---

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# UNITED STATESSECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

# FORM 20-F

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

OR

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

For the fiscal year
ended December 31, 2008

OR

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

OR

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

Commission file number 0-27466

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

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

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

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

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

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

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

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



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

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

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

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

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

# 60,853,776 Ordinary
Shares, par value NIS 1.00 Per Share (which includes 186,064 restricted shares)

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

x Yes    o No

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

o Yes    x No

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

x Yes    o No

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

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

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

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

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

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

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

o Item 17       o  Item 18

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

o Yes   x No



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# PRELIMINARY NOTE

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

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

In
this annual report, all references to NICE, we, us or
our are to NICE-Systems Ltd., a company organized under the laws of the State
of Israel, and its wholly owned subsidiaries. For a list of our significant subsidiaries,
please refer to page 47 of this annual report.

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

I

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

II

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# TABLE OF CONTENTS

|                              |                                                                              | Page
|----------------------------- | ---------------------------------------------------------------------------- | ----
|
|
|
|
|                              | PART I                                                                       |     
|Item 1.                       | Identity of Directors, Senior Management and Advisers                        | 1   
|Item 2.                       | Offer Statistics and Expected Timetable                                      | 1   
|Item 3.                       | Key Information                                                              | 1   
|Item 4.                       | Information on the Company                                                   | 21  
|Item 4A                       | Unresolved Staff Comments                                                    | 49  
|Item 5.                       | Operating and Financial Review and Prospects                                 | 49  
|Item 6.                       | Directors, Senior Management and Employees                                   | 70  
|Item 7.                       | Major Shareholders and Related Party Transactions                            | 85  
|Item 8.                       | Financial Information                                                        | 86  
|Item 9.                       | The Offer and Listing                                                        | 91  
|Item 10.                      | Additional Information                                                       | 93  
|Item 11.                      | Quantitative and Qualitative Disclosures About Market Risk                   | 111 
|Item 12.                      | Description of Securities Other than Equity Securities                       | 112 
|                             
|                              | PART II                                                                     
|Item 13.                      | Defaults, Dividend Arrearages and Delinquencies                              | 112 
|Item 14.                      | Material Modifications to the Rights of Security Holders and Use of Proceeds | 112 
|Item 15.                      | Controls and Procedures                                                      | 113 
|Item 16A.                     | Audit Committee Financial Expert                                             | 113 
|Item 16B.                     | Code of Ethics                                                               | 114 
|Item 16C.                     | Principal Accountant Fees and Services                                       | 114 
|Item 16D.                     | Exemptions from the Listing Standards for Audit Committees                   | 115 
|Item 16E.                     | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 115 
|Item 16F.                     | Change in Registrant's Certifying Accountant                                 | 115 
|Item 16G.                     | Corporate Governance                                                         | 115 
|                             
|                              | PART III                                                                    
|Item 17.                      | Financial Statements                                                         | 115 
|Item 18.                      | Financial Statements                                                         | 115 
|Item 19.                      | Exhibits                                                                     | 115 
|Index to Financial Statements | F-1                                                                         

III

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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, 2007 and 2008 and for
the years ended December 31, 2006, 2007 and 2008 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 selected consolidated statement of income data as of December 31, 2004, 2005
and 2006 and the selected consolidated balance sheet data for the years ended December 31,
2004 and 2005 have been derived from other Consolidated Financial Statements not included
in this annual report and have also been prepared in accordance with U.S. GAAP and audited
by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. The selected
consolidated financial data set forth below should be read in conjunction with and are
qualified by reference to Item 5, Operating and Financial Review and Prospects
and the Consolidated Financial Statements and notes thereto and other financial
information included elsewhere in this annual report.

1

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

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

2

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# Risk Factors

General Business Risks
Relating to Our Business and Market

Conditions and changes in the
local and global economic environments may adversely affect our business and financial
results.

Adverse
economic conditions in markets in which we operate can harm our business. Current global
financial conditions have been characterized by increased volatility and several financial
institutions have either gone into bankruptcy or have had to be rescued by governmental
authorities. These current economic factors include diminished liquidity and tighter
credit conditions, leading to decreased credit availability, as well as declines in
economic growth and employment levels. It is commonly believed that the current recession
will continue and perhaps even further deteriorate. Partly as a result, entire industries
are facing extreme contraction and even the prospect of collapse. The credit crisis could
have a number of follow-on effects on our business, including a possible: (i) slow-down in
our business, resulting from lower customer expenditure, inability of customers to pay for
products and services, insolvency of customers or insolvency of key partners, (ii)
negative impact on our liquidity, financial condition and share price, which may impact
our ability to raise capital in the market, obtain financing and other sources of funding
in the future on terms favorable to us, and (iii) decrease in asset values that are deemed
to be other than temporary, which may result in impairment losses. If such increased
levels of volatility and market turmoil continue, it may materially adversely affect our
results of operations and may increase the difficulty for us to accurately forecast and
plan future business.

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

We
are subject to the effects of general global economic and market conditions. Recent events
in the financial market may have an impact on our enterprise business and we may
experience a slowdown in our business. To the extent that our business suffers as a result
of such unfavorable economic and market conditions, our operating results may be
materially adversely affected. In particular, enterprises may reduce spending in
connection with their contact centers. Financial institutions may also reduce spending in
relation to trading floors and operational risk management. IT-related capital
expenditures are typically cyclical in nature, with generally higher budgets in times of
improving economic conditions and lower budgets in times of economic slowdowns. In
addition, our clients may, due to imminent regulatory or operational deadlines or
objectives or for other reasons, prioritize other expenditures over the solutions that we
offer.

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

3

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Operating globally exposes us to
additional and unpredictable risks.

We
sell our products and solutions throughout the world and intend to continue to increase
our penetration of international markets. In 2006, 2007 and 2008, approximately 99% of our
total sales were derived from sales to customers outside of Israel. A number of risks are
inherent in international transactions. Our future results could be materially adversely
affected by a variety of factors including changes in exchange rates, general economic
conditions, regulatory requirements, tax structures or changes in tax laws or practices,
and longer payment cycles in the countries in our geographic areas of operations.
International sales and operations may be limited or disrupted by the imposition of
governmental controls and regulations, export license requirements, political instability,
trade restrictions, changes in tariffs and difficulties in managing international
operations. We cannot assure you that one or more of these factors will not have a
material adverse effect on our international operations and, consequently, on our
business, financial condition and results of operations.

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

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

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

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

4

---

---

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

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

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

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 financial results
could be materially adversely affected if our contracts with distribution channels or our
other partners were terminated, if our relationship with our distribution channels or our
other partners were to deteriorate or if the financial condition of our distribution
channels or our other partners were to weaken. Moreover, our current distribution channels
or our strategic partners may decide to enter into our markets in competition with us,
which will likely result in the termination of our relationship and may lead to a
significant reduction in sales through related channels.

A
portion of our strategic partners are suppliers of telecommunication infrastructure
equipment. If our competitors are able to penetrate our strategic relationships or if our
strategic partners decide to end the relationship and expand its product offering to
compete with us, this may result in a significant reduction of sales made by that
strategic partner as well as to customers who use that partners infrastructure or
work in its environment, which is broader than that partners direct business with
us.

5

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---

This
is particularly relevant to our relationship with Avaya, one of the leading global
providers of enterprise business communication platforms in voice, e-business and data.
Avaya, our largest global distribution channel, accounted for approximately 16%, 13% and
13% of our revenues in 2006, 2007 and 2008, respectively. If Avaya enters into a strategic
relationship with our competitors or decides to otherwise end the relationship and expand
its product offering to compete with us, this may result in a significant reduction of
sales made through Avaya, as well as to customers who use Avayas infrastructure or
work in its environment, which is broader than Avayas direct business with us, as
stated above.

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

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.

The
market for our video platforms and applications is highly competitive. 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.

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

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

6

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---

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

# We depend on the success
of our recording solutions.

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

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

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

7

---

---

# We face risks relating
to government contracts.

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

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

As
part of our growth strategy, we have made a number of acquisitions over the past few years
and expect to continue to make acquisitions. We frequently evaluate the tactical or
strategic opportunity available related to complementary businesses, products or
technologies. The process of integrating an acquired companys business into our
operations and/or of investing in new technologies, may result in unforeseen operating
difficulties and large expenditures and may absorb significant management attention that
would otherwise be available for the ongoing development of our business. Other risks
commonly encountered with acquisitions include the effect of the acquisition on our
financial and strategic position and reputation, the failure of the acquired business to
further our strategies, the inability to successfully integrate or commercialize acquired
technologies or otherwise realize anticipated synergies or economies of scale on a timely
basis, and the potential impairment of acquired assets. Moreover, there can be no
assurance that the anticipated benefits of any acquisition or investment will be realized.
Future acquisitions or investments could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities, and amortization
expenses related to intangible assets, any of which could have a material adverse effect
on our operating results and financial condition. There can be no assurance that we will
be successful in making additional acquisitions or effective in integrating such
acquisitions into our existing business. In addition, if we consummate one or more
significant acquisitions in which the consideration consists, in whole or in part, of
ordinary shares or American Depositary Shares (ADSs), representing our ordinary shares,
shareholders would suffer dilution of their interests in us. We have also invested in
companies which can still be considered in the start-up or development stages. These
investments are inherently risky as the market for the technologies or products they have
under development are typically in the early stages and may never materialize. We could
lose our entire initial investment in these companies. Due to changes in the industry and
market conditions, we could also be required to realign our resources and consider
restructuring or other action, which could result in an impairment of goodwill.

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

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

Our evolving business strategy
could adversely affect our business.

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

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

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

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

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

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

# We face foreign exchange
currency risks.

We
are impacted by exchange rates and fluctuations thereof. We are likely to face risks from
fluctuations in the value of the NIS, EUR, GBP and other currencies compared to the
U.S. dollar, the functional currency in our financial statements. A significant portion of
the expenses associated with our Israeli operations, including personnel and facilities
related expenses, are incurred in NIS, whereas most of our business and revenues are
generated mostly in U.S. dollars, but also in GBP, Euros and other currencies. In
addition, a significant portion of the expenses associated with our European operations,
are incurred in GBP and EUR. If the value of the U.S. dollar decreases against the NIS,
our earnings may be negatively impacted. In 2007 and 2008, the value of the U.S. dollar
significantly decreased against the NIS, which caused us to recognize higher dollar
expenses. In 2008 the GBP and EUR decreased significantly against the U.S. dollar, which
negatively impacted our earnings. We monitor foreign currency exposure and, from time to
time, may use various instruments to preserve the value of sales transactions, expenses
and commitments; however, this cannot assure our full protection against risks of currency
fluctuations. For information on the market risks relating to foreign exchange, please see
Item 11, Quantitative and Qualitative Disclosures about Market Risk in this
annual report.

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

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

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,
transactional related platforms, 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.

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

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

Historically, our revenues have reflected seasonal fluctuations related to slower spending
activities in the first quarter, and the increased activity related to the year-end
purchasing cycles of many users of our products. We believe that we will continue to
encounter quarter-to-quarter seasonality. The current economic downturn could have a
further impact on our quarter-to-quarter results and backlog

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our software products are highly
complex, and any undetected software errors in our products could adversely affect our
reputation, result in significant costs to us, impair our ability to market our products
and expose us to legal liability.

Our
software products are highly complex. Despite extensive testing by us and by our clients,
we have in the past discovered errors, failures, bugs or other weaknesses in our software
applications and will likely continue to do so in the future. Such errors, failures, bugs
or other weaknesses in products released by us could result in product returns, loss of or
delay in market acceptance of our products, loss of competitive position, or claims by
clients or others, which would seriously harm our revenues, financial condition and
results of operations. Correcting and repairing such errors, failures or bugs could also
require significant expenditures of our capital and other resources and could cause
interruptions, delays or cessation of our product licensing.

In
addition, the identification of errors in our software applications or the detection of
bugs by our clients may damage our reputation in the market as well as our relationships
with existing clients, which may result in our inability to attract or retain clients.

Further,
since our products are used for compliance recording and operational risk management
functions that are often critical to our clients, the licensing and support of our
products makes us potentially subject to product liability claims. Any product liability
insurance we carry may not be sufficient to cover our losses resulting from any such
product liability claims. The successful assertion of one or more large product liability
claims against us could have a material adverse effect on our results of operations and
financial condition.

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

Our
success is dependent, to a significant extent, upon our proprietary technology. We
currently hold 50 U.S. patents and 71 patents issued in additional countries covering
substantially the same technology as the U.S. patents. We have over 150 patent
applications pending in the United States and other countries.We rely on a
combination of patent, trade secret, copyright and trademark law, together with
non-disclosure and non-competition agreements, as well as third party licenses to
establish and protect the technology used in our systems. However, we cannot assure you
that such measures will be adequate to protect our proprietary technology, that
competitors will not develop products with features based upon, or otherwise similar to
our systems, or that third party licenses will be available to us or that we will prevail
in any proceeding instituted by us in order to enjoin competitors from selling similar
products. Although we believe that our products do not infringe upon the proprietary
rights of third parties, we cannot assure you that one or more third parties will not make
a contrary claim or that we will be successful in defending such claim.

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

From
time to time, we receive cease and desist letters alleging patent
infringements. No formal claims or other actions have been filed with respect to such
alleged infringements, except for claims filed by Dictaphone and Verint America Inc. (both
of which have since been settled and dismissed) and Multi-Format, Inc. (see Item 8,
Financial Information  Legal Proceedings in this annual report). We cannot
assure you, however, that we will be successful in defending against the claim that has
been asserted or any other claims that may be asserted. We also cannot assure you that
such claim will not have a material adverse effect on our business, financial condition,
or operations. Defending infringement claims or other claims could involve substantial
costs and diversion of management resources.

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

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

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

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

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

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

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

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

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

# 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.

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

A
directive issued by the European Union on the Restriction of the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment, or RoHS, came into effect
on July 1, 2006. Our products meet the requirements of the RoHS directive and we are
making every effort in order to maintain compliance, without otherwise adversely affecting
the quality and functionalities of our products. Our inability or failure to comply with
these regulations, including by reason of failure by our suppliers to comply with the
directive, may restrict us for a period of time from conducting certain business in the
European Union and could have a material adverse effect on our results of operations.

A
further directive on Waste Electrical and Electronic Equipment, or WEEE,
published by the European Union in 2003, promotes waste recovery with a view to reducing
the quantity of waste for disposal and saving natural resources, in particular by reuse,
recycling and recovery of waste electrical and electronic equipment. Our products fall
within the scope of the WEEE directive, and we have set up the operational and financial
infrastructure required for collection and recycling of WEEE, as stipulated in the WEEE
directive, including product labeling, registration and the joining of compliance schemes.
We are taking and will continue to take all requisite steps to ensure compliance with this
directive. If we fail to maintain compliance, we may be restricted from conducting certain
business in the European Union, which could adversely affect our results of operations.

The
countries of the European Union, as a single market for our products, accounted in 2008
for approximately 21% of our revenues. If our products fail to comply with WEEE or RoHS
directives or any other directive issued from time to time by the European Union, we could
be subject to penalties and other sanctions that could have a material adverse effect on
our results of operations and financial condition. In addition, similar regulations are
being formulated in other parts of the world. We may incur substantial costs in complying
with other similar programs that might be enacted outside Europe in the future.

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

If
our growth continues or as a result of regular recruitment, we will be required to hire
and integrate new employees. Recruiting and retaining qualified engineers and computer
programmers to perform research and development and to commercialize our products, as well
as qualified personnel to market and sell those products, are critical to our success. As
of December 31, 2008, approximately 25% of our employees were devoted to research and
product development and approximately 20% were devoted to marketing and sales. There can
be no assurance that we will be able to successfully recruit and integrate new employees.
There is often intense competition to recruit highly skilled employees in the technology
industry. We may also experience personnel changes as a result of our move from multimedia
recording equipment towards business performance solutions. An inability to attract and
retain highly qualified employees may have an adverse effect on our ability to develop new
products and enhancements for existing products and to successfully market such products,
all of which would likely have a material adverse effect on our results of operations and
financial position. Our success also depends, to a significant extent, upon the continued
service of a number of key management, sales, marketing and development employees, the
loss of any of whom could materially adversely affect our business, financial condition
and results of operations.

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

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

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

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

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

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

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

Risks relating to Israel

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

Our
headquarters, research and development and main manufacturing facilities, as well as the
facilities of Flextronics Israel Ltd., our key manufacturer, are located in the State of
Israel, and we are directly affected by the political, economic and security conditions to
which Israel is subject. Since the establishment of the State of Israel in 1948, a number
of armed conflicts have taken place between Israel and its Arab neighbors. A state of
hostility, varying in degree and intensity, has led to security and economic problems for
Israel. Since October 2000, there has been a high level of violence between Israel and the
Palestinians. Hamas, an Islamist movement responsible for many attacks, including missile
strikes, against Israelis, won the majority of the seats in the Parliament of the
Palestinian Authority in January 2006 and took control of the entire Gaza Strip by force
in June 2007. Further, in the summer of 2006, Israel engaged in a war with Hezbollah, a
Lebanese Islamist Shiite militia group, which involved thousands of missile strikes and
disrupted most day-to-day civilian activity in northern Israel. Rocket strikes from Gaza
have increased since June 2007, and thousands of rockets have been fired at population
centers in southern Israel, leading to an armed conflict between Israel and Hamas in
January 2009. In addition, acts of terrorism, armed conflicts or political instability in
the region could negatively affect local business conditions and harm our results of
operations. We cannot predict the effect on the region of any diplomatic initiatives or
political developments involving Israel or the Palestinians or other countries in the
Middle East. Furthermore, several countries restrict doing business with Israel and
Israeli companies, and additional companies may restrict doing business with Israel and
Israeli companies as a result of an increase in hostilities. Our products are heavily
dependent upon components imported from, and most of our sales are made to, countries
outside of Israel. Accordingly, our operations could be materially adversely affected if
trade between Israel and its present trading partners were interrupted or curtailed.

18

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Some
of our officers and employees are currently obligated to perform annual military reserve
duty and some were called to duty during the summer of 2006 and in January 2009.
Additionally, in the event of a military conflict, including the ongoing conflict with the
Palestinians, these persons could be required to serve in the military for extended
periods of time. We cannot assess the full impact of these requirements on our workforce
or business and we cannot predict the effect on us of any expansion or reduction of these
obligations.

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

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

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

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

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On
April 1, 2005, an amendment to the Israeli law which deals with Approved Enterprises came
into force. Pursuant to the amendment, a companys facility will be granted the
status of Approved Enterprise only if it is proven to be an industrial
facility (as defined in such law) that contributes to the economic independence of the
Israeli economy and is a competitive facility that contributes to the Israeli gross
domestic product. The amendment incorporates certain changes to both the criteria and
procedure for obtaining Approved Enterprise status for an investment program,
and changes to the tax benefits afforded in certain circumstances to Approved
Enterprises under such law (which is referred to as a Privileged
Enterprise following such amendment). We have four Privileged Enterprise programs,
which are covered by the amendment. While we believe that we meet the statutory conditions
as set out in the amendment, there can be no assurance that the tax authorities in Israel
will concur. Should it be determined that these Privileged Enterprise programs do not meet
the statutory conditions, our provision for income taxes will increase materially.

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

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

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

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

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

Risks related to our
Ordinary Shares and ADSs

# Our share price is
volatile and may decline.

Numerous
factors, some of which are beyond our control, may cause the market price of our ordinary
shares or our ADSs, each of which represents one ordinary share, to fluctuate
significantly. These factors include, among other things, announcements of technological
innovations, development of or disputes concerning our intellectual property rights,
customer orders or new products by us or our competitors, currency exchange rate
fluctuations, earnings releases by us or our competitors, general economic and market
conditions, market conditions in the industry and the general state of the securities
markets, with particular emphasis on the technology and Israeli sectors of the securities
markets.

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

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

|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.

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# Business Overview

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

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

Industry Background and
Trends

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

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

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

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

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

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

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

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

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Our Strategy

The key elements of our strategy
include the following:

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

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

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

Expand
and leverage our existing customer base, strategic alliances and global
infrastructure. With over 24,000 customers in more than 150 countries, including
over 85 of the Fortune 100 companies, we believe there are abundant opportunities
to up-sell and cross-sell within our existing customer base by increasing their use of the
full breadth of our solutions and by migrating them to our next-generation portfolio. We
also have strong strategic relationships with industry leaders such as Avaya Inc., Cisco,
Honeywell International Inc., IPC Systems, Inc., Motorola, Inc. and Orange Business
Services. We intend to continue to leverage these relationships and invest in nurturing
new strategic alliances to increase the value of our solutions to our customers, to
strengthen our channels to market and to enhance our market position. We have a global
infrastructure that can support, directly or through our partners, customers around the
world 24 hours a day, seven days a week. We intend to utilize this infrastructure to
address the growing needs of our customers.

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

Our Solutions

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

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

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

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| |  | Streamline
and improve contact center operations, focusing on its agent and enterprise performance;
| | - | ---------------------------------------------------------------------------------------------------

| |  | monitor
and improve contact center business performance and customer satisfaction related
processes;
| | - | ----------------------------------------------------------------------------------------------------

| |  | identify
training requirements and other necessary improvements;
| | - | ----------------------------------------------------------------

| |  | allocate
the appropriate workforce level and skills to optimize customer service; and
| | - | -------------------------------------------------------------------------------------

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

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

End-to-end
security solutions. We integrated a suite of security solutions that address
organizations complete security needs   from real-time threat detection
and verification to post incident investigation and resolution. Many of the worlds
largest and busiest airports, transportation centers and transit companies, as well as
government agencies and first responders, use our security solutions to monitor, manage
and enhance security in every aspect of their operations. Our intelligent surveillance
solutions can instantaneously alert customers to potential security threats, leading to a
more timely and informed response. In the public safety sector, our solutions, experience
and know-how are helping teams work smarter and faster  to detect threats, mobilize
resources, investigate incidents and prosecute criminals. With our intelligent video
solutions, teams stay a step ahead of critical incidents, through real-time intelligence
delivered to command and control centers and responders. Our security solutions also link
disparate systems, data sources and departments to streamline incident reconstructions and
investigations. Top financial companies, educational institutions, correctional
facilities, utilities, casinos, and other critical infrastructure sites also rely on our
end-to-end security solutions to improve safety and security, reduce risk and losses, and
enhance operational performance and business results.

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Products

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

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

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

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|Products                   | Markets Served          | Purpose                                                
|-------------------------- | ----------------------- | -------------------------------------------------------
|
|
|
|
|NICE SmartCenter           | Enterprise              | Leverages the synergies of the combined capabilities of
|                           |                         | NICE Perform, NICE Quality Management, NICE Interaction
|                           |                         | Analytics, NICE Feedback, IEX TotalView and Performance
|                           |                         | Manager, as detailed below.                            
|                           |                        
|NICE Perform               | Enterprise              | Records and analyzes customer interactions with contact
|                           |                         | center agents, financial trading floors, investment    
|                           |                         | banking and enterprises, with a separate suite of      
|                           |                         | applications for contact centers and investment        
|                           |                         | banking, including for organizations that have a       
|                           |                         | relatively small number of input channels              
|                          
|NICE Quality Management    | Enterprise              | Delivers comprehensive tools for implementing a        
|                           |                         | multifaceted quality program encompassing agents,      
|                           |                         | supervisors, evaluators and managers, and the ability  
|                           |                         | to improve the quality and effectiveness of customer   
|                           |                         | interactions in contact centers                        
|                          
|NICE Interaction Analytics | Enterprise              | Utilizes a multi-dimensional analysis approach to      
|                           |                         | analyze customer interactions and provide automated    
|                           |                         | business insight and root cause analysis based on      
|                           |                         | speech analytics, E-mail and chat analysis, call flow  
|                           |                         | analysis, screen content analysis and integration with 
|                           |                         | CRM data                                               
|                          
|NICE Packaged Business     | Enterprise              | A comprehensive, out-of-the-box solution designed to   
|Solution                   |                         | address common contact center challenges such as First 
|                           |                         | Call Resolution, Average Handling Time and customer    
|                           |                         | retention. The Packaged Business solutions are designed
|                           |                         | to provide immediate value, reduce deployment time and 
|                           |                         | significantly improve return on investment             
|                          
|NICE Feedback              | Enterprise              | Advanced solution for collecting real-time customer    
|                           |                         | feedback after a call or any other type of interaction 
|                           |                         | with the organization. It enables businesses to enhance
|                           |                         | customer satisfaction, calibrate quality measurements  
|                           |                         | and optimize processes                                 
|                          
|IEX TotalView              | Enterprise and Security | Forecasts customer interactions, schedules agents with 
|                           |                         | appropriate skills to manage and optimize level of     
|                           |                         | customer service and resources, measures agent and team
|                           |                         | performance and supports managing overall contact      
|                           |                         | center performance                                     

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|                             |                           |                                                         
|---------------------------- | ------------------------- | --------------------------------------------------------
|                            
|Performance Manager          | Enterprise                | Maps enterprise business objectives to group and        
|                             |                           | individual goals; tracks and reports performance        
|                             |                           | against these goals                                     
|                            
|NiceUniverse                 | Enterprise                | Evaluates agent performance and raises the level of     
|                             |                           | customer service in contact centers through advanced    
|                             |                           | voice and desktop screen recording technologies         
|                            
|NiceLog                      | Enterprise and            | Provides digital voice recording system, and a          
|                             | Security                  | computer telephony integrated multi-channel voice       
|                             |                           | recording and retrieval system, and is available for a  
|                             |                           | range of environments, including VoIP                   
|                            
|NICE VoIP Logger             | Enterprise and            | Builds on NiceLog technology to provide a complete      
|                             | Security                  | solution to capture and log audio in VoIP telephony     
|                            
|Network Embedded Logger      | Enterprise                | Offers a Linux based VoIP Logger embedded in Cisco      
|                             |                           | routers, suitable for branch recording with NICE Perform
|                            
|NICE Storage Center          | Enterprise and            | Provides central storage option; integrates with        
|                             | Security                  | various enterprise storage networks (SAN, NAS or DAS)   
|                             |                           | for long term or medium term voice storage              
|                            
|NiceCall Focus III           | Enterprise and            | Provides a competitively priced voice recording system  
|                             | Security                  | for organizations that have a relatively small number   
|                             |                           | of input channels and a cost-effective solution for     
|                             |                           | branch recording (TDM only) with centralized storage    
|                            
|NiceUniverse Compact         | Enterprise and            | Provides a competitively priced voice recording and     
|                             | Security                  | 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                      
|                            
|Actimize Trading Interaction | Enterprise - Financial    | Combines insights from transactional data with voice    
|Surveillance                 | Institutions - Securities | analytics to meet growing regulatory requirements for   
|                             |                           | monitoring of market abuse, insider trading and other   
|                             |                           | regulatory issues. Automates and enhances trading       
|                             |                           | surveillance and the effectiveness of regulatory        
|                             |                           | investigations                                          

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|                              |                           |                                                        
|----------------------------- | ------------------------- | -------------------------------------------------------
|                             
|Actimize Global Trading       | Enterprise - Financial    | Monitors across an extensive range of products and     
|Compliance                    | Institutions - Securities | issues to identify suspicious activities like front    
|                              |                           | running, wash transactions, etc. and provides the tools
|                              |                           | needed to effectively manage investigations, workflow, 
|                              |                           | reporting and audit tracking                           
|                             
|Actimize Sales Practices      | Enterprise - Financial    | Ensures sales practices compliance suitability,        
|                              | Institutions - Securities | registration, sales of mutual funds and annuities,     
|                              |                           | approval levels of options and more - across the       
|                              |                           | organization by monitoring transactions, accounts and  
|                              |                           | sales representatives                                  
|                             
|MiFID compliance              | Enterprise - Financial    | Addresses surveillance and supervision requirements    
|                              | Institutions - Securities | based on the European Union MiFID (Markets in Financial
|                              |                           | Instruments Directive), such as best execution,        
|                              |                           | systematic internalization, transparency, client       
|                              |                           | categorization, suitability, and conflicts of interest 
|                              |                           | regulation                                             
|                             
|Actimize Employee Fraud       | Enterprise - Financial    | Monitors firm employees for easier to find policy      
|                              | Institutions - Fraud      | violation and self dealing fraud as well as highly     
|                              |                           | complex and more severe attacks                        
|                             
|Actimize Remote Banking Fraud | Enterprise - Financial    | Monitors remote banking (online, call center, ACH,     
|                              | Institutions - Fraud      | mobile and others) activities to detect suspicious     
|                              |                           | patterns                                               
|                             
|Actimize Electronic Payments  | Enterprise - Financial    | Provides high-volume, cross-channel (ACH, external     
|Fraud                         | Institutions - Fraud      | debit and others) transaction monitoring of alerting,  
|                              |                           | and real-time blocking for electronic payments fraud   
|                              |                           | protection                                             
|                             
|Actimize Deposit Fraud        | Enterprise - Financial    | Monitors account activity and highlights deposits that 
|                              | Institutions - Fraud      | have been or are at a high risk for fraud              
|                             
|Actimize ATM and Debit Card   | Enterprise - Financial    | Detects fraud from compromised debit cards and         
|Fraud                         | Institutions - Fraud      | compromised ATM devices                                
|                             
|Actimize Suspicious Activity  | Enterprise - Financial    | Identifies suspicious patterns and abnormal behavior to
|Monitoring                    | Institutions - AML        | assist in the identification of money laundering       
|                              |                           | activity                                               

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|                              |                        |                                                         
|----------------------------- | ---------------------- | --------------------------------------------------------
|                             
|Actimize Watch List Filtering | Enterprise - Financial | Compares firm accounts to external regulatory and       
|                              | Institutions - AML     | third-party lists (like Politically Exposed Persons,    
|                              |                        | Office of Foreign Assets Control, etc) to comply with   
|                              |                        | AML rules                                               
|                             
|Actimize Customer Due         | Enterprise - Financial | Provides dynamic, risk-based data collection            
|Diligence                     | Institutions - AML     | capabilities verify client background and money source, 
|                              |                        | while improving firm productivity and customer          
|                              |                        | experience                                              
|                             
|Actimize Risk Case Manager    | Enterprise - Financial | Web-based graphical user interface for managing         
|                              | Institutions           | enterprise-wide transactional risks                     
|                             
|Mirra IV                      | Enterprise and         | Provides small recording system that is suited to       
|                              | Security               | simple recording applications in which it can record up 
|                              |                        | to 48 channels of voice traffic from a wide variety of  
|                              |                        | analog and digital interfaces                           
|                             
|NICE Inform                   | Security               | Provides information management solution for            
|                              |                        | comprehensive management of multimedia interactions for 
|                              |                        | security command and control centers, enables effective 
|                              |                        | management of multimedia incident information from      
|                              |                        | various sources, for faster incident reconstruction,    
|                              |                        | greater insight and improved response                   
|                             
|NiceVision Net                | Security               | Provides a complete solution for IP video security,     
|                              |                        | including encoders, decoders and network video recorders
|                             
|NiceVision ControlCenter      | Security               | Provides an advanced control room management and        
|                              |                        | network-based digital video matrix                      
|                             
|NiceVision Analytics          | Security               | Provides a set of video content analytics applications  
|                              |                        | for automated detection of threats, safety and          
|                              |                        | operational related events                              
|                             
|NiceVision Digital            | Security               | Provides a portfolio of digital video recorders for     
|                              |                        | different capacities and performance requirements       
|                             

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|                     |          |                                                        
|-------------------- | -------- | -------------------------------------------------------
|NiceVision SafeRoute | Security | Provides a solution for mobile video surveillance      
|                     |          | onboard public transport vehicles                      
|                    
|FAST alpha Silver    | Security | Provides high quality digital video monitoring and     
|                     |          | recording solution for large to mid-size applications  
|                    
|NiceTrack            | Security | Provides interception, delivery, monitoring, collection
|                     |          | and advanced analysis of telecommunication interactions

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NICE
SmartCenteris a solution that enables call centers and enterprises to drive higher
performance, operationally and in the level of their customer service. NICE SmartCenter
leverages the synergies of the combined capabilities of NICE Perform, NICE Quality Management, NICE Interaction Analytics, NICE Feedback,
 IEX TotalView and
Performance Manager. It provides a holistic view of contact center operations and business
insight into market and customer dynamics. These capabilities are offered together with
NICEs structured service and implementation methodology.

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

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

The
system can integrate with various enterprise storage networks (ESM devices, SAN, NAS or
DAS) for long-term or medium-term storage of recordings. Central storage sites can hold
the entire recording from the organizations different sites, helping to reduce
management costs and redundancy. The retrieval process is fully automated.

The
system also provides a recording and quality management solution for organizations that
require up to 100 input channels.

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

NICE
Quality Management provides an all-inclusive ability to manage the quality and
effectiveness of customer interactions and deliver a consistently satisfying customer
experience. Flexible recording rules and powerful query capabilities let organizations
capture and evaluate relevant interactions to develop fair, accurate and empowering
insight into agent performance. NICE Quality Management solution automates many
time-consuming tasks, freeing supervisory staff to focus on actions rather than process.
Automated scoring and visualization help focusing on the most meaningful interactions,
those interactions that reveal urgent issues and the best practices to be shared with the
entire contact center.

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NICE
Interaction Analytics is a powerful business solution that drives high performance and
business excellence in the contact center. The solution offers companies the means to
obtain multi-dimensional business insight to improve operational efficiency, increase
customer loyalty and retention, and improve marketing and sales effectiveness. Analyzing
contact center interaction data using NICE Interaction Analytics empowers organizations to
meet short-term objectives such as improving First Call Resolution and reducing Average
Handle Time (AHT). Additionally, the solution enables companies to achieve strategic goals
such as predicting customer churn, increasing customer loyalty and satisfaction, and
increasing marketing campaign effectiveness.

NICE
Packaged Business Solutionprovides organizations with an innovative approach and
quick turnaround in tackling some of their most pressing business issues, such as repeat
callers, AHT optimization and customer churn. This solution offers highly valuable
integration with the organizations existing business processes where organizations
can automatically analyze customer interactions and perform root cause analysis
identifying potential problems as well as deriving immediate insight into potential
resolutions. The business package constitutes end-to-end, out-of-the-box solution
that includes comprehensive reports, dashboards and workflows that enable rapid deployment
and provide an accelerated return on investment.

NICE
Feedback is a post-call customer feedback solution. It delivers customer insights,
enabling companies to take timely business decisions that build customer satisfaction and
loyalty. Feedback is easily collected from customers immediately after a call or any other
interaction with your contact center. Getting a response while the experience is still
fresh in the customers mind improves accuracy and provides quick results.
Furthermore, as NICE Feedback is fully integrated with the rest of the NICE SmartCenter
suite of solutions, individual customer responses are correlated to specific interactions.
This allows deeper understanding of the underlying factors that drive customer perceptions
and helps pinpointing areas for improvement.

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

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

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NiceUniverse
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. NiceLog is available for a range of
environments, including traditional, hybrid or VoIP telephony environment.

NICE
VoIP Loggerbuilds on our NiceLog technology to provide a complete solution to capture
and log audio in VoIP telephony environments. The VoIP Logger provides an IP-recording
platform with a wide range of scaleable recording solutions that supports the leading
telephony vendors. Our VoIP Loggers 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
Loggers active recording solutions integrate with leading vendors such as Alcatel,
Avaya, Cisco and Nortel, offering efficient centralized recording of distributed
environments and other benefits.

Network
Embedded Loggeris a Linux based VoIP Logger embedded in Cisco routers suitable for
branch recording with NICE Perform. The Network Embedded Logger does not require a
dedicated server machine and provides a cost effective recording solution in Cisco
environments. The Network Embedded Logger can support voice recording of up to 75 input
channels.

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

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

NiceUniverse
Compact is a 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.

Actimize
Trading Interaction Surveillance, the financial industrys first cross-channel
trading compliance solution, combines insight from transactional data with voice analytics
to meet growing regulatory requirements for monitoring of market abuse and insider trading
and other regulatory issues. Consolidated under one unified view, the solution monitors
and links together transactional data and related voice conversations ensuring compliance
officers can achieve broader and more effective cross-channel surveillance and more
successful investigations. With automated and enhanced trading surveillance, businesses
can reduce risk and operational costs, delivering fast return on investment.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NiceVision
Analyticsis a wide portfolio of video content analytics applications that enable
automated detection of security, safety and operational hazards. NiceVision Analytics is
integrated with NiceVision edge devices and DVRs and is managed by NiceVision
ControlCenter  for automated and enhanced event detection and management.

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

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NiceVision
SafeRouteis a complete solution for high performance mobile video surveillance
designed to withstand the demanding conditions of public transport vehicles, such as
railcars and transit buses. The solution helps transit agencies secure vehicles and keep
passengers safe, improving loss prevention and ensuring driver compliance with safety
procedures.

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

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

Strategic Relationships

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

# Service and Support

We
have focused on building a strong global service and support organization for all our
systems and have focused on enabling our various regions to leverage the skills and
personnel required by them on a global basis. Our partners and dealers are primarily
responsible for supporting the day-to-day requirements of the end-users, while we provide
technical support to such partners and dealers. In order to support our direct customers
and partners, we established regional support centers, the largest of which is in Denver,
Colorado, with an additional support center in Richardson, Texas, to support our customers
and partners in the Americas. We also have a support center in Israel and several support
locations in the United Kingdom to support EMEA customers, dealers and partners, a support
center in India to support APAC customers, dealers and partners, and several other smaller
support offices in various locations around the world. By globalizing our support
organization, we also enable our multi-regional customers to enjoy full global service
customized to their needs. We maintain at our headquarters a staff of highly skilled
customer service engineers that offer support to our dealers or partners that offer direct
support to our customers. These service engineers provide first class field services and
support worldwide. We maintain regular technical training sessions for our dealers and
installation support as well.

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

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

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

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

# Manufacturing and Source
of Supplies

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

We
manufacture our products through subcontractors. Under a manufacturing agreement with
Flextronics Israel Ltd. (or Flextronics), a subsidiary of a global electronics
manufacturing services company, Flextronics provides us with a turnkey manufacturing
solution including order receipt purchasing, manufacturing, testing and configuration.
This agreement covers all of our product lines, including our voice recording family of
products, our video product lines, our upgrade lines and our spare parts and return
material authorization (RMA). We believe this outsourcing agreement provides us with a
number of cost advantages due to Flextronics large-scale purchasing power, and
greater supply chain flexibility.

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

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

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

# Research and Development

We
believe that the development of new products and the enhancement of existing products are
essential to our future success. Therefore, we intend to continue to devote substantial
resources to research and new product development, and to continuously improve our systems
and design processes in order to reduce the cost of our products. Our research and
development efforts have been financed through our internal funds and programs sponsored
through the Government of Israel and the European community. We believe our research and
development effort has been an important factor in establishing and maintaining our
competitive position. Gross expenditures on research and development in 2006, 2007 and
2008 were approximately $48.0 million, $63.3 million and $83.3 million, respectively, of
which approximately $1.9 million, $2.7 million and $3.6 million, respectively, were
derived from third-party funding, and $1.2 million, $1.0 million and $1.3 million,
respectively, were capitalized software development costs.

In
2008, we were qualified to participate in nine programs funded by the Office of the Chief
Scientist, or OCS, of the Israeli Ministry of Industry, Trade and Labor to develop generic
technology relevant to the development of our products. Such programs are approved
pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, or
the Research and Development Law, and the regulations promulgated thereunder. We were
eligible to receive grants constituting between 40% and 66% of certain research and
development expenses relating to these programs. These programs are approved under certain
Magnet consortiums and programs approved for companies with large research and development
activities. Accordingly, the grants under these programs are not required to be repaid.
However, the restrictions of the Research and Development Law described below apply to
these programs. In 2006, 2007 and 2008, we received a total of $1.9 million, $2.0 million
and $ 3.5 million from the OCS programs, respectively, and we anticipate receiving
approximately $1.4 million in 2009 from 2008 programs.

We
are eligible to receive grants from the OCS under its standard programs,
usually constituting a grant of up to 50% of certain approved research and development
expenses, for the research and development of certain approved technology. Under the terms
of these programs, a grant recipient is required to pay royalties of 3% to 5% of the net
sales of products incorporating technology developed in, and related services resulting
from, a project funded by the OCS. Generally, the royalties are required to be paid
beginning with the commencement of sales of such products and ending when 100% of the
grant is repaid in NIS, linked to the U.S. dollar plus LIBOR interest. In 2008 we received
no such grants. In 2007 we received grants in the amount of $0.8 million, solely with
respect to Actimizes standard OCS program. Upon the acquisition of Actimize, we
decided to terminate the royalty bearing obligations under Actimizes standard OCS
program. In March 2008, we paid the OCS $4.4 million in respect of the outstanding royalty
obligations under such program. Notwithstanding the termination of such royalty
obligations, the restrictions of the Research and Development Law described below still
apply to this program.

42

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

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

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

43

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

In
2006, we were selected to participate in the Sixth Framework Programme (FP6). FP6 is the
European Community Framework Programme for Research, Technological Development and
Demonstration, which funds and promotes research. The total grant to be received under
this program is EUR 329,000 during the 30 month period of FP6. There are no royalty
obligations associated with receiving such funding. In 2006, 2007 and 2008, we received a
total of EUR 266,000 and we anticipate receiving EUR 30,000 in 2009.

# 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 50 U.S. patents and 71 patents issued in additional countries covering
substantially the same technology as the U.S. patents. We have over 150 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 and Verint America Inc.
(both of which have since been settled and dismissed) and Multi-Format, Inc. (for further
information please see Item 8, Financial Information  Legal Proceedings in
this annual report). We cannot assure you, however, that we will be successful in
defending such claims, if asserted, or that infringement claims or other claims, if
asserted, will not have a material adverse effect on our business, financial condition and
results of operations. Defending infringement claims or other claims could involve
substantial costs and diversion of 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.

44

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

# Regulation

Israeli Export
Restrictions

The
export of certain defense products from Israel, such as our NiceTrack products, requires a
permit from the Israeli Ministry of Defense. In addition, the sale of products to certain
customers, mostly armed forces, also requires a permit from the Israeli Ministry of
Defense. In 2008, the vast majority of our sales were not subject to such permit
requirements. To date, we have encountered no difficulties in obtaining such permits.
However, the Ministry of Defense notifies us from time to time not to conduct business
with specific countries that are undergoing political unrest, violating human rights or
exhibiting hostility towards Israel. We may be unable to obtain permits for our defense
products we could otherwise sell in particular countries in the future.

European Environmental
Regulations

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

45

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

In
addition, similar regulations are being formulated in other parts of the world. We may be
required to complying with other similar programs that might be enacted outside Europe in
the future.

# Competition

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

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

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

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

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

There
are a number of competitors in the telecommunications monitoring market, having products
competing with our NiceTrack system, the major ones being ETI, JSI, Raytheon Company,
Siemens 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.

# Organizational Structure

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

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

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# Property, Plants and
Equipment

Our
executive offices and engineering, research and development operations are located in
Raanana, Israel, where we occupy approximately 140,000 square feet of space,
pursuant to a lease expiring in 2013. The annual rent and maintenance fee for the facility
is approximately $3.15 million, paid in NIS and linked to the U.S. consumer price index.
We also occupy additional office space in North Raanana, Israel, which is
approximately 70,600 square feet, pursuant to a lease expiring in 2013. The annual rent
and maintenance fee for this additional facility is approximately $1.94 million, paid in
NIS and linked to the Israeli consumer price index.

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

| |  | Our
office in Petach Tikva, Israel, which occupies approximately 16,730 square feet. We
expect to expand our North Raanana facilities by an additional 20,042 square feet,
effective as of September 2009. The enlarged office space in North Raanana will
replace the current office in Petach Tikva;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
North American headquarters in Rutherford, New Jersey, which occupy approximately 28,400
square feet. We also have offices in New York, which occupy approximately 23,000 square
feet;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

None.

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

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

# Overview

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

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 16%, 13% and 13% of revenues in
2006, 2007 and 2008, respectively.

# Recent Acquisitions

The
following acquisitions were accounted for as purchases, and, accordingly, the purchase
price for each acquisition was allocated to the assets acquired and liabilities assumed
based on their respective fair values. The results of operations related to each
acquisition are included in our consolidated statement of income from the date of
acquisition.

On
April 28, 2008, NICE CTI Systems UK Limited completed the acquisition of certain assets of
AVT Systems Limited, for approximately $6.2 million in cash. The business acquired
includes the sale, distribution, service, maintenance and support of NICE voice recording
solutions (hardware and software and associated services) in the United Kingdom.

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On
April 8, 2008, we acquired certain assets, shares and business from Quality Plus Group
Ltd., a UK-based value-added distributor of NICEs contact center solutions, and its
affiliates (QPC), for approximately $12.6 million in cash. The business
acquired includes the sale, distribution, service, support, maintenance and development of
workforce management solutions and associated services as conducted by QPC in the UK,
Sweden and Australia.

On
August 30, 2007, we acquired Actimize Ltd., a global provider of operational
risk management software solutions that enable financial services institutions to manage
the challenges of regulatory compliance, internal policy enforcement and fraud prevention
and money laundering. Under the terms of the Agreement and Plan of Merger, dated
July 2, 2007 (the Merger Agreement), the consideration paid for
Actimize was approximately $281.1 million, approximately 80% of which was in cash and
approximately 20% of which was satisfied through the issuance of 1,501,933 of our ordinary
shares based on the market price of the securities a few days before and after the terms
of the acquisition were agreed upon and announced, and the fair value of the vested
portion of 987,104 options and restricted shares that were issued to holders of Actimize
options and restricted shares. Pursuant to the terms of the Merger Agreement, we assumed
the stock options and restricted shares granted by Actimize (for further information
please see Item 6, Directors, Senior Management and Employees in this annual
report).On September 12, 2007, as required by the Merger Agreement, we
filed a registration statement with the U.S. Securities and Exchange Commission to
register for resale the securities issued pursuant to the Merger Agreement, which we
maintained effective for approximately six months.

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

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

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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 $22 million in cash, plus earn-outs based on performance
milestones. For 2006 we paid an earn-out of approximately $6.2 million and for 2008 there
was no earn-out payment. The acquisition of FAST strengthens our position in the video
security market with smart IP-based solutions and technologies complementary to our
existing digital video offerings. Additionally, it extends our presence in the digital
video security market by increasing our footprint in the European and APAC markets with
high quality distribution channels and partners, and with new prestigious customers. By
purchasing FAST, we strategically expanded our market share both in geographical and
vertical markets. The factors that contributed to the purchase price that resulted in
recognition of goodwill included synergies, the benefits of increased market share,
strategic positioning value and time-to-market benefits.

# Off-Balance Sheet
Transactions

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

# Critical Accounting
Policies

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

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

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

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

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

| |  | Taxes
on income
| | - | ---------------

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

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

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

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

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

51

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

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

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

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

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

Revenues
from fixed price contracts that require significant customization, integration and
installation are recognized using the percentage-of-completion method of accounting based
on the ratio of hours incurred to date to the total estimated hours of the contract. The
amount of revenue recognized is based on the total license fees under the license
agreement and the percentage of completion achieved. The revenues from such arrangements
are allocated between license revenues and professional services revenues to reflect the
portion of each revenue source separately. Estimates of total project requirements are
based on prior experience of customization, delivery and acceptance of similar contracts
and are reviewed and updated regularly by management. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are first determined, in
the amount of the estimated loss on the entire contact. As of December 31, 2008, no such
estimated losses were identified.

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

We
record a provision for estimated sales returns in accordance with SFAS No. 48 in the same
period as the related revenues are recorded. We base these estimates on the historical
sales returns ratio and other known factors. Actual returns could be different from our
estimates and current provisions for sales returns may need to be adjusted.

52

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Allowance
for Doubtful Accounts.We regularly review our allowance for doubtful
accounts by considering factors such as historical experience, age of the account
receivable and current economic conditions that may affect a customers ability to
pay. We allocate a certain percentage for the provision based on the length of time the
receivables are past due.

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

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

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

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

53

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

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

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

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

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

54

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

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

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

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

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

55

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Effective
January 1, 2008, we adopted the provisions of SFAS No. 157, Fair Value
Measurements for financial assets and liabilities, and related FSPs, including
FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active. SFAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or a liability. As a basis for considering such
assumptions, SFAS 157 establishes a three-tier value hierarchy, as set forth below, which
prioritizes the inputs used in the valuation methodologies in measuring fair value:

| |  | Level 1
 Valuations based on quoted prices in active markets for identical assets or
liabilities that the Company has the ability to access. Valuation adjustments and block
discounts are not applied to Level 1 instruments. Since valuations are based on quoted
prices that are readily and regularly available in an active market, valuation of these
products does not entail a significant degree of judgment.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Level 2
 Valuations based on one or more quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or indirectly.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Level 3
 Valuations based on unobservable inputs which are supported by little or no market
activity and significant to the overall fair value measurement.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.

The
actual value at which such securities could actually be sold or settled with a willing
buyer or seller may differ from such estimated fair values depending on a number of
factors, including, but not limited to, current and future economic conditions, the
quantity sold or settled, the presence of an active market and the availability of a
willing buyer or seller.

# Results of Operations

The
following table sets forth our selected consolidated statements of income for the years
ended December 31, 2006, 2007 and 2008 expressed as a percentage of total revenues. Totals
may not add up due to rounding.

|                                                            | 2006 | 2007 | 2008
|----------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Revenues                                                    |      |      |     
|Products                                                    |      |      |     
|Services                                                    |      |      |     
|                                                            |      |      |     
|                                                            |      |      |     
|Cost of revenues                                            |      |     
|Products*                                                   |      |      |     
|Services*                                                   |      |      |     
|                                                            |      |      |     
|                                                            |      |      |     
|                                                            |      |     
|Gross Profit                                                |      |      |     
|                                                            |      |     
|Operating expenses                                          |      |     
|Research and development, net                               |      |      |     
|Selling and marketing                                       |      |      |     
|General and administrative                                  |      |      |     
|Amortization of acquired                                    |      |     
|Intangibles                                                 |      |      |     
|In process research and               development write-off |      |      |     
|Settlement and related expenses                             |      |      |     
|Total operating expenses                                    |      |      |     
|                                                            |      |     
|Operating income                                            |      |      |     
|Financial income, net                                       |      |      |     
|Other income, net                                           |      |      |     
|                                                            |      |      |     
|                                                            |      |     
|Income before taxes                                         |      |      |     
|Taxes on income                                             |      |      |     
|                                                            |      |      |     
|                                                            |      |     
|Net income                                                  |      |      |     
|                                                            |      |      |     

| | (*)
Respective revenues
| | -----------------------

56

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Comparison of Years Ended
December 31, 2007 and 2008

Revenues

Our
total revenues increased by approximately 20.6% to $624.2 million in 2008 from $517.4
million in 2007. Revenues from sales of enterprise interactions solutions were $417.4
million in 2008, an increase of 9.0% from 2007, revenues from sales to the public safety
and security sector were $148.6 million in 2008, an increase of 20.9% from 2007, and
revenues from sales of operational risk management Solutions were $58.2 million in 2008
compared to $11.6 in Actimizes four month results included in 2007.Approximately 44% of the growth in revenues is attributable to the
inclusion of full year results of Actimize, compared with Actimizes four month
results included in 2007 revenues. Actimize is an operational risk management solutions
company. The remaining 56% of the growth is due to organic growth in all our regions and
the revenues from our acquisitions of QPC and AVT.

|                 | Years Ended December 31,
(U.S. dollars in millions)
|---------------- | ---------------------------------------------------
|
|
|
|
|Product Revenues |                                                    
|Service Revenues |                                                    
|                 |                                                    
|                 |                                                    
|Total Revenues   |                                                    

57

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Approximately
67% of the increase in product revenues is attributable to the inclusion of full year
results for Actimize compared with Actimizes four month results included in 2007
product revenues. The remainder is due to organic growth.

Approximately
32% of the increase in service revenues is attributable to the inclusion of full year
results for Actimize compared with Actimizes four month results included in 2007
service revenues. The remaining 68% growth in service revenue was due to an increase in
sales of applications that resulted in an increase in professional services and
maintenance services, and an increase in maintenance revenue resulting from an increase in
our installed customer base and focus on sales of maintenance services. Most of our
service revenues represented approximately 44% of total revenues, as compared to
approximately 39% in 2007.

Revenues
in 2008 in the Americas, which include the United States, Canada and Central and South
America, rose 19.6% to $347.4 million, as compared to $290.3 million in 2007.
Approximately 49% of the increase is attributable to the inclusion of full year results
for Actimize compared with Actimizes four month results included in 2007. The
remaining 51% of growth is mainly due to higher post-contract services and maintenance
revenue. Sales in Europe, the Middle East and Africa (EMEA) rose 22.4% to $188.5 million
in 2008, as compared to $154.0 million in 2007. Approximately 41% of the increase is
attributable to the inclusion of full year results for Actimize compared with
Actimizes four month results included in 2007. The remainder of the increase is
attributable to a growth in product and service revenues in the enterprise and security
markets and the acquisitions of AVT and QPC. Sales to Asia-Pacific (APAC) increased 21.0%
to $88.3 million in 2008, as compared to $73.0 million in 2007. Approximately 27% of the
increase is attributable to the inclusion of full year results for Actimize compared with
Actimizes four month results included in 2007. The remainder of the increase is
attributable to a growth in product and service revenues in the enterprise market.

Cost of Revenues

|                         | Years Ended December 31,
(U.S. dollars in millions)
|------------------------ | ---------------------------------------------------
|
|
|
|
|Cost of Product Revenues |                                                    
|Cost of Service Revenues |                                                    
|                         |                                                    
|                         |                                                    
|Total Cost of Revenues   |                                                    

Cost
of product revenues increased on a dollar basis while decreasing as a percentage of
product revenues. The increase on a dollar basis is mostly due to higher amortization of
intangible assets in the amount of $16.8 million in 2008 compared to $11.8 million in
2007. The decrease in the cost of product percentage from product revenues is a result of
a higher proportion of software in the product mix. Cost of service revenues increased on
a dollar basis while decreasing as a percentage of service revenues. Approximately 57% of
the increase on dollar base of the cost of services is attributable to the inclusion of
full year results for Actimize compared with Actimizes four month results included
in 2007. The decrease in the percentage of cost of service from service revenues is due to
a better utilization of the service organization and a higher volume of service revenues.

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Gross Profit

|                                    | Years Ended December 31,
(U.S. dollars in millions)
|----------------------------------- | ---------------------------------------------------
|
|
|
|
|Gross Profit on Product Revenues    |                                                    
|as a percentage of product revenues |                                                    
|Gross Profit on Service Revenue     |                                                    
|as a percentage of service revenues |                                                    
|                                    |                                                    
|Total Gross Profit                  |                                                    
|as a percentage of total revenues   |                                                    

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

Operating Expenses

|                                               | Years Ended December 31,
(U.S. dollars in millions)
|---------------------------------------------- | ---------------------------------------------------
|
|
|
|
|Research and development, net                  |                                                    
|Selling and marketing                          |                                                    
|General and administrative                     |                                                    
|Amortization of acquired intangible assets     |                                                    
|In process research and development write-off. |                                                    
|Settlement and related expenses                |                                                    

Research
and Development, Net. Research and development expenses, before
capitalization of software development costs and government grants, increased to $83.3
million in 2008, as compared to $63.3 million in 2007 and represented 13.3% and 12.2% of
revenues in 2008 and 2007, respectively. Approximately 41% of the increase in research and
development, net is attributable to the inclusion of Actimize for the entire year of 2008
compared to the inclusion of Actimize in the last four months of 2007. The remainder is
primarily due to the strengthening of the NIS against the U.S. dollar.

Capitalized
software development costs were $1.3 million in 2008, as compared to $1.0 million in 2007.
Amortization of capitalized software development costs included in cost of product
revenues were $0.8 million and $1.0 million in 2008 and 2007, respectively.

Selling
and Marketing Expenses. Selling and marketing expenses increased to $147.9
million in 2008, as compared to $120.6 million in 2007, and represented 23.7% of total
revenues in 2008, as compared to 23.3% in 2007. Approximately 49% of the increase is
attributable to the inclusion of Actimize for the entire year of 2008 compared to the
inclusion of Actimize in the last four months of 2007. The remainder is due to business
growth.

59

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General
and Administrative Expenses. General and administrative expenses
represented 15.5% of total revenues in 2008, as compared to 16.5% in 2007. Approximately
26% of the increase is attributable to the inclusion of Actimize for the entire year of
2008 compared to the inclusion of Actimize in the last four months of 2007. The remainder
is due to an increase in the doubtful accounts expenses, the strengthening of the NIS
against the U.S. dollar and the need to support our growing business.

Amortization
of acquired intangible assets.Amortization of
acquired intangibles included in the operating expenses represent 2.3% and 1.8% of our
2008 and 2007 revenues, respectively. Approximately 70% of the increase in amortization of
acquired intangible assets is attributable to the amortization of intangible assets
related to the acquisition of Actimize for the entire year of 2008 compared to the
amortization of intangible assets related to the acquisition of Actimize in the last four
months of 2007. The remainder is due to amortization related to the QPC and AVT
acquisitions.

Settlement
and related expenses. Settlement and related expenses in the amount of $9.9
million represents an agreement to settle and dismiss patent disputes (see Item 8,
Financial Information  Legal Proceedings).

Financial and Other Income

|                            | Years Ended December 31,
(U.S. dollars in millions)
|--------------------------- | ---------------------------------------------------
|
|
|
|
|Financial income, net       |                                                    
|Other income (expense), net |                                                    

Financial
Income, Net. The decrease in financial income, net reflects lower average
interest rates in 2008, as compared to 2007 and loss of $4.9 million on marketable
securities sold or impaired in 2008.

Taxes
on Income.In 2008 taxes on income amounted to $9.5 million, as
compared to $10.3 million in 2007. Our effective tax rate amounted to 19.5% in 2008
compared with 21.5% in 2007. The slight decrease in our effective tax rate in 2008 was
mainly due to an increase in our Approved and Privileged Enterprise benefits together with
other favorable items partly offset by a decrease in the deferred tax assets in certain
jurisdictions.

The
reduction of the corporate tax rate in Israel from 31% in 2006 and 29% in 2007 to 27% in
2008 had a minor impact on our effective tax rate. This is because the majority of our
income earned in Israel benefits from the reduced tax rates applicable to us as a result
of our Approved and Privileged Enterprise programs.

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

60

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

Net
Income from Continuing Operations.Net income from continuing
operations was $39.1 million in 2008, as compared to $37.4 million in 2007. The increase
in 2008 resulted primarily from the increase in revenues and an increase in the gross
margin.

Comparison of Years Ended
December 31, 2006 and 2007

Revenues

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

|                 | Years Ended December 31,
(U.S. dollars in millions)
|---------------- | ---------------------------------------------------
|
|
|
|
|Product Revenues |                                                    
|Service Revenues |                                                    
|                 |                                                    
|Total Revenues   |                                                    

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

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

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

61

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Cost of Revenues

|                         | Years Ended December 31,
(U.S. dollars in millions)
|------------------------ | ---------------------------------------------------
|
|
|
|
|Cost of Product Revenues |                                                    
|Cost of Service Revenues |                                                    
|                         |                                                    
|                         |                                                    
|Total Cost of Revenues   |                                                    

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

Gross Profit

|                                    | Years Ended December 31,
(U.S. dollars in millions)
|----------------------------------- | ---------------------------------------------------
|
|
|
|
|Gross Profit on Product Revenues    |                                                    
|as a percentage of product revenues |                                                    
|Gross Profit on Service Revenue     |                                                    
|as a percentage of service revenues |                                                    
|                                    |                                                    
|Total Gross Profit                  |                                                    
|as a percentage of total revenues   |                                                    

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

62

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Operating Expenses

|                                               | Years Ended December 31,
(U.S. dollars in millions)
|---------------------------------------------- | ---------------------------------------------------
|
|
|
|
|Research and development, net                  |                                                    
|Selling and marketing                          |                                                    
|General and administrative                     |                                                    
|Amortization of acquired intangible assets     |                                                    
|In process research and development write-off. |                                                    

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

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

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

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

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

63

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

Financial and Other Income

|                            | Years Ended December 31,
(U.S. dollars in millions)
|--------------------------- | ---------------------------------------------------
|
|
|
|
|Financial income, net       |                                                    
|Other income (expense), net |                                                    

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

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

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

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

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

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

64

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# Liquidity and Capital
Resources

In
recent years, the cash generated from our operating activities has financed our
operations. Generally, we invest our excess cash in instruments that are highly liquid,
investment grade securities. At December 31, 2008, we had $501.4 million of cash and cash
equivalents and short-term and long-term investments, as compared to $398.2 million at
December 31, 2007 and $296.1 million at December 31, 2006.

Cash
provided by operating activities was $135.7 million, $118.2 million and $87.6 million in
2008, 2007 and 2006, respectively. Net cash from operations in 2008 consisted primarily of
net income of $39.1 million and adjustments for non-cash activities including depreciation
and amortization of $42.7 million, stock-based compensation of $25.3 million, an increase
in accrued expenses and other liabilities of $28.4 million, and loss on marketable
securities sold or impaired of $4.9 million, which were partially offset by deferred tax
of $5.6 million. Net cash from operations in 2007 consisted primarily of net income of
$37.4 million and adjustments for non-cash activities including depreciation and
amortization of $30.9 million, stock-based compensation of $23.7 million, an in-process
research and development write-off of $3.7 million, an increase in accrued expenses and
other liabilities of $51.9 million, and a decrease in inventories of $7.6 million, which
were partially offset by an excess tax benefit from share-based payments arrangements of
$4.9 million, an increase in trade receivables of $15.2 million, an increase in other
receivables and prepaid expenses of $9.6 million, a decrease in trade payable of $3.0
million and deferred tax of $5.3 million. Net cash from operations in 2006 consisted
primarily of net income of $22.4 million and adjustments for non-cash activities including
depreciation and amortization of $21.9 million, stock-based compensation of $12.6 million,
an in-process research and development write-off of $12.9 million, an increase in accrued
expenses and other liabilities of $28.0 million, an increase in trade payable of $1.4
million and a decrease in inventories of $5.4 million, which were partially offset by an
excess tax benefit from share-based payments arrangements of $5.7 million, an increase in
trade receivables of $6.8 million and deferred tax of $3.7 million.

Net
cash used in investing activities from continuing operations was $120.9 million, $276.0
million and $318.4 million in 2008, 2007 and 2006, respectively. In 2008, net cash used in
investing activities consisted primarily of net investment in marketable securities of
$54.5 million, net investment in short-term bank deposits of $25.4 million, purchase of
property and equipment of $15.5 million and payment for the acquisitions of QPC and AVT of
$12.6 million and $6.2 million, respectively. In 2007, net cash used in investing
activities consisted primarily of net investment in short-term bank deposits of $39.0
million, purchase of property and equipment of $10.9 million, payment for the acquisition
of Actimize Ltd. of $210.5 million, a $5.0 million earn out payment with respect to FAST
Security AG acquisition and payment for working capital adjustment with respect to the
acquisition of IEX Corporation of $1.5 million. In 2006, net cash used in investing
activities consisted primarily of net investment in marketable securities of $72.4
million, purchase of property and equipment of $8.1 million, payment for the acquisition
of IEX Corporation of $203.2 million, payment for the acquisition of Performix
Technologies Ltd. of $13.8 million and payment for the acquisition of FAST Video Security
AG of $21.3 million.

65

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Net
cash provided by financing activities was $15.9 million, $206.2 million and $43.7 million
in 2008, 2007 and 2006, respectively. In 2008, net cash provided from financing activities
consisted primarily of proceeds from the issuance of shares upon exercise of options and
purchase of shares under employee share purchase plans of $15.3 million. In 2007, net cash
provided from financing activities consisted of proceeds from the issuance of shares in
our public offering of $180.9 million, proceeds from the issuance of shares upon exercise
of options and purchase of shares under the employee share purchase plan of $20.3 million
and an excess tax benefit from share-based payments agreements of $4.9 million. In 2006,
net cash provided from financing activities consisted primarily of proceeds from the
issuance of shares upon exercise of options and purchase of shares under the employee
share purchase plan of $39.0 million and an excess tax benefit from share-based payments
agreements. As of December 31, 2008, we had non-binding arrangements, for the rendering of
credit lines from banks against our portfolio with those banks.

We believe that based on our current
operating forecast, the combination of existing working capital, expected cash flows from
operations will be sufficient to finance our ongoing operations for the next twelve
months.

# Research and Development

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

# Trend Information

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

We
believe that enhancing operational efficiency is especially critical to our customers, who
continuously seek solutions that would help them reduce costs while maintaining or even
improving customer service. In addition, our customers seek solutions that can improve
their customer retention and insight and can assist in cross and up-selling into their
customer base.

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

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

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

66

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Governments,
municipalities, security authorities and corporations around the world are investing in
the protection of people and assets. As a result, there is a growing demand for more
comprehensive and integrated solutions to provide better safety and security to citizens.
These large projects include installation and implementation of wide-scale security
systems, which better synchronize and correlate multimedia data sources in order to
detect, prevent and resolve crime and terror in real time and investigate quickly in order
to prosecute the persons involved. Our solutions offer an integrated multimedia capture
and management solution that combines radio, telephony, IP data, GIS, and video. We also
expect video content analysis applications to become increasingly important to city center
protection, as well as various homeland security applications, mass transportation
systems, campus perimeter security, and critical facilities, to enable proactive security
management.

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

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

67

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# Contractual Obligations

Set
forth below are our contractual obligations and other commercial commitments over the
medium term as of December 31, 2008 (in thousands of U.S. dollars).

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

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

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

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

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# Qualitative and
Quantitative Disclosure About Market Risk

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

# Adoption of New
Accounting Standards

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
standard defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years.

# Recently Issued
Accounting Pronouncements

In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2,
Effective Date of FASB Statement No. 157 (FSP 157-2), to delay the
effective date of FASB Statement 157 for one year for certain non-financial assets and
non-financial liabilities, excluding those that are recognized or disclosed in financial
statements at fair value on a recurring basis (i.e., at least annually).  For
purposes of applying FSP 157-2, non-financial assets and non-financial liabilities include
all assets and liabilities other than those meeting the definition of a financial asset or
a financial liability in FASB Statement 159.   FSP 157-2 defers the effective
date of Statement 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of this FSP 157-2. We do not
expect the adoption of FSP 157-2 to have a material impact on our financial position,
results of operations or cash flows.

In
March 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161) an amendment to FASB No.
133.  This statement changes the disclosure requirements for derivative
instruments and hedging activities.  Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related hedged items
affect an entitys financial position, financial performance, and cash
flows.  This statement is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008.  Early application
is encouraged.  We do not expect the adoption of SFAS 161 to have a material
impact on our financial position, results of operations or cash flows.

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

In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. We do not expect the adoption of FSP 142-3 to have a material impact on our
consolidated financial position, results of operations or cash flows.

69

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EITF
Issue No. 08-7, Defensive Intangible Assets (EITF 08-7),
requires an acquiring entity to account defensive intangible assets as a separate unit of
accounting. Defensive intangible assets should not be included as part of the cost of the
acquirers existing intangible assets because the defensive intangible assets are
separately identifiable. Defensive intangible assets must be recognized at fair value in
accordance with SFAS 141(R) and SFAS 157. EITF 08-7 will be effective for the reporting
period beginning after December 15, 2008. We do not expect a material impact on our
consolidated financial statements from adoption of EITF 08-7.

In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of financial
statements of non-governmental entities that are presented in conformity with generally
accepted accounting principles in the United States. It is effective 60 days following the
SECs approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. We are currently evaluating the impact of SFAS No. 162 on our
financial statements, and the adoption of this statement is not expected to have a
material effect on our financial statements.

In
June 2008, the FASB issued FSP EITF No. 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. Under the FSP, unvested share-based payment awards that contain rights
to receive non-forfeitable dividends (whether paid or unpaid) are participating
securities, and should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008, and interim periods
within those years, and is not expected to have a significant impact on our consolidated
financial statements.

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

# Directors and Senior
Management

The
following table sets forth, as of April 5, 2009, the name, age and position of each of our
directors and executive officers:

|Name                   | Age | Position                               
|---------------------- | --- | ---------------------------------------
|
|
|
|
|Ron Gutler (1)(2)      | 51  | Chairman of the Board of Directors     
|                      
|Joseph Atsmon(1)(3)    | 60  | Vice-Chairman of the Board of Directors
|                      
|Rimon Ben-Shaoul(2)    | 64  | Director                               
|                      
|Yoseph Dauber(2)(3)    | 73  | Director                               
|                      
|Dan Falk(1)(2)(3)(4)   | 64  | Director                               
|                      
|John Hughes(2)         | 57  | Director                               
|                      
|Yocheved Dvir(1)(3)(4) | 56  | Director                               

70

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|Name          | Age | Position                                                            
|------------- | --- | --------------------------------------------------------------------
|
|
|
|David Kostman | 44  | Director                                                            
|             
|Haim Shani    | 52  | Chief Executive Officer                                             
|             
|Eran Gorev    | 43  | Chief Business Officer                                              
|             
|Udi Ziv       | 42  | President of the Enterprise Products Group and Chief Product Officer
|             
|Israel Livnat | 58  | Corporate Vice President & President, Security Group                
|             
|David Sosna   | 40  | Chief Executive Officer, Actimize Ltd.                              
|             
|Dafna Gruber  | 44  | Corporate Vice President and Chief Financial Officer                
|             
|Yechiam Cohen | 52  | Corporate Vice President, General Counsel and Corporate Secretary   
|             
|Eran Porat    | 46  | Corporate Vice President, Finance                                   
|             
|Eran Liron    | 41  | Corporate Vice President, Business Development                      
|             
|Dan Yalon     | 37  | Corporate Vice President, Strategy & Strategic Alliance             

---

|(1) | Member
of the Audit Committee.
|--- | ------------------------------

|(2) | Member
of the Compensation Committee.
|--- | -------------------------------------

|(3) | Member
of the Internal Audit Committee.
|--- | ---------------------------------------

|(4) | Outside
Director. See Item 6, Directors, Senior Management and           Employees  Board
Practices  Outside Directors.
|--- | ---------------------------------------------------------------------------------------------------------------------------

On
July 29, 2008, David Kostman was elected as a director. Mr. Kostman previously served
on our board of directors between 2001 and 2007.

Dr. Shlomo Shamir resigned from his position as President of NICE, effective as of
          January 1, 2009.

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

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

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

Yoseph
Dauber has served as one of our directors since April 2002. Mr. Dauber has served in
various senior positions at Bank Hapoalim since 1973. Until June 2002, Mr. Dauber was
Deputy Chairman of the Board of Management and Joint Managing Director of Bank Hapoalim
and was responsible for the commercial division of the bank. From 1994 to June 2002, Mr.
Dauber served as Chairman of the Isracard Group. From 1995 to July 2002, Mr. Dauber also
served as Chairman of Poalim American Express. From 2002 to 2003, he served as Chairman of
the Israel Maritime Bank Ltd. and from 2003 to 2008 he served as a director of Bank
Hapoalim. Mr. Dauber currently serves as a director of Vocaltec Communications Ltd.,
Lodzia Rotex Ltd., Micromedic Ltd., Orbit Alchut Technologies Ltd. and Delek Group Ltd.
Mr. Dauber holds a Bachelors degree in Economics and Statistics from the Hebrew
University in Jerusalem and a Masters degree in Law from Bar Ilan University.

Dan
Falk has served as one of our statutory outside directors since 2001. From 1999 to
2000, Mr. Falk was President and Chief Operating Officer of Sapiens International
Corporation N.V.  From 1985 to 1999, Mr. Falk served in various positions in Orbotech
Ltd., the last of which were Chief Financial Officer and Executive Vice President. From
1973 to 1985, he served in several executive positions in the Israel Discount Bank. Mr.
Falk serves on the board of directors of Orad Hi-Tech Systems Ltd. (where he is Chairman),
Orbotech Ltd., Ormat Technologies Inc., Clicksoftware Technologies Ltd., Jacada Ltd.,
Attunity Ltd., Nova Measuring Systems Ltd., Dmatek Ltd., AVT Ltd., Amiad Filteration
Systems Ltd., Plastopil Ltd. and Oridion Medical Ltd. Mr. Falk holds a Bachelors
degree in Economics and Political Science and a Masters degree in Business
Administration, both from the Hebrew University, Jerusalem.

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

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

David
Kostman has served as one of our directors since July 2008. Mr. Kostman previously
served on our board of directors between 2001 and 2007. Mr. Kostman is currently
Chairman and CEO of Nanoosh LLC, a restaurant operating company. From 2006 until
2008, Mr. Kostman was a Managing Director in the investment banking division of Lehman
Brothers, heading the Global Internet Group. From April 2003 until July 2006, Mr. Kostman
was Chief Operating Officer and then Chief Executive Officer of Delta Galil USA, a
subsidiary of Delta Galil Industries Ltd., a NASDAQ-listed apparel manufacturer. From
2000 until 2002, Mr. Kostman was President of the International Division and Chief
Operating Officer of VerticalNet, Inc., a NASDAQ-listed internet and software company. Mr.
Kostman serves on the board of directors of J Mendel, LLC and Russell Newman, LLC. Mr.
Kostman holds a Bachelors degree in Law from Tel Aviv University and a Masters
degree in Business Administration from INSEAD.

Haim
Shani has served as our Chief Executive Officer since January 2001. He also served as
our President from January 2001 to April 2005 and as a director from January 2001 to
September 2005. From 1998 to 2000, he served as General Manager of the Israeli office of
Applied Materials Inc., where he headed the process diagnostic and control business group
formed following the acquisition by Applied Materials of Opal Ltd. and Orbot Instruments,
Ltd. Prior thereto, Mr. Shani held various management positions at Orbotech Ltd. From 1995
to 1998, he served as Corporate Vice President of Marketing and Business Development, from
1993 to 1995, he served as President of Orbotechs subsidiary in Asia Pacific, based
in Hong Kong, and from 1992 to 1993, he served as President of Orbotech Europe, based in
Brussels. From 1982 to 1992, Mr. Shani held various management positions at Scitex
Corporation and IBM Israel. Mr. Shani holds a Bachelors degree in Industrial and
Management engineering from the TechnionIsrael Institute of Technology and a
Masters degree in Business Administration from INSEAD, France.

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Eran
Gorev has served as our Chief Business Officer since October 2008. Since March 2005,
Mr. Gorev also serves as the President and Chief Executive Officer of Nice Systems Inc.
From 2002 to 2004, Mr. Gorev was President of the North America  Major Clients
division at Amdocs Ltd. From 2000 to 2002, he served as Corporate Vice President and Head
of Worldwide Sales at Amdocs. Prior thereto, Mr. Gorev held various marketing and sales
management positions in the information technology industry. Mr. Gorev holds a
Bachelors degree in Law from Tel Aviv University and a joint Masters degree in
Business Administration from the Kellogg School of Management of Northwestern University
and the Leon Recanati Graduate School of Business Administration of Tel Aviv University.

Udi
Ziv has served as President of the Enterprise Products Group and Chief Product Officer
since January 2009. From 2001 until 2007, Mr. Ziv held several senior executive positions
with SAP AG, a leading global enterprise software company, including General Manager of
SAPs Small Business Solutions, Managing Director of SAP Labs Israel and Vice
President responsible for the research and development of the SAP Portal product. Prior to
joining SAP, Mr. Ziv was one of the original members, and the head of global research
& development, of Top Tier Software, a leading enterprise portal company (acquired by
SAP in 2001). Mr. Ziv holds a Bachelor of Science degree in Computer Engineering from
the Technion  Israel Institute of Technology.

Israel
Livnat has served as our Corporate Vice President and President of the Security
Group since May 2006. Prior to joining NICE, he served since 2001 as the President and CEO
of Elta Systems Ltd. Prior to his last position as the President of Elta Systems, Mr.
Livnat headed a division in Israeli Aircraft Industries Ltd., leading the development of
the Arrow weapons system. Before that he was Vice President Engineering in the same
division in Israeli Aircraft Industries, and director for hardware engineering at 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 Bachelor of Science
degree in Electrical Engineering from the Technion  Israel Institute of Technology,
and an Executive MBA from Stanford University. He was awarded the prestigious Israeli
Industry Prize in 2004.

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

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

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

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

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

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

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

# Compensation

The
aggregate compensation paid to or accrued on behalf of all our directors and executive
officers as a group of 20 persons during 2008 consisted of approximately $5.7 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
2008, our officers and directors received, in the aggregate, options and restricted shares
with respect to 629,500 ordinary shares under our equity based compensation plans. These
options and restricted shares have an average price of $28.39 and the options will expire
six years after the date the options were granted.

Pursuant
to the requirements of the Israeli Companies Law, 57591999, or the Companies Law,
remuneration of our directors generally requires shareholder approval. Compensation and
reimbursement for outside directors (as described below) is statutorily determined
pursuant to the Companies Law.  Effective as of July 29, 2008, we pay each of our
directors, including outside directors, an annual fee of NIS 90,000 (equivalent to
approximately $23,684) and a meeting attendance fee of NIS 3,250 (equivalent to
approximately $855), including for meetings of committees of the board of directors. Our
directors are also entitled to an annual grant of options to purchase 5,000 of our
ordinary shares and our Chairman of the Board is entitled to an annual grant of options to
purchase 15,000 ordinary shares on the date of our annual general meeting during each
calendar year until and including the 2010 annual general meeting. These options fully
vest following the lapse of twelve (12) months from the applicable date of grant and are
granted under the Nice-Systems Ltd. 2003 Stock Option Plan. In addition, effective as of
July 29, 2008, our Chairman of the Board receives a special annual fee in the amount of
NIS 180,000 (equivalent to approximately $47,368).

# Board Practices

Corporate Governance
Practices

We
are incorporated in Israel and therefore are subject to various corporate governance
practices under the Companies Law, relating to such matters as outside directors, the
audit committee, the internal auditor and approvals of interested party transactions.
These matters are in addition to the ongoing listing conditions of
the NASDAQ and other relevant provisions of U.S. securities laws. Under the
NASDAQ rules, a foreign private issuer may generally follow its home country rules of
corporate governance in lieu of the comparable NASDAQ requirements, except for certain
matters such as composition and responsibilities of the audit committee and the
independence of its members. For further information see Item 16G  Corporate
Governance.

General Board Practices

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

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 four
members, an audit committee that currently has four members and a compensation committee
that has five 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.

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Outside Directors

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

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

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

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

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

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

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

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

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

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

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

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

Financial and Accounting
Expertise

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

Independent Directors

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

Audit Committee

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

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

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

Internal Audit Committee

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

Internal Auditor

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

Compensation Committee

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

Nominations Committee

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

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# Employees

At
December 31, 2008, we had 2,404 employees worldwide, which represented an increase of
10.7% from year-end 2007.

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

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

|Geographic Location |  |  | 
|------------------- |  |  | 
|
|
|
|
|Israel              |  |  | 
|Americas            |  |  | 
|Europe              |  |  | 
|Asia Pacific        |  |  | 
|                    |  |  | 
|Total               |  |  | 
|                    |  |  | 

We
also utilize temporary employees in various activities. On average, we employed 17
temporary employees and obtained services from 257 consultants (not included in the
numbers set forth above) during 2008.

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

We
are not a party to any collective bargaining agreement with our employees or with any
labor organization. However, we are subject to certain labor related statutes, and to
certain provisions of collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations
(including the Industrialists Association of Israel) that are applicable to our
Israeli employees by order of the Israeli Ministry of Labor and Welfare. These statutes
and provisions principally concern the length of the work day and the work week, minimum
wages for workers, insurance for work-related accidents, determination of severance pay
and other conditions of employment. Furthermore, pursuant to such provisions, the wages of
most of our Israeli employees are automatically adjusted based on changes in the Israeli
consumer price index, or CPI. The amount and frequency of these adjustments are modified
from time to time. Israeli law generally requires the payment by employers in Israel of
severance pay upon the death of an employee, his retirement or upon termination of
employment by the employer without due cause. We currently fund our ongoing severance
obligations in Israel by making monthly payments to approved severance funds or insurance
policies. Please see Note 2Q to our Consolidated Financial Statements. In addition,
according to the National Insurance Law, Israeli employers and employees are required to
pay predetermined sums to the National Insurance Institute, an organization similar to the
U.S. Social Security Administration. These contributions entitle the employees to benefits
in periods of unemployment, work injury, maternity leave, disability, reserve military
service and bankruptcy or winding-up of the employer. Since January 1, 1995, such amount
also includes payments for national health insurance. The payments to the National
Insurance Institute are equal to approximately 17% of an employees wages (up to a
certain cap as determined from time to time by law), of which the employee contributes
approximately 66% and the employer contributes approximately 34%.

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

Employment Agreements

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

# Share Ownership

As
of March 11, 2009, our directors and executive officers beneficially owned an aggregate of
854,252 ordinary shares, or approximately 1.4% of our outstanding ordinary shares. This
figure includes 45,280 unvested restricted shares as well as options to purchase ordinary
shares that were vested on such date or that were scheduled to vest within the following
60 days. The restricted shares and options have an average exercise price of $22.49 per
share and the options expire between 2010 and 2016. No individual director or executive
officer beneficially owns 1% or more of our outstanding ordinary shares.

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

1995 Stock Option Plan

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

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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 mostly be taxed at a rate of only 25%
and partially at the marginal income tax rate applicable to the grantee (up to 47% in
2008). In general, all options granted to Israeli grantees, shares issued upon exercise of
such options and any bonus shares issued with respect to such shares will be held in trust
for the benefit of the grantee for at least a period equal to the shorter of 30 months
from the date of grant or two years from the end of the tax year in which the options are
granted. Following an amendment to the Tax Ordinance which came into effect on January 1,
2006, the aforementioned trust period for options granted on or after January 1, 2006 is
24 months from the date of grant. The options may not be released from the trust prior to
the payment of the grantees tax liabilities. In the event the requirements of
Section 102 for the allocation of options according to the Capital Gains Route are not
met, the applicable marginal income tax rates will apply.

The
1995 Plan is generally administered by our compensation committee, which determines the
grantees under the 1995 Plan and the number of options to be granted. As of April 5, 2009,
there were no outstanding options to purchase ordinary shares under the 1995 Plan. All of
the outstanding options under this plan have expired.

2003 Stock Option Plan

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

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

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

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

The
2003 Plan is generally administered by our compensation committee, which determines the
grantees under the 2003 Plan and the number of options to be granted. As of March 31,
2009, options to purchase 4,574,203 ordinary shares were outstanding under the 2003 Plan
at a weighted average exercise price of $27.13.

1999 Amended and Restated
Employee Stock Purchase Plan

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

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

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

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

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

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

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

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

As
of March 31, 2009, options to purchase 366,052 ordinary shares of NICE were outstanding
and 129,499 restricted shares were issued under the 2003 Actimize Plan at a weighted
average exercise price of $11.72 and $0.96, respectively. No additional grants are being
made under this plan following the acquisition of Actimize.

2008 Share Incentive Plan

In
June 2008, we adopted the NICE-Systems Ltd. 2008 Share Incentive Plan, or 2008 Plan, to
provide incentives to employees, directors, consultants and/or contractors by rewarding
performance and encouraging behavior that will improve our profitability. Under the 2008
Plan, our employees, directors, consultants and/or contractors may be granted any
equity-related award, including any type of an option to acquire our ordinary shares
and/or share appreciation right and/or share and/or restricted share and/or restricted
share unit and/or other share unit and/or other share-based award and/or other right or
benefit under the Plan (each an Award). The options to acquire ordinary shares
are granted at an exercise price of not less than the fair market value of the ordinary
shares on the date of the grant, subject to certain exceptions which may be determined by
our board of directors, including in some cases options granted with an exercise price of
zero. We have registered, through the filing of registration statements on Form S-8 with
the SEC under the Securities Act of 1933, 2,000,000 ADSs for issuance under the 2008 Plan.

84

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Generally,
under the terms of the 2008 Plan, 25% of an Award granted becomes exercisable on the first
anniversary of the date of grant and 6.25% becomes exercisable once every quarter during
the subsequent three years. Specifically with respect to restricted share units, unless
determined otherwise by the board of directors, 25% of the restricted share units granted
become vested on each of the four consecutive annual anniversaries following the date of
grant. Awards with a vesting period expire six years after the date of grant. Awards are
non-transferable except by will or the laws of descent and distribution.

Our
board of directors adopted an addendum to the 2008 Plan for Awards granted to grantees who
are residents of Israel (the Addendum). On June 16, 2008, our board of
directors resolved to elect the Capital Gains Route (as defined in Section
102(b)(2) of the Tax Ordinance) for the grant of Awards to Israeli grantees, which is
described above under 1995 Stock Option Plan.The U.S. addendum of the
2008 Plan provides only for non-qualified stock options for purposes of U.S. tax
laws.

The
2008 Plan provides that the number of shares that may be subject to Awards granted under
the 2008 Plan shall be an amount per calendar year, equal to 3.5% of our issued and
outstanding share capital as of December 31 of the preceding calendar year. Such amount is
reset for each calendar year. By setting this target, our board of directors took into
account the need for current employee retention and retention of future employees. For
2008, the aforementioned amount was reduced by the number of shares subject to Awards
granted by us during the 2008 calendar year under the 2003 Plan.

The
2008 Plan is generally administered by our board of directors and compensation committee,
which determines the grantees under the 2008 Plan and the number of Awards to be granted.
As of March 31, 2009, options and restricted share units to purchase 1,509,849 ordinary
shares were outstanding under the 2008 Plan at a weighted average exercise price of
$28.33.

|Item 7. |  | Major Shareholders and Related Party Transactions.
|------- |  | --------------------------------------------------

# Major Shareholders

As
of April 5, 2009, no person known to us is the beneficial owner of 5% or more of our
outstanding ordinary shares. None of our shareholders has any different voting rights than
any other shareholder.

As
of April 3, 2009, we had approximately 73 ADS holders of record in the United States,
holding approximately 65% of our outstanding ordinary shares, as reported by The Bank of
New York, the depositary for our ADSs.

As
of December 11, 2008, Migdal Insurance and Financing Holdings Ltd. held 2,944,307, or
4.8%, of our ordinary shares. This information is based upon a Schedule 13G/A filed by
Migdal Insurance and Financing Holdings Ltd. with the SEC on that date. As of December 3,
2008, Migdal Insurance and Financing Holdings Ltd. held 3,068,603, or 5.1%, of our
ordinary shares, according to a Schedule 13G filed by Migdal Insurance and Financing
Holdings Ltd. with the SEC on that date.

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As
of December 31, 2008, Massachusetts Financial Services Company held 336,918, or 0.6%, of
our ordinary shares. This information is based upon a Form 13G/A, filed by Massachusetts
Financial Services Company with the SEC on February 9, 2009. As of December 31, 2007,
Massachusetts Financial Services Company held 3,040,862, or 5.2%, of our ordinary shares,
according to a Schedule 13G/A filed by Massachusetts Financial Services Company with the
SEC on February 8, 2008.

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

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

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.

Witness Patent
Infringement Lawsuits

On
July 20, 2004, S.T.S. Software Systems Ltd. (STS) filed a lawsuit in the U.S. District
Court for the Southern District of New York charging Witness Systems, Inc. (Witness) with
infringement of VoIP patents in the U.S. On June 26, 2007, we joined as a plaintiff in the
litigation. A trial took place in the U.S. District Court for the Northern District of
Georgia during the week of March 17, 2008 and on May 25, 2008. The Court dismissed the
claim and determined that Witness Systems does not infringe our patents.

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On
August 30, 2004, Witness filed a patent infringement action in the Federal Court for the
Northern District of Georgia against NICE Systems, Inc. Witness subsequently filed an
identical action against us in the same court. Witness accused us of infringing two U.S.
patents relating to certain technology used with some of our products, mainly screen
capture. A trial did not take place.

On
January 19, 2006 Witness filed a patent infringement action in the Federal Court for the
Northern District of Georgia against the Company and NICE Systems, Inc., alleging the
infringement of a certain U.S patent relating to certain technology used with some of our
products, mainly Nice Perform. A trial took place during the week of May 12, 2008. The
jury decided that we infringe Witness patent and adjudicated monetary damages of
$3.3 million. We filed a motion to revoke the jurys decision and Witness filed a
motion for a permanent injunction against us, to which we submitted our response.

On
May 10, 2006, NICE and NICE Systems, Inc. filed a new lawsuit against Witness in the
United States District Court for the District of Delaware claiming that Witness was
infringing ten U.S. patents. These patents cover various aspects of recording
customer interaction communications and traditional logging. A trial took place
before a jury on January 14, 2008. The jury deadlocked and on January 25, 2008 and a
mistrial was declared. We filed a motion for a new trial date for the case.

On
August 1, 2008, we entered into an agreement with Verint Systems Inc. (that acquired
Witness in 2007) to settle and dismiss all patent disputes between the two companies,
which had commenced with Witness Systems, Inc., as detailed above.

Multi-Format Patent
Infringement Lawsuit

On
September 3, 2008, Multi-Format, Inc. filed a lawsuit against Harrahs Entertainment,
Inc. and Nice Systems Inc., a wholly owned subsidiary of ours, in the United States
District Court for the District of New Jersey, alleging infringement of a U.S. patent and
requesting damages. The patent purports to cover a PC-based system for monitoring and
sorting representative images from video cameras, for security or other monitoring
purposes. Multi-Format alleges that the defendants infringed one or more of the claims of
the patent by making, using, selling, offering for sale and/or importing video
surveillance products, including the NiceVision Pro and NiceVision Harmony products, and
that Nice Systems Inc. has induced infringement of the patent through its sale and
supplying of video surveillance solutions to Ballys Atlantic City and/or other third
parties or customers. On December 10, 2008, Multi-Format filed an Amended Complaint
substituting Ballys Park Place, Inc. for Harrahs Entertainment, Inc. We filed
a response and counterclaim on December 23, 2008, to which Multi-Format responded on
January 7, 2009. An initial scheduling hearing took place on January 26,
2009. Multi-Format has not identified any specific patent claim it believes was
infringed and has not made a monetary demand.  Nice Systems Inc. has undertaken to
represent and indemnify Harrahs Entertainment in respect of this lawsuit.

CipherActive Lawsuit

On
October 19, 2004, CipherActive filed an action against us in the District Court of Tel
Aviv. In this lawsuit, CipherActive claims that under a development agreement with us, it
is entitled to receive license fees in respect of certain software that it allegedly
developed for us and which has been embedded in one of our products. CipherActive claims
that it is entitled to license fees in an amount of $600,000, in addition to the amount of
$100,000 already paid toCipherActive by us in respect of such license fees. In our
statement of defense we claim that the software developed by CipherActive under the
agreement has not been successful in the market, is no longer embedded in our product and,
therefore, CipherActive is not entitled to any additional license fees. Both parties to
this litigation have recently agreed to submit the matter to binding arbitration and
hearings are expected to take place during the month of May 2009. The arbitration
agreement approved by the Court determines that our liability shall not exceed $600,000
plus interest and expenses.

87

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Dictaphone Corp. v.
VoicePrint.

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

Calyon Dispute

In
December 2006, Calyon Corporate and Investment Bank filed a suit against us in the
District Court of Tel Aviv, demanding repayment of $648,144 plus accrued interest, for a
total amount of $740,395.  We had deducted this amount in January 2004 from a payment
transferred from an account of Thales maintained with Calyon to our account, at the
instruction of Thales, in connection with our acquisition of TCS from Thales. We had
notified TCS in 2004 that we had setoff such amount with respect to an overdue payment by
TCS to us. The dispute was submitted to mediation, however the mediation process failed
and the proceedings were returned to the District Court of Tel Aviv. This lawsuit is in
its initial stages and the first hearing is scheduled to take place on June 23, 2009.

Formatest Dispute

On
March 9, 2007, Formatest AG filed a claim against NICE Switzerland AG, a wholly owned
subsidiary of ours, in the Cantonal Court of Zug, Switzerland.  The claim was in the
amount of EUR 1,187,793 (plus interest at 5% per annum) and was made in connection with an
agreement dated December 10, 2004 between FAST Video Security AG (now NICE Switzerland AG)
and Formatest AG.  On June 19, 2007, NICE and Formatest AG entered into an agreement
settling all claims.

We
believe we are entitled to recover all or a substantial part of the settlement amount paid
to Formatest AG (with the addition of legal costs) under the terms of indemnification
provision contained in the sale and purchase agreement between the selling shareholders of
FAST Video Security AG (the Sellers) and NICE dated November 16, 2006 (the
Agreement). On December 18, 2007, the Sellers issued a Notice of Arbitration
in the Zurich Chamber of Commerce, claiming that NICE should pay them an amount of
$1,228,766 (plus late payment interest of 5% from July 2007), which is the remaining
unpaid portion of the first earn out payment under the Agreement, release $3,000,000 (plus
accrued interest) from the escrow account pursuant to the Agreement, plus an additional
late release interest of 5%, and compensate them for loss incurred due to deteriorating
exchange rates and other related expenses. Prior to the commencement of the arbitration
proceedings, we released to the Sellers a partial payment of $1,400,000 out of the escrow
funds and paid to the Sellers the amount of $1,228,766.60.

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On
June 23, 2008, the Sellers filed their statement of claim, asking for payments of
$1,600,000 (representing the balance of the escrow funds) plus additional amounts for
interest, losses on the exchange rate, legal costs for the defense of the Formatest claim,
and unspecified legal costs and expenses related to the arbitration proceeding. We filed a
statement of defense and counterclaim on August 25, 2008, seeking an award dismissing the
Sellers claims and holding the Sellers liable (jointly and severally) for the
payment of EUR 831,600 and additional amounts, plus interest and unspecified arbitration
costs. Pursuant to the current procedural timetable, the arbitration proceedings are
expected to take place in the first half of 2009, and an award is not expected to be
rendered before July 2009.

Nice Systems Inc.
Discrimination in Employment Disputes

On
October 26, 2007, two former employees of Nice Systems Inc. filed a lawsuit against NICE
and Nice Systems Inc., alleging violations of various laws prohibiting discrimination in
employment. The dispute was settled in December 2008 between the parties.

On
December 19, 2007, a former employee of Nice Systems Inc. sent NICE and Nice Systems Inc.
a letter alleging engagement in prohibited discrimination in employment and retaliation in
terminating his employment. The dispute was settled in December 2008 between the parties.

Actimize Former Employee
Dispute

On
October 15, 2007, a former employee of Actimize Ltd., a wholly owned subsidiary of ours,
filed a claim with the Tel Aviv District Labor Court, seeking a declaration that he is
entitled to 0.5% of the outstanding share capital of Actimize Ltd. In its statement of
defense, Actimize Ltd. claimed that once the former employee chose not to exercise his
vested options upon termination of his employment with the company, such options expired.
In addition, Actimize Ltd. claimed that the former employees options deteriorated in
value due to his decision not to exercise his right to re-price such options during his
employment term. The case is at the preliminary stages, and the Court has yet to set a
hearing date.

Plant Dispute

Around
December 31, 2008, Nice Systems Inc. received a letter from Plant CML, a distributor of
Nice Systems Inc., asserting several indemnity claims against the company. The claims
arise out of the Commonwealth of Massachusetts claim against Verizon relating to
numerous alleged problems associated with our products used by the Commonwealth. Nice
Systems Inc. sold our products to Plant pursuant to a Reseller Agreement between the
parties dated December 2005, and Plant, in turn, resold the products to Verizon, who in
turn sold the overall system to the Commonwealth. We are in an initial stage of assessing
the facts, merits and potential magnitude of these claims.

89

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# Dividends

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

# Significant Changes

Dr.
          Shlomo Shamir resigned from his position as President of NICE, effective as of
          January 2009.

On
July 29, 2008, David Kostman was elected as a director. Mr. Kostman previously served on
our Board between 2001 and 2007.

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

Trading in the ADSs

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

|                             | ADSs
|---------------------------- | ----
|
|
|
|
|Annual                       |     
|                             |     
|2004                         |     
|2005                         |     
|2006                         |     
|2007                         |     
|2008                         |     
|                             |     
|Quarterly 2007               |     
|                             |     
|First Quarter                |     
|Second Quarter               |     
|Third Quarter                |     
|Fourth Quarter               |     
|                             |     
|Quarterly 2008               |     
|                             |     
|First Quarter                |     
|Second Quarter               |     
|Third Quarter                |     
|Fourth Quarter               |     
|                             |     
|Quarterly 2009               |     
|                             |     
|First Quarter                |     
|                             |     
|Monthly                      |     
|                             |     
|October 2008                 |     
|November 2008                |     
|December 2008                |     
|January 2009                 |     
|February 2009                |     
|March 2009                   |     
|April 2009 (through April 3) |     

On
April 3, 2009, the last reported price of our ADSs was $26.29 per ADS.

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

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Trading in the Ordinary
Shares

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

|                             | Ordinary Shares
|---------------------------- | ---------------
|
|
|
|
|Annual                       |                
|                             |                
|2004                         |                
|2005                         |                
|2006                         |                
|2007                         |                
|2008                         |                
|                             |                
|Quarterly 2007               |                
|                             |                
|First Quarter                |                
|Second Quarter               |                
|Third Quarter                |                
|Fourth Quarter               |                
|                             |                
|Quarterly 2008               |                
|                             |                
|First Quarter                |                
|Second Quarter               |                
|Third Quarter                |                
|Fourth Quarter               |                
|                             |                
|Quarterly 2009               |                
|                             |                
|First Quarter                |                
|                             |                
|Monthly                      |                
|                             |                
|October 2008                 |                
|November 2008                |                
|December 2008                |                
|January 2009                 |                
|February 2009                |                
|March 2009                   |                
|April 2008 (through April 5) |                

As
of April 5,  2009,  the last  reported  price of our  ordinary  shares on the TASE was
NIS  111.9  (or $26.87) 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 Companies Law.
We are registered with the Registrar of Companies of the State of Israel and have been
assigned company number 52-0036872.

Objects and Purposes

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

Directors

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

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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.

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

Fiduciary Duties of
Officers

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

Approval of Certain
Transactions

Under
the Companies Law, all arrangements as to compensation of office holders who are not
directors, or controlling parties, require approval of the board of directors. Similarly,
adoption and amendment of equity based compensation plans require approval of the board of
directors. Arrangements regarding the compensation of directors also require internal
audit committee and shareholder approval. Although NASDAQ rules generally require
shareholder approval when an equity based compensation plan is established or materially
amended, as a foreign company we follow the aforementioned requirements of the Companies
Law.

The
Companies Law requires that an office holder of the company promptly disclose any personal
interest that he or she may have and all related material information known to him or her,
in connection with any existing or proposed transaction by the company. In addition, if
the transaction is an extraordinary transaction as defined under Israeli law, the office
holder must also disclose any personal interest held by the office holders spouse,
siblings, parents, grandparents, 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 associationdo not allow us to do so.

Office Holder Insurance

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

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

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

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

96

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

97

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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.

98

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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.

# Material Contracts

Actimize Ltd. Acquisition

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

99

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FAST Video Security AG
Acquisition

On
January 4, 2006, pursuant to a share purchase agreement, we acquired all the outstanding
shares of FAST Video Security AG, a Switzerland-based developer of innovative video
systems for security and surveillance purposes, for approximately $22 million in cash,
plus earn-outs based on performance milestones. For 2006 we paid an earn-out of
approximately $6.2 million and for 2008 there was no earn-out payment.

# 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.

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

Israeli Tax Considerations

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

100

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General Corporate Tax
Structure

Generally,
Israeli companies are subject to Corporate Tax on taxable income at the rate of 27% for
the 2008 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: 26% for the 2009 tax
year and 25% for the 2010 tax year and thereafter. Israeli companies are generally
subject to capital gains tax at a rate of 25% for capital gains (other than gains
deriving from the sale of listed securities) derived after January 1, 2003. However, the
effective tax rate payable by a company that derives income from an Approved or
Privileged Enterprise may be considerably less.

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

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

We
derive and expect to continue to derive significant tax benefits in Israel relating to
our Approved and Privileged Enterprise programs, pursuant to the Law for
Encouragement of Capital Investments, 1959, or the Investments Law. To be eligible for
these tax benefits, we must continue to meet certain conditions, including making certain
specified investments in fixed assets. In the event of a failure to comply with these
conditions, the benefits may be canceled and we may be required to refund the amount of
the benefits, in whole or in part, including interest and certain inflation adjustments.
As of December 31, 2008 we believe that we are in compliance with all the conditions
required by the law.

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

Other
than by way of our complete liquidation, if we distribute dividends from the income of
our Approved Enterprises which was exempted from taxes pursuant to our Approved
Enterprise benefits, we will be taxed as if the exempt income was subject to the
regular reduced corporate tax rate arising under our Approved Enterprise programs.
Tax-exempt income generated under our Privileged Enterprises, will subject the Company to
taxes upon dividend distribution or complete liquidation.

101

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

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

Tax Benefits and Grants
for Research and Development

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

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

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

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

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

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

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

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

In
2008, we 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. We believe that we meet and will continue to
meet, the necessary conditions and as such, will continue to measure our results for tax
purposes based on the U.S. dollar/NIS exchange rate.

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Israeli Transfer Pricing
Regulations

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

Capital Gains Tax on
Sales of Our Ordinary Shares

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

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

Taxation of Israeli
Residents

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

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

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Taxation of Non-Israeli
Residents

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

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

Taxation of Dividends
Paid on our Ordinary Shares

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

Taxation of Israeli
Residents

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

Taxation of
Non-Israeli Residents

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

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

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

U.S. Federal Income Tax
Considerations

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

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

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

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

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

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

| |  | banks;
| | - | ------

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

105

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

106

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

U.S. Taxation of ADSs

Distributions

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

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

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

107

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

Sale or Other
Disposition of ADSs

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

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

Passive Foreign
Investment Companies

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

108

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

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

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

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

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

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

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

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

109

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

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

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

Backup Withholding
and Information Reporting

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

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

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

# 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.

110

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

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

General

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

Foreign Currency Risk

We
conduct our business primarily in U.S. dollars but also in the currencies of the United
Kingdom, Canada, the European Union and Israel as well as other currencies. Thus, we are
exposed to foreign exchange movements, primarily in UK, European and Israeli currencies.
We monitor foreign currency exposure and, from time to time, may use various instruments
to preserve the value of sales transactions and commitments; however, this cannot assure
our protection against risks of currency fluctuations. For more information regarding
foreign currency related risks, please refer to General Business Risks Relating to
Our Business and Market, on page 3. We use currency forward contracts together with
currency options to hedge payments in NIS. These transactions constitute a future cash
flow hedge. As of December 31, 2008, we had outstanding forward contracts and currency
options in the total amount of $55.5 million. These transactions were for a nine month
period.

111

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Interest Rate Risk

Our
exposure to market risk for changes in interest rates relates primarily to our investment
in marketable securities and deposits. Our marketable securities portfolio is invested in
investment-grade corporate bonds, U.S. federal agency securities and U.S. treasury bills,
treasury notes and structured notes. As of December 31, 2008, 65% of our portfolio was in
such securities.

The
decline in interest rates due to the global credit crisis has a direct effect on our
interest income and our ability to maintain our portfolios yield level in line with
prior years. In a market environment of declining interest rates, we are likely to
reinvest the redeemed proceeds from our called or matured marketable securities in lower
yielding investments. Conversely, an increase in market interest rates could also have an
adverse effect on the value of our investment portfolio, for example, by decreasing the
fair values of the fixed income securities that comprise a substantial majority of our
investment portfolio.

We
invest in dollar deposits with U.S. banks, European banks and money market funds. As of
December 31, 2008, 34% of our portfolio was in such deposits. Since these investments are
for short periods, interest income is sensitive to changes in interest rates. The fair
value of our long and short term securities is based upon their market values as of
December 31, 2008.

The
average duration of the portfolio, as of December 31, 2008, is 1.26 years. The securities
in our portfolio are rated at the least as A- according to Standard and Poors rating
or A3, according to Moodys rating. Securities representing 32% of the portfolio are
rated as AAA; securities representing 37% of the portfolio are rated as AA; securities
representing 30% of the portfolio are rated as A; and securities representing 1% of the
portfolio are rated as BBB, after being down graded during 2008.

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

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

Not
Applicable.

# PART II

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

None.

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

None.

112

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

Disclosure Controls and
Procedures

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

Managements Annual
Report on Internal Control Over Financial Reporting

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

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

Our
management assessed our internal control over financial reporting as of December 31, 2008.
Our management based its assessment on criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, our management has concluded that, as
of December 31, 2008, our internal control over financial reporting is effective.

Attestation Report of the
Independent Registered Public Accounting Firm

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

Changes in Internal
Control Over Financial Reporting

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

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

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

113

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

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

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

# Fees Paid to Independent
Auditors

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

|Services Rendered | 2007 Fees | 2008 Fees
|----------------- | --------- | ---------
|
|
|
|
|Audit (1)         |           |          
|Audit-related (2) |           |          
|Tax (3)           |           |          
|Total             |           |          

|(1) | Audit
fees are for audit services for each of the years shown in this table,
               including fees associated with the annual audit for 2008 (including audit
in                accordance with section 404 of the Sarbanes-Oxley act) and certain
procedures                regarding our quarterly financial results submitted on Form
6-K, consultations                on various accounting issues and performance of local
statutory audits.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

114

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# Policies and Procedures

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

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

Not
applicable.

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

None.

|Item 16F. |  | Change in Registrants Certifying Accountant.
|--------- |  | ---------------------------------------------

Not
applicable.

|Item 16G. |  | Corporate Governance.
|--------- |  | ---------------------

We
follow the Companies Law, the relevant provisions of which are summarized in
this annual report, rather than comply with the NASDAQ requirements relating to:
(i) the quorum for shareholder meetings, as described in Item 10  Additional
Information  Memorandum and Articles of Association  Meetings of
Shareholders; (ii) shareholder approval with respect to issuance of
securities under equity based compensation plans, as described in Item 10
 Additional Information  Memorandum and Articles of Association 
Approval of Certain Transactions; and (iii) sending annual reports to shareholders,
as described in Item 10  Additional Information  Documents on
Display.

# PART III

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

Not
Applicable.

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

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

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

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

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

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

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

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

115

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|4.1 |  | Manufacturing
Outsourcing Agreement dated January 21, 2002 by and among NICE-Systems Ltd. and
                Flextronics Israel Ltd. (filed as Exhibit 4.5 to NICE-Systems Ltd.'s
Annual Report on Form 20-F filed                 with the Commission on June 26, 2003,
and incorporated herein by reference).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|4.3 |  | Agreement
and Plan of Merger, dated as of July 2, 2007, among Actimize Ltd., Nemo Acquisitions Ltd.
                and NICE-Systems Ltd. (filed as Exhibit 99.2 to NICE-Systems Ltd.'s
Report on Form 6-K filed with the                 Commission on August 30, 2007, and
incorporated herein by reference).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | NICE
Systems Ltd. 1995 Stock Option Plan (filed as Exhibit 99.1 to NICE-Systems Ltd.'s
Registration                 Statement on Form S-8 (Registration No. 333-9350) filed with
the Commission on September 1, 1995, and                 incorporated herein by
reference).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | NICE
Systems Ltd. 2003 Stock Option Plan, as amended.
|--- |  | -----------------------------------------------------

|4.6 |  | NICE
Systems Ltd.  Amended and  Restated  1999  Employee  Stock  Purchase  Plan (filed as
Exhibit 4 to                 NICE-System  Ltd.'s  Registration  Statement on Form S-8
(Registration No.  333-111113) filed with the                 Commission on May 22, 2006,
and incorporated herein by reference).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | Actimize
Ltd. 2003 Omnibus Stock Option and Restricted Stock Incentive Plan (filed as Exhibit 4.4
to                 NICE-System Ltd.'s Registration Statement on Form S-8 (Registration
No. 333-145981) filed with the                 Commission on September 11, 2007, and
incorporated herein by reference).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | NICE
Systems Ltd. 2008 Share Incentive Plan, as amended.
|--- |  | --------------------------------------------------------

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

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

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

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

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

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

116

---

---

NICE SYSTEMS LTD. AND
SUBSIDIARIES

CONSOLIDATED
FINANCIAL STATEMENTS

AS OF DECEMBER 31,
2008

IN U.S. DOLLARS

INDEX

|                                                          |  |                
|--------------------------------------------------------- |  | ---------------
|                                                          |  | Page           
|                                                          |  |                
|                                                          |  |                
|Reports of Independent Registered Public
 Accounting Firm |  | F - 2  F - 3  
|                                                          |  |                
|Consolidated Balance Sheets                               |  | F - 4  F - 5  
|                                                          |  |                
|Consolidated Statements of Income                         |  | F - 6          
|                                                          |  |                
|Statements of Changes in Shareholders
 Equity            |  | F - 7  F - 8  
|                                                          |  |                
|Consolidated Statements of Cash Flows                     |  | F - 9  F- 12  
|                                                          |  |                
|Notes to Consolidated Financial Statements                |  | F - 13  F - 57

---

---



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



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Shareholders
and Board of Directors of

NICE SYSTEMS LTD.

We have audited the accompanying consolidated balance sheets of NICE
Systems Ltd. and subsidiaries (the Company) as of December 31, 2007 and 2008,
and the related consolidated statements of income, shareholders equity and
cash flows for each of the three years in the period ended December 31, 2008.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and
subsidiaries as of December 31, 2007 and 2008, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States.

We also have audited,
in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated April 5, 2009
expressed an unqualified opinion thereon.

|Tel-Aviv, IsraelApril 5,
 2009 |  | /s/
KOST, FORER, GABBAY & KASIERER

KOST
FORER GABBAY & KASIERER A Member of Ernst & Young Global
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------

F - 2

---

---



|                     |                                    |                              | 
|-------------------- | ---------------------------------- | ---------------------------- | 
|(ERNST & YOUNG LOGO) | NICE SYSTEMS LTD. AND SUBSIDIARIES
|                     |                                    |                             
|                     |                                    | Kost Forer Gabbay & Kasierer
|                     |                                    | 3
 Aminadav St.             
|                     |                                    | Tel-Aviv
 67067, Israel     
|                     |                                    |                             
|                     |                                    | Tel: 972 (3)6232525         
|                     |                                    | Fax: 972
 (3)5622555        
|                     |                                    | www.ey.com/il               

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders
and Board of Directors of

NICE SYSTEMS LTD.

We have audited NICE
Systems Ltd.s (NICE or the Company) internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). NICEs
management is responsible for maintaining effective internal control over
financial reporting included in the accompanying Managements Annual Report on
internal control over financial reporting. Our responsibility is to express an
opinion on the Companys Internal Control over Financial Reporting based on our
audit.

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

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

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

In our opinion, NICE
maintained in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the COSO criteria.

We also have audited,
in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of NICE and subsidiaries
as of December 31, 2007 and 2008, and the related consolidated statements of
income, shareholders equity and cash flows for each of the three years in the
period ended December 31, 2008 and our report dated April 5, 2009 expressed an unqualified opinion
thereon.

|Tel-Aviv, IsraelApril 5,
 2009 |  | /s/
KOST, FORER, GABBAY & KASIERER

KOST
FORER GABBAY & KASIERER A Member of Ernst & Young Global
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------

F - 3

---

---



|                                   
|-----------------------------------
|NICE
 SYSTEMS LTD. AND SUBSIDIARIES
|                                   
|CONSOLIDATED BALANCE SHEETS        
|                                   
|U.S. dollars in thousands          

|                                                                                                                              |  |              |           |      |   |           | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- | 
|                                                                                                                              |  | December 31, |          
|                                                                                                                              |  |              |          
|                                                                                                                              |  | 2007         |           | 2008 |  
|                                                                                                                              |  |              |           |      |  
|                                                                                                                              |  |              |           |      |   |           | 
|ASSETS                                                                                                                        |  |              |           |      |   |           | 
|                                                                                                                              |  |              |           |      |   |           | 
|CURRENT ASSETS:                                                                                                               |  |              |           |      |   |           | 
|Cash and cash equivalents                                                                                                     |  | $            | 116,619   |      | $ | 144,376   | 
|Short-term bank deposits                                                                                                      |  |              | 39,233    |      |   | 65,003    | 
|Marketable securities                                                                                                         |  |              | 84,089    |      |   | 121,069   | 
|Trade receivables (net of allowance for
 doubtful accounts of $5,239 and
 $6,308 at December 31, 2007 and 2008, respectively) |  |              | 101,977   |      |   | 104,115   | 
|Other receivables and prepaid expenses                                                                                        |  |              | 20,749    |      |   | 23,697    | 
|Inventories                                                                                                                   |  |              | 11,835    |      |   | 11,500    | 
|Deferred tax assets                                                                                                           |  |              | 8,258     |      |   | 8,400     | 
|                                                                                                                              |  |              |           |      |   |           | 
|                                                                                                                              |  |              |           |      |   |           | 
|Total current
 assets                                                                                                         |  |              | 382,760   |      |   | 478,160   | 
|                                                                                                                              |  |              |           |      |   |           | 
|                                                                                                                              |  |              |           |      |   |           | 
|LONG-TERM ASSETS:                                                                                                             |  |              |           |      |   |           | 
|Marketable securities                                                                                                         |  |              | 158,260   |      |   | 170,923   | 
|Other long-term assets                                                                                                        |  |              | 27,088    |      |   | 25,322    | 
|Property and equipment, net                                                                                                   |  |              | 18,655    |      |   | 23,394    | 
|Other intangible assets, net                                                                                                  |  |              | 162,315   |      |   | 145,402   | 
|Goodwill                                                                                                                      |  |              | 443,256   |      |   | 445,504   | 
|                                                                                                                              |  |              |           |      |   |           | 
|                                                                                                                              |  |              |           |      |   |           | 
|Total long-term
 assets                                                                                                       |  |              | 809,574   |      |   | 810,545   | 
|                                                                                                                              |  |              |           |      |   |           | 
|                                                                                                                              |  |              |           |      |   |           | 
|Total assets                                                                                                                  |  | $            | 1,192,334 |      | $ | 1,288,705 | 
|                                                                                                                              |  |              |           |      |   |           | 

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

F - 4

---

---



|                                             
|---------------------------------------------
|NICE
 SYSTEMS LTD. AND SUBSIDIARIES          
|                                             
|CONSOLIDATED BALANCE SHEETS                  
|                                             
|U.S. dollars in thousands (except share data)

|                                                                                                                                                               |  |              |           |      |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- | -
|                                                                                                                                                               |  | December 31, |          
|                                                                                                                                                               |  |              |          
|                                                                                                                                                               |  | 2007         |           | 2008 |  
|                                                                                                                                                               |  |              |           |      |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                           |  |              |           |      |   |           |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|CURRENT LIABILITIES:                                                                                                                                           |  |              |           |      |   |           |  
|Trade payables                                                                                                                                                 |  | $            | 21,792    |      | $ | 23,060    |  
|Accrued expenses and other liabilities                                                                                                                         |  |              | 208,085   |      |   | 237,589   |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|Total current
 liabilities                                                                                                                                     |  |              | 229,877   |      |   | 260,649   |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|LONG-TERM LIABILITIES:                                                                                                                                         |  |              |           |      |   |           |  
|Accrued severance pay                                                                                                                                          |  |              | 16,431    |      |   | 19,928    |  
|Deferred tax liabilities                                                                                                                                       |  |              | 41,764    |      |   | 37,060    |  
|Other long-term liabilities                                                                                                                                    |  |              | 468       |      |   | 246       |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|Total long-term
 liabilities                                                                                                                                   |  |              | 58,663    |      |   | 57,234    |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                         |  |              |           |      |   |           |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|SHAREHOLDERS EQUITY:                                                                                                                                          |  |              |           |      |   |           |  
|Share capital-                                                                                                                                                 |  |              |           |      |   |           |  
|Ordinary shares of NIS 1 par value:                                                                                                                            |  |              |           |      |   |           |  
|Authorized: 125,000,000 at December 31,
 2007 and 2008; Issued and outstanding: 59,412,812 and 60,667,712 shares at
 December 31, 2007 and 2008, respectively; |  |              | 14,801    |      |   | 15,157    |  
|Additional paid-in capital                                                                                                                                     |  |              | 811,250   |      |   | 853,226   |  
|Accumulated other comprehensive income
 (loss)                                                                                                                 |  |              | 13,068    |      |   | (1,343    | )
|Retained earnings                                                                                                                                              |  |              | 64,675    |      |   | 103,782   |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|Total
 shareholders equity                                                                                                                                    |  |              | 903,794   |      |   | 970,822   |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|                                                                                                                                                               |  |              |           |      |   |           |  
|Total liabilities
 and shareholders equity                                                                                                                    |  | $            | 1,192,334 |      | $ | 1,288,705 |  
|                                                                                                                                                               |  |              |           |      |   |           |  

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

F - 5

---

---



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

|                                               |  |                         |         |      |   |         |  |   |         | 
|---------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|                                               |  | Year ended December 31, |        
|                                               |  |                         |        
|                                               |  | 2006                    |         | 2007 |   | 2008    | 
|                                               |  |                         |         |      |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Revenues:                                      |  |                         |         |      |   |         |  |   |         | 
|Products                                       |  | $                       | 261,098 |      | $ | 316,888 |  | $ | 351,680 | 
|Services                                       |  |                         | 148,546 |      |   | 200,486 |  |   | 272,482 | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Total revenues                                 |  |                         | 409,644 |      |   | 517,374 |  |   | 624,162 | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Cost of revenues:                              |  |                         |         |      |   |         |  |   |         | 
|Products                                       |  |                         | 84,675  |      |   | 89,373  |  |   | 95,861  | 
|Services                                       |  |                         | 89,539  |      |   | 116,969 |  |   | 142,885 | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Total cost of
 revenues                        |  |                         | 174,214 |      |   | 206,342 |  |   | 238,746 | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Gross profit                                   |  |                         | 235,430 |      |   | 311,032 |  |   | 385,416 | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Operating expenses:                            |  |                         |         |      |   |         |  |   |         | 
|Research and development, net                  |  |                         | 44,880  |      |   | 59,632  |  |   | 78,445  | 
|Selling and marketing                          |  |                         | 95,190  |      |   | 120,592 |  |   | 147,879 | 
|General and administrative                     |  |                         | 60,463  |      |   | 85,089  |  |   | 97,378  | 
|Amortization of acquired intangibles           |  |                         | 4,918   |      |   | 9,175   |  |   | 14,493  | 
|In process research and development
 write-off |  |                         | 12,882  |      |   | 3,710   |  |   |        | 
|Settlement and related expenses                |  |                         |        |      |   |        |  |   | 9,870   | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Total operating
 expenses                      |  |                         | 218,333 |      |   | 278,198 |  |   | 348,065 | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Operating income                               |  |                         | 17,097  |      |   | 32,834  |  |   | 37,351  | 
|Financial income and other, net                |  |                         | 13,895  |      |   | 14,800  |  |   | 11,236  | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Income before taxes on income                  |  |                         | 30,992  |      |   | 47,634  |  |   | 48,587  | 
|Taxes on income                                |  |                         | 8,591   |      |   | 10,254  |  |   | 9,480   | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Net income                                     |  | $                       | 22,401  |      | $ | 37,380  |  | $ | 39,107  | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Net earnings per share:                        |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Basic                                          |  | $                       | 0.45    |      | $ | 0.69    |  | $ | 0.65    | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|                                               |  |                         |         |      |   |         |  |   |         | 
|Diluted                                        |  | $                       | 0.43    |      | $ | 0.67    |  | $ | 0.64    | 
|                                               |  |                         |         |      |   |         |  |   |         | 

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

F - 6

---

---



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

|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|-------------------------------------------------------------- |  | ------------ | ------ | ------------------------ | - | -------------------------------------- | - | ------------------ | ------ | ---------------------------- | - | ------------------------ |  | - | ------ |  | - | ------- | -
|                                                               |  | Sharecapital |        | Additionalpaid-incapital |   | Accumulated other comprehensive income |   | Retained
 earnings |        | Total
 comprehensive
 income |   | Totalshareholdersequity | 
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          | 
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|Balance as of January 1, 2006                                  |  | $            | 6,772  |                          | $ | 473,203                                |   | $                  | 2,996  |                              | $ | 4,070                    |  |   |        |  | $ | 487,041 |  
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|Issuance of shares of ESPP                                     |  |              | 2      |                          |   | 227                                    |   |                    |       |                              |   |                         |  |   |        |  |   | 229     |  
|Exercise of share options                                      |  |              | 510    |                          |   | 37,187                                 |   |                    |       |                              |   |                         |  |   |        |  |   | 37,697  |  
|Stock-based compensation                                       |  |              |       |                          |   | 12,571                                 |   |                    |       |                              |   |                         |  |   |        |  |   | 12,571  |  
|Tax benefit in respect of offering expenses                    |  |              |       |                          |   | (585                                   | ) |                    |       |                              |   |                         |  |   |        |  |   | (585    | )
|Excess tax benefit from share based payment arrangements       |  |              |       |                          |   | 5,733                                  |   |                    |       |                              |   |                         |  |   |        |  |   | 5,733   |  
|Stock split effected as stock dividend                         |  |              | 5,470  |                          |   | (5,470                                 | ) |                    |       |                              |   |                         |  |   |        |  |   |        |  
|Comprehensive income:                                          |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|Foreign currency translation adjustments                       |  |              |       |                          |   |                                       |   |                    | 4,463  |                              |   |                         |  | $ | 4,463  |  |   | 4,463   |  
|Unrealized gains on derivative instruments, net                |  |              |       |                          |   |                                       |   |                    | 24     |                              |   |                         |  |   | 24     |  |   | 24      |  
|Net income                                                     |  |              |       |                          |   |                                       |   |                    |       |                              |   | 22,401                   |  |   | 22,401 |  |   | 22,401  |  
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|Total comprehensive income                                     |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  | $ | 26,888 |  |   |         |  
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|Balance as of December 31, 2006                                |  |              | 12,754 |                          |   | 522,866                                |   |                    | 7,483  |                              |   | 26,471                   |  |   |        |  |   | 569,574 |  
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|Issuance of shares upon public offering, net                   |  |              | 1,283  |                          |   | 179,546                                |   |                    |       |                              |   |                         |  |   |        |  |   | 180,829 |  
|Issuance of shares of ESPP                                     |  |              | 4      |                          |   | 495                                    |   |                    |       |                              |   |                         |  |   |        |  |   | 499     |  
|Exercise of share options                                      |  |              | 393    |                          |   | 19,406                                 |   |                    |       |                              |   |                         |  |   |        |  |   | 19,799  |  
|Stock-based compensation                                       |  |              |       |                          |   | 23,666                                 |   |                    |       |                              |   |                         |  |   |        |  |   | 23,666  |  
|Tax benefit in respect of offering expenses                    |  |              |       |                          |   | 10                                     |   |                    |       |                              |   |                         |  |   |        |  |   | 10      |  
|Excess tax benefit from share based payment arrangements       |  |              |       |                          |   | 4,945                                  |   |                    |       |                              |   |                         |  |   |        |  |   | 4,945   |  
|Issuance of shares and options for the acquisition of Actimize |  |              | 365    |                          |   | 60,272                                 |   |                    |       |                              |   |                         |  |   |        |  |   | 60,637  |  
|Restricted shares vesting in respect of Actimize acquisition   |  |              | 2      |                          |   | 44                                     |   |                    |       |                              |   |                         |  |   |        |  |   | 46      |  
|FIN 48 opening balance adjustment                              |  |              |       |                          |   |                                       |   |                    |       |                              |   | 824                      |  |   |        |  |   | 824     |  
|Comprehensive income:                                          |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|Foreign currency translation adjustments                       |  |              |       |                          |   |                                       |   |                    | 5,175  |                              |   |                         |  | $ | 5,175  |  |   | 5,175   |  
|Unrealized gains on derivative instruments, net                |  |              |       |                          |   |                                       |   |                    | 410    |                              |   |                         |  |   | 410    |  |   | 410     |  
|Net income                                                     |  |              |       |                          |   |                                       |   |                    |       |                              |   | 37,380                   |  |   | 37,380 |  |   | 37,380  |  
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|Total comprehensive income                                     |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  | $ | 42,965 |  |   |         |  
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|                                                               |  |              |        |                          |   |                                        |   |                    |        |                              |   |                          |  |   |        |  |   |         |  
|Balance as of December 31, 2007                                |  |              | 14,801 |                          |   | 811,250                                |   |                    | 13,068 |                              |   | 64,675                   |  |   |        |  |   | 903,794 |  

F - 7

---

---



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

|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|------------------------------------------------------------- |  | -------------- | ------ | ---------------------------- | - | ------------------------------------------------ |  | ------------------ | ------- | ---------------------------- | - | ---------------------------- |  | - | ------- | - | - | ------- | -
|                                                              |  | Share
 capital |        | Additional
 paid-in
 capital |   | Accumulated
 other
 comprehensive
 income (loss) |  | Retained
 earnings |         | Total
 comprehensive
 income |   | Total
 shareholders
 equity | 
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              | 
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|Balance as of December 31,
 2007                              |  | $              | 14,801 |                              | $ | 811,250                                          |  | $                  | 13,068  |                              | $ | 64,675                       |  |   |         |   | $ | 903,794 |  
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|Issuance of shares of ESPP                                    |  |                | 5      |                              |   | 526                                              |  |                    |         |                              |   |                              |  |   |         |   |   | 531     |  
|Exercise of share options                                     |  |                | 290    |                              |   | 14,430                                           |  |                    |         |                              |   |                              |  |   |         |   |   | 14,720  |  
|Stock-based compensation                                      |  |                |        |                              |   | 25,321                                           |  |                    |         |                              |   |                              |  |   |         |   |   | 25,321  |  
|Tax benefit in respect of
 offering expenses                  |  |                |        |                              |   | 892                                              |  |                    |         |                              |   |                              |  |   |         |   |   | 892     |  
|Excess tax benefit from
 share based payment arrangements     |  |                |        |                              |   | 638                                              |  |                    |         |                              |   |                              |  |   |         |   |   | 638     |  
|Restricted shares vesting
 in respect of Actimize acquisition |  |                | 61     |                              |   | 169                                              |  |                    |         |                              |   |                              |  |   |         |   |   | 230     |  
|Comprehensive income:                                         |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|Foreign currency translation adjustments                      |  |                |        |                              |   |                                                  |  |                    | (14,405 | )                            |   |                              |  | $ | (14,405 | ) |   | (14,405 | )
|Unrealized gains on marketable securities, net                |  |                |        |                              |   |                                                  |  |                    | 1,432   |                              |   |                              |  |   | 1,432   |   |   | 1,432   |  
|Unrealized losses on derivative instruments, net              |  |                |        |                              |   |                                                  |  |                    | (1,438  | )                            |   |                              |  |   | (1,438  | ) |   | (1,438  | )
|Net income                                                    |  |                |        |                              |   |                                                  |  |                    |         |                              |   | 39,107                       |  |   | 39,107  |   |   | 39,107  |  
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|Total comprehensive income                                    |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  | $ | 24,696  |   |   |         |  
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|Balance as of December 31,
 2008                              |  | $              | 15,157 |                              | $ | 853,226                                          |  | $                  | (1,343  | )                            | $ | 103,782                      |  |   |         |   | $ | 970,822 |  
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|Accumulated unrealized
 gains on marketable securities, net   |  |                |        |                              |   |                                                  |  | $                  | 1,432   |                              |   |                              |  |   |         |   |   |         |  
|Accumulated unrealized
 losses on derivative instruments, net |  |                |        |                              |   |                                                  |  |                    | (956    | )                            |   |                              |  |   |         |   |   |         |  
|Accumulated foreign
 currency translation adjustments         |  |                |        |                              |   |                                                  |  |                    | (1,819  | )                            |   |                              |  |   |         |   |   |         |  
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  
|Accumulated other
 comprehensive loss as of December 31, 2008 |  |                |        |                              |   |                                                  |  | $                  | (1,343  | )                            |   |                              |  |   |         |   |   |         |  
|                                                              |  |                |        |                              |   |                                                  |  |                    |         |                              |   |                              |  |   |         |   |   |         |  

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, |         
|                                                                                               |  |                         |         
|                                                                                               |  | 2006                    |          | 2007 |   | 2008     |  
|                                                                                               |  |                         |          |      |   |          |  
|                                                                                               |  |                         |          |      |   |          |   |   |          |  
|Cash flows from operating activities:                                                          |  |                         |          |      |   |          |   |   |          |  
|                                                                                               |  |                         |          |      |   |          |   |   |          |  
|Net income                                                                                     |  | $                       | 22,401   |      | $ | 37,380   |   | $ | 39,107   |  
|                                                                                               |  |                         |          |      |   |          |   |   |          |  
|                                                                                               |  |                         |          |      |   |          |   |   |          |  
|Adjustments required to reconcile net
 income to net cash provided by operating activities:    |  |                         |          |      |   |          |   |   |          |  
|Depreciation and amortization                                                                  |  |                         | 21,919   |      |   | 30,926   |   |   | 42,740   |  
|Stock-based compensation                                                                       |  |                         | 12,571   |      |   | 23,666   |   |   | 25,321   |  
|Excess tax benefit from share-based
 payments arrangements                                     |  |                         | (5,733   | )    |   | (4,945   | ) |   | (638     | )
|In-process research and development
 write-off                                                 |  |                         | 12,882   |      |   | 3,710    |   |   |         |  
|Accrued severance pay, net                                                                     |  |                         | 751      |      |   | 632      |   |   | 1,506    |  
|Amortization of premium (accretion of
 discount) and accrued interest on marketable securities |  |                         | 278      |      |   | (252     | ) |   | 1,504    |  
|Loss on marketable securities sold, called
 or impaired                                        |  |                         |         |      |   | 257      |   |   | 4,924    |  
|Deferred taxes, net                                                                            |  |                         | (3,707   | )    |   | (5,231   | ) |   | (5,554   | )
|Increase in trade receivables                                                                  |  |                         | (6,772   | )    |   | (15,224  | ) |   | (232     | )
|Increase in other receivables and prepaid
 expenses                                            |  |                         | (1,897   | )    |   | (9,623   | ) |   | (1,450   | )
|Decrease in inventories                                                                        |  |                         | 5,376    |      |   | 7,579    |   |   | 300      |  
|Increase (decrease) in trade payables                                                          |  |                         | 1,435    |      |   | (2,982   | ) |   | 189      |  
|Increase in accrued expenses and other
 liabilities                                            |  |                         | 27,991   |      |   | 51,933   |   |   | 28,352   |  
|Other                                                                                          |  |                         | 80       |      |   | 418      |   |   | (359     | )
|                                                                                               |  |                         |          |      |   |          |   |   |          |  
|                                                                                               |  |                         |          |      |   |          |   |   |          |  
|Net cash provided by operating activities                                                      |  |                         | 87,575   |      |   | 118,244  |   |   | 135,710  |  
|                                                                                               |  |                         |          |      |   |          |   |   |          |  
|                                                                                               |  |                         |          |      |   |          |   |   |          |  
|Cash flows from investing activities:                                                          |  |                         |          |      |   |          |   |   |          |  
|                                                                                               |  |                         |          |      |   |          |   |   |          |  
|Purchase of property and equipment                                                             |  |                         | (8,111   | )    |   | (10,947  | ) |   | (15,454  | )
|Proceeds from sale of property and
 equipment                                                  |  |                         | 76       |      |   | 58       |   |   | 20       |  
|Investment in marketable securities                                                            |  |                         | (217,655 | )    |   | (208,590 | ) |   | (231,057 | )
|Proceeds from maturity of marketable
 securities                                               |  |                         | 142,209  |      |   | 170,945  |   |   | 64,725   |  
|Proceeds from sale and call of marketable
 securities                                          |  |                         | 3,000    |      |   | 30,100   |   |   | 111,826  |  
|Investment in short-term bank deposits                                                         |  |                         | (117     | )    |   | (39,131  | ) |   | (64,448  | )
|Proceeds from short-term bank deposits                                                         |  |                         | 99       |      |   | 139      |   |   | 39,095   |  

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

F - 9

---

---



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

|                                                                         |  |                         |          |      |   |          |   |   |          |  
|------------------------------------------------------------------------ |  | ----------------------- | -------- | ---- | - | -------- | - | - | -------- | -
|                                                                         |  | Year ended December 31, |         
|                                                                         |  |                         |         
|                                                                         |  | 2006                    |          | 2007 |   | 2008     |  
|                                                                         |  |                         |          |      |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Cash flows from investing activities
 (cont.):                           |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Payment for the acquisition of FAST (a)                                  |  | $                       | (21,320  | )    | $ | (4,975   | ) | $ | (1,229   | )
|Payment for the acquisition of Performix
 (b)                            |  |                         | (13,800  | )    |   |         |   |   |         |  
|Payment for the acquisition of IEX (c)                                   |  |                         | (203,162 | )    |   | (1,500   | ) |   |         |  
|Payment for the acquisition of Actimize (d)                              |  |                         |         |      |   | (210,540 | ) |   | (1,633   | )
|Refund (payment) for other acquisitions                                  |  |                         | 1,500    |      |   | (500     | ) |   | (18,773  | )
|Decrease in accrued acquisition costs                                    |  |                         | (15      | )    |   | (83      | ) |   | (44      | )
|Capitalization of software development
 costs                            |  |                         | (1,225   | )    |   | (962     | ) |   | (1,278   | )
|Purchase of intangible asset                                             |  |                         |         |      |   |         |   |   | (3,533   | )
|Received upon the realization of investment
 in an affiliate             |  |                         |         |      |   |         |   |   | 964      |  
|Other                                                                    |  |                         | 83       |      |   |         |   |   |         |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Net cash used in investing activities                                    |  |                         | (318,438 | )    |   | (275,986 | ) |   | (120,819 | )
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Cash flows from financing activities:                                    |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Proceeds from issuance of shares upon
 public offering, net              |  |                         |         |      |   | 180,934  |   |   |         |  
|Proceeds from issuance of shares upon
 exercise of options and ESPP, net |  |                         | 38,987   |      |   | 20,273   |   |   | 15,282   |  
|Receipt of short-term bank loan                                          |  |                         |         |      |   | 120,000  |   |   |         |  
|Repayment of short-term bank loan                                        |  |                         |         |      |   | (120,000 | ) |   |         |  
|Excess tax benefit from share-based
 payments arrangements               |  |                         | 5,733    |      |   | 4,945    |   |   | 638      |  
|Decrease in accrued offering expenses                                    |  |                         | (273     | )    |   |         |   |   |         |  
|Decrease in short-term bank credit assumed
 in the acquisition of FAST   |  |                         | (785     | )    |   |         |   |   |         |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Net cash provided by financing activities                                |  |                         | 43,662   |      |   | 206,152  |   |   | 15,920   |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Effect of exchange rate changes on cash                                  |  |                         | (390     | )    |   | 844      |   |   | (3,054   | )
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Increase (decrease) in cash and cash
 equivalents                        |  |                         | (187,591 | )    |   | 49,254   |   |   | 27,757   |  
|Cash and cash equivalents at the beginning
 of the year                  |  |                         | 254,956  |      |   | 67,365   |   |   | 116,619  |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Cash and cash equivalents at the end of the
 year                        |  | $                       | 67,365   |      | $ | 116,619  |   | $ | 144,376  |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Supplemental disclosure of cash flows
 activities:                       |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Cash paid during the year for:                                           |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Income taxes                                                             |  | $                       | 1,407    |      | $ | 2,199    |   | $ | 2,499    |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  
|Interest                                                                 |  | $                       | 40       |      | $ | 668      |   | $ | 52       |  
|                                                                         |  |                         |          |      |   |          |   |   |          |  

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

F - 10

---

---



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

|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|--- | ----------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ----- | - | - | ----- | 
|    |                                                                                           |  | Year ended December 31, |        
|    |                                                                                           |  |                         |        
|    |                                                                                           |  | 2006                    |         | 2007 |   | 2008  |  
|    |                                                                                           |  |                         |         |      |   |       |  
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|(a) | Payment for the acquisition of FAST:                                                      |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    | Estimated fair value of assets acquired and
 liabilities assumed at the acquisition date: |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    | Working capital deficiency (excluding cash
 and cash equivalents)                         |  | $                       | (5      | )    | $ |      |   | $ |      | 
|    | Property and equipment                                                                    |  |                         | 256     |      |   |      |   |   |      | 
|    | In-process research and development                                                       |  |                         | 212     |      |   |      |   |   |      | 
|    | Other intangible assets                                                                   |  |                         | 11,753  |      |   |      |   |   |      | 
|    | Goodwill                                                                                  |  |                         | 17,042  |      |   |      |   |   |      | 
|    | Long-term deferred tax liability                                                          |  |                         | (1,449  | )    |   |      |   |   |      | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         | 27,809  |      |   |      |   |   |      | 
|    | Less  decrease in deferred acquisition
 costs                                            |  |                         | (256    | )    |   |      |   |   |      | 
|    | Add (less)  earn out payment (accrued earn
 out payment)                                 |  |                         | (6,233  | )    |   | 4,975 |   |   | 1,229 | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  | $                       | 21,320  |      | $ | 4,975 |   | $ | 1,229 | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|(b) | Payment for the acquisition of Performix:                                                 |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    | Estimated fair value of assets acquired and
 liabilities assumed at the acquisition date: |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    | Working capital deficiency (excluding cash
 and cash equivalents)                         |  | $                       | (2,800  | )    |   |       |   |   |       | 
|    | Property and equipment                                                                    |  |                         | 360     |      |   |       |   |   |       | 
|    | Other intangible assets                                                                   |  |                         | 8,060   |      |   |       |   |   |       | 
|    | Goodwill                                                                                  |  |                         | 8,292   |      |   |       |   |   |       | 
|    | Long-term deferred tax liability                                                          |  |                         | (24     | )    |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         | 13,888  |      |   |       |   |   |       | 
|    | Less - accrued acquisition costs                                                          |  |                         | (88     | )    |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  | $                       | 13,800  |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|(c) | Payment for the acquisition of IEX:                                                       |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    | Estimated fair value of assets acquired and
 liabilities assumed at the acquisition date: |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    | Working capital deficiency (excluding cash
 and cash equivalents)                         |  | $                       | 1,687   |      |   | (149  | ) |   |       | 
|    | Property and equipment                                                                    |  |                         | 315     |      |   |      |   |   |       | 
|    | In-process research and development                                                       |  |                         | 12,670  |      |   |      |   |   |       | 
|    | Other intangible assets                                                                   |  |                         | 78,170  |      |   |      |   |   |       | 
|    | Goodwill                                                                                  |  |                         | 140,900 |      |   | 149   |   |   |       | 
|    | Long-term deferred tax liabilities                                                        |  |                         | (28,909 | )    |   |      |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         | 204,833 |      |   |      |   |   |       | 
|    | Payment (provision) on account of purchase
 price                                         |  |                         | (1,671  | )    |   | 1,500 |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 
|    |                                                                                           |  | $                       | 203,162 |      | $ | 1,500 |   |   |       | 
|    |                                                                                           |  |                         |         |      |   |       |   |   |       | 

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

F - 11

---

---



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

|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|--- |  | ----------------------------------------------------------------------------------------- |  | ----------------------- | ---- | ---- | - | ------- | - | - | ----- | 
|    |  |                                                                                           |  | Year ended December 31, |     
|    |  |                                                                                           |  |                         |     
|    |  |                                                                                           |  | 2006                    |      | 2007 |   | 2008    |  
|    |  |                                                                                           |  |                         |      |      |   |         |  
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|(d) |  | Payment for the acquisition of Actimize:                                                  |  |                         |      |      |   |         |   |   |       | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  | Estimated fair value of assets acquired and
 liabilities assumed at the acquisition date: |  |                         |      |      |   |         |   |   |       | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  | Working capital deficiency (excluding cash
 and cash equivalents)                         |  |                         |      |      | $ | (8,919  | ) | $ |      | 
|    |  | Property and equipment                                                                    |  |                         |      |      |   | 622     |   |   |      | 
|    |  | Severance pay fund                                                                        |  |                         |      |      |   | 324     |   |   |      | 
|    |  | Long-term other receivables and prepaid expenses                                          |  |                         |      |      |   | 332     |   |   |      | 
|    |  | In-process research and development                                                       |  |                         |      |      |   | 3,710   |   |   |      | 
|    |  | Other intangible assets                                                                   |  |                         |      |      |   | 71,300  |   |   |      | 
|    |  | Goodwill                                                                                  |  |                         |      |      |   | 219,543 |   |   |      | 
|    |  | Long-term deferred tax liabilities                                                        |  |                         |      |      |   | (13,028 | ) |   |      | 
|    |  | Other long-term liabilities                                                               |  |                         |      |      |   | (854    | ) |   |      | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  |                                                                                           |  |                         |      |      |   | 273,030 |   |   |      | 
|    |  | Add (less)  (accrued) acquisition costs                                                  |  |                         |      |      |   | (1,853  | ) |   | 1,633 | 
|    |  | Less - amount acquired by issuance of
 shares and options, net of issuance expenses       |  |                         |      |      |   | (60,637 | ) |   |      | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  |                                                                                           |  |                         |      |      | $ | 210,540 |   | $ | 1,633 | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|(e) |  | Non-cash activities:                                                                      |  |                         |      |      |   |         |   |   |       | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  | Tax benefit on offering expenses                                                          |  | $                       | (585 | )    | $ | 10      |   | $ | 892   | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 
|    |  | Accrued offering expenses                                                                 |  | $                       |     |      | $ | 105     |   | $ |      | 
|    |  |                                                                                           |  |                         |      |      |   |         |   |   |       | 

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

F - 12

---

---



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

|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------- | ------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | a.      | General:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |         | NICE Systems
 Ltd. (NICE) and subsidiaries (collectively - the Company) is a leading
 provider of solutions that capture, manage and analyze unstructured
 multimedia content and transactional data enabling companies and public
 organizations to comply with internal and governmental regulations, enhance
 business and operational performance, address security threats and behave in
 a proactive manner. Unstructured multimedia content includes phone calls to
 contact centers, trading floors, branches, home agents and back offices and
 emergency services and first responders, video captured by closed circuit
 cameras, radio communications between emergency services and first
 responders personnel, internet sessions, email and instant messaging and
 converged multimedia solutions for command and control centers. The Companys
 solutions include integrated, scalable, multimedia recording platforms,
 software applications and related professional services. These solutions
 address critical business processes and risk management, compliance
 procedures and security needs of companies and public organizations. The
 Companys solutions facilitate faster decision-making and near real-time
 action, improving business and employee performance, reducing exposure to
 operational risk such as fraud and compliance and anti-money laundering, and
 enhancing security and public safety.
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |         | The
 Companys customers use its systems in a variety of enterprises, such as
 financial services, telecommunications, health-care, outsourcers, retail,
 service providers and utilities. The Companys security solutions are
 primarily focused on homeland security and first responder organizations,
 transportation organizations, and the public and private sectors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |         | The
 Companys markets are located primarily in North America, Europe, the Middle
 East and Africa (EMEA) and Asia Pacific (APAC).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |         | The Company
 depends on a limited number of contract manufacturers for producing its
 products. If any of these manufacturers become unable or unwilling to
 continue to manufacture or fail to meet the quality or delivery requirements needed to satisfy the
 Companys customers, it could result in the loss of sales, which could
 adversely affect the Companys results of operations and financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |         | The Company
 relies upon a number of independent distributors to market, sell and service
 its products in certain markets. If the Company is unable to effectively
 manage and maintain relationships with its distributors, or to enter into
 similar relationships with others, its ability to market and sell its
 products in these markets will be affected. In addition, a loss of a major
 distributor, or any event negatively affecting such distributors financial
 condition, could cause a material adverse effect on the Companys results of
 operations and financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |         | As for major
 customer data, see Note 14c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F - 13

---

---



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

|         |                 |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------- | --------------- | ------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | b.              | Acquisitions:
|         |                 |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                 | 1.            | Acquisition
 of FAST Video Security AG (FAST):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                 |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                 |               | On January 4, 2006, the Company consummated an agreement to acquire
 all of the outstanding shares of FAST, a Switzerland-based
 developer of innovative video systems for security and surveillance purposes.
 Under the agreement, the Company acquired FAST for $21,650 in cash (including
 acquisition costs), with potential earn out based on performance milestones
 amounting to a maximum of $12,000 payable based on certain financial
 performance criteria covering years 2006 and 2008 (of which $7,000 in respect
 of 2006 and $5,000 in respect of 2008).
|         |                 |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                 |               | During the
 fourth quarter of 2006 the Company estimated that an additional consideration
 for earn out in the amount of approximately $6,200 would be paid by the
 Company on account of 2006 earn out; accordingly, the Company recorded
 additional goodwill in this amount. See also Note 11(c)(6). FAST did not meet
 the financial performance criteria with respect to 2008; accordingly no
 additional payment will be made and no additional goodwill will be recorded
 for 2008 earn out.                                                                     
|         |                 |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                 |               | The
 acquisition of FAST strengthens the Companys position in the video security
 market with smart IP-based solutions and technologies complementary to the
 Companys existing digital video offerings. Additionally, the Company extends
 its presence in the digital video security market by increasing its footprint
 in Europe and APAC markets with high quality distribution channels and
 partners, and with new prestigious customers.                                                                                                                      
|         |                 |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                 |               | By
 purchasing FAST, the Company strategically expanded its market share both in
 geographical and vertical markets. The factors that contributed to the
 purchase price that resulted in recognition of goodwill included synergies,
 the benefits of increased market share, strategic positioning value and
 time-to-market benefits.                                                                                                                                                                                                                                
|         |                 |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                 |               | The
 acquisition was accounted for by the purchase method and accordingly, the
 purchase price has been allocated according to the estimated fair value of
 the assets acquired and liabilities assumed of FAST. The results of FASTs
 operations have been included in the consolidated financial statements since
 January 4, 2006 (the consummation date).                                                                                                                                                                                                        

F - 14

---

---



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

|         |                 |  |                                                                                                           
|-------- | --------------- |  | ----------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |  |                                                                                                           
|         |                 |  | The
 following table summarizes the estimated fair values of the assets acquired
 and liabilities assumed:

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

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    | The $212
 assigned to in-process research and development was written off at the
 acquisition date in accordance with FASB Interpretation (FIN) No. 4,
 Applicability of FASB Statement No. 2 to Business Combinations Accounted for
 by the Purchase Method.                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | Trademarks,
 core technology and customer relationships in the amount of $11,753 are
 amortized at an annual weighted average rate of 20%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | 2. | Acquisition
 of Performix:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | On May 22, 2006, the Company consummated an agreement to acquire all
 of the outstanding shares of
 Performix Software Limited and to acquire the assets and assume
 certain liabilities of Performix Holdings
 Inc. and its subsidiaries (collectively Performix). Under the agreement,
 the Company acquired Performix for a total purchase price of $13,910 in
 cash (including acquisition costs). According to the agreement the purchase
 price may increase by up to an additional $3,150 based on certain performance
 criteria for the twelve month period ending July 1, 2007. Since the
 performance criteria have not been met, no additional payment was made in
 2007.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | Performix
 was among the first to recognize the potential in the area of contact center
 performance management (CCPM), an emerging trend in the contact center
 market. The acquisition of Performix extends NICEs solutions portfolio for
 the contact center market.                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | The factors
 that contributed to the purchase price that resulted in recognition of
 goodwill included synergies, the benefits of increased market share
 vertically, strategic positioning value and time-to-market benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F - 15

---

---



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

|         |                 |  |                                                                                                                                                                                                                                                                                                                                                                        
|-------- | --------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |  |                                                                                                                                                                                                                                                                                                                                                                        
|         |                 |  | The
 acquisition was accounted for by the purchase method and accordingly, the
 purchase price has been allocated according to the estimated fair value of
 the assets acquired and liabilities assumed of Performix. The results of
 Performixs operations have been included in the consolidated financial
 statements since May 22, 2006 (the consummation date).
|         |                 |  |                                                                                                                                                                                                                                                                                                                                                                        
|         |                 |  | The
 following table summarizes the estimated fair values of the assets acquired
 and liabilities assumed:                                                                                                                                                                                                                                                             

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

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    | Trade name,
 core technology, customer relationships and distribution network in the
 amount of $8,060 are amortized at an annual weighted average rate of 26%.                                                                                                                                                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 3. | Acquisition
 of IEX:                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | On July 7,
 2006, the Company consummated an agreement
 to acquire all of the outstanding shares of IEX Corporation (IEX), a
 worldwide provider of contact center workforce management solutions. Under
 the agreement, the Company acquired the shares of IEX, a wholly owned
 subsidiary of Tekelec, for approximately $204,900 in cash (including acquisition costs).                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | The
 acquisition of IEX allows NICE to offer its customers and partners a more
 extensive product portfolio in the industries in which NICE operates. IEX is
 a leading vendor in workforce management, strategic planning and performance
 management solutions for the contact center market. IEX provides a high-end
 centralized solution that compiles data seamlessly across the enterprise, enabling
 more accurate and effective forecasting, planning and scheduling.

F - 16

---

---



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

|         |                 |  |                                                                                                                                                                                                                                                                                                                                                              
|-------- | --------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |  |                                                                                                                                                                                                                                                                                                                                                              
|         |                 |  | By
 purchasing IEX, the Company strategically expanded its market share both in
 geographical and vertical markets. The factors that contributed to the
 purchase price that resulted in recognition of goodwill included synergies,
 the benefits of increased market share, strategic positioning value and
 time-to-market benefits.                      
|         |                 |  |                                                                                                                                                                                                                                                                                                                                                              
|         |                 |  | The
 acquisition was accounted for by the purchase method and accordingly, the
 purchase price has been allocated according to the estimated fair value of
 the assets acquired and liabilities assumed of IEX. The results of the IEX
 operations have been included in the consolidated financial statements since
 July 7, 2006 (the consummation date).
|         |                 |  |                                                                                                                                                                                                                                                                                                                                                              
|         |                 |  | The
 following table summarizes the estimated fair values of the assets acquired
 and liabilities assumed:                                                                                                                                                                                                                                                   

|                                        |  |   |         |  
|--------------------------------------- |  | - | ------- | -
|Cash                                    |  | $ | 67      |  
|Trade
 receivables                      |  |   | 7,215   |  
|Other
 receivables and prepaid expenses |  |   | 346     |  
|Inventories                             |  |   | 1,016   |  
|Short-term
 deferred tax assets         |  |   | 9,007   |  
|Property and
 equipment                 |  |   | 315     |  
|Trade name                              |  |   | 4,090   |  
|Core technology                         |  |   | 35,060  |  
|In-process
 research and development    |  |   | 12,670  |  
|Customer
 relationships                 |  |   | 39,020  |  
|Goodwill                                |  |   | 141,049 |  
|                                        |  |   |         |  
|                                        |  |   |         |  
|Total assets
 acquired                  |  |   | 249,855 |  
|                                        |  |   |         |  
|                                        |  |   |         |  
|Trade
 payables                         |  |   | (292    | )
|Accrued
 expenses and other liabilities |  |   | (12,838 | )
|Short-term
 deferred tax liabilities    |  |   | (2,916  | )
|Long-term
 deferred tax liabilities     |  |   | (28,909 | )
|                                        |  |   |         |  
|                                        |  |   |         |  
|Total
 liabilities assumed              |  |   | (44,955 | )
|                                        |  |   |         |  
|                                        |  |   |         |  
|Net assets
 acquired                    |  | $ | 204,900 |  
|                                        |  |   |         |  

| |  |  |                                                                                                                                                                                                                                                                     
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | The $12,670
 assigned to in-process research and development was written off at the
 acquisition date in accordance with FASB Interpretation (FIN) No. 4,
 Applicability of FASB Statement No. 2 to Business Combinations Accounted for
 by the Purchase Method.
| |  |  |                                                                                                                                                                                                                                                                     
| |  |  | Trade name,
 core technology and customer relationships in the amount of $78,170 are
 amortized at an annual weighted average rate of 12%.                                                                                                                          

F - 17

---

---



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

|         |                 |    |                                                                                                                                                                                                                                                                                                                                                        
|-------- | --------------- | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |    |                                                                                                                                                                                                                                                                                                                                                        
|         |                 | 4. | Acquisition
 of Actimize Ltd. (Actimize):                                                                                                                                                                                                                                                                                                            
|         |                 |    |                                                                                                                                                                                                                                                                                                                                                        
|         |                 |    | On August
 30, 2007, the Company consummated an agreement to acquire all of the
 outstanding shares of Actimize Ltd. (Actimize), a leading provider of transactional
 risk management software for the financial services industry, for an
 aggregate consideration of $281,111. The total purchase price of Actimize was
 composed of the following:

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

| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | *)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Represents
 the fair value of 1,501,933 American Depositary Shares (ADSs) of NICE
 issued to Actimize shareholders upon consummation of the acquisition, valued
 based on the market price of the securities a few days before and after the
 terms of the acquisition were agreed to and announced, in accordance with
 EITF 99-12.                                                                                                                                                                                                                                                                                                                                                                            
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | **)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Represents
 the fair value of the vested portion of 987,104 options and restricted shares
 of Nice granted upon consummation of the acquisition to the holders of
 partially vested NICE options and restricted shares of Actimize originally
 granted under Actimizes 2003 Omnibus Stock Option and Restricted Stock
 Incentive Plan. The fair value of these options was determined using a
 Black-Scholes-Merton valuation model with the following assumptions: expected
 life of 0-4 years, risk-free interest rate of 4.85%-4.99%, expected
 volatility of 30.7%-35.8% and no dividend yield. The fair value of the vested
 portion of the options is included herein as part of the total purchase
 price.
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | ***)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Acquisition
 related transaction costs include investment banking fees, legal and
 accounting fees and other external costs directly related to the acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | On August
 29, 2007, to finance a portion of the cash consideration for the Actimize
 acquisition, the Company entered into an unsecured loan agreement and a
 letter of undertaking with a bank, which provide for a term loan of $120,000,
 originally repayable in one installment on February 29, 2008. The loan bore
 interest payable monthly, at an annual rate of LIBOR plus a margin of 0.45%.
 On September 28, 2007, the Company repaid the loan.                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | The
 acquisition of Actimize allows NICE to offer its customers and partners a
 more extensive product portfolio in the industries in which NICE operates.
 Actimize is a leading provider of software solutions for anti-money
 laundering, brokerage compliance, customer due diligence and fraud
 prevention. Built on a patented, scalable and extensible analytics platform,
 Actimize solutions enable financial institutions to increase their insight
 into real-time customer behavior and improve risk and compliance performance.
 By purchasing Actimize, the Company strategically strengthened its position
 as an enterprise wide analytics powerhouse and expanded its solution
 offering. The factors that contributed to the purchase price that resulted in
 recognition of goodwill, included the leverage for vertical markets and time
 to market benefits.

F - 18

---

---



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

|         |                 |  |                                                                                                                                                                                                                                                                                                                                                                           
|-------- | --------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |  |                                                                                                                                                                                                                                                                                                                                                                           
|         |                 |  | The
 acquisition was accounted for by the purchase method and accordingly, the
 purchase price has been allocated according to the estimated fair value of
 the assets acquired and liabilities assumed of Actimize. The results of the
 Actimize operations have been included in the consolidated financial
 statements since August 30, 2007 (the consummation date).
|         |                 |  |                                                                                                                                                                                                                                                                                                                                                                           
|         |                 |  | The
 following table summarizes the estimated fair values of the assets acquired
 and liabilities assumed:                                                                                                                                                                                                                                                                

|                                                   |  |   |         |  
|-------------------------------------------------- |  | - | ------- | -
|Cash                                               |  | $ | 8,081   |  
|Marketable
 securities                             |  |   | 6,140   |  
|Trade
 receivables                                 |  |   | 4,503   |  
|Short-term
 other receivables and prepaid expenses |  |   | 1,648   |  
|Short-term
 deferred tax assets                    |  |   | 925     |  
|Property and
 equipment                            |  |   | 622     |  
|Severance
 pay fund                                |  |   | 324     |  
|Long-term
 other receivables and prepaid expenses  |  |   | 332     |  
|Trade name                                         |  |   | 1,680   |  
|Core
 technology                                   |  |   | 38,480  |  
|In-process
 research and development               |  |   | 3,710   |  
|Customer
 relationships                            |  |   | 31,140  |  
|Goodwill                                           |  |   | 219,543 |  
|                                                   |  |   |         |  
|                                                   |  |   |         |  
|Total assets
 acquired                             |  |   | 317,128 |  
|                                                   |  |   |         |  
|                                                   |  |   |         |  
|Trade
 payables                                    |  |   | (1,729  | )
|Accrued
 expenses and other liabilities            |  |   | (18,403 | )
|Short-term
 deferred tax liabilities               |  |   | (2,003  | )
|Long-term
 deferred tax liabilities                |  |   | (13,028 | )
|Other
 long-term liabilities                       |  |   | (854    | )
|                                                   |  |   |         |  
|                                                   |  |   |         |  
|Total
 liabilities assumed                         |  |   | (36,017 | )
|                                                   |  |   |         |  
|                                                   |  |   |         |  
|Net assets
 acquired                               |  | $ | 281,111 |  
|                                                   |  |   |         |  

| |  |  |                                                                                                                                                                                                                                                                    
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | The $3,710
 assigned to in-process research and development was written off at the
 acquisition date in accordance with FASB Interpretation (FIN) No. 4,
 Applicability of FASB Statement No. 2 to Business Combinations Accounted for
 by the Purchase Method.
| |  |  |                                                                                                                                                                                                                                                                    
| |  |  | Trade name,
 core technology and customer relationships in the amount of $71,300 are
 amortized at an annual weighted average rate of 19%.                                                                                                                         

F - 19

---

---



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

|         |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------- | --------------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                 | 5. | Acquisition
 of Quality Plus Group Ltd. (QPC):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                 |    | On April 8,
 2008, the Company acquired certain assets, shares and business from Quality
 Plus Group Ltd., a UK-based value-added distributor of NICEs contact center
 solutions, and its affiliates (QPC) for $12,587 in cash (including acquisition costs). The
 business acquired includes the sale, distribution, service, support,
 maintenance and development of workforce management solutions and associated
 services as conducted by QPC in the UK, Sweden and Australia. With the
 acquisition of QPC, the Company expanded its customer base and presence in
 the UK, Sweden and Australia and expanded and strengthened the Companys
 support organization in these regions. The acquisition was accounted for by
 the purchase method and accordingly, the purchase price has been allocated
 according to the estimated fair value of the assets acquired and liabilities
 assumed of QPC. The results of the QPC operations have been included in the
 consolidated financial statements since April 8, 2008 (the consummation
 date). The Company recorded customer relationships and goodwill in the amounts
 of $12,000 and $5,524, respectively.
|         |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                 | 6. | Acquisition
 of certain assets and liabilities of AVT:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                 |    | On April 28,
 2008, the Company completed the acquisition of certain assets of AVT Systems
 Limited, for $6,186 in cash (including acquisition costs). The business
 acquired includes the sale, distribution, service, maintenance and support of
 NICE voice recording solutions (hardware and software and associated
 services) in the United Kingdom. With the acquisition of AVT, the Company
 expanded its customer base and presence in the UK financial sector and
 expanded and strengthened the Companys support organization in the UK. The
 acquisition was accounted for by the purchase method and accordingly, the
 purchase price has been allocated according to the estimated fair value of
 the assets acquired and liabilities assumed of AVT. The results of the AVT
 operations have been included in the consolidated financial statements since
 April 28, 2008 (the consummation date). The Company recorded customer
 relationships and goodwill in the amounts of $3,838 and $3,478, respectively.                                                                                                                                          

F - 20

---

---



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

|         |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------- | --------------- | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                 | 7. | Unaudited
 pro forma condensed results of operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                 |    | The following represents the unaudited pro forma condensed results of
 operations for the year ended December 31, 2007 assuming that the acquisition
 of Actimize occurred on January 1, 2007. The pro forma information is not
 necessarily indicative of the results of operations, which actually would
 have occurred had the acquisitions been consummated on those dates, nor does
 it purport to represent the results of operations for future periods. The
 2008 acquisitions were immaterial; therefore no pro forma was presented for
 the year ended December 31, 2008.
|         |                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                 |    | In-process research and development write offs in respect of the
 acquisition of Actimize was not included in the pro forma condensed results
 of operation since it is a non-recurring charge.                                                                                                                                                                                                                                                                                                                                                                                    

|                                |  |                         |         | 
|------------------------------- |  | ----------------------- | ------- | 
|                                |  | Year ended December 31, |        
|                                |  |                         |        
|                                |  | 2007                    |        
|                                |  |                         |        
|                                |  | Unaudited               |        
|                                |  |                         |        
|                                |  |                         |         | 
|Revenues                        |  | $                       | 537,467 | 
|                                |  |                         |         | 
|                                |  |                         |         | 
|Net income                      |  | $                       | 15,436  | 
|                                |  |                         |         | 
|                                |  |                         |         | 
|Basic net
 earnings per share   |  | $                       | 0.28    | 
|                                |  |                         |         | 
|                                |  |                         |         | 
|Diluted net
 earnings per share |  | $                       | 0.27    | 
|                                |  |                         |         | 

F - 21

---

---



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

|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES                                                                                                               
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | The
 consolidated financial statements were prepared in accordance with United
 States Generally Accepted Accounting Principles (U.S. GAAP).
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | a.                                                                                                                                             | Use of
 estimates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                | The
 preparation of financial statements in conformity with generally accepted
 accounting principles requires management to make estimates and assumptions
 that affect the amounts reported in the financial statements and accompanying
 notes. Actual results could differ from those estimates.                                                                                                                                                                                                                                    
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | b.                                                                                                                                             | Financial
 statements in United States dollars:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                | The currency
 of the primary economic environment in which the operations of NICE and
 certain subsidiaries are conducted is the U.S. dollar (dollar); thus, the
 dollar is the functional currency of NICE and certain subsidiaries.                                                                                                                                                                                                                                                                                                 
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                | NICE and
 certain subsidiaries transactions and balances denominated in dollars are
 presented at their original amounts. Non-dollar transactions and balances
 have been remeasured to dollars in accordance with Statement of Financial
 Accounting Standards (SFAS) No. 52, Foreign Currency Translation. All
 transaction gains and losses from remeasurement of monetary balance sheet
 items denominated in non-dollar currencies are reflected in the statements of
 income as financial income or expenses, as appropriate.
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                | For those
 subsidiaries whose functional currency has been determined to be their local
 currency, assets and liabilities are translated at year-end exchange rates
 and statement of income items are translated at average exchange rates
 prevailing during the year. Such translation adjustments are recorded as a
 separate component of accumulated other comprehensive income (loss) in
 shareholders equity.                                                                                                                  
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | c.                                                                                                                                             | Principles
 of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                | Intercompany
 transactions and balances have been eliminated upon consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | d.                                                                                                                                             | Cash
 equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                | Cash
 equivalents are short-term unrestricted highly liquid investments that are
 readily convertible into cash, with original maturities of three months or
 less from acquisition date.                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | 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 - 22

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | f.                                      | Marketable
 securities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | The Company
 accounts for investments in debt securities in accordance with SFAS No. 115,
 Accounting for Certain Investments in Debt and Equity Securities.
 Management determines the appropriate classification of its investments in
 debt securities at the time of purchase and reevaluates such determinations
 at each balance sheet date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | In the third
 quarter of 2008, the Company reclassified its investments in marketable
 securities from the held to maturity category into the available-for-sale
 category.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | Marketable
 securities classified as available-for-sale are carried at fair value,
 based on quoted market prices. Unrealized gains and losses are reported in a
 separate component of shareholders equity in accumulated other comprehensive
 income (loss). Gains and losses are recognized when realized, on a specific
 identification basis, in the Companys consolidated statements of income.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | Prior to the
 third quarter of 2008, debt securities were classified as held-to-maturity as
 the Company previously had the intent and ability to hold the securities to
 maturity and were 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | In
 accordance with the Companys policy and FASB Staff Position (FSP) Nos.
 SFAS 115-1 (FSP 115-1) and SFAS 124-1, The Meaning of Other-Than-Temporary
 Impairment and Its Application to Certain Investments, the Company
 recognizes an impairment charge when a decline in the fair value of its
 investments below the cost basis is judged to be other-than-temporary. The
 Company considers various factors in determining whether to recognize an
 impairment charge, including the Companys intent and ability to hold the
 investment for a period of time sufficient to allow for any anticipated recovery
 in market value, the length of time and extent to which the fair value has
 been less than the cost basis, the credit ratings of the securities and the
 financial condition and near-term prospects of the issuers.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | g.                                      | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | Inventories
 are stated at the lower of cost or market value. The cost of raw materials is
 determined by the average cost method, and the cost of finished goods on
 the basis of costs charged by third party manufacturer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F - 23

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | Inventory
 provisions are provided to cover risks arising from slow-moving items,
 technological obsolescence, excess inventories, and discontinued products and
 for market prices lower than cost. At the point of the loss recognition, a
 new lower cost basis for that inventory is established. In addition, the
 Company records a liability for firm non-cancelable and unconditional
 purchase commitments with contract manufacturers for quantities in excess of
 the Companys future demands forecast consistent with its valuation of excess
 and obsolete inventory. Inventory provisions for 2006, 2007 and 2008 were
 $5,095, $2,716 and $130 respectively, and have been included in cost of
 revenues.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | h.                                      | Property and
 equipment, net:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | Property and
 equipment are stated at cost, net of accumulated depreciation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         | Depreciation
 is calculated using the straight-line method over the estimated useful lives
 of the assets, at the following annual rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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

| |    |                                                                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Leasehold
 improvements are amortized by the straight-line method over the term of the
 lease (including option terms) or the estimated useful life of the
 improvements, whichever is shorter.
| |    |                                                                                                                                                                                                
| | i. | Other
 intangible assets, net:                                                                                                                                                                 
| |    |                                                                                                                                                                                                
| |    | Intangible
 assets are amortized over their estimated useful lives using the
 straight-line method, at the following annual rates:                                                             

|                                                 |  |                    |    | 
|------------------------------------------------ |  | ------------------ | -- | 
|                                                 |  | Weighted average % |   
|                                                 |  |                    |   
|                                                 |  |                    |    | 
|Capitalized
 software development costs (see n)  |  |                    | 33 | 
|Core
 technology                                 |  |                    | 17 | 
|Trademarks                                       |  |                    | 20 | 
|Customer
 relationships and distribution network |  |                    | 12 | 

F - 24

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | j.                                      | Impairment
 of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | The
 Companys long-lived assets and identifiable intangibles that are subject to
 amortization are reviewed for impairment in accordance with SFAS No. 144,
 Accounting for the Impairment or Disposal of Long-Lived Assets whenever
 events or changes in circumstances indicate that the carrying amount of an
 asset may not be recoverable. Recoverability of assets to be held and used is
 measured by a comparison of the carrying amount of the assets to the future
 undiscounted cash flows expected to be generated by the assets. If such
 assets are considered to be impaired, the impairment to be recognized is
 measured by the amount by which the carrying amount of the assets exceeds the
 fair value of the assets. Assets to be disposed of are reported at the lower
 of the carrying amount or fair value less costs to sell. In 2006, 2007 and
 2008, no impairment indicators have been identified.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | k.                                      | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | Goodwill
 represents the excess of the purchase price in a business combination over
 the fair value of the net tangible and intangible assets acquired. Under SFAS
 No. 142, goodwill is not amortized, but rather is subject to an annual
 impairment test.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | SFAS No. 142
 requires goodwill to be tested for impairment at least annually or between
 annual tests in certain circumstances, and written down when impaired.
 Goodwill is tested for impairment by comparing the fair value of the
 reporting unit with its carrying value. The Company operates in four
 operating segments, and these segments comprise its reporting units. Fair
 value is determined using discounted cash flows. Significant estimates used
 in the fair value methodologies include estimates of future cash flows,
 future growth rates and the weighted average cost of capital of the reporting
 units. The Company performed annual impairment tests during the fourth
 quarter of 2006, 2007 and 2008 and did not identify any impairment losses.                                                                                                                                                 

F - 25

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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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         | l.                                      | Revenue
 recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | The Company
 generates revenues from sales of products, which include hardware and
 software, software licensing, professional services and maintenance.
 Professional services include mainly installation, project management and
 training. The Company sells its products indirectly through a global network
 of distributors, system integrators and strategic partners, all of whom are
 considered end-users, and through its direct sales force.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | Revenues
 from sales of product and software licensing are recognized when all criteria
 outlined in Statement of Position (SOP) No. 97-2, Software Revenue
 Recognition (as amended by SOP No. 98-9) are met. Revenue from products and
 software licensing is recognized when persuasive evidence of an agreement
 exists, delivery of the product has occurred, the fee is fixed or
 determinable and collectability is probable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | Revenues
 from maintenance and professional services are recognized ratably over the
 contractual period or as services are performed, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | In
 transactions where a customers contractual terms include a provision for
 customer acceptance, revenues are recognized either when such acceptance has
 been obtained or as the acceptance provision has lapsed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | With regard
 to arrangements involving multiple elements, the Company applies Statement of
 Position No. 98-9, Modification of SOP No. 97-2, Software Revenue
 Recognition with Respect to Certain Transactions (SOP No. 98-9). According
 to SOP No. 98-9, revenues should be allocated to the different elements
 in the arrangement under the residual method when Vendor Specific Objective
 Evidence (VSOE) of fair value exists for all undelivered elements and no
 VSOE exists for the delivered elements. Under the residual method, at the
 outset of the arrangement with the customer, the Company defers revenue for
 the fair value of its undelivered elements (maintenance and professional
 services) and recognizes revenue for the remainder of the arrangement fee
 attributable to the elements initially delivered in the arrangement (products
 and software licenses) when the basic criteria in SOP No. 97-2 have been
 met. Any discount in the arrangement is allocated to the delivered element.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         | The
 Companys policy for establishing VSOE of fair value of maintenance services
 is based on the price charged when the maintenance is sold separately i.e.
 based on the renewal activity for the installed base of the Company.
 Establishment of VSOE of fair value of installation and training services is
 based on the price charged when these elements are sold separately. VSOE of
 fair value of project management services is established based on a price per
 day which is similar to price per day charged for installation services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F - 26

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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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | Revenues
 from fixed price contracts that require significant customization,
 integration and installation are recognized based on SOP No. 81-1 Accounting
 for Performance of ConstructionType and Certain ProductionType Contracts
 using the percentage-of-completion method of accounting based on the ratio of
 hours incurred to date to the total estimated hours of the contract. The
 amount of revenue recognized is based on the total fees under the license
 agreement and the percentage of completion achieved. The revenues from such
 arrangements are allocated between products and services revenues to reflect
 the portion of each revenue source separately. Estimates of total project
 requirements are based on prior experience of customization, delivery and
 acceptance of similar contracts and are reviewed and updated regularly by
 management. Provisions for estimated losses on uncompleted contracts are made
 in the period in which such losses are first determined, in the amount of the
 estimated loss on the entire contact. As of December 31, 2008, no such
 estimated losses were identified.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | The Company
 maintains a provision for product returns in accordance with SFAS No. 48,
 Revenue Recognition When Right of Return Exists. The provision is estimated
 based on the Companys past experience and is deducted from revenues. As of
 December 31, 2006, 2007 and 2008 provision for product returns amounted
 $1,975, $2,823and $2,833, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | Deferred
 revenues include advances and payments received from customers, for which
 revenue has not yet been recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | m.                                      | Research and
 development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | Research and
 development costs (net of grants) incurred in the process of software
 production before establishment of technological feasibility are charged to
 expenses as incurred. Costs of the production of a product master incurred
 subsequent to the establishment of technological feasibility are capitalized
 according to the principles set forth in SFAS No. 86, Accounting for the
 Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Based
 on the Companys product development process, technological feasibility is
 established upon completion of a detailed program design.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | Costs
 incurred by the Company between completion of the detailed program design and
 the point at which the product is ready for general release, have been
 capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | Capitalized
 software development costs are amortized commencing with general product
 release by the straight-line method over the estimated useful life of the
 software product.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | n.                                      | Income
 taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | The Company
 accounts for income taxes in accordance with SFAS No. 109, Accounting for
 Income Taxes. This statement prescribes the use of the liability method
 whereby deferred tax asset and liability account balances are determined
 based on differences between financial reporting and tax bases of assets and
 liabilities and are measured using the enacted tax rates and laws that will
 be in effect when the differences are expected to reverse. The Company
 provides a valuation allowance, if necessary, to reduce deferred tax assets
 to the amount that is more likely than not to be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F - 27

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | On
 January 1, 2007, the Company adopted FASB Interpretation No. 48,
 Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
 Statement No. 109 (FIN 48). FIN 48 contains a two-step
 approach to recognizing and measuring uncertain tax positions accounted for
 in accordance with SFAS No. 109. The first step is to evaluate the tax
 position taken or expected to be taken in a tax return by determining if the
 weight of available evidence indicates that it is more likely than not that,
 on an evaluation of the technical merits, the tax position will be sustained
 on audit, including resolution of any related appeals or litigation
 processes. The second step is to measure the tax benefit as the largest
 amount that is more than 50% (cumulative basis) likely to be realized upon
 ultimate settlement.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | The Company
 has decided to classify interest as financial expenses and penalties as
 general and administrative expenses. The Companys policy for interest and
 penalties related to income tax exposures was not impacted as a result of the
 adoption of the recognition and measurement provisions of FIN No. 48.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | As a result
 of the implementation of FIN No. 48, the Company recognized a $824 decrease
 in the liability for unrecognized tax benefits, which was accounted for as an
 increase to the January 1, 2007 balance of retained earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | o.                                      | Government
 grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | Non-royalty
 bearing grants from the Government of Israel for funding research and
 development projects are recognized at the time the Company is entitled to
 such grants on the basis of the related costs incurred and recorded as a
 deduction from research and development costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | p.                                      | Concentrations
 of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | Financial
 instruments that potentially subject the Company to concentrations of credit
 risk consist principally of cash and cash equivalents, short-term bank
 deposits, trade receivables 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. Deposits in the
 U.S. may be in excess of insured limits and are not insured in other jurisdictions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | 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. A general
 allowance for doubtful accounts is provided, based on the length of time the
 receivables are past due, and for specific debts that the Company has
 determined to be doubtful of collection. The Allowance for doubtful accounts
 expenses were $(254), $2,532 and $7,782 for the years 2006, 2007 and 2008,
 respectively and has being included in general and administrative expenses.                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | The
 Companys marketable securities include investment in U.S. corporate
 debentures, U.S. government debentures and structured notes. The Companys
 investment policy limits the amount the Company may invest in any one type of
 investment or issuer, thereby reducing credit risk concentrations. As a
 result of the recent turmoil in capital markets, the Company has tightened
 its control and monitoring over its marketable securities portfolio in order
 to minimize potential risks stemming from current capital markets
 environment.                                                                                                                                                                                                                                                                                              

F - 28

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         | The Company
 entered into forward contracts and option strategies (together: derivative
 instruments) intended to protect against the increase in value of forecasted
 non-dollar currency cash flows. The derivative instruments hedge portion of
 the Companys non-dollar currency exposure (see 2(w) below).                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | q.                                      | Severance
 pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         | The
 Companys liability for severance pay for its Israeli employees is calculated
 pursuant to Israels Severance Pay Law based on the most recent monthly
 salary of the employees multiplied by the number of years of employment as of
 the balance sheet date. Employees are entitled to one months salary for each
 year of employment, or a portion thereof. The Companys liability is fully
 provided by monthly deposits with insurance policies and severance pay funds
 and by an accrual.                                                                                                                                                                                                 
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         | The
 deposited funds include profits (losses) accumulated up to the balance sheet
 date. The deposited funds may be withdrawn only upon the fulfillment of the
 obligation pursuant to Israels Severance Pay Law or labor agreements. The
 value of the deposited funds is based on the cash surrendered value of these
 policies.                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         | Severance
 pay expense for 2006, 2007 and 2008 amounted to $4,305, $5,680 and $7,822,
 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         | The Company
 has a 401(K) defined contribution plan covering certain employees in the U.S.
 All eligible employees may elect to contribute up to 6%, but generally not
 greater than $15 per year, (for certain employees over 50 years of age the
 maximum contribution is $20 per year) of their annual compensation to the
 plan through salary deferrals, subject to IRS limits. The Company matches 50%
 of employee contributions to the plan up to a limit of 6% of their eligible
 compensation. In the years 2006, 2007, and 2008 the Company recorded an
 expense for matching contributions in the amount of $1,176, $1,769 and
 $2,154, respectively.                                       
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | r.                                      | Basic and
 diluted net earnings per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         | Basic net
 earnings per share are computed based on the weighted average number of
 Ordinary shares outstanding during each year. Diluted net earnings per share
 are computed based on the weighted average number of Ordinary shares
 outstanding during each year plus dilutive potential equivalent Ordinary
 shares considered outstanding during the year, in accordance with SFAS No.
 128, Earnings Per Share.                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         | The weighted
 average number of shares related to outstanding anti-dilutive options and
 restricted shares excluded from the calculations of diluted net earnings per
 share was 705,589, 1,817,895 and 3,133,816 for
 the years 2006, 2007 and 2008, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | s.                                      | Accounting
 for Stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         | The Company
 accounts for stock-based compensation in accordance with Statement of
 Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS
 123(R)) which requires the measurement and recognition of compensation
 expense based on estimated fair values for all share-based payment awards
 made to employees and directors. SFAS 123(R) requires companies to estimate
 the fair value of equity-based payment awards on the date of grant using an
 option-pricing model. The value of the portion of the award that is
 ultimately expected to vest is recognized as an expense over the requisite
 service periods in the Companys consolidated income statements.

F - 29

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                             
|-------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                         | The Company
 recognizes compensation expenses for the value of its awards, which have
 graded vesting, based on the accelerated attribution method over the
 requisite service period of each of the awards, net of estimated forfeitures.
 Estimated forfeitures are based on actual historical pre-vesting forfeitures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                         | The Company
 estimates the fair value of stock options granted using the
 Black-Scholes-Merton option-pricing model and values restricted stock based
 on the market value of the underlying shares at the date of grant. This
 option-pricing model requires a number of assumptions, of which the most
 significant are the expected stock price volatility and the expected option
 term. Expected volatility was calculated based upon actual historical stock
 price movements. The expected term of options granted is based upon
 historical experience and represents the period of time that options granted
 are expected to be outstanding. The risk-free interest rate is based on the
 yield from U.S. Federal Reserve zero-coupon bonds with an equivalent term.
 The Company has historically not paid dividends and has no foreseeable plans
 to pay dividends.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                             
|         | t.                                      | Fair value
 of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                         | The Company
 adopted the provisions of SFAS No. 157, Fair Value Measurements (SFAS
 No. 157) effective January 1, 2008. Under this standard, fair value is
 defined as the price that would be received to sell an asset or paid to
 transfer a liability (i.e., the exit price) in an orderly transaction
 between market participants at the measurement date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                         | In
 determining fair value, the Company uses various valuation approaches. SFAS
 No. 157 establishes a hierarchy for inputs used in measuring fair value
 that maximizes the use of observable inputs and minimizes the use of
 unobservable inputs by requiring that the most observable inputs be used when
 available. Observable inputs are inputs that market participants would use in
 pricing the asset or liability developed based on market data obtained from
 sources independent of the Company. Unobservable inputs are inputs that
 reflect the Companys assumptions about the assumptions market participants
 would use in pricing the asset or liability developed based on the best
 information available in the circumstances. The hierarchy is broken down into
 three levels based on the observability of inputs as follows:                         
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                         | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Level
 1Valuations based on quoted prices in active markets for identical assets
 that the Company has the ability to access. Valuation adjustments and block
 discounts are not applied to Level 1 instruments. Since valuations are based
 on quoted prices that are readily and regularly available in an active
 market, valuation of these products does not entail a significant degree of
 judgment.
|         |                                         | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Level
 2Valuations based on one or more quoted prices in markets that are not
 active or for which all significant inputs are observable, either directly or
 indirectly.                                                                                                                                                                                                                                  
|         |                                         | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Level
 3Valuations based on inputs that are unobservable and significant to the
 overall fair value measurement.                                                                                                                                                                                                                                                                                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                         | The
 availability of observable inputs can vary from investment to investment and
 is affected by a wide variety of factors, including, for example, the type of
 investment, the liquidity of markets and other characteristics particular to
 the transaction. To the extent that valuation is based on models or inputs
 that are less observable or unobservable in the market, the determination of
 fair value requires more judgment and the investments are categorizes as
 Level 3.                                                                                                                                                                                                                                                                                                                                                                                   

F - 30

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                  
|-------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                  
|         |                                         | The
 Companys marketable securities trade in markets that are not considered to
 be active, but are valued based on quoted market prices, broker or dealer
 quotations, or alternative pricing sources with reasonable levels of price
 transparency and accordingly are categorized as Level 2.
|         |                                         |                                                                                                                                                                                                                                                                                                  
|         |                                         | Foreign
 currency derivative contracts are classified within Level 2 as the valuation
 inputs are based on quoted prices and market observable data of similar
 instruments.                                                                                                                     
|         |                                         |                                                                                                                                                                                                                                                                                                  
|         |                                         | The
 following table presents assets and liabilities measured at fair value on a
 recurring basis at December 31, 2008:                                                                                                                                                                          

|                                      |  |                                          |   |         |   |         |   |       |   |  |   |         |  
|------------------------------------- |  | ---------------------------------------- | - | ------- | - | ------- | - | ----- | - |  | - | ------- | -
|                                      |  | Fair value measurements using input type |  
|                                      |  |                                          |  
|                                      |  | Level 1                                  |   | Level 2 |   | Level 3 |   | Total |  
|                                      |  |                                          |   |         |   |         |   |       |  
|                                      |  |                                          |   |         |   |         |   |       |   |  |   |         |  
|Marketable
 securities:               |  |                                          |   |         |   |         |   |       |   |  |   |         |  
|Corporate debentures                  |  | $                                        |  |         | $ | 180,774 |   | $     |  |  | $ | 180,774 |  
|US Treasuries                         |  |                                          |  |         |   | 88,530  |   |       |  |  |   | 88,530  |  
|U.S. government agency
 debentures    |  |                                          |  |         |   | 18,688  |   |       |  |  |   | 18,688  |  
|Structured notes                      |  |                                          |  |         |   | 4,000   |   |       |  |  |   | 4,000   |  
|Foreign currency derivative contracts |  |                                          |  |         |   | (956    | ) |       |  |  |   | (956    | )
|                                      |  |                                          |   |         |   |         |   |       |   |  |   |         |  
|Total Financials Assets               |  | $                                        |  |         | $ | 291,036 |   | $     |  |  | $ | 291,036 |  

| |  |                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The carrying
 amounts of financial instruments carried at cost, including cash and cash
 equivalents, short term bank deposits, trade receivables and trade payables
 approximate their fair value due to the short-term maturities of such
 instruments.

F - 31

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | u.                                      | Legal
 contingencies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | The Company
 is currently involved in various claims and legal proceedings. The Company
 reviews the status of each matter and assesses its potential financial
 exposure. If the potential loss from any claim or legal proceeding is
 considered probable and the amount can be reasonably estimated, the Company
 accrues a liability for the estimated loss.                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | v.                                      | Advertising
 expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | Advertising
 expenses are charged to expense as incurred. Advertising expenses for the
 years 2006, 2007 and 2008 were $5,918, $6,479 and
 $8,047, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | 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 cash flow hedge
 (i.e., hedging the exposure to variability in expected future cash flows that
 is attributable to a particular risk), the effective portion of the gain or
 loss on the derivative instrument is reported as a component of accumulated
 other comprehensive income (loss) and reclassified into earnings in the line
 item associated with the hedged transaction in the period or periods during
 which the hedged transaction affects earnings. The remaining gain or loss on
 the derivative instrument in excess of the cumulative change in the present
 value of future cash flows of the hedged item, if any, is recognized in
 financial income/expense in the period of change.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | The Company
 entered into derivative instrument arrangements to hedge a portion of
 anticipated new Israeli shekel (NIS) payroll payments. These derivative
 instruments are designated as cash flows hedges, as defined by SFAS No. 133,
 as amended, and are all highly effective as hedges of these expenses when the
 salary is recorded. The effective portion of the derivative instruments is
 included in payroll expenses in the statements of income.                                                                                                                                                                                                                                                                                                          
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         | At December
 31, 2008, the Company expects to reclassify $956 of net losses on derivative
 instruments from accumulated other comprehensive loss to earnings during the
 next twelve months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F - 32

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------- | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | x.                                      | New
 accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         | In February
 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2, Effective
 Date of FASB Statement No. 157 (FSP 157-2), to delay the effective date of
 FASB Statement 157 for one year for certain nonfinancial assets and
 nonfinancial liabilities, excluding those that are recognized or disclosed in
 financial statements at fair value on a recurring basis (that is, at least
 annually).  For purposes of applying the FSP 157-2, nonfinancial
 assets and nonfinancial liabilities include all assets and liabilities other
 than those meeting the definition of a financial asset or a financial
 liability in FASB Statement 159. FSP 157-2 defers the effective date of
 Statement No. 157 to fiscal years beginning after November 15, 2008, and
 interim periods within those fiscal years for items within the scope of this
 FSP 157-2. The Company does not expect the adoption of FSP 157-2 to have a
 material impact on its financial position, results of operations or cash
 flows.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         | In March
 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
 and Hedging Activities (SFAS 161) an amendment to FASB No.
 133.  This statement changes the disclosure requirements for
 derivative instruments and hedging activities.  Entities are
 required to provide enhanced disclosures about (a) how and why an entity uses
 derivative instruments, (b) how derivative instruments and related hedged items
 are accounted for under Statement 133 and its related interpretations, and
 (c) how derivative instruments and related hedged items affect an entitys
 financial position, financial performance, and cash flows.  This
 statement is effective for financial statements issued for fiscal years and
 interim periods beginning after November 15, 2008.  Early
 application is encouraged.  The Company does not expect the
 adoption of SFAS 161 to have a material impact on its financial position,
 results of operations or cash flows.                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         | In December
 2007, the FASB issued SFAS No. 141 (revised 2007), Business
 Combinations (SFAS 141R). SFAS 141R establishes principles and
 requirements for how an acquirer recognizes and measures in its financial
 statements the identifiable assets acquired, the liabilities assumed, any non
 controlling interest in the acquiree and the goodwill acquired.
 SFAS 141R also establishes disclosure requirements to enable the
 evaluation of the nature and financial effects of the business combination. SFAS 141R
 is effective for fiscal years beginning after December 15, 2008. Earlier
 adoption is prohibited. The Company believes that the adoption of SFAS 141R
 could have an impact on its consolidated financial statements; however, the
 impact would depend on the nature, terms and magnitude of acquisitions it
 consummates in the future.                                                                                                                                                  

F - 33

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | In April
 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
 Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
 considered in developing renewal or extension assumptions used to determine
 the useful life of a recognized intangible asset under SFAS No. 142,
 Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal
 years beginning after December 15, 2008. The Company does not expect the
 adoption of FSP 142-3 will have a material impact on the Companys financial
 position, results of operations or cash flows.                                                                                                                                                                                                                                                                    
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | EITF Issue
 No. 08-7, Defensive Intangible Assets (EITF 08-7), requires an
 acquiring entity to account defensive intangible assets as a separate unit of
 accounting. Defensive intangible assets should not be included as part of the
 cost of the acquirers existing intangible assets because the defensive
 intangible assets are separately identifiable. Defensive intangible assets
 must be recognized at fair value in accordance with SFAS 141(R) and SFAS 157.
 EITF 08-7 will be effective for the reporting period beginning after December
 15, 2008. The Company does not expect a material impact on its consolidated
 financial statements from adoption of EITF 08-7.                                                                                                                                                                        
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | In May 2008,
 the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
 Principles. SFAS No. 162 identifies the sources of accounting principles and
 the framework for selecting the principles to be used in the preparation of
 financial statements of nongovernmental entities that are presented in
 conformity with generally accepted accounting principles in the United
 States. It is effective 60 days following the SECs approval of the Public
 Company Accounting Oversight Board amendments to AU Section 411, The Meaning
 of Present Fairly in Conformity With Generally Accepted Accounting
 Principles. The Company is currently evaluating the impact of SFAS No. 162
 on its financial statements, and the adoption of this statement is not
 expected to have a material effect on the Companys financial statements.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                         | In
 June 2008, the FASB issued FSP EITF No. 03-6-1,
 Determining Whether Instruments Granted in Share-Based Payment Transactions
 Are Participating Securities. Under the FSP, unvested share-based payment
 awards that contain rights to receive non-forfeitable dividends (whether paid
 or unpaid) are participating securities, and should be included in the
 two-class method of computing EPS. The FSP is effective for fiscal years
 beginning after December 15, 2008, and interim periods within those
 years, and is not expected to have a significant impact on the Companys
 consolidated financial statements.                                                                                                                                                                                                                                     

F - 34

---

---



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

|         |                       |                                                                                                                                                                                             
|-------- | --------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3:- | MARKETABLE SECURITIES
|         |                       |                                                                                                                                                                                             
|         | a.                    | Available-for-sale
 marketable securities                                                                                                                                                   
|         |                       |                                                                                                                                                                                             
|         |                       | The
 following table summarizes amortized costs, gross unrealized gains and losses
 and estimated fair values of available for sale marketable securities as of
 December 31, 2007 and 2008:

|                                  |  |                |       |                        |   |                         |  |                      |   |      |   |       |  |      |   |      |   |       |  |   |       |  |   |         | 
|--------------------------------- |  | -------------- | ----- | ---------------------- | - | ----------------------- |  | -------------------- | - | ---- | - | ----- |  | ---- | - | ---- | - | ----- |  | - | ----- |  | - | ------- | 
|                                  |  | Amortized cost |       | Gross unrealized gains |   | Gross unrealized losses |  | Estimated fair value |  
|                                  |  |                |       |                        |   |                         |  |                      |  
|                                  |  | December 31,   |       | December 31,           |   | December 31,            |  | December 31,         |  
|                                  |  |                |       |                        |   |                         |  |                      |  
|                                  |  | 2007           |       | 2008                   |   | 2007                    |  | 2008                 |   | 2007 |   | 2008  |  | 2007 |   | 2008 |  
|                                  |  |                |       |                        |   |                         |  |                      |   |      |   |       |  |      |   |      |  
|                                  |  |                |       |                        |   |                         |  |                      |   |      |   |       |  |      |   |      |   |       |  |   |       |  |   |         | 
|Corporate debentures              |  | $              |      |                        |   | 180,705                 |  | $                    |  |      |   | 1,691 |  | $    |  |      |   | 1,622 |  | $ |      |  |   | 180,774 | 
|U.S Government agency
 debentures |  | $              | 1,199 |                        |   | 18,553                  |  |                      |  |      |   | 137   |  |      |  |      |   | 2     |  | $ | 1,199 |  | $ | 18,688  | 
|US treasuries                     |  |                |      |                        |   | 87,168                  |  |                      |  |      |   | 1,363 |  |      |  |      |   | 1     |  |   |       |  |   | 88,530  | 
|Structured notes                  |  |                |      |                        |   | 4,000                   |  |                      |  |      |   |      |  |      |  |      |   |      |  |   |      |  |   | 4,000   | 
|                                  |  |                |       |                        |   |                         |  |                      |   |      |   |       |  |      |   |      |   |       |  |   |       |  |   |         | 
|                                  |  |                |       |                        |   |                         |  |                      |   |      |   |       |  |      |   |      |   |       |  |   |       |  |   |         | 
|                                  |  | $              | 1,199 |                        | $ | 290,426                 |  | $                    |  |      | $ | 3,191 |  | $    |  |      | $ | 1,625 |  | $ | 1,199 |  | $ | 291,992 | 
|                                  |  |                |       |                        |   |                         |  |                      |   |      |   |       |  |      |   |      |   |       |  |   |       |  |   |         | 

| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | The
 scheduled maturities of available-for-sale marketable securities at December
 31, 2008 were as follows:

|                                        |  |                 |         |                       |   |         | 
|--------------------------------------- |  | --------------- | ------- | --------------------- | - | ------- | 
|                                        |  | Amortized
 cost |         | Estimated
 fair value |  
|                                        |  |                 |         |                       |  
|                                        |  |                 |         |                       |   |         | 
|Due within
 one year                    |  | $               | 121,374 |                       | $ | 121,069 | 
|Due after
 one year through five years  |  |                 | 165,172 |                       |   | 166,489 | 
|Due after
 five years through ten years |  |                 | 3,880   |                       |   | 4,434   | 
|                                        |  |                 |         |                       |   |         | 
|                                        |  |                 |         |                       |   |         | 
|                                        |  | $               | 290,426 |                       | $ | 291,992 | 
|                                        |  |                 |         |                       |   |         | 

| |    |                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | Held-to-maturity
 marketable securities                                                                                                                                                   
| |    |                                                                                                                                                                                           
| |    | 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, 2007 and 2008:

|                                 |  |                |         |                        |   |                         |  |                      |       |      |   |      |  |      |     |      |   |   |  |   |         |  |   |   | 
|-------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | -------------------- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | - |  | - | ------- |  | - | - | 
|                                 |  | Amortized cost |         | Gross unrealized gains |   | Gross unrealized losses |  | Estimated fair value |      
|                                 |  |                |         |                        |   |                         |  |                      |      
|                                 |  | December 31,   |         | December 31,           |   | December 31,            |  | December 31,         |      
|                                 |  |                |         |                        |   |                         |  |                      |      
|                                 |  | 2007           |         | 2008                   |   | 2007                    |  | 2008                 |       | 2007 |   | 2008 |  | 2007 |     | 2008 |  
|                                 |  |                |         |                        |   |                         |  |                      |       |      |   |      |  |      |     |      |  
|                                 |  |                |         |                        |   |                         |  |                      |       |      |   |      |  |      |     |      |   |   |  |   |         |  |   |   | 
|Corporate debentures             |  | $              | 181,192 |                        | $ |                        |  | $                    | 973   |      | $ |     |  | $    | 631 |      | $ |  |  | $ | 181,534 |  | $ |  | 
|U.S Government agency debentures |  |                | 54,278  |                        |   |                        |  |                      | 42    |      |   |     |  |      | 94  |      |   |  |  |   | 54,226  |  |   |  | 
|Structured notes                 |  |                | 5,680   |                        |   |                        |  |                      |      |      |   |     |  |      | 70  |      |   |  |  |   | 5,610   |  |   |  | 
|                                 |  |                |         |                        |   |                         |  |                      |       |      |   |      |  |      |     |      |   |   |  |   |         |  |   |   | 
|                                 |  |                |         |                        |   |                         |  |                      |       |      |   |      |  |      |     |      |   |   |  |   |         |  |   |   | 
|                                 |  | $              | 241,150 |                        | $ |                        |  | $                    | 1,015 |      | $ |     |  | $    | 795 |      | $ |  |  | $ | 241,370 |  | $ |  | 
|                                 |  |                |         |                        |   |                         |  |                      |       |      |   |      |  |      |     |      |   |   |  |   |         |  |   |   | 

F - 35

---

---



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

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

|         |                                                |                                                                                                                                                                                                                                                                                            
|-------- | ---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                | In 2007 and
 2008 the Company sold debt securities, which were classified as
 held-to-maturity, due to a credit deterioration of the issuer, in
 consideration of $5,736 and $13,356, respectively. As a result of the sale,
 the Company recorded a loss of $203 and $1,806, respectively.
|         |                                                |                                                                                                                                                                                                                                                                                            
|         |                                                | In the third
 quarter of 2008, due to market conditions and deterioration in the credit
 worthiness of issuers, the Company reclassified its investments in marketable
 securities from the held-to-maturity category into the available-for-sale
 category.                               
|         |                                                |                                                                                                                                                                                                                                                                                            
|         |                                                | In 2006, the
 Company did not sell any securities prior to their maturity and accordingly,
 did not realize any gains or losses on held-to-maturity securities in this
 year.                                                                                                              
|         |                                                |                                                                                                                                                                                                                                                                                            
|         |                                                | During 2006,
 2007 and 2008, held-to-maturity marketable securities in the amounts of
 $3,000, $24,364 and $41,680, respectively, were called by the issuers prior
 to maturity.                                                                                                           
|         |                                                |                                                                                                                                                                                                                                                                                            
|NOTE 4:- | CURRENT OTHER RECEIVABLES AND PREPAID EXPENSES

|                        |  |              |        |      |   |        | 
|----------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                        |  | December 31, |       
|                        |  |              |       
|                        |  | 2007         |        | 2008 |  
|                        |  |              |        |      |  
|                        |  |              |        |      |  
|Government
 authorities |  | $            | 4,090  |      | $ | 6,409  | 
|Interest
 receivable    |  |              | 3,765  |      |   | 2,290  | 
|Prepaid
 expenses       |  |              | 9,273  |      |   | 11,784 | 
|Other                   |  |              | 3,621  |      |   | 3,214  | 
|                        |  |              |        |      |   |        | 
|                        |  |              |        |      |   |        | 
|                        |  | $            | 20,749 |      | $ | 23,697 | 
|                        |  |              |        |      |   |        | 

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

|                |  |              |        |      |   |        | 
|--------------- |  | ------------ | ------ | ---- | - | ------ | 
|                |  | December 31, |       
|                |  |              |       
|                |  | 2007         |        | 2008 |  
|                |  |              |        |      |  
|                |  |              |        |      |  
|Raw
 materials  |  | $            | 1,832  |      | $ | 1,828  | 
|Finished
 goods |  |              | 10,003 |      |   | 9,672  | 
|                |  |              |        |      |   |        | 
|                |  |              |        |      |   |        | 
|                |  | $            | 11,835 |      | $ | 11,500 | 
|                |  |              |        |      |   |        | 

|         |                       
|-------- | ----------------------
|NOTE 6:- | OTHER LONG-TERM ASSETS

|                                        |  |              |        |      |   |        | 
|--------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                        |  | December 31, |       
|                                        |  |              |       
|                                        |  | 2007         |        | 2008 |  
|                                        |  |              |        |      |  
|                                        |  |              |        |      |   |        | 
|Investment
 in affiliates               |  | $            | 1,200  |      | $ | 236    | 
|Severance
 pay fund                     |  |              | 13,966 |      |   | 15,957 | 
|Other
 receivables and prepaid expenses |  |              | 3,183  |      |   | 1,756  | 
|Deferred tax
 assets                    |  |              | 8,739  |      |   | 7,373  | 
|                                        |  |              |        |      |   |        | 
|                                        |  |              |        |      |   |        | 
|                                        |  | $            | 27,088 |      | $ | 25,322 | 
|                                        |  |              |        |      |   |        | 

F - 36

---

---



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

|         |                            
|-------- | ---------------------------
|NOTE 7:- | PROPERTY AND EQUIPMENT, NET

|                                   |  |              |        |      |   |         | 
|---------------------------------- |  | ------------ | ------ | ---- | - | ------- | 
|                                   |  | December 31, |       
|                                   |  |              |       
|                                   |  | 2007         |        | 2008 |  
|                                   |  |              |        |      |  
|                                   |  |              |        |      |   |         | 
|Cost:                              |  |              |        |      |   |         | 
|Computers and peripheral
equipment |  | $            | 69,838 |      | $ | 77,839  | 
|Office furniture and equipment     |  |              | 16,180 |      |   | 15,593  | 
|Leasehold improvements             |  |              | 5,301  |      |   | 9,014   | 
|                                   |  |              |        |      |   |         | 
|                                   |  |              |        |      |   |         | 
|                                   |  |              | 91,319 |      |   | 102,446 | 
|                                   |  |              |        |      |   |         | 
|Accumulated depreciation:          |  |              |        |      |   |         | 
|Computers and peripheral
equipment |  |              | 57,262 |      |   | 63,093  | 
|Office furniture and equipment     |  |              | 11,580 |      |   | 11,243  | 
|Leasehold improvements             |  |              | 3,822  |      |   | 4,716   | 
|                                   |  |              |        |      |   |         | 
|                                   |  |              |        |      |   |         | 
|                                   |  |              | 72,664 |      |   | 79,052  | 
|                                   |  |              |        |      |   |         | 
|                                   |  |              |        |      |   |         | 
|Depreciated cost                   |  | $            | 18,655 |      | $ | 23,394  | 
|                                   |  |              |        |      |   |         | 

| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Depreciation
 expense totaled $8,244, $8,740
 and $10,260 for the years 2006, 2007 and 2008, respectively.

|         |                             
|-------- | ----------------------------
|NOTE 8:- | OTHER INTANGIBLE ASSETS, NET

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

|                                                 |  |              |         |      |   |         | 
|------------------------------------------------ |  | ------------ | ------- | ---- | - | ------- | 
|                                                 |  | December 31, |        
|                                                 |  |              |        
|                                                 |  | 2007         |         | 2008 |  
|                                                 |  |              |         |      |  
|                                                 |  |              |         |      |   |         | 
|Original amounts:                                |  |              |         |      |   |         | 
|Capitalized software development
costs           |  | $            | 8,207   |      | $ | 8,927   | 
|Core technology                                  |  |              | 99,675  |      |   | 103,487 | 
|Trademarks                                       |  |              | 8,366   |      |   | 8,397   | 
|Customer relationships and distribution
 network |  |              | 92,262  |      |   | 101,836 | 
|                                                 |  |              |         |      |   |         | 
|                                                 |  |              |         |      |   |         | 
|                                                 |  |              | 208,510 |      |   | 222,647 | 
|                                                 |  |              |         |      |   |         | 
|                                                 |  |              |         |      |   |         | 
|Accumulated amortization:                        |  |              |         |      |   |         | 
|Capitalized software development
costs           |  |              | 5,877   |      |   | 6,475   | 
|Core technology                                  |  |              | 23,148  |      |   | 40,234  | 
|Trademarks                                       |  |              | 3,200   |      |   | 4,688   | 
|Customer relationships and distribution
 network |  |              | 13,970  |      |   | 25,848  | 
|                                                 |  |              |         |      |   |         | 
|                                                 |  |              |         |      |   |         | 
|                                                 |  |              | 46,195  |      |   | 77,245  | 
|                                                 |  |              |         |      |   |         | 
|                                                 |  |              |         |      |   |         | 
|Other intangible assets, net                     |  | $            | 162,315 |      | $ | 145,402 | 
|                                                 |  |              |         |      |   |         | 

| |    |                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------
| | b. | Amortization
 expense amounted $13,675, $22,186 and $32,480 for the years 2006, 2007 and 2008,
 respectively.

F - 37

---

---



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

|         |                                      |                                                                                                                         
|-------- | ------------------------------------ | ------------------------------------------------------------------------------------------------------------------------
|NOTE 8:- | OTHER INTANGIBLE ASSETS, NET (Cont.)
|         |                                      |                                                                                                                         
|         | c.                                   | Estimated
 amortization expense for the years ended (excluding amortization of
 capitalized software development costs):

|                     |  |   |         | 
|-------------------- |  | - | ------- | 
|December
 31,        |  |   |         | 
|                     |  |   |         | 
|                     |  |   |         | 
|2009                 |  | $ | 31,198  | 
|2010                 |  |   | 30,726  | 
|2011                 |  |   | 27,512  | 
|2012                 |  |   | 24,320  | 
|2013                 |  |   | 16,935  | 
|2014 and
 thereafter |  |   | 12,259  | 
|                     |  |   |         | 
|                     |  |   |         | 
|                     |  | $ | 142,950 | 
|                     |  |   |         | 

|         |                                                                                                                
|-------- | ---------------------------------------------------------------------------------------------------------------
|NOTE 9:- | GOODWILL                                                                                                       
|         |                                                                                                                
|         | The changes
 in the carrying amount of goodwill for the years ended December 31, 2007 and
 2008 are as follows:

|                                          |  |              |         |      |   |         |  
|----------------------------------------- |  | ------------ | ------- | ---- | - | ------- | -
|                                          |  | December 31, |        
|                                          |  |              |        
|                                          |  | 2007         |         | 2008 |  
|                                          |  |              |         |      |  
|                                          |  |              |         |      |   |         |  
|Goodwill,
 beginning of the year          |  | $            | 220,430 |      | $ | 443,256 |  
|Additions in
 respect of acquisitions     |  |              | 220,192 |      |   | 9,002   |  
|Foreign
 currency translation adjustments |  |              | 2,634   |      |   | (6,754  | )
|                                          |  |              |         |      |   |         |  
|                                          |  |              |         |      |   |         |  
|Goodwill,
 end of year                    |  | $            | 443,256 |      | $ | 445,504 |  
|                                          |  |              |         |      |   |         |  

|          |                                       
|--------- | --------------------------------------
|NOTE 10:- | ACCRUED EXPENSES AND OTHER LIABILITIES

|                                               |  |              |         |      |   |         | 
|---------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | 
|                                               |  | December 31, |        
|                                               |  |              |        
|                                               |  | 2007         |         | 2008 |  
|                                               |  |              |         |      |  
|                                               |  |              |         |      |   |         | 
|Employees
 and payroll accruals                |  | $            | 36,432  |      | $ | 42,699  | 
|Accrued
 expenses                              |  |              | 56,529  |      |   | 51,472  | 
|Deferred
 revenues and advances from customers |  |              | 93,293  |      |   | 108,196 | 
|Other                                          |  |              | 21,831  |      |   | 35,222  | 
|                                               |  |              |         |      |   |         | 
|                                               |  |              |         |      |   |         | 
|                                               |  | $            | 208,085 |      | $ | 237,589 | 
|                                               |  |              |         |      |   |         | 

F - 38

---

---



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

|          |                                       
|--------- | --------------------------------------
|NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES

| |    |                                                                                                        |                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------
| | 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, were as follows:

|                     |  |   |        | 
|-------------------- |  | - | ------ | 
|2009                 |  | $ | 11,964 | 
|2010                 |  |   | 7,714  | 
|2011                 |  |   | 6,277  | 
|2012                 |  |   | 5,930  | 
|2013                 |  |   | 1,101  | 
|2014 and
 thereafter |  |   | 4,109  | 
|                     |  |   |        | 
|                     |  |   |        | 
|                     |  | $ | 37,095 | 
|                     |  |   |        | 

| |    |                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                     | Rent
 expenses for the years 2006, 2007 and 2008 were approximately $8,668, $10,531
 and $13,286, 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 $818 as of December 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                     | Lease
 expenses for motor vehicles for the years 2006, 2007 and 2008 were $2,865,
 $4,041 and $5,387,
 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | b. | Other
 commitments:                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company
 is obligated under certain agreements with its suppliers to purchase goods
 and under an agreement with its manufacturing subcontractor to purchase
 projected inventory and excess inventory. Non cancelable obligations, net of
 provisions, as of December 31, 2008, were $3,120. These obligations will be
 fulfilled during 2009.
| |    |                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | c. | Legal
 proceedings:                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 1.                                                                                                                                                                                                                                                                                                                                                  | On October
 19, 2004, CipherActive filed an action against the Company in the District
 Court of Tel Aviv, State of Israel. In this lawsuit, CipherActive claims that
 under a development agreement with the Company, it is entitled to receive
 license fees in respect of certain software that it allegedly developed for
 the Company and which has been embedded in one of the Companys products.
 CipherActive claims that it is entitled to license fees in the amount of $600
 in addition to the amount of $100 already paid to CipherActive by the Company
 in respect of such license fees.
| |    |                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                     | 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.                                                                                                                                                                                                                                                                                                                  

F - 39

---

---



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

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

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    | The parties
 to this litigation have recently agreed to submit the matter to a binding
 arbitration and hearings are expected to take place during the month of May
 2009. The arbitration agreement approved by the Court determines that the
 Companys liability shall not exceed $600 plus interest and expenses. The
 Company is currently unable to evaluate the probability of a favorable or
 unfavorable outcome.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | 2. | On September
 3, 2008, Multi-Format, Inc. filed a lawsuit against Harrahs Entertainment,
 Inc. and NICE Systems, Inc, a wholly owned subsidiary of the Company in the
 United States District Court for the District of New Jersey, alleging
 infringement of a U.S. patent and requesting damages. The patent purports to
 cover a PC-based system for monitoring and sorting representative images from
 video cameras, for security or other monitoring purposes. Multi-Format
 alleges that the defendants infringed one or more of the claims of the patent
 by making, using, selling, offering for sale and/or importing video
 surveillance products, including the Companys NiceVision Pro and NiceVision
 Harmony products, and that NICE Systems Inc has induced infringement of the
 patent through its sale and supplying of video surveillance solutions to
 Ballys Atlantic City, and/or other third parties or customers. On
 December 10, 2008, Multi-Format filed an Amended Complaint substituting
 Ballys Park Place, Inc. for Harrahs Entertainment, Inc. The Company
 filed a response and counterclaim on
 December 23, 2008, to which Multi-Format responded on January 7, 2009. An
 initial scheduling hearing took place on January 26, 2009. Multi-Format
 has not identified any specific patent claim it believes was infringed and
 has not made a monetary demand.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | NICE Systems
 Inc. has undertaken to represent and indemnify Harrahs Entertainment in
 respect of this lawsuit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | The Company
 is currently unable to evaluate the probability of a favorable or unfavorable
 outcome                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | 3. | On July 20,
 2004, S.T.S. Software Systems Ltd. (STS) filed a lawsuit in the U.S.
 District Court for the Southern District of New York charging Witness
 Systems, Inc. (Witness) with infringement of VoIP patents in the U.S. On June 26, 2007, the Company joined
 as a plaintiff in the litigation. A trial took place in the U.S. District
 Court for the Northern District of Georgia during the week of March 17, 2008 and on May 25, 2008. The Court
 dismissed the claim and determined that Witness Systems does not infringe the
 Companys patents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | On August
 30, 2004, Witness filed a patent infringement action in the Federal Court for
 the Northern District of Georgia against NICE Systems, Inc. Witness
 subsequently filed an identical action against the Company in the same court.
 Witness accused the Company of infringing two U.S. patents relating to
 certain technology used with some of the Companys products, mainly screen
 capture. No trial date was set.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | On January
 19, 2006 Witness filed a patent infringement action in the Federal Court for
 the Northern District of Georgia against the Company and NICE Systems, Inc.,
 alleging the infringing of a certain U.S patent relating to certain
 technology used with some of the Companys products, mainly Nice Perform. A
 trial took place during the week of May 12, 2008. The jury decided that the
 Company infringes Witness Systems patent and adjudicated monetary damages of
 $3,300. The Company filed a motion to revoke the jurys decision. Witness
 Systems filed a motion for a permanent injunction against the Company and the
 Company submitted its response to the Court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F - 40

---

---



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

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

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    | On May 10,
 2006, the Company and 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. This lawsuit went to trial
 before a jury on January 14, 2008. The jury deadlocked and on January 25,
 2008 and a mistrial was declared. The Company filed a motion for a new trial
 date for the case.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    | On August 1,
 2008, the Company and Verint Systems Inc. entered into an agreement to settle
 and dismiss all of the above patent disputes (which had commenced with
 Witness Systems, Inc. prior to its acquisition by Verint).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | 4. | On July 27,
 2004, Dictaphone Corp. (which was acquired by the Company) filed an action
 against VoicePrint in the United States District Court for the Central
 District of California asserting the infringement by VoicePrint of two U.S
 patents. The Company subsequently acquired these patents from Dictaphone as
 part of its acquisition. This lawsuit has been settled in principle, but the
 documentation for this settlement has not been finalized and executed by the
 parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | 5. | In December
 2006, Calyon Corporate and Investment Bank (Calyon) filed a suit against
 the Company in the District Court of Tel Aviv, demanding repayment of $648
 plus accrued interest, in the total amount of $740. The Company deducted this
 amount in January 2004 from a payment transferred from an account of Thales
 maintained with Calyon to the Companys account, at the instruction of
 Thales, in connection with the acquisition of Thales Contact Solutions
 (TCS) from Thales. The Company had notified TCS in 2004 that it had setoff
 such amount with respect to an overdue payment by TCS to the Company. The dispute
 was submitted to mediation, however the mediation process failed and the
 proceedings were returned to the District Court of Tel Aviv. This lawsuit is
 in its initial stages and the first hearing is scheduled to take place on
 June 23, 2009. The Company is currently unable to evaluate the probability of
 a favorable or unfavorable outcome.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | 6. | On March 9,
 2007, Formatest AG filed a claim against NICE Switzerland AG, a wholly owned
 subsidiary of the Company, in the Cantonal Court of Zug, Switzerland. The
 claim was in the amount of approximately $1,600 ( 1,187,793), plus
 interest at 5% per annum, and was made in connection with an agreement dated
 December 10, 2004 between FAST Video Security AG (now NICE Switzerland AG)
 and Formatest AG. On June 19, 2007, the Company and Formatest AG entered
 into an agreement settling all claims. The Company believes it is entitled to
 recover all or a substantial part of the settlement amount paid to Formatest
 AG (with the addition of legal costs), under the terms of indemnification
 provision contained in the sale and purchase agreement between the selling
 shareholders of FAST Video Security AG (the Sellers) and the Company dated
 November 16, 2006 (the Agreement). On December 18, 2007, the Sellers issued
 a Notice of Arbitration in the Zurich Chamber of Commerce, claiming that the
 Company should pay them an amount of $1,229 (plus late payment interest of 5%
 from July 2007), which is the remaining unpaid portion of the first earn-out
 payment under the Agreement, release $3,000 (plus accrued interest) from the
 escrow account pursuant to the Agreement, plus an additional late release
 interest of 5%, and compensate them for loss incurred due to deteriorating
 exchange rates and other related expenses.

F - 41

---

---



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

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

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    | Prior to the
 commencement of the arbitration proceedings, the Company released to the
 Sellers a partial payment of $1,400 out of the escrow funds and paid to the
 Sellers the amount of $1,229.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | On June 23,
 2008, the Sellers filed their statement of claim, asking for payment of
 $1,600 (representing the balance of the escrow funds) plus additional amounts
 for interest, losses on the exchange rates, legal costs for the defense of
 the Formatest claim and unspecified legal costs and expenses related to the
 arbitration proceeding. The Company filed a statement of defense and
 counterclaim on August 25, 2008, seeking an award dismissing the Sellers
 claims and holding the Sellers liable (jointly and severally) for the payment
 of a total of EUR 831,600 and additional amounts for interest and unspecified
 arbitration costs.                                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | Pursuant to
 the current procedural timetable, the arbitration proceedings are expected to
 take place in the first half of 2009, and an award is not expected to be
 rendered before July 2009. The Company is currently unable to evaluate the
 probability of a favorable or unfavorable outcome.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 7. | On October
 26, 2007, two former employees of NICE Systems Inc. filed a lawsuit against
 the Company and NICE Systems Inc, alleging violations of various laws
 prohibiting discrimination in employment. The dispute was settled in December
 2008 between the parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 8. | On December
 19, 2007, a former employee of NICE Systems Inc. sent the Company and NICE
 Systems Inc. a letter alleging engagement in prohibited discrimination in
 employment and retaliation in terminating his employment. The dispute was settled in December 2008
 between the parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 9. | On October
 15, 2007, a former employee of Actimize Ltd, a wholly owned subsidiary of the
 Company, filed a claim with the Tel Aviv district labor court, seeking a
 declaration, that he is entitled to 0.5% of the outstanding share capital of
 Actimize Ltd. In its statement of defense, Actimize Ltd. claimed that once
 the former employee chose not to exercise his vested options upon termination
 of his employment with the company, such options expired. In addition,
 Actimize Ltd. claimed, that the former employees options deteriorated in value
 due to his decision not to exercise his right to re-price such options during
 his employment term. The case is at the preliminary stages and the court yet
 to set a hearing date. The Company is currently unable to evaluate the
 probability of a favorable or unfavorable outcome.

F - 42

---

---



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

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

| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10. | Around
 December 31, 2008, NICE Systems, Inc. received a letter from Plant CML
 (Plant), a distributor of NICE Systems, Inc., asserting several indemnity
 claims against the Company. The claims arise out of the Commonwealth of
 Massachusetts claim against Verizon Communications Inc. (Verizon) relating
 to numerous alleged problems associated with Companys products used by the
 Commonwealth. NICE Systems, Inc. sold the Companys products to Plant
 pursuant to a Reseller Agreement between the parties dated December 2005, and
 Plant, in turn, resold the products to Verizon, who in turn sold the overall
 system to the Commonwealth.
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |     | The Company
 is in the initial stage of assessing the facts, merits and potential
 magnitude of these claims. The Company is currently unable to evaluate the
 probability of a favorable or unfavorable outcome in this dispute.                                                                                                                                                                                                                                                                                                                                                                                                                                

| |  |     |                                                                                                                                                                                                                                                                                                                                                      
| |  | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 11. | The Company
 is involved in various other legal proceedings arising in the normal course
 of its business. Based upon the advice of counsel, the Company does not
 believe that the ultimate resolution of these matters will have a material
 adverse effect on the Companys consolidated financial position, results of
 operations or cash flows.

F - 43

---

---



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

|          |                
|--------- | ---------------
|NOTE 12:- | TAXES ON INCOME

| |    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | ------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Israeli
 taxation:
| |    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | 1.                 | Corporate
 tax rates in Israel:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                    | Taxable
 income of Israeli companies is subject to tax at the rate of 27% in 2008, 26%
 in 2009 and 25% in 2010 and thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | 2.                 | Tax benefits
 under the Israel Law for the Encouragement of Capital Investments, 1959 (the
 Law):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                    | The Law
 empowers the Israeli Investment Center to grant Approved Enterprise status to
 capital investments in production facilities that meet certain relevant
 criteria (Approved Enterprise). In general, such capital investments will
 receive Approved Enterprise status if the enterprise is expected to
 contribute to the development of the productive capacity of the economy,
 absorption of immigrants, creation of employment opportunities, or
 improvement in the balance of payments.                                                                                                 
| |    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                    | The tax
 benefits derived from any such Approved Enterprise relate only to taxable
 income attributable to the specific program of investment to which the status
 was granted. To the extent that NICE has been granted Approved Enterprise
 status and operates under more than one approval, or that its capital
 investments are only partly approved, its effective corporate tax rate will be
 the result of a weighted combination of the various rates applicable.                                                                                                                               
| |    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                    | Certain
 production facilities of NICE have been granted the status of an Approved
 Enterprise under the Law, in four separate investment programs. For all such
 Approved Enterprises, the Company elected to apply for alternative tax
 benefits (Alternative Package), waiving Government grants in return for a
 tax exemption.                                                                                                                                                                                                                                                                    
| |    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                    | Income
 derived from the first and second program was tax-exempt for a period of four
 years, commencing 1999 and 1997, respectively, and is taxed at the reduced
 corporate tax rate of 10%-25% (based on the percentage of foreign ownership
 in each taxable year) for an additional period of six years. Income derived
 from the third and fourth programs are tax-exempt for a period of two years,
 commencing 2005, and will be taxed at the reduced corporate tax rate of
 10%-25% (based on the percentage of foreign ownership in each taxable year)
 for an additional period of eight years.
| |    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                    | The above
 mentioned tax benefits are scheduled to expire by 2014 in a gradual manner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F - 44

---

---



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

|          |                        
|--------- | -----------------------
|NOTE 12:- | TAXES ON INCOME (Cont.)

| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | The Companys
 wholly owned subsidiary, Actimize Ltd., has received approval as an Approved
 Enterprise in Israel under the Law, for two investment programs and is
 therefore eligible for Israeli tax benefits. Pursuant to these benefits,
 Actimize Ltd. may enjoy a tax exemption from Israeli taxes on income derived
 during the first two years in which each investment program produces taxable
 income, subject to certain timing restrictions, provided that it does not
 distribute such income as a dividend. In addition, Actimize Ltd. will enjoy a
 reduced tax rate of 10% - 25%, (based on the percentage of foreign ownership
 in each taxable year) for an additional period of eight years. The benefit
 periods have not yet commenced.                                                                                                                                                                                                                                                                                                                                                       
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | In the event
 of distribution of dividends from the said tax-exempt income, the amount
 distributed will be subject to corporate tax at the rate ordinarily
 applicable to the Approved Enterprises income. The tax-exempt income
 attributable to the Approved Enterprise programs mentioned above can be
 distributed to shareholders without subjecting the Company to taxes only upon
 the complete liquidation of NICE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | The duration
 of tax benefits, for each of the Programs is subject to limitations of the
 earlier of 12 years from completion of the investment or commencement of
 production, or 14 years from receipt of approval, as an Approved Enterprise
 under the Law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | The entitlement
 to the above benefits is conditional upon the Companys fulfilling the
 conditions stipulated by the Law and regulations published thereunder. Should
 the Company fail to meet such requirements in the future, income attributable
 to its Approved Enterprise programs could be subject to the statutory Israeli
 corporate tax rate and the Company could be required to refund a portion of
 the tax benefits already received, with respect to such programs. As of
 December 31, 2008, management believes that the Company is in compliance with
 all the conditions required by the Law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | On April 1,
 2005, an amendment to the Law came into effect (the Amendment) and has
 significantly changed the provisions of the Law. The Amendment limits the
 scope of enterprises which may be approved by the Investment Center by
 setting criteria for the approval of a facility as a Privileged Enterprise
 (rather than the previous terminology of Approved Enterprise), such as a
 provision requiring that at least 25% of the Privileged Enterprises income
 will be derived from export. Additionally, the Amendment enacted major
 changes in the manner in which tax benefits are awarded under the Law so that
 companies are no longer required for Investment Center approval in order to
 qualify for tax benefits. The period of tax benefits for a new Privileged
 Enterprise commences in the Year of Commencement. This year is the later
 of: (1) the year in which taxable income is first generated by the Company,
 or (2) a year selected by the company for commencement, on the condition that
 the Company meets certain provisions provided by the Law (Year of
 Election).
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | If a company
 requested the Alternative Package of benefits for an Approved Enterprise
 under the old law before the 2005 amendment, it is precluded from filing a
 Year of Election notice for a Privileged Enterprise for two years after the
 year in which the Approved Enterprise was activated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | In addition,
 the Law provides that terms and benefits included in any certificate of approval
 already granted will remain subject to the provisions of the law as they were
 on the date of such approval. Therefore, the four existing Approved
 Enterprises will not be subject to the provisions of the Amendment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F - 45

---

---



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

|          |                        
|--------- | -----------------------
|NOTE 12:- | TAXES ON INCOME (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The Company
 has four Privileged Enterprises with Years of Election ranging from 2006
 through 2008.                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | As a result
 of the Amendment, tax-exempt income generated under the Companys Privileged
 Enterprise program will be subject to taxes upon dividend distribution or
 complete liquidation.                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The Company
 does not intend to distribute any amounts of its undistributed tax exempt
 income as dividends as it intends to reinvest its tax-exempt income within
 the Company. Accordingly, no deferred income taxes have been provided on
 income attributable to the Companys Approved or Privileged Enterprise
 programs as the undistributed tax exempt income is essentially permanent in
 duration.                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | As of
 December 31, 2008, approximately $160,000 is tax-exempt attributable to its
 various Approved and Privileged Enterprise programs. If such tax exempt
 income is distributed (other than in respect of the first four programs upon
 the complete liquidation of the Company), it would be taxed at the reduced
 corporate tax rate applicable to such profits (between 10%-25%) and an income
 tax liability of approximately $28,000 would be incurred as of December 31,
 2008.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Income from
 sources other than an Approved or a Privileged Enterprise is subject to tax
 at regular Israeli corporate tax rate.                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Tax benefits
 under the Israeli Law for the Encouragement of Industry (Taxation), 1969:                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | NICE is an
 Industrial Company as defined and, as such, is entitled to certain tax
 benefits including accelerated depreciation, deduction of public offering
 expenses in three equal annual installments and amortization of other
 intangible property rights for tax purposes.                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | b. | Income taxes
 on non-Israeli subsidiaries:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Non-Israeli
 subsidiaries are taxed according to the tax laws in their respective country
 of residence. Neither Israeli income taxes, foreign withholding taxes nor
 deferred income taxes were provided in relation to undistributed earnings of
 the Companys foreign subsidiaries. This is because the Company intends to
 permanently reinvest undistributed earnings in the foreign subsidiaries in
 which those earnings arose. If these earnings were distributed to Israel in
 the form of dividends or otherwise, the Company would be subject to additional
 Israeli income taxes (subject to an adjustment for foreign tax credits) and
 foreign withholding taxes.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | c. | Net
 operating loss carryforward:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | As of
 December 31, 2008, the Company had carryforward tax losses totaling
 approximately $60,000 which can be carried forward and offset against taxable
 income with expiration dates ranging from 2009 and onwards. Approximately
 $37,600 of these carryforward tax losses have no expiration date. The balance
 expires between 2009 and 2028.                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Utilization
 of U.S. net operating losses may be subject to substantial annual limitation
 due to the change in ownership provisions of the Internal Revenue Code of
 1986 and similar state provisions. The annual limitation may result in the
 expiration of net operating losses increasing taxes before utilization.                                                                                                                                                                                                                                                                                                                                                     

F - 46

---

---



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

|          |                        
|--------- | -----------------------
|NOTE 12:- | TAXES ON INCOME (Cont.)

| |    |                                                                                                                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | Deferred tax
 assets and liabilities:                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                      
| |    | Deferred
 taxes reflect the net tax effect of temporary differences between the
 carrying amounts of assets and liabilities for financial reporting purposes
 and the amounts recorded for tax purposes. Significant components of the
 Companys deferred tax assets and liabilities are as follows:

|                                                |  |              |         |      |   |         |  
|----------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | -
|                                                |  | December 31, |        
|                                                |  |              |        
|                                                |  | 2007         |         | 2008 |  
|                                                |  |              |         |      |  
|                                                |  |              |         |      |  
|Deferred tax assets:                            |  |              |         |      |   |         |  
|Net operating losses
 carryforward              |  | $            | 10,510  |      | $ | 11,890  |  
|Acquired intangibles                            |  |              | 6,244   |      |   | 5,340   |  
|Share based payments                            |  |              | 2,809   |      |   | 4,977   |  
|Other                                           |  |              | 9,927   |      |   | 13,648  |  
|                                                |  |              |         |      |   |         |  
|                                                |  |              |         |      |   |         |  
|Deferred tax assets before valuation
 allowance |  |              | 29,490  |      |   | 35,855  |  
|Valuation allowance                             |  |              | (6,182  | )    |   | (17,760 | )
|                                                |  |              |         |      |   |         |  
|                                                |  |              |         |      |   |         |  
|Deferred tax assets                             |  |              | 23,308  |      |   | 18,095  |  
|                                                |  |              |         |      |   |         |  
|Deferred tax liabilities:                       |  |              |         |      |   |         |  
|Acquired intangibles                            |  |              | (48,075 | )    |   | (39,382 | )
|                                                |  |              |         |      |   |         |  
|                                                |  |              |         |      |   |         |  
|Deferred tax liabilities, net                   |  | $            | (24,767 | )    | $ | (21,287 | )
|                                                |  |              |         |      |   |         |  

| |  |                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.
| |  |                                                                                                                                                                                                                                            
| |  | The increase
 in the valuation allowance in 2008 amounted to $11,578 related to
 operations.                                                                                                                                               

F - 47

---

---



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

|          |                         |                                                                                                          
|--------- | ----------------------- | ---------------------------------------------------------------------------------------------------------
|NOTE 12:- | TAXES ON INCOME (Cont.)
|          |                         |                                                                                                          
|          | e.                      | A
 reconciliation of the Companys effective tax rate to the statutory tax rate
 in Israel is as follows:

|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | -- | - | ------ | --
|                                                                                                                             |  | Year ended December 31, |       
|                                                                                                                             |  |                         |       
|                                                                                                                             |  | 2006                    |        | 2007 |   | 2008   |   
|                                                                                                                             |  |                         |        |      |   |        |   
|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   
|Income before taxes on income, as reported
 in the consolidated statements of income                                         |  | $                       | 30,992 |      | $ | 47,634 |    | $ | 48,587 |   
|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   
|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   
|Statutory tax rate in Israel                                                                                                 |  |                         | 31     | %    |   | 29     | %  |   | 27     | % 
|Approved and Privileged Enterprise benefits
 *)                                                                              |  |                         | (14.6  | )%   |   | (10.1  | )% |   | (11.9  | )%
|Changes in valuation allowance                                                                                               |  |                         | 3.8    | %    |   | (1.4   | )% |   | 6.2    | % 
|Earnings taxed under foreign law                                                                                             |  |                         | (7.4   | )%   |   | (2.6   | )% |   | 1.4    | % 
|Acquired in-process research and
 development                                                                                |  |                         | 14.6   | %    |   | 2.3    | %  |   |       |   
|Other                                                                                                                        |  |                         | 0.3    | %    |   | 4.3    | %  |   | (3.2   | )%
|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   
|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   
|Effective tax rate                                                                                                           |  |                         | 27.7   | %    |   | 21.5   | %  |   | 19.5   | % 
|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   
|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   
|*) Net earnings per Ordinary share -
 amounts of the benefit resulting from the Approved and Privileged
 Enterprise status |  |                         |        |      |   |        |    |   |        |   
|Basic                                                                                                                        |  | $                       | 0.09   |      | $ | 0.09   |    | $ | 0.10   |   
|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   
|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   
|Diluted                                                                                                                      |  | $                       | 0.09   |      | $ | 0.09   |    | $ | 0.09   |   
|                                                                                                                             |  |                         |        |      |   |        |    |   |        |   

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

|           |  |                         |        |      |   |        |  |   |        | 
|---------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|           |  | Year ended December 31, |       
|           |  |                         |       
|           |  | 2006                    |        | 2007 |   | 2008   | 
|           |  |                         |        |      |   |        | 
|           |  |                         |        |      |   |        |  |   |        | 
|Domestic   |  | $                       | 33,629 |      | $ | 27,506 |  | $ | 36,000 | 
|Foreign *) |  |                         | (2,637 | )    |   | 20,128 |  |   | 12,587 | 
|           |  |                         |        |      |   |        |  |   |        | 
|           |  |                         |        |      |   |        |  |   |        | 
|           |  | $                       | 30,992 |      | $ | 47,634 |  | $ | 48,587 | 
|           |  |                         |        |      |   |        |  |   |        | 

| |    |                                                                                                                                         
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------
| | *) | The loss
 before taxes in 2006 arose as a result of write off of acquired in-process
 research and development of approximately $13,000.

F - 48

---

---



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

|          |                        
|--------- | -----------------------
|NOTE 12:- | TAXES ON INCOME (Cont.)

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

|         |  |                         |       |      |   |        |   |   |        |  
|-------- |  | ----------------------- | ----- | ---- | - | ------ | - | - | ------ | -
|         |  | Year ended December 31, |      
|         |  |                         |      
|         |  | 2006                    |       | 2007 |   | 2008   |  
|         |  |                         |       |      |   |        |  
|         |  |                         |       |      |   |        |  
|Current  |  | $                       | 6,404 |      | $ | 10,516 |   | $ | 14,290 |  
|Deferred |  |                         | 2,187 |      |   | (262   | ) |   | (4,810 | )
|         |  |                         |       |      |   |        |   |   |        |  
|         |  |                         |       |      |   |        |   |   |        |  
|         |  | $                       | 8,591 |      | $ | 10,254 |   | $ | 9,480  |  
|         |  |                         |       |      |   |        |   |   |        |  
|         |  |                         |       |      |   |        |   |   |        |  
|Domestic |  | $                       | 5,892 |      | $ | 4,254  |   | $ | 4,646  |  
|Foreign  |  |                         | 2,699 |      |   | 6,000  |   |   | 4,834  |  
|         |  |                         |       |      |   |        |   |   |        |  
|         |  |                         |       |      |   |        |   |   |        |  
|         |  | $                       | 8,591 |      | $ | 10,254 |   | $ | 9,480  |  
|         |  |                         |       |      |   |        |   |   |        |  

| |    |                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------
| | h. | Uncertain
 tax positions:                                                                                               
| |    |                                                                                                                         
| |    | A
 reconciliation of the beginning and ending balances of the total amounts of
 unrecognized tax benefits is as follows:

|                                                |  |              |        |      |   |        |  
|----------------------------------------------- |  | ------------ | ------ | ---- | - | ------ | -
|                                                |  | December 31, |       
|                                                |  |              |       
|                                                |  | 2007         |        | 2008 |  
|                                                |  |              |        |      |  
|                                                |  |              |        |      |   |        |  
|Uncertain tax positions, beginning of the
 year |  | $            | 10,702 |      | $ | 14,919 |  
|Increases in tax positions for prior years      |  |              | 1,315  |      |   | 3,080  |  
|Decreases in tax positions for prior years      |  |              | (734   | )    |   | (391   | )
|Increases in tax positions for current year     |  |              | 3,805  |      |   | 7,848  |  
|Settlements                                     |  |              | (169   | )    |   |       |  
|                                                |  |              |        |      |   |        |  
|                                                |  |              |        |      |   |        |  
|Uncertain tax positions, end of year            |  | $            | 14,919 |      | $ | 25,456 |  
|                                                |  |              |        |      |   |        |  

| |  |                                                                                                                                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Unrecognized
 tax benefits included $24,820 of tax benefits, which if recognized, would
 reduce the Companys annual effective tax rate. The Company has further
 accrued $625 of accrued interest related to uncertain tax positions as of
 December 31, 2008.      
| |  |                                                                                                                                                                                                                                                                      
| |  | As of December
 31, 2008, the Company is subject to Israeli income tax audits for the tax
 years 2002 through 2008, to U.S. federal income tax audits for the tax years
 of 2003 through 2008 and to other income tax audits for the tax years of 2002
 through 2008.

F - 49

---

---



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

|          |                     
|--------- | --------------------
|NOTE 13:- | SHAREHOLDERS EQUITY

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | The Ordinary
 shares of the Company are traded on the Tel-Aviv Stock Exchange and its ADSs
 are traded on NASDAQ.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In 2007 the
 Company completed a secondary public offering of its ADSs on NASDAQ. The Company
 issued 5,175,000 shares at a price of $35.02 per share before issuance
 expenses. Total net proceeds from the issuance amounted to approximately
 $180,829.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 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
 are granted at an exercise price of not less than the fair market value of
 the Ordinary shares on the grant date, subject to certain exceptions, which
 may be determined by the Companys Board of Directors. 16,691,132 options of the 1995 Option Plan were
 granted.                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Under the
 terms of the 1995 Option 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 the Company at the date the stock option becomes exercisable. As
 of February 15, 2000, the Board of Directors of the Company adopted a
 resolution amending the exercise terms of 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% becomes exercisable once every quarter during the
 subsequent three years. The options expire 6 years from 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
 are granted at an exercise price of not less than the fair market value of
 the Ordinary shares on the grant date, subject to certain exceptions, which may
 be determined by the Companys Board of Directors. Generally, under the terms
 of the 2003 Plan, 25% of the stock options granted become exercisable on the
 first anniversary of the date of grant and 6.25% becomes exercisable once
 every quarter during the subsequent three years. Stock options expire six
 years after the date of grant.                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Pursuant to
 the terms of the acquisition of Actimize Ltd. in August 2007, the Company
 assumed and replaced the stock options and restricted shares granted by
 Actimize. In 2003, Actimize adopted the 2003 Omnibus Stock Option and
 Restricted Stock Incentive Plan (the 2003 Actimize Plan). Under the 2003
 Actimize Plan, the grantees could be granted options to acquire Actimizes
 ordinary shares, restricted shares and shares. Incentive stock options to
 acquire ordinary shares of Actimize were granted at an exercise price not
 less than the fair market value of the ordinary shares of Actimize on the
 date of grant or as determined by Actimizes board of directors or by a
 committee thereof. In addition, the options were granted at an exercise price
 of not less than the par value of the ordinary shares of Actimize.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Generally,
 under the terms of the 2003 Actimize Plan, 25% of the options granted become
 exercisable on the first anniversary of the date of grant and 6.25% become
 exercisable following the lapse of every consecutive quarter thereafter
 during the subsequent three years. Options generally expire ten years after
 the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F - 50

---

---



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

|          |                             
|--------- | ----------------------------
|NOTE 13:- | SHAREHOLDERS EQUITY (Cont.)

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In June
 2008, the Company adopted the 2008 Share Incentive Plan (the 2008 Plan), to
 provide incentives to employees, directors, consultants and/or contractors by
 rewarding performance and encouraging behavior that will improve the Companys
 profitability. Under the 2008 Plan, the Companys employees, directors,
 consultants and/or contractors may be granted any equity-related award,
 including any type of an option to acquire the Companys ordinary shares
 and/or share appreciation right and/or share and/or restricted share and/or
 restricted share unit and/or other share unit and/or other share-based award
 and/or other right or benefit under the 2008 Plan (each an Award). The
 options to acquire ordinary shares 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 the Companys
 board of directors, including in some cases options granted with an exercise
 price of zero.            
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Generally,
 under the terms of the 2008 Plan, 25% of an Award granted becomes exercisable
 on the first anniversary of the date of grant and 6.25% becomes exercisable
 once every quarter during the subsequent three years. Specifically with
 respect to restricted share units, unless determined otherwise by the board
 of directors, 25% of the restricted share units granted becomes vested on
 each of the four consecutive annual anniversaries following the date of
 grant. Awards with a vesting period expire six years after the date of grant.
 The 2008 Plan provides that the maximum number of shares that may be subject
 to Awards granted under the 2008 Plan shall be an amount per calendar year,
 equal to 3.5% of the Companys issued and outstanding share capital as of
 December 31 of the preceding calendar year. Such amount is reset for each
 calendar year. For 2008, the aforementioned amount was reduced by the number
 of shares subject to Awards granted by the Company during the 2008 calendar
 year under the 2003 Plan.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The fair
 value of the Companys stock options granted to employees and directors for
 the years ended December 31, 2006, 2007 and 2008 was estimated using the
 following assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                            |  |             |  |             |  |            
|--------------------------- |  | ----------- |  | ----------- |  | -----------
|                            |  | 2006        |  | 2007        |  | 2008       
|                            |  |             |  |             |  |            
|                            |  |             |  |             |  |            
|Expected volatility         |  | 33.9%-40.6% |  | 32.5%-37.9% |  | 32.5%-39.8%
|Weighted average volatility |  | 40.0%       |  | 37.5%       |  | 34.2%      
|Risk free interest rate     |  | 4.6%-4.9%   |  | 3.3%-4.6%   |  | 1.7%-3.1%  
|Expected dividend           |  | 0%          |  | 0%          |  | 0%         
|Expected term (in years)    |  | 2.3-3.7     |  | 2.5-3.7     |  | 2.5-3.7    

F - 51

---

---



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

|          |                             
|--------- | ----------------------------
|NOTE 13:- | SHAREHOLDERS EQUITY (Cont.)

| |  |                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------
| |  | A summary of
 the Companys stock options activity and related information for the year ended
 December 31, 2008, is as follows:

|                                 |  |                   |            |                                 |   |                                                          |  |                           |     |  |   |        | 
|-------------------------------- |  | ----------------- | ---------- | ------------------------------- | - | -------------------------------------------------------- |  | ------------------------- | --- |  | - | ------ | 
|                                 |  | Number of options |            | Weighted-average exercise price |   | Weighted- average remaining contractual term (in
 years) |  | Aggregate intrinsic value |    
|                                 |  |                   |            |                                 |   |                                                          |  |                           |    
|                                 |  |                   |            |                                 |   |                                                          |  |                           |     |  |   |        | 
|Outstanding at January 1, 2008   |  |                   | 6,460,595  |                                 | $ | 23.64                                                    |  |                           | 4.3 |  | $ | 70,697 | 
|Granted                          |  |                   | 1,846,266  |                                 | $ | 29.06                                                    |  |                           |     |  |   |        | 
|Exercised                        |  |                   | (1,015,649 | )                               | $ | 14.50                                                    |  |                           |     |  |   |        | 
|Forfeited                        |  |                   | (419,997   | )                               | $ | 25.17                                                    |  |                           |     |  |   |        | 
|Cancelled                        |  |                   | (50,241    | )                               | $ | 29.22                                                    |  |                           |     |  |   |        | 
|                                 |  |                   |            |                                 |   |                                                          |  |                           |     |  |   |        | 
|                                 |  |                   |            |                                 |   |                                                          |  |                           |     |  |   |        | 
|Outstanding at December 31, 2008 |  |                   | 6,820,974  |                                 | $ | 26.33                                                    |  |                           | 4.3 |  |   | 15,745 | 
|                                 |  |                   |            |                                 |   |                                                          |  |                           |     |  |   |        | 
|                                 |  |                   |            |                                 |   |                                                          |  |                           |     |  |   |        | 
|Exercisable at December 31, 2008 |  |                   | 2,868,747  |                                 | $ | 23.23                                                    |  |                           | 3.4 |  | $ | 11,200 | 
|                                 |  |                   |            |                                 |   |                                                          |  |                           |     |  |   |        | 

| |  |                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
 weighted-average grant-date fair value of options granted during the years
 2006, 2007 and 2008 was $9.20, $11.8 and $8.6,
 respectively.        
| |  |                                                                                                                                                       
| |  | The total
 intrinsic value of options exercised during the years 2006, 2007 and 2008 was $41,249,
 $40,735 and $16,818,
 respectively.                
| |  |                                                                                                                                                       
| |  | The options
 outstanding under the Companys Stock Option Plans as of December 31, 2008
 have been separated into ranges of exercise price as follows:

|                          |             |                                                 |  |                                               |  |                                    |      |                                                 |   |                                                             |  |  |           |  |   |       | 
|------------------------- | ----------- | ----------------------------------------------- |  | --------------------------------------------- |  | ---------------------------------- | ---- | ----------------------------------------------- | - | ----------------------------------------------------------- |  |  | --------- |  | - | ----- | 
|Ranges of
 exercise price |             | Options
 outstanding
 as of
 December 31,
 2008 |  | Weighted
 average
 remaining
 contractualterm |  | Weighted
 average
 exercise
 price |      | Options
 exercisable
 as of
 December 31,
 2008 |   | Weighted
 Average
 Exercise
 price of
 Options
 Exercisable | 
|                          |             |                                                 |  |                                               |  |                                    |      |                                                 |   |                                                             | 
|                          |             |                                                 |  | (Years)                                       |  |                                    |      |                                                 |   |                                                             | 
|                          |             |                                                 |  |                                               |  |                                    |      |                                                 |   |                                                             | 
|$                         | 0.02        |                                                 |  | 4,692                                         |  |                                    | 8.66 |                                                 | $ | 0.02                                                        |  |  | 2,930     |  | $ | 0.02  | 
|$                         | 0.27        |                                                 |  | 20,366                                        |  |                                    | 5.67 |                                                 |   | 0.27                                                        |  |  |          |  |   |      | 
|$                         | 2.46-2.89   |                                                 |  | 52,442                                        |  |                                    | 5.98 |                                                 |   | 2.84                                                        |  |  | 44,544    |  |   | 2.83  | 
|$                         | 6.00-6.87   |                                                 |  | 141,337                                       |  |                                    | 7.58 |                                                 |   | 6.59                                                        |  |  | 52,394    |  |   | 6.59  | 
|$                         | 9.67-14.04  |                                                 |  | 409,946                                       |  |                                    | 2.31 |                                                 |   | 10.52                                                       |  |  | 375,592   |  |   | 10.32 | 
|$                         | 14.60-21.76 |                                                 |  | 1,547,497                                     |  |                                    | 3.43 |                                                 |   | 17.94                                                       |  |  | 915,008   |  |   | 17.15 | 
|$                         | 22.33-32.31 |                                                 |  | 2,591,827                                     |  |                                    | 4.83 |                                                 |   | 28.72                                                       |  |  | 601,533   |  |   | 26.48 | 
|$                         | 34.78-38.44 |                                                 |  | 2,052,867                                     |  |                                    | 4.30 |                                                 |   | 35.07                                                       |  |  | 876,746   |  |   | 34.99 | 
|                          |             |                                                 |  |                                               |  |                                    |      |                                                 |   |                                                             |  |  |           |  |   |       | 
|                          |             |                                                 |  |                                               |  |                                    |      |                                                 |   |                                                             |  |  |           |  |   |       | 
|                          |             |                                                 |  | 6,820,974                                     |  |                                    | 4.27 |                                                 | $ | 26.33                                                       |  |  | 2,868,747 |  | $ | 23.23 | 
|                          |             |                                                 |  |                                               |  |                                    |      |                                                 |   |                                                             |  |  |           |  |   |       | 

F - 52

---

---



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

|          |                              |                                                                                                                                                   
|--------- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:- | SHAREHOLDERS EQUITY (Cont.)
|          |                              |                                                                                                                                                   
|          |                              | A summary of
 the Companys Restricted Stock Awards (RSA) activity and related information for the year ended December
 31, 2008, is as follows:

|                                 |  |               |          |                                 |   |      | 
|-------------------------------- |  | ------------- | -------- | ------------------------------- | - | ---- | 
|                                 |  | Number of RSA |          | Weighted-average exercise price |  
|                                 |  |               |          |                                 |  
|                                 |  |               |          |                                 |   |      | 
|Outstanding at January 1, 2008   |  |               | 412,841  |                                 | $ | 1.09 | 
|Vested                           |  |               | (221,638 | )                               | $ | 1.04 | 
|Forfeiture                       |  |               | (5,139   | )                               | $ | 0.02 | 
|                                 |  |               |          |                                 |   |      | 
|                                 |  |               |          |                                 |   |      | 
|Outstanding at December 31, 2008 |  |               | 186,064  |                                 | $ | 0.93 | 
|                                 |  |               |          |                                 |   |      | 

| |  |                                                                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As of
 December 31, 2008, there was approximately $21,361 and $7,590 of
 unrecognized compensation expense related to non-vested stock options and
 restricted stock awards, respectively, expected to be recognized over four
 years.
| |  |                                                                                                                                                                                                                                       
| |  | A summary of
 the Companys Restricted Stock Units (RSU) activity and related information for the year ended December
 31, 2008, is as follows:                                                                                     

|                                 |  |               |       |                                 |   |      | 
|-------------------------------- |  | ------------- | ----- | ------------------------------- | - | ---- | 
|                                 |  | Number of RSU |       | Weighted-average exercise price |  
|                                 |  |               |       |                                 |  
|                                 |  |               |       |                                 |   |      | 
|Outstanding at January 1, 2008   |  |               |      |                                 | $ |     | 
|Issued                           |  |               | 6,500 |                                 | $ | 0.26 | 
|                                 |  |               |       |                                 |   |      | 
|                                 |  |               |       |                                 |   |      | 
|Outstanding at December 31, 2008 |  |               | 6,500 |                                 | $ | 0.26 | 
|                                 |  |               |       |                                 |   |      | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | Employee
 Stock Purchase Plan (ESPP):                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | Eligible employees under the Employee Stock Purchase Plan (the
 Purchase Plan) can have up to 10% of their earnings withheld, up to certain
 maximums, to be used to purchase Ordinary shares. Commencing January 1, 2006,
 the price of Ordinary shares purchased under the Purchase Plan is equal to
 95% of the fair market value of the Ordinary shares.                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | During 2006,
 2007 and 2008, employees purchased 8,570,16,041 and17,613 shares at average
prices of $26.73, $31.08 and $30.14 per share, respectively.                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | d. | Stock split:                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | On May 17,
 2006, the Company affected a two-for-one stock split on its Ordinary shares
 which was affected in the form of a 100% stock dividend. Shareholders of
 record at the close of business on May 30, 2006, the record date, received
 one additional Ordinary share/ADS for each Ordinary share/ADS held. All
 Ordinary share options and per share amounts have been adjusted to give
 retroactive effect to the stock split for all periods presented.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | e. | Dividends:                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | Dividends,
 if any, will be paid in NIS. Dividends paid to shareholders outside Israel
 may be converted to dollars on the basis of the exchange rate prevailing at
 the date of the conversion. The Company does not intend to pay cash dividends
 in the foreseeable future.                                                                                                                                                                                   

F - 53

---

---



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

|          |                                                           
|--------- | ----------------------------------------------------------
|NOTE 14:- | REPORTABLE SEGMENTS, PRODUCT LINES AND MAJOR CUSTOMER DATA

| |    |                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Reportable
 segments:                                                                                                                                 
| |    |                                                                                                                                                       
| |    | The Company
 operates under several reportable segments. The following tables present the
 financial information of the Companys reportable segments.

|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|----------------------- |  | ----------------------------- | ------- | ------ | - | ------- |  | -------- | ------ | ------------- | - | ------- | - | - | -------- | - | - | ------- | 
|                        |  | Year ended December 31,
 2008 |        
|                        |  |                               |        
|                        |  | Americas                      |         | EMEA*) |   | APAC**) |  | Actimize |        | Not allocated |   | Total   |  
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |  
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|Revenues                |  | $                             | 311,884 |        | $ | 170,097 |  | $        | 84,029 |               | $ | 58,152  |   | $ |         |   | $ | 624,162 | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|Gross profit (loss)     |  | $                             | 205,824 |        | $ | 111,496 |  | $        | 62,085 |               | $ | 28,946  |   | $ | (22,935  | ) | $ | 385,416 | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|Operating expenses      |  | $                             | 71,936  |        | $ | 34,366  |  | $        | 15,024 |               | $ | 50,456  |   | $ | 176,283  |   | $ | 348,065 | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|Operating income (loss) |  | $                             | 133,888 |        | $ | 77,130  |  | $        | 47,061 |               | $ | (21,510 | ) | $ | (199,218 | ) | $ | 37,351  | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|                        |  | Year ended December 31,
 2007 |        
|                        |  |                               |        
|                        |  | Americas                      |         | EMEA*) |   | APAC**) |  | Actimize |        | Not allocated |   | Total   |  
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |  
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|Revenues                |  | $                             | 283,009 |        | $ | 149,913 |  | $        | 72,894 |               | $ | 11,558  |   | $ |         |   | $ | 517,374 | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|Gross profit (loss)     |  | $                             | 176,678 |        | $ | 98,184  |  | $        | 51,818 |               | $ | 4,110   |   | $ | (19,758  | ) | $ | 311,032 | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|Operating expenses      |  | $                             | 63,779  |        | $ | 34,272  |  | $        | 13,426 |               | $ | 20,127  |   | $ | 146,594  |   | $ | 278,198 | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 
|Operating income (loss) |  | $                             | 112,899 |        | $ | 63,912  |  | $        | 38,392 |               | $ | (16,017 | ) | $ | (166,352 | ) | $ | 32,834  | 
|                        |  |                               |         |        |   |         |  |          |        |               |   |         |   |   |          |   |   |         | 

|                        |  |                               |         |        |   |         |  |               |        |       |   |          |   |   |         | 
|----------------------- |  | ----------------------------- | ------- | ------ | - | ------- |  | ------------- | ------ | ----- | - | -------- | - | - | ------- | 
|                        |  | Year ended December 31,
 2006 |        
|                        |  |                               |        
|                        |  | Americas                      |         | EMEA*) |   | APAC**) |  | Not allocated |        | Total |  
|                        |  |                               |         |        |   |         |  |               |        |       |  
|                        |  |                               |         |        |   |         |  |               |        |       |   |          |   |   |         | 
|Revenues                |  | $                             | 241,308 |        | $ | 112,541 |  | $             | 55,795 |       | $ |         |   | $ | 409,644 | 
|                        |  |                               |         |        |   |         |  |               |        |       |   |          |   |   |         | 
|                        |  |                               |         |        |   |         |  |               |        |       |   |          |   |   |         | 
|Gross profit (loss)     |  | $                             | 141,797 |        | $ | 70,028  |  | $             | 37,097 |       | $ | (13,492  | ) | $ | 235,430 | 
|                        |  |                               |         |        |   |         |  |               |        |       |   |          |   |   |         | 
|                        |  |                               |         |        |   |         |  |               |        |       |   |          |   |   |         | 
|Operating expenses      |  | $                             | 59,766  |        | $ | 30,326  |  | $             | 10,169 |       | $ | 118,072  |   | $ | 218,333 | 
|                        |  |                               |         |        |   |         |  |               |        |       |   |          |   |   |         | 
|                        |  |                               |         |        |   |         |  |               |        |       |   |          |   |   |         | 
|Operating income (loss) |  | $                             | 82,031  |        | $ | 39,702  |  | $             | 26,928 |       | $ | (131,564 | ) | $ | 17,097  | 
|                        |  |                               |         |        |   |         |  |               |        |       |   |          |   |   |         | 

| |  |     |                                                                
| |  | --- | ---------------------------------------------------------------
| |  | *)  | Includes
 Europe, the Middle East (including Israel) and Africa
| |  | **) | Includes
 Asia Pacific                                         

F - 54

---

---



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

|          |                                                                   
|--------- | ------------------------------------------------------------------
|NOTE 14:- | REPORTABLE SEGMENTS, PRODUCT LINES AND MAJOR CUSTOMER DATA (Cont.)

| |  |                                                                                       
| |  | --------------------------------------------------------------------------------------
| |  | The
 following presents long-lived assets of December 31, 2007 and December 31,
 2008:

|         |  |                         |         |      |   |         | 
|-------- |  | ----------------------- | ------- | ---- | - | ------- | 
|         |  | Year ended December 31, |        
|         |  |                         |        
|         |  | 2007                    |         | 2008 |  
|         |  |                         |         |      |  
|         |  |                         |         |      |   |         | 
|Americas |  | $                       | 254,826 |      | $ | 241,739 | 
|EMEA     |  |                         | 77,916  |      |   | 88,167  | 
|APAC     |  |                         | 4,101   |      |   | 3,608   | 
|Actimize |  |                         | 287,383 |      |   | 280,786 | 
|         |  |                         |         |      |   |         | 
|         |  |                         |         |      |   |         | 
|         |  | $                       | 624,226 |      | $ | 614,300 | 
|         |  |                         |         |      |   |         | 

| |    |                                                                                                     
| | -- | ----------------------------------------------------------------------------------------------------
| | b. | Product
 lines:                                                                                     
| |    |                                                                                                     
| |    | Total
 revenues from external customers on the basis of the Companys product lines
 are as follows:

|                                      |  |                         |         |      |   |         |  |   |         | 
|------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|                                      |  | Year ended December 31, |        
|                                      |  |                         |        
|                                      |  | 2006                    |         | 2007 |   | 2008    | 
|                                      |  |                         |         |      |   |         | 
|                                      |  |                         |         |      |   |         |  |   |         | 
|Enterprise interaction solutions      |  | $                       | 300,920 |      | $ | 382,893 |  | $ | 417,454 | 
|Public safety and security sector     |  |                         | 108,724 |      |   | 122,923 |  |   | 148,556 | 
|Operational risk management solutions |  |                         |        |      |   | 11,558  |  |   | 58,152  | 
|                                      |  |                         |         |      |   |         |  |   |         | 
|                                      |  |                         |         |      |   |         |  |   |         | 
|                                      |  | $                       | 409,644 |      | $ | 517,374 |  | $ | 624,162 | 
|                                      |  |                         |         |      |   |         |  |   |         | 

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

|           |  |                         |    |      |  |      |   |  |    |  
|---------- |  | ----------------------- | -- | ---- |  | ---- | - |  | -- | -
|           |  | Year ended December 31, |   
|           |  |                         |   
|           |  | 2006                    |    | 2007 |  | 2008 |  
|           |  |                         |    |      |  |      |  
|           |  |                         |    |      |  |      |   |  |    |  
|Customer A |  |                         | 16 | %    |  | 13   | % |  | 13 | %
|           |  |                         |    |      |  |      |   |  |    |  

F - 55

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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 15:- | SELECTED STATEMENTS OF INCOME DATA
|          |                                    |                                
|          | a.                                 | Research and
 development, net:

|                                                     |  |                         |        |      |   |        |   |   |        |  
|---------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                     |  | Year ended December 31, |       
|                                                     |  |                         |       
|                                                     |  | 2006                    |        | 2007 |   | 2008   |  
|                                                     |  |                         |        |      |   |        |  
|                                                     |  |                         |        |      |   |        |   |   |        |  
|Total costs                                          |  | $                       | 47,963 |      | $ | 63,271 |   | $ | 83,296 |  
|Less - grants and participations                     |  |                         | (1,858 | )    |   | (2,677 | ) |   | (3,573 | )
|Less - capitalization of software
 development costs |  |                         | (1,225 | )    |   | (962   | ) |   | (1,278 | )
|                                                     |  |                         |        |      |   |        |   |   |        |  
|                                                     |  |                         |        |      |   |        |   |   |        |  
|                                                     |  | $                       | 44,880 |      | $ | 59,632 |   | $ | 78,445 |  
|                                                     |  |                         |        |      |   |        |   |   |        |  

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

|                                                                                  |  |                         |        |      |   |        |   |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------- | -
|                                                                                  |  | Year ended December 31, |       
|                                                                                  |  |                         |       
|                                                                                  |  | 2006                    |        | 2007 |   | 2008   |  
|                                                                                  |  |                         |        |      |   |        |  
|                                                                                  |  |                         |        |      |   |        |  
|Financial income:                                                                 |  |                         |        |      |   |        |   |   |         |  
|Interest and amortization/accretion of
 premium/discount on marketable securities |  | $                       | 6,848  |      | $ | 10,875 |   | $ | 7,739   |  
|Realized gain on marketable securities                                            |  |                         |       |      |   | 5      |   |   | 3,054   |  
|Interest                                                                          |  |                         | 7,101  |      |   | 5,499  |   |   | 4,809   |  
|Foreign currency translation                                                      |  |                         | 1,434  |      |   | 1,581  |   |   | 6,088   |  
|                                                                                  |  |                         |        |      |   |        |   |   |         |  
|                                                                                  |  |                         |        |      |   |        |   |   |         |  
|                                                                                  |  |                         | 15,383 |      |   | 17,960 |   |   | 21,690  |  
|                                                                                  |  |                         |        |      |   |        |   |   |         |  
|Financial expenses:                                                               |  |                         |        |      |   |        |   |   |         |  
|Realized loss on marketable securities                                            |  |                         |       |      |   | (262   | ) |   | (4,107  | )
|Interest                                                                          |  |                         | (40    | )    |   | (668   | ) |   | (613    | )
|Foreign currency translation                                                      |  |                         | (1,455 | )    |   | (1,548 | ) |   | (4,568  | )
|Other                                                                             |  |                         | (616   | )    |   | (658   | ) |   | (1,113  | )
|                                                                                  |  |                         |        |      |   |        |   |   |         |  
|                                                                                  |  |                         |        |      |   |        |   |   |         |  
|                                                                                  |  |                         | (2,111 | )    |   | (3,136 | ) |   | (10,401 | )
|                                                                                  |  |                         |        |      |   |        |   |   |         |  
|                                                                                  |  |                         |        |      |   |        |   |   |         |  
|Other income (expenses), net                                                      |  |                         | 623    |      |   | (24    | ) |   | (53     | )
|                                                                                  |  |                         |        |      |   |        |   |   |         |  
|                                                                                  |  |                         |        |      |   |        |   |   |         |  
|                                                                                  |  | $                       | 13,895 |      | $ | 14,800 |   | $ | 11,236  |  
|                                                                                  |  |                         |        |      |   |        |   |   |         |  

| |    |                                                                                              
| | -- | ---------------------------------------------------------------------------------------------
| | c. | Net earnings
 per share:                                                                     
| |    |                                                                                              
| |    | The
 following table sets forth the computation of basic and diluted net earnings
 per share:

| |  |    |           
| |  | -- | ----------
| |  | 1. | Numerator:

|                                               |  |                         |        |      |   |        |  |   |        | 
|---------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                               |  | Year ended December 31, |       
|                                               |  |                         |       
|                                               |  | 2006                    |        | 2007 |   | 2008   | 
|                                               |  |                         |        |      |   |        | 
|                                               |  |                         |        |      |   |        | 
|Net income available to Ordinary
 shareholders |  | $                       | 22,401 |      | $ | 37,380 |  | $ | 39,107 | 
|                                               |  |                         |        |      |   |        |  |   |        | 

F - 56

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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 15:- | SELECTED STATEMENTS OF INCOME DATA (Cont.)
|          |                                            |    |                             
|          |                                            | 2. | Denominator
 (in thousands):

|                                                                                   |  |  |        |  |  |        |  |  |        | 
|---------------------------------------------------------------------------------- |  |  | ------ |  |  | ------ |  |  | ------ | 
|Denominator for basic net earnings per
 share -                                    |  |  |        |  |  |        |  |  |        | 
|Weighted average number of shares                                                  |  |  | 49,572 |  |  | 53,921 |  |  | 60,088 | 
|Effect of dilutive securities:                                                     |  |  |        |  |  |        |  |  |        | 
|Add - Employee stock options and
RSA                                               |  |  | 2,429  |  |  | 2,005  |  |  | 1,180  | 
|Add - ESPP                                                                         |  |  | 1      |  |  |       |  |  |       | 
|                                                                                   |  |  |        |  |  |        |  |  |        | 
|                                                                                   |  |  |        |  |  |        |  |  |        | 
|Denominator for diluted net earnings per
 share - adjusted weighted average shares |  |  | 52,002 |  |  | 55,926 |  |  | 61,268 | 
|                                                                                   |  |  |        |  |  |        |  |  |        | 

F - 57

---

---

# SIGNATURES

The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on
its behalf.

| |  | NICE-SYSTEMS LTD.By: /s/ Haim Shani
Haim ShaniChief Executive Officer
| |  | -----------------------------------------------------------------------------------

Date: April 5, 2009

117

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---