324,650                       |                                             |                                                       
| | 48.13-64.88              |                                             |                                             | 341,100                         |                                             |                                                       
| | 70.88-76.25              |                                             |                                             | 344,200                         |                                             |                                                       
| |                          |                                             |                                             |                                 |                                             |                                                       
| |                          |                                            
| |                          |                                             |                                             | 4,068,377                       |                                             |                                                       
| |                          |                                             |                                             |                                 |                                             |                                                       

| | Weighted
average fair values and weighted average exercise prices of options whose exercise price
is equal to the market price of the shares at date of grant are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Weighted average fair value of
options granted at an exercise price | Weighted average exercise price of
options granted at an exercise price
| |  | ------------------------------------------------------------------- | -----------------------------------------------------------------------
|
|
|
|
| |  |                                                                     |                                                                        
| |  |                                                                     |                                                                        

| | 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. The
price of Ordinary shares purchased under the Purchase Plan will be 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2003, 2004 and 2005, employees purchased 221,184, 139,913 and 167,045 shares at average
prices of $ 6.86, $ 16.20 and $ 25.87 per share, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Dividends:
| | -- | ----------

| | Dividends,
if any, will be paid in NIS. Dividends paid to shareholders outside Israel may be
converted to dollars on the basis of the exchange rate prevailing at the date of the
conversion. The Company does not intend to pay cash dividends in the foreseeable future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

---

---



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

|NOTE 14: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | e. | Increase
in authorized share capital:
| | -- | -------------------------------------

| | On
September 28, 2005 the shareholders of the Company approved an Amendment to the Companys
Memorandum and Articles of Association in order to increase the authorized share capital
from 50,000,000 to 75,000,000 Ordinary Shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 15: |  | MAJOR
CUSTOMER AND GEOGRAPHIC INFORMATION
|-------- | - | -----------------------------------------

| | a. | Summary
information about geographic areas:
| | -- | -------------------------------------------

| | The
Company manages its business on a basis of one reportable segment. See Note 1a for a
brief description of the Companys business. The following data is presented in
accordance with SFAS No. 131, Disclosure About Segments of an Enterprise and
Related Information. Total revenues are attributed to geographic areas based on the
location of end customers.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table presents total revenues and long-lived assets for the years ended
December 31, 2003, 2004 and 2005 and as of December 31, 2003, 2004 and 2005 respectively:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |          | 2003 | 2004 | 2005
| | -------- | ---- | ---- | ----
|
|
|
|
| | Americas |      |      | $   
| | EMEA *)  |      |      |     
| | Far East |      |      |     
| | Israel   |      |      |     
| |          |      |      |     
| |          |      |     
| |          |      |      | $   
| |          |      |      |     

| | *) | Includes
Europe, the Middle East (excluding Israel) and Africa.
| | -- | ---------------------------------------------------------------

| | b. | Market
sectors:
| | -- | ---------------

| | Total
revenues from external customers divided on the basis of the Companys market
sectors are as follows:
| | -----------------------------------------------------------------------------------------------------------

| |                                   | Year ended December 31,
| | --------------------------------- | -----------------------
|
|
|
|
| | Enterprise Interaction Solutions  |                        
| | Public Safety and Security sector |                        
| |                                   |                        
| |                                   |                        
| |                                   |                        
| |                                   |                        

| | c. | Major
customers' data as a percentage of total revenues:
| | -- | --------------------------------------------------------

| |            |  |  | 
| | ---------- |  |  | 
|
|
|
|
| | Customer A |  |  | 
| |            |  |  | 

F - 40

---

---



|NICE SYSTEMS LTD. AND SUBSIDIARIES        
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 16: |  | SELECTED
STATEMENTS OF OPERATIONS DATA
|-------- | - | --------------------------------------

| | a. | Research
and development, net:
| | -- | ------------------------------

| |                                               | Year ended December 31,
| | --------------------------------------------- | -----------------------
|
|
|
|
| | Total costs                                   |                        
| | Less - grants and participations              |                        
| | Less - capitalization of software development |                        
| | costs                                         |                        
| |                                               |                        
| |                                               |                        
| |                                               |                        
| |                                               |                        

| | b. | Financial
income, net:
| | -- | ----------------------

| |                                           |  |  |  
| | ----------------------------------------- |  |  | -
|
|
|
|
| | Financial income:                         |  |  |  
| | Interest and amortization/accretion of    |  | 
| | premium/discount of marketable securities |  |  | $
| | Interest                                  |  |  |  
| | Foreign currency translation              |  |  |  
| |                                           |  |  |  
| |                                           |  | 
| |                                           |  |  |  
| |                                           |  |  |  
| | Financial expenses:                       |  | 
| | Interest                                  |  |  |  
| | Foreign currency translation              |  |  |  
| | Other                                     |  |  |  
| |                                           |  |  |  
| |                                           |  | 
| |                                           |  |  |  
| |                                           |  |  |  
| |                                           |  | 
| |                                           |  |  | $
| |                                           |  |  |  

| | c. | Restructuring
expenses and settlement of litigation:
| | -- | ----------------------------------------------------

| |                                 |  |  |  
| | ------------------------------- |  |  | -
|
|
|
|
| | Restructuring expenses (income) |  |  | $
| | Settlement of litigation (*)    |  |  |  
| |                                 |  |  |  
| |                                 |  | 
| |                                 |  |  | $
| |                                 |  |  |  

| | (*) | In
the fourth quarter of 2003, the Company reached a settlement agreement with           one
of its competitors to settle a patent infringement claim filed by the
          competitor in June 2000. Under the settlement agreement, the Company paid the
          competitor $ 10,000 (of which approximately $ 4,800 was covered by insurance).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

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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: |  | SELECTED
STATEMENTS OF OPERATIONS DATA (Cont.)
|-------- | - | ----------------------------------------------

| | d. | 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,
| | ---------------------------------------------------------- | -----------------------
|
|
|
|
| | Numerator for basic and diluted net
  earnings per share - |                        
| | Net income from continuing operations                      |                        
| | Net income from discontinued operation                     |                        
| |                                                            |                        
| | 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                    |  |  | 
| | Add - ESPP                                      |  |  | 
| |                                                 |  |  | 
| |                                                 |  | 
| | Denominator for diluted net earnings per        |  | 
| | share - adjusted weighted average               |  | 
| | shares                                          |  |  | 
| |                                                 |  |  | 

|NOTE 17: |  | SUBSEQUENT
EVENTS
|-------- | - | -----------------

| | a. | On
November 17, 2005, the Company signed a definitive agreement to acquire all           of
the outstanding shares of FAST Video Security AG, a Switzerland-based           developer
of innovative video systems for security and surveillance purposes.           Under the
agreement, the Company acquired FASTVideo Security AG for $ 21,000 in           cash,
with potential earn out based on performance milestones amounting to a           maximum
of $ 12,000 payable over the next threeyears. The closing           was on
January 4, 2006.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
the second quarter of 2006, it became reasonably assured that the Company           shall
pay additional consideration in the amount of $ 500 in respect of Hannamax
          acquisition, due to meeting the performance criteria specified in the
          acquisition agreement relating to year 2005.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 42

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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 17: |  | SUBSEQUENT
EVENTS (Cont.)
|-------- | - | -------------------------

| | d. | In
April 2006, the Company signed a definitive agreement to acquire IEX
          Corporation, a worldwide provider of contact center workforce management
          solutions. Under the terms of the definitive agreement, the Company will
acquire           the shares of IEX, a wholly owned subsidiary of Tekelec, for
approximately $           200,000 in cash. The transaction is subject to the satisfaction
of customary           closing conditions and is anticipated to close towards the end of
the second or           the beginning of the third quarter of 2006.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | In
April 2006, the Company signed a definitive agreement to acquire Performix
          Technologies Ltd., a pioneer of contact center performance management. Under
the           terms of the definitive agreement, the Company will acquire Performix for a
          total purchase price of $13,200 in cash. The purchase price may increase by up
          to an additional $ 6,150 (of which up to $ 3,000 may be payable at closing)
          based on certain performance criteria. The transaction is subject to the
          satisfaction of customary closing conditions and is anticipated to close
towards           the end of the second or the beginning of the third quarter of 2006.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

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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:  May 17, 2006



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