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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2004

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934


COMMISSION FILE NUMBER: 0-15502


COMVERSE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)

NEW YORK 13-3238402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

170 CROSSWAYS PARK DRIVE, WOODBURY, NY 11797
(Address of principal executive offices) (Zip Code)

(516) 677-7200
(Registrant's telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)


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 [ ] No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

[X] Yes [ ] No

The number of shares outstanding of the registrant's common stock, par
value $0.10 per share, as of September 2, 2004 was 196,007,395.


TABLE OF CONTENTS
-----------------

Page

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

1. Condensed Consolidated Balance Sheets as
of January 31, 2004 and July 31, 2004 2

2. Condensed Consolidated Statements of Operations
for the Three and Six Month Periods
Ended July 31, 2003 and July 31, 2004 3

3. Condensed Consolidated Statements of Cash Flows
for the Six Month Periods Ended
July 31, 2003 and July 31, 2004 4

4. Notes to Condensed Consolidated Financial
Statements 5

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 14

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 34

ITEM 4. CONTROLS AND PROCEDURES. 34

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS. 34

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 35

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 36

SIGNATURES 37



ii

FORWARD-LOOKING STATEMENTS

From time to time, the Company makes forward-looking statements.
Forward-looking statements include financial projections, statements of plans
and objectives for future operations, statements of future economic performance,
and statements of assumptions relating thereto. Forward-looking statements are
often identified by future or conditional words such as "will," "plans,"
"expects," "intends," "believes," "seeks," "estimates," or "anticipates" or by
variations of such words or by similar expressions.

The Company may include forward-looking statements in its periodic
reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K,
in its annual report to shareholders, in its proxy statements, in its press
releases, in other written materials, and in statements made by employees to
analysts, investors, representatives of the media, and others.

By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors,
including without limitation those discussed under "Certain Trends and
Uncertainties" and elsewhere in this report. Investors and others should
carefully consider these and other uncertainties and events, whether or not the
statements are described as forward-looking.

Forward-looking statements made by the Company are intended to apply
only at the time they are made, unless explicitly stated to the contrary.
Moreover, whether or not stated in connection with a forward-looking statement,
the Company makes no commitment to revise or update any forward-looking
statements in order to reflect events or circumstances after the date any such
statement is made. If the Company were in any particular instance to update or
correct a forward-looking statement, investors and others should not conclude
that the Company will make additional updates or corrections thereafter.



1

PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.


COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)



JANUARY 31, JULY 31,
2004* 2004
(Unaudited)


ASSETS
- ------

CURRENT ASSETS:
Cash and cash equivalents $ 1,530,995 $ 1,808,641
Bank time deposits and short-term investments 667,504 378,120
Accounts receivable, net 158,236 197,830
Inventories 54,751 66,691
Prepaid expenses and other current assets 50,798 54,898
------------ ------------
TOTAL CURRENT ASSETS 2,462,284 2,506,180
PROPERTY AND EQUIPMENT, net 125,023 124,222
OTHER ASSETS 140,735 171,137
------------ ------------
TOTAL ASSETS $ 2,728,042 $ 2,801,539
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------

CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 229,296 $ 269,304
Bank loans and other debt 2,649 8,827
Advance payments from customers 89,062 99,576
------------ ------------
TOTAL CURRENT LIABILITIES 321,007 377,707
CONVERTIBLE DEBT 544,723 507,253
OTHER LIABILITIES 28,288 19,261
------------ ------------
TOTAL LIABILITIES 894,018 904,221
------------ ------------
MINORITY INTEREST 161,478 178,180
------------ ------------

STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value -
authorized, 600,000,000 shares;
issued and outstanding, 194,549,886 and 195,985,395 shares 19,454 19,598
Additional paid-in capital 1,210,547 1,240,728
Unearned stock compensation (6,707) (5,843)
Retained earnings 439,899 460,227
Accumulated other comprehensive income 9,353 4,428
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,672,546 1,719,138
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,728,042 $ 2,801,539
============ ============



*The Condensed Consolidated Balance Sheet as of January 31, 2004 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date.

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



2

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)



SIX MONTHS ENDED THREE MONTHS ENDED

JULY 31, JULY 31, JULY 31, JULY 31,
2003 2004 2003 2004

Sales $ 369,020 $ 454,822 $ 188,468 $ 233,427
Cost of sales 161,697 182,716 81,324 93,124
---------- ---------- ---------- ----------
Gross margin 207,323 272,106 107,144 140,303

Operating expenses:
Research and development, net 108,292 112,069 53,804 56,527
Selling, general and administrative 125,065 140,002 62,993 71,507
In-process research and development and other
acquisition-related charges - 4,635 - -
Workforce reduction, restructuring and impairment
charges (credits) (233) ` 164 (233) (534)
---------- ---------- ---------- ----------

Income (loss) from operations (25,801) 15,236 (9,420) 12,803

Interest and other income, net 25,054 15,429 11,718 7,784
---------- ---------- ---------- ----------

Income (loss) before income tax provision, minority interest
and equity in the earnings (losses) of affiliates (747) 30,665 2,298 20,587

Income tax provision 4,206 5,160 2,226 3,668

Minority interest and equity in the earnings (losses) of affiliates (1,924) (5,177) (1,130) (3,592)
---------- ---------- ---------- ----------

Net income (loss) $ (6,877) $ 20,328 $ (1,058) $ 13,327
========== ========== ========== ==========

Earnings (loss) per share:
Basic $ (0.04) $ 0.10 $ (0.01) $ 0.07
========== ========== ========== ==========
Diluted $ (0.04) $ 0.10 $ (0.01) $ 0.06
========== ========== ========== ==========


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


3

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)



SIX MONTHS ENDED
JULY 31, JULY 31,
2003 2004

Cash flows from operating activities:
Net cash from operations after adjustment
for non-cash items $ 35,607 $ 64,837
Changes in operating assets and liabilities:
Accounts receivable, net 35,609 (39,594)
Inventories 225 (11,940)
Prepaid expenses and other current assets 8,422 (2,518)
Accounts payable and accrued expenses (17,519) 37,525
Advance payments from customers (11,827) 10,514
Other, net (5,518) (5,115)
------------ ------------
Net cash provided by operating activities 44,999 53,709
------------ ------------

Cash flows from investing activities:
Maturities and sales (purchases) of bank time deposits
and investments, net (326,949) 283,748
Purchase of property and equipment (19,403) (23,326)
Capitalization of software development costs (4,894) (2,041)
Net assets acquired (5,910) (36,107)
------------ ------------
Net cash provided by (used in) investing activities (357,156) 222,274
------------ ------------



Cash flows from financing activities:
Net proceeds from issuance of convertible debt 412,974 -
Repurchase of convertible debt (221,446) (36,873)
Repayment of bank loan (42,000) -
Net proceeds from issuance of stock 147,391 38,813
Other, net (4,205) (277)
------------ ------------
Net cash provided by financing activities 292,714 1,663
------------ ------------

Net increase (decrease) in cash and cash equivalents (19,443) 277,646
Cash and cash equivalents, beginning of period 1,402,783 1,530,995
------------ ------------
Cash and cash equivalents, end of period $ 1,383,340 $ 1,808,641
============ ============



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



4

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


BASIS OF PRESENTATION. Comverse Technology, Inc. ("CTI" and, together
with its subsidiaries, the "Company") is engaged in the design, development,
manufacture, marketing and support of computer and telecommunications systems
and software for multimedia communications and information processing
applications.

The accompanying financial information should be read in conjunction
with the financial statements, including the notes thereto, for the annual
period ended January 31, 2004. The financial information included herein is
unaudited; however, such information reflects all adjustments (consisting solely
of normal recurring adjustments), which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. The results
of operations for the three and six month periods ended July 31, 2004 are not
necessarily indicative of the results to be expected for the full year.

RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to the presentation in the current year.

STOCK-BASED COMPENSATION. The Company accounts for stock options under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, no stock-based employee compensation cost for
stock options is reflected in net income (loss) for any periods, as all options
granted had an exercise price at least equal to the market value of the
underlying common stock on the date of grant. During the year ended January 31,
2004, the Company and one of its subsidiaries granted shares of restricted stock
to certain key employees. Stock-based employee compensation expense relating to
restricted stock for the three month periods ended July 31, 2003 and 2004, of
approximately $0 and $433,000, respectively, and for the six month periods ended
July 31, 2003 and 2004, of approximately $0 and $864,000, respectively, is
included in 'Selling, general and administrative' expenses in the Condensed
Consolidated Statements of Operations.

The Company estimated the fair value of employee stock options utilizing
the Black-Scholes option valuation model, using appropriate assumptions, as
required under accounting principles generally accepted in the United States of
America. The Black-Scholes model was developed for use in estimating the fair
value of traded options and does not consider the non-traded nature of employee
stock options, vesting and trading restrictions, lack of transferability or the
ability of employees to forfeit the options prior to expiry. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's employee stock options.


5

The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee compensation
for all periods:



THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
-----------------------------------------------------------------------

2003 2004 2003 2004
---- ---- ---- ----
(In thousands) (In thousands)


Net income (loss), as reported $ (1,058) $ 13,327 $ (6,877) $ 20,328

Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (39,914) (31,602) (77,049) (70,654)
--------- --------- --------- ---------

Pro forma net loss $(40,972) $(18,275) $(83,926) $(50,326)
========= ========= ========= =========

Earnings (loss) per share:

Basic - as reported $ (0.01) $ 0.07 $ (0.04) $ 0.10
Basic - pro forma $ (0.22) $ (0.09) $ (0.45) $ (0.26)

Diluted - as reported $ (0.01) $ 0.06 $ (0.04) $ 0.10
Diluted - pro forma $ (0.22) $ (0.09) $ (0.45) $ (0.26)



INVENTORIES. The composition of inventories at January 31, 2004 and
July 31, 2004 is as follows:

JANUARY 31, JULY 31,
2004 2004
(In thousands)

Raw materials $ 23,157 $ 21,139
Work in process 12,802 15,118
Finished goods 18,792 30,434
-------- --------
$ 54,751 $ 66,691
======== ========


6

RESEARCH AND DEVELOPMENT EXPENSES. A significant portion of the
Company's research and development operations are located in Israel where the
Company derives benefits from participation in programs sponsored by the
Government of Israel for the support of research and development activities
conducted in that country. Certain of the Company's research and development
activities include projects partially funded by the Office of the Chief
Scientist of the Ministry of Industry and Trade of the State of Israel (the
"OCS") under which the funding organization reimburses a portion of the
Company's research and development expenditures under approved project budgets.
Certain of the Company's subsidiaries accrue royalties to the OCS for the sale
of products incorporating technology developed in these projects. Under the
terms of the applicable funding agreements, products resulting from projects
funded by the OCS may not be manufactured outside of Israel without government
approval. The amounts reimbursed by the OCS for the three month periods ended
July 31, 2003 and 2004 were approximately $3,781,000 and $2,373,000,
respectively, and for the six month periods ended July 31, 2003 and 2004 were
approximately $4,989,000 and $4,824,000, respectively.

EARNINGS (LOSS) PER SHARE. The computation of basic earnings (loss) per
share is based on the weighted average number of outstanding common shares.
Diluted earnings per share further assumes the issuance of common shares for all
dilutive potential common shares outstanding. The calculation of earnings (loss)
per share for the three and six month periods ended July 31, 2003 and 2004 is as
follows:



THREE MONTHS ENDED THREE MONTHS ENDED
JULY 31, 2003 JULY 31, 2004
------------- -------------
Net Per Share Net Per Share
Loss Shares Amount Income Shares Amount
(In thousands, except per share data)


BASIC EPS
- ---------
Net income (loss) $ (1,058) 188,844 $ (0.01) $ 13,327 195,467 $ 0.07
========= =========

EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Options 6,350
Subsidiary options (243)
----------------------------------------- ----------------------------------------

DILUTED EPS $ (1,058) 188,844 $ (0.01) $ 13,084 201,817 $ 0.06
========= ========= ========= ========= ========= =========



7



SIX MONTHS ENDED SIX MONTHS ENDED
JULY 31, 2003 JULY 31, 2004
------------- -------------
Net Per Share Net Per Share
Loss Shares Amount Income Shares Amount
(In thousands, except per share data)


BASIC EPS
- ---------
Net income (loss) $ (6,877) 188,531 $ (0.04) $ 20,328 195,136 $ 0.10
========= =========

EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Options 6,637
Subsidiary options (394)
----------------------------------------- -------------------------------------------

DILUTED EPS $ (6,877) 188,531 $ (0.04) $ 19,934 201,773 $ 0.10
========= ========= ========= ========= ========= =========




The diluted loss per share computation for the three and six month
periods ended July 31, 2003 excludes incremental shares of approximately
5,639,000 and 3,935,000, respectively, related to employee stock options. These
shares are excluded due to their antidilutive effect as a result of the
Company's loss during these periods. The shares issuable upon the conversion of
the Company's 1.50% Convertible Senior Debentures due December 2005 (the
"Debentures") were not included in the computation of diluted earnings (loss)
per share for all periods because the effect of including them would be
antidilutive. In addition, the shares issuable upon the conversion of the
Company's Zero Yield Puttable Securities due 2023 ("ZYPS") were not included in
the computation of diluted earnings (loss) per share for all periods. The ZYPS
are convertible into shares of the Company's common stock contingent upon the
occurrence of certain events that have not yet occurred. As such, the contingent
conversion feature has not been satisfied and the ZYPS are not currently
considered to be dilutive in accordance with the provisions of SFAS No. 128,
"Earnings per Share." However, refer to footnote "Proposed Accounting
Pronouncement" for a description of a proposed change to this treatment. A full
conversion of the ZYPS would result in the issuance of approximately 23,367,000
additional shares of common stock.

COMPREHENSIVE INCOME (LOSS). Total comprehensive income (loss) was
approximately $(7,748,000) and $12,466,000 for the three month periods ended
July 31, 2003 and 2004, respectively, and $(14,570,000) and $15,403,000 for the
six month periods ended July 31, 2003 and 2004, respectively. The elements of
comprehensive income (loss) include net income (loss), unrealized gains/losses
on available for sale securities and foreign currency translation adjustments.


8

CONVERTIBLE DEBT. In May 2003, the Company issued $420,000,000
aggregate principal amount of its ZYPS, for net proceeds of approximately $412.8
million. The ZYPS are unsecured senior obligations of the Company ranking
equally with all of the Company's existing and future unsecured senior
indebtedness and are senior in right of payment to any of the Company's existing
and future subordinated indebtedness. The ZYPS are convertible, contingent upon
the occurrence of certain events, into shares of the Company's common stock at a
conversion price of $17.97 per share. The ability of the holders to convert the
ZYPS into common stock is subject to certain conditions including: (i) during
any fiscal quarter, if the closing price per share for a period of at least a
thirty consecutive trading-day period ending on the last trading day of the
preceding fiscal quarter is more than 120% of the conversion price per share in
effect on that thirtieth day; (ii) on or before May 15, 2018, if during the five
business-day period following any ten consecutive trading-day period in which
the daily average trading price for the ZYPS for that ten trading-day period was
less than 105% of the average conversion value for the ZYPS during that period;
(iii) during any period, if following the date on which the credit rating
assigned to the ZYPS by Standard & Poor's Rating Services is lower than "B-" or
upon the withdrawal or suspension of the ZYPS rating at the Company's request;
(iv) if the Company calls the ZYPS for redemption; or (v) upon other specified
corporate transactions. The ZYPS mature on May 15, 2023. The Company has the
right to redeem the ZYPS for cash at any time on or after May 15, 2008, at their
principal amount. The holders have a series of put options, pursuant to which
they may require the Company to repurchase, at par, all or a portion of the ZYPS
on each of May 15 of 2008, 2013, and 2018 and upon the occurrence of certain
events. The ZYPS holders may require the Company to repurchase the ZYPS at par
in the event that the common stock ceases to be publicly traded and, in certain
instances, upon a change in control of the Company. Upon the occurrence of a
change in control, instead of paying the repurchase price in cash, the Company
may, under certain circumstances, pay the repurchase price in common stock.

In November and December 2000, the Company issued $600,000,000
aggregate principal amount of its Debentures. The Debentures are unsecured
senior obligations of the Company ranking equally with all of the Company's
existing and future unsecured senior indebtedness and are senior in right of
payment to any of the Company's existing and future subordinated indebtedness.
The Debentures are convertible, at the option of the holders, into shares of the
Company's common stock at a conversion price of $116.325 per share, subject to
adjustment in certain events; and are subject to redemption at any time on or
after December 1, 2003, in whole or in part, at the option of the Company, at
redemption prices (expressed as percentages of the principal amount) of 100.375%
if redeemed during the twelve-month period beginning December 1, 2003, and 100%
of the principal amount if redeemed thereafter. The Debenture holders may
require the Company to repurchase the Debentures at par in the event that the
common stock ceases to be publicly traded and, in certain instances, upon a
change in control of the Company. Upon the occurrence of a change in control,
instead of paying the repurchase price in cash, the Company may, under certain
circumstances, pay the repurchase price in common stock.

During the three month periods ended July 31, 2003 and 2004, the
Company acquired, in open market purchases, $188,458,000 and $6,975,000 of face
amount of the Debentures, respectively, resulting in a pre-tax gain, net of debt
issuance costs, of approximately $6,405,000 and $97,000, respectively, and
during the six month periods ended July 31, 2003 and 2004, the Company acquired,
in open market purchases, $233,008,000 and $37,470,000 of face amount of the
Debentures, respectively, resulting in a pre-tax gain, net of debt issuance
costs, of approximately $9,214,000 and $341,000, respectively. These gains are
included in 'Interest and other income, net' in the Condensed Consolidated
Statements of Operations. As of July 31, 2004, the Company had outstanding
Debentures of $87,253,000.


9

ISSUANCE OF SUBSIDIARY STOCK. In February 2004, Starhome B.V.
("Starhome"), a subsidiary of CTI, received equity financing from an
unaffiliated investor group of approximately $14,481,000, net of expenses. The
Company recorded a gain of approximately $11,767,000, which was recorded as an
increase in stockholders' equity as a result of the issuance of subsidiary
stock. Upon the completion of this transaction, the Company's ownership interest
in Starhome was approximately 69.5%. In addition, Starhome received a commitment
for an additional $5,000,000 in equity financing from the unaffiliated investor
group, which funds are currently being held in escrow.

ACQUISITION. On March 31, 2004, Verint Systems Inc. ("Verint") acquired
certain assets and assumed certain liabilities of the government surveillance
business of ECtel Ltd. ("ECtel"), which provided Verint with additional
communications interception capabilities for the mass collection and analysis of
voice and data communications. The purchase price was approximately $35,000,000
in cash. Verint incurred transaction costs, consisting primarily of professional
fees, amounting to approximately $1,107,000 in connection with this acquisition.

The acquisition was accounted for using the purchase method. The
purchase price was allocated to the assets and liabilities of ECtel based on the
estimated fair value of those assets and liabilities as of March 31, 2004. The
results of operations of ECtel have been included in the Company's results of
operations since March 31, 2004. Identifiable intangible assets consist of sales
backlog, acquired technology, customer relationships and non-competition
agreements and have estimated useful lives of up to ten years. Purchased
in-process research and development represents the value assigned to research
and development projects of the acquired business that were commenced but not
completed at the date of acquisition, for which technological feasibility had
not been established and which have no alternative future use in research and
development activities or otherwise. In accordance with SFAS No. 2, "Accounting
for Research and Development Costs," as interpreted by Financial Accounting
Standards Board ("FASB") Interpretation No. 4, amounts assigned to purchased
in-process research and development meeting the above criteria must be charged
to expense at the acquisition date. At the acquisition date, it was estimated
that the purchased in-process research and development was approximately 40%
complete and it was expected that the remaining 60% would be completed during
the ensuing year. The fair value of the purchased in-process research and
development was determined by an independent valuation using the income
approach, which reflects the projected free cash flows that will be generated by
the purchased in-process research and development projects and discounting the
projected net cash flows back to their present value using a discount rate of
21%.

As a result of the acquisition of the government surveillance business
of ECtel, Verint had certain capitalized software development costs that became
impaired due to the existence of duplicative technology and, accordingly, were
written-down to their net realizable value at the date of acquisition. Such
impairment charge amounted to approximately $1,481,000 and is included in
'In-process research and development and other acquisition-related charges' in
the Condensed Consolidated Statements of Operations.


10

The following is a summary of the allocation of the purchase price for
this acquisition:



(IN THOUSANDS)

Purchase price $ 35,000
Acquisition costs 1,107
----------
Total purchase price $ 36,107
==========


Fair value of assets acquired $ 1,417
Fair value of liabilities assumed (3,282)
In-process research and development 3,154
Sales backlog 854
Acquired technology 5,307
Customer relationships 1,382
Non-competition agreements 2,221
Goodwill 25,054
----------
Total purchase price $ 36,107
==========


A summary of pro forma results of operations has not been presented as
the effect of this acquisition was not deemed material.

WORKFORCE REDUCTION, RESTRUCTURING AND IMPAIRMENT CHARGES (CREDITS).
During the year ended January 31, 2002, the Company committed to and began
implementing a restructuring program, including changes to its organizational
structure and product offerings, to better align its cost structure with the
business environment and to improve the efficiency of its operations via
reductions in workforce, restructuring of operations and the write-off of
impaired assets. In connection with these actions, during the three year period
ended January 31, 2004, the Company incurred net charges to operations primarily
pertaining to severance and other related costs, the elimination of excess
facilities and related leasehold improvements and the write-off of certain
property and equipment and other impaired assets. During the three and six month
periods ended July 31, 2004, the Company incurred net charges (credits) to
operations of approximately $(534,000) and $164,000, respectively.

As of July 31, 2004, the Company had an accrual of approximately
$24,711,000 relating to workforce reduction and restructuring. A roll-forward of
the workforce reduction and restructuring accrual from February 1, 2004 is as
follows:



WORKFORCE
ACCRUAL REDUCTION, ACCRUAL
BALANCE AT RESTRUCTURING BALANCE AT
FEBRUARY 1, & IMPAIRMENT CASH NON-CASH JULY 31,
2004 CHARGES (CREDITS) PAYMENTS CHARGES 2004
---- ----------------- -------- ------- ----
(IN THOUSANDS)

Severance and related $ 3,068 $ 698 $ 2,247 $ - $ 1,519
Facilities and related 26,427 (743) 2,492 - 23,192
Property and equipment - 209 - 209 -
--------- --------- --------- --------- ---------
Total $ 29,495 $ 164 $ 4,739 $ 209 $ 24,711
========= ========= ========= ========= =========




11

Severance and related costs consist primarily of severance payments to
terminated employees, fringe related costs associated with severance payments,
other termination costs and legal and consulting costs. The balance of these
severance and related costs is expected to be paid during the year ended January
31, 2005.

Facilities and related costs consist primarily of contractually
obligated lease liabilities and operating expenses related to facilities that
were vacated primarily in the United States and Israel as a result of the
restructuring. The balance of these facilities and related costs is expected to
be paid at various dates through January 2011.

Property and equipment costs consist primarily of the write-down of
various assets to their current estimable fair value.

BUSINESS SEGMENT INFORMATION. The Company's reporting segments are as
follows:

Comverse Network Systems ("CNS") - Enable telecommunications service
providers ("TSP") to offer products to enhance the communication experience and
generate TSP traffic and revenue. These services comprise four primary
categories: call completion and call management solutions; advanced messaging
solutions for groups, communities and person-to-person communication; solutions
and enablers for the management and delivery of data and content-based services;
and real-time billing and account management solutions for dynamic service
environments and other components and applications.

Service Enabling Signaling Software - Enable equipment manufacturers,
application developers, and service providers to deploy revenue generating
infrastructure and enhanced services for wireline, wireless and Internet
communications. These services include global roaming, voice and text messaging,
prepaid calling and emergency-911. These products are also embedded in a range
of packet softswitching products to interoperate or converge voice and data
networks and facilitate services such as VoIP, hosted IP telephony, and virtual
private networks. This segment represents the Company's Ulticom subsidiary.

Security and Business Intelligence Recording - Provides analytic
software-based solutions for communications interception, networked video and
contact centers. The software generates actionable intelligence through the
collection, retention and analysis of voice, fax, video, email, Internet and
data transmissions from multiple types of communications networks. This segment
represents the Company's Verint subsidiary.


12

All Other - Includes other miscellaneous operations.

Reconciling items - consists of the following:

Sales - elimination of intersegment revenues.
Income (Loss) from Operations - elimination of intersegment income
(loss) from operations and corporate operations.
Total Assets - elimination of intersegment receivables and unallocated
corporate assets.

The table below presents information about sales, income (loss) from
operations and segment assets as of and for the three and six month periods
ended July 31, 2003 and 2004:



Service Security and
Comverse Enabling Business
Network Signaling Intelligence Reconciling Consolidated
Systems Software Recording All Other Items Totals
------- -------- --------- --------- ----- ------


THREE MONTHS ENDED JULY 31, 2003:

Sales $ 130,401 $ 9,434 $ 46,892 $ 2,673 $ (932) $ 188,468
Income (loss) from
operations $ (12,506) $ 855 $ 4,133 $ (200) $ (1,702) $ (9,420)

THREE MONTHS ENDED JULY 31, 2004:

Sales $ 156,293 $ 16,087 $ 60,167 $ 2,551 $ (1,671) $ 233,427
Income (loss) from
operations $ 4,725 $ 5,312 $ 5,352 $ (125) $ (2,461) $ 12,803

SIX MONTHS ENDED JULY 31, 2003:

Sales $ 256,277 $ 18,563 $ 91,307 $ 4,917 $ (2,044) $ 369,020
Income (loss) from
operations $ (30,818) $ 1,232 $ 7,632 $ (452) $ (3,395) $ (25,801)

SIX MONTHS ENDED JULY 31, 2004:

Sales $ 306,374 $ 29,276 $ 116,805 $ 5,145 $ (2,778) $ 454,822
Income (loss) from
operations $ 6,566 $ 7,952 $ 6,213 $ (397) $ (5,098) $ 15,236

TOTAL ASSETS:

July 31, 2003 $ 927,718 $ 238,983 $ 309,072 $ 35,045 $ 1,149,799 $ 2,660,617
July 31, 2004 $ 891,524 $ 254,312 $ 361,774 $ 38,665 $ 1,255,264 $ 2,801,539



PROPOSED ACCOUNTING PRONOUNCEMENT. In July 2004, the Emerging Issues
Task Force ("EITF") of the FASB issued a draft abstract for EITF Issue No. 04-8,
"The Effect of Contingently Convertible Debt on Diluted Earnings per Share"
("EITF 04-8"). EITF 04-8 reflects the Task Force's tentative conclusion, to be
discussed further at the next EITF meeting scheduled for September 2004, that


13

contingently convertible debt should be included in diluted earnings per share
computations (if dilutive) regardless of whether the common stock price has
exceeded a predetermined threshold for a specified time period, or other market
price triggers or contingent features have been met. If adopted in its current
form, this consensus would be effective for reporting periods ending after
December 15, 2004. Prior period earnings per share amounts presented for
comparative purposes would also be required to be restated. The Company would be
required to include the shares issuable upon the conversion of the Company's
ZYPS in diluted earnings per share computations for all periods that the ZYPS
are outstanding, which would result in the inclusion of approximately 23,367,000
additional shares, using the "if-converted" method.

LITIGATION. On March 16, 2004, BellSouth Intellectual Property Corp.
("BellSouth") filed a complaint in the United States District Court for the
Northern District of Georgia against Comverse Technology, Inc. alleging
infringement of Patent Nos. 5,857,013 and 5,764,747, and, on March 17, 2004,
BellSouth amended the complaint, removing any and all references to Comverse
Technology, Inc., and naming Comverse, Inc., in an action captioned: BellSouth
Intellectual Property Corp. v. Comverse, Inc., Civil Action No. 1:04-CV-0739.
BellSouth alleges that Patent Nos. 5,857,013 and 5,764,747 cover certain aspects
of some of Comverse Inc.'s systems, and it seeks, among other relief, monetary
damages and injunctive relief. On May 5, 2004, Comverse, Inc. filed an answer
and counterclaims which, among other things, denies any infringement and seeks a
declaratory judgment that the patents at issue are invalid and unenforceable.
The Company believes all claims are without merit and Comverse, Inc. will
vigorously defend against BellSouth's claims.

From time to time, the Company is subject to claims in legal
proceedings arising in the normal course of its business. The Company does not
believe that it is currently party to any other pending legal action that could
reasonably be expected to have a material adverse effect on its business,
financial condition and results of operations.

SUBSEQUENT EVENT. On September 2, 2004, Verint, through a
subsidiary, acquired all of the outstanding stock of RP Sicherheitssysteme GmbH
("RP"), a company in the business of developing and selling mobile digital video
security solutions for transportation applications. Verint paid approximately
$9,028,000 in cash and 90,144 shares of Verint common stock for RP. In addition,
the shareholders of RP will be entitled to receive earn-out payments over three
years based on Verint's worldwide sales, profitability and backlog of mobile
video products in the transportation market during that period.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions 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. The critical accounting policies described in Item 7 in the Company's
Annual Report on Form 10-K are those that are both most important to the
portrayal of the Company's financial position and results of operations, and
require management's most difficult, subjective or complex judgments. As of July
31, 2004, there have been no material changes to any of the critical accounting
policies contained therein.


14

RESULTS OF OPERATIONS

SUMMARY OF RESULTS

Consolidated results of operations in dollars and as a percentage of
sales for each of the six month periods ended July 31, 2003 and 2004 were as
follows:



Six months Six months
ended ended
July 31, 2003 % of sales July 31, 2004 % of sales
-------------------------------------------------------------------

(In thousands)


Sales $ 369,020 100.0% $ 454,822 100.0%
Cost of sales 161,697 43.8% 182,716 40.2%
------------ ------------
Gross margin 207,323 56.2% 272,106 59.8%

Operating expenses:
Research and development, net 108,292 29.3% 112,069 24.6%
Selling, general and administrative 125,065 33.9% 140,002 30.8%
In-process research and development and other
acquisition-related charges - - 4,635 1.0%
Workforce reduction, restructuring and
impairment charges (credits) (233) (0.1)% 164 0.0%
------------ ------------

Income (loss) from operations (25,801) (7.0)% 15,236 3.3%

Interest and other income, net 25,054 6.8% 15,429 3.4%
------------ ------------

Income (loss) before income tax provision,
minority interest and equity in the earnings
(losses) of affiliates (747) (0.2)% 30,665 6.7%

Income tax provision 4,206 1.1% 5,160 1.1%

Minority interest and equity in the earnings
(losses) of affiliates (1,924) (0.5)% (5,177) (1.1)%
------------ ------------

Net income (loss) $ (6,877) (1.9)% $ 20,328 4.5%
============ ============




15

Consolidated results of operations in dollars and as a percentage of
sales for each of the three month periods ended July 31, 2003 and 2004 were as
follows:



Three months Three months
ended ended
July 31, 2003 % of sales July 31, 2004 % of sales
--------------------------------------------------------------------
(In thousands)


Sales $ 188,468 100.0% $ 233,427 100.0%
Cost of sales 81,324 43.2% 93,124 39.9%
------------ ------------
Gross margin 107,144 56.8% 140,303 60.1%

Operating expenses:
Research and development, net 53,804 28.5% 56,527 24.2%
Selling, general and administrative 62,993 33.4% 71,507 30.6%
Workforce reduction, restructuring and
impairment charges (credits) (233) (0.1)% (534) (0.2)%
------------ ------------

Income (loss) from operations (9,420) (5.0)% 12,803 5.5%

Interest and other income, net 11,718 6.2% 7,784 3.3%
------------ ------------

Income before income tax provision,
minority interest and equity in the earnings
(losses) of affiliates 2,298 1.2% 20,587 8.8%

Income tax provision 2,226 1.2% 3,668 1.6%

Minority interest and equity in the earnings
(losses) of affiliates (1,130) (0.6)% (3,592) (1.5)%
------------ ------------

Net income (loss) $ (1,058) (0.6)% $ 13,327 5.7%
============ ============



INTRODUCTION

As explained in greater detail in "Certain Trends and Uncertainties",
the Company's two business units serving telecommunications markets are
operating within an industry that has been experiencing a challenging capital
spending environment, although there is some evidence of recent improvement.
Both business units achieved year over year revenue growth, operating income and
net income during the six and three month periods ended July 31, 2004 as well as
sequential revenue growth during the three month period ended July 31, 2004.
Verint, which services the security and business intelligence markets, achieved
record revenue during the six and three month periods ended July 31, 2004 based,
in part, on increased sales due to heightened awareness surrounding homeland
defense and security related initiatives in the United States and abroad as well
as increased business intelligence sales. Overall, for the six and three month
periods ended July 31, 2004, the Company experienced year over year sales growth
of 23.3% and 23.9%, respectively, and sequential sales growth of 5.4% for the
three month period ended July 31, 2004, with a substantial majority of sales for
all periods generated from activities serving the telecommunications industry.
The Company generated operating and net income for the six and three month
periods ended July 31, 2004.


16

SIX MONTH AND THREE MONTH PERIODS ENDED JULY 31, 2004
COMPARED TO SIX MONTH AND THREE MONTH PERIODS ENDED JULY 31, 2003

Sales. Sales for the six and three month periods ended July 31, 2004
increased by approximately $85.8 million, or 23%, and $45.0 million, or 24%,
respectively, compared to the six and three month periods ended July 31, 2003.
These increases are attributable to an increase in sales in the Company's three
primary business units. CNS sales increased by approximately $50.1 million
during the six month period ended July 31, 2004, due primarily to increased
business in Europe and Asia Pacific, and increased by approximately $25.9
million during the three month period ended July 31, 2004, due primarily to
increased business in Europe and the Americas. Security and business
intelligence recording sales increased by approximately $25.5 million and $13.3
million, respectively, and service enabling signaling software sales increased
by approximately $10.7 million and $6.7 million, respectively, during the six
and three month periods ended July 31, 2004. On a consolidated basis, sales to
customers in North America represented approximately 34% and 36% of total sales
for the six month periods ended July 31, 2004 and 2003, respectively, and 28% of
total sales for each of the three month periods ended July 31, 2004 and 2003.

Cost of Sales. Cost of sales for the six and three month periods ended
July 31, 2004 increased by approximately $21.0 million, or 13%, and $11.8
million, or 15%, respectively, compared to the six and three month periods ended
July 31, 2003. The increase in cost of sales is primarily attributable to
increased materials and overhead net of overhead absorption of approximately
$13.2 million and $8.3 million, respectively, increased personnel-related costs
of approximately $6.5 million and $3.0 million, respectively, and net increase
in various other costs of approximately $1.3 million and $0.5 million,
respectively, for the six and three month periods ended July 31, 2004. Gross
margins for the six and three month periods ended July 31, 2004 increased to
approximately 59.8% and 60.1% from approximately 56.2% and 56.8% in the
corresponding 2003 periods.

Research and Development, Net. Net research and development expenses
for the six and three month periods ended July 31, 2004 increased by
approximately $3.8 million, or 3%, and $2.7 million, or 5%, respectively,
compared to the six and three month periods ended July 31, 2003. The increase in
net research and development expenses is primarily attributable to increased
personnel-related costs of approximately $3.6 million and $2.6 million for the
six and three month periods, respectively.

Selling, General and Administrative. Selling, general and
administrative expenses for the six and three month periods ended July 31, 2004
increased by approximately $14.9 million, or 12%, and $8.5 million, or 14%,
respectively, compared to the six and three month periods ended July 31, 2003.
However, selling, general and administrative expenses as a percentage of sales
for the six and three month periods ended July 31, 2004 decreased to
approximately 30.8% and 30.6% from approximately 33.9% and 33.4% in the
corresponding 2003 periods. The increase in the dollar amount of selling,
general and administrative expenses for the six month period is primarily due to
increased employee and agent sales commissions, personnel-related costs, travel
costs, professional fees and contractors and other temporary workers costs of
approximately $5.2 million, $4.2 million, $1.9 million, $1.8 million and $1.0
million, respectively, and net increase in various other costs of approximately
$3.8 million due primarily to decreased SG&A allocations to other expense
categories, partially offset by lower bad debt expense of approximately $3.0
million. The increase in the dollar amount of selling, general and
administrative expenses for the three month period is primarily due to increased
employee and agent sales commissions and personnel-related costs of
approximately $2.7 million and $1.9 million, respectively, and net increase in
various other costs of approximately $3.9 million due primarily to decreased
SG&A allocations to other expense categories.


17

In-process Research and Development and Other Acquisition-related
Charges. During the six month period ended July 31, 2004, the Company incurred
approximately $4.6 million for in-process research and development and other
acquisition-related charges resulting from Verint's purchase of ECtel's
government surveillance business, as follows: (i) approximately $3.1 million of
purchased in-process research and development, which was charged to expense at
the acquisition, and (ii) approximately $1.5 million for the write-down of
certain capitalized software development costs to their net realizable value at
the date of acquisition, due to impairment caused by the existence of
duplicative technology.

Workforce reduction, restructuring and impairment charges (credits).
During the year ended January 31, 2002, the Company committed to and began
implementing a restructuring program to better align its cost structure with the
business environment and to improve the efficiency of its operations via
reductions in workforce, restructuring of operations and the write-off of
impaired assets. In connection with the restructuring, the Company changed its
organizational structure and product offerings, resulting in the impairment of
certain assets. In connection with these actions, during the six and three month
periods ended July 31, 2004, the Company incurred net charges (credits) to
operations of approximately $0.2 million and $(0.5) million, respectively, and
during the six and three month periods ended July 31, 2003, the Company recorded
a credit to operations of approximately $0.2 million. The Company expects to pay
out approximately $1.5 million for severance and related obligations during the
year ended January 31, 2005 and approximately $23.2 million for facilities and
related obligations at various dates through January 2011.

Interest and Other Income, Net. Interest and other income, net, for the
six and three month periods ended July 31, 2004 decreased by approximately $9.6
million and $3.9 million, respectively, compared to the six and three month
periods ended July 31, 2003. The principal reasons for the decrease are (i) a
decrease in the gain recorded as a result of the Company's repurchases of its
Debentures of approximately $8.9 million and $6.3 million, respectively; (ii) a
decrease in foreign currency gains of approximately $3.2 million for the six
months ended July 31, 2004; and (iii) other decreases of approximately $0.1
million, net, for the six months ended July 31, 2004. Such items were offset by
(i) decreased interest expense of approximately $1.6 million and $0.3 million,
respectively, due primarily to the Company's repurchases of its Debentures and
other debt reduction; (ii) a change in foreign currency gains/losses of
approximately $1.6 million for the three months ended July 31, 2004; (iii) a
change in the net gains/losses from the sale and write-down of investments of
approximately $0.5 million and $0.2 million, respectively; and (iv) increased
interest and dividend income of approximately $0.5 million and $0.3 million,
respectively.

Income Tax Provision. Provision for income taxes for the six and three
month periods ended July 31, 2004 increased by approximately $1.0 million, or
23%, and $1.4 million, or 65%, respectively, compared to the six and three month
periods ended July 31, 2003, due primarily to shifts in the underlying mix of
pre-tax income by entity and tax jurisdiction. The Company's overall rate of tax
is reduced significantly by the existence of net operating loss carryforwards
for Federal income tax purposes in the United States, as well as the tax
benefits associated with qualified activities of certain of its Israeli
subsidiaries, which are entitled to favorable income tax rates under a program
of the Israeli Government for "Approved Enterprise" investments in that country.


18

Minority Interest and Equity in the Earnings (Losses) of Affiliates.
Minority interest and equity in the earnings (losses) of affiliates for the six
and three month periods ended July 31, 2004 increased by approximately $3.3
million and $2.5 million, respectively, as a result of increased minority
interest expense of approximately $2.3 million and $2.0 million, respectively,
primarily attributable to overall increased earnings at majority-owned
subsidiaries, and a change in equity in the earnings (losses) of affiliates of
approximately $1.0 million and $0.5 million, respectively.

Net Income (Loss). Net income (loss) for the six and three month
periods ended July 31, 2004 increased by approximately $27.2 million and $14.4
million, respectively, compared to the six and three month periods ended July
31, 2003, while as a percentage of sales was approximately 4.5% and 5.7%,
respectively, in the six and three month periods ended July 31, 2004 compared to
(1.9)% and (0.6)%, respectively, in the corresponding 2003 periods. These
variances resulted primarily from the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital at July 31, 2004 and January 31, 2004 was
approximately $2,128.5 million and $2,141.3 million, respectively. At July 31,
2004 and January 31, 2004, the Company had total cash and cash equivalents, bank
time deposits and short-term investments of approximately $2,186.8 million and
$2,198.5 million, respectively.

Operations for the six month periods ended July 31, 2004 and 2003,
after adjustment for non-cash items, provided cash of approximately $64.8
million and $35.6 million, respectively. During such periods, other changes in
operating assets and liabilities provided (used) cash of approximately $(11.1)
million and $9.4 million, respectively. This resulted in net cash provided by
operating activities of approximately $53.7 million and $45.0 million,
respectively.

Investing activities for the six month periods ended July 31, 2004 and
2003 provided (used) cash of approximately $222.3 million and $(357.2) million,
respectively. These amounts include (i) net maturities and sales (purchases) of
bank time deposits and investments of approximately $283.7 million and $(326.9)
million, respectively; (ii) purchases of property and equipment of approximately
$(23.3) million and $(19.4) million, respectively; (iii) capitalization of
software development costs of approximately $(2.0) million and $(4.9) million,
respectively; and (iv) net assets acquired as a result of acquisitions of
approximately $(36.1) million and $(5.9) million, respectively.

Financing activities for the six month periods ended July 31, 2004 and
2003 provided cash of approximately $1.7 million and $292.7 million,
respectively. These amounts include (i) net proceeds from the issuance of ZYPS
of approximately $413.0 million for the six months ended July 31, 2003; (ii)
repurchases of Debentures of approximately $(36.9) million and $(221.4) million,
respectively; (iii) repayment of bank loan of $(42.0) million for the six months
ended July 31, 2003; (iv) net proceeds from the issuance of stock in connection
with the exercise of stock options and employee stock purchase plans and the
sale of stock by Company subsidiaries of approximately $38.8 million and $147.4
million, respectively, and (v) other, net of approximately $(0.2) million and
$(4.2) million, respectively.


19

During the six month periods ended July 31, 2004 and 2003, the Company
acquired, in open market purchases, approximately $37.5 million and $233.0
million of face amount of the Debentures, respectively, resulting in a pre-tax
gain, net of debt issuance costs, of approximately $0.3 million and $9.2
million, respectively, included in 'Interest and other income, net' in the
Condensed Consolidated Statements of Operations. As of July 31, 2004, the
Company had outstanding Debentures of approximately $87.3 million.

In February 2004, Starhome received equity financing from an unaffiliated
investor group of approximately $14.5 million, net of expenses. The Company
recorded a gain of approximately $11.8 million, which was recorded as an
increase in stockholders' equity as a result of the issuance of subsidiary
stock. Upon the completion of this transaction, the Company's ownership interest
in Starhome was approximately 69.5%. In addition, Starhome received a commitment
for an additional $5.0 million in equity financing from the unaffiliated
investor group, which funds are currently being held in escrow.

On March 31, 2004, Verint acquired certain assets and assumed certain
liabilities of the government surveillance business of ECtel. The purchase price
was approximately $35.0 million in cash. Verint incurred transaction costs,
consisting primarily of professional fees, amounting to approximately $1.1
million in connection with this acquisition.


On September 2, 2004, Verint, through a subsidiary, acquired all of the
outstanding stock of RP Sicherheitssysteme GmbH ("RP"), a company in the
business of developing and selling mobile digital video security solutions for
transportation applications. Verint paid approximately $9.0 million in cash and
90,144 shares of Verint common stock for RP. In addition, the shareholders of RP
will be entitled to receive earn-out payments over three years based on Verint's
worldwide sales, profitability and backlog of mobile video products in the
transportation market during that period.


The Company's liquidity and capital resources have not been, and are
not anticipated to be, materially affected by restrictions pertaining to the
ability of its foreign subsidiaries to pay dividends or by withholding taxes
associated with any such dividend payments.

The Company regularly examines opportunities for strategic acquisitions
of other companies or lines of business and anticipates that it may from time to
time issue additional debt and/or equity securities either as direct
consideration for such acquisitions or to raise additional funds to be used (in
whole or in part) in payment for acquired securities or assets. The issuance of
such securities could be expected to have a dilutive impact on the Company's
shareholders, and there can be no assurance as to whether or when any acquired
business would contribute positive operating results commensurate with the
associated investment.

The Company believes that its existing working capital, together with
funds generated from operations, will be sufficient to provide for its planned
operations for the foreseeable future.


20

CERTAIN TRENDS AND UNCERTAINTIES

The Company derives the majority of its revenue from the
telecommunications industry, which is experiencing a challenging capital
spending environment. Although the capital spending environment has improved
recently and the Company's revenues have increased in recent quarters, the
Company experienced significant revenue declines from historical peak revenue
levels, and if capital spending and technology purchasing by TSPs does not
continue to improve or declines, revenue may stagnate or decrease, and the
Company's operating results may be adversely affected. For these reasons and the
risk factors outlined below, it has been and continues to be very difficult for
the Company to accurately forecast future revenues and operating results.

The Company's business is particularly dependent on the strength of the
telecommunications industry. The telecommunications industry, including the
Company, have been negatively affected by, among other factors, the high costs
and large debt positions incurred by some TSPs to expand capacity and enable the
provision of future services (and the corresponding risks associated with the
development, marketing and adoption of these services as discussed below),
including the cost of acquisitions of licenses to provide broadband services and
reductions in TSPs' actual and projected revenues and deterioration in their
actual and projected operating results. Accordingly, TSPs, including the
Company's customers, have significantly reduced their actual and planned
expenditures to expand or replace equipment and delayed and reduced the
deployment of services. A number of TSPs, including certain customers of the
Company, also have indicated the existence of conditions of excess capacity in
certain markets.

In addition, certain TSPs have delayed the planned introduction of new
services, such as broadband mobile telephone services, that would be supported
by certain of the Company's products. Certain of the Company's customers also
have implemented changes in procurement practices and procedures, including
limitations on purchases in anticipation of estimated future capacity
requirements, and in the management and use of their networks, that have reduced
the Company's sales, which also has made it very difficult for the Company to
project future sales. The continuation and/or exacerbation of these negative
trends will have an adverse effect on the Company's future results.

The Company has experienced declines in revenue from some of its
traditional products sold to TSPs compared with prior years. The Company is
executing a strategy to capitalize on growth opportunities in new and emerging
products to offset such declines. While certain of these new products have met
with initial success, it is unclear whether they will be widely adopted by the
Company's customers and TSPs in general. Increases in revenue from these new
products also may not exceed declines the Company may experience in revenue from
the sale of its traditional products. If revenue from sales of its traditional
products declines faster than revenue from the new products increases, the
Company's revenue and operating results may be adversely affected.

In addition to loss of revenue, weakness in the telecommunications
industry has affected and will continue to affect the Company's business by
increasing the risks of credit or business failures of suppliers, customers or
distributors, by customer requirements for vendor financing and longer payment
terms, by delays and defaults in customer or distributor payments, and by price
reductions instituted by competitors or by the Company to retain or acquire
market share.

The Company's current plan of operations is predicated, in part, on a
recovery in capital expenditures by its customers. In the absence of such
improvement, the Company would experience deterioration in its operating
results, and may determine to modify its plan for future operations accordingly,
which may include, among other things, additional reductions in its workforce.


21

The Company intends to continue to make significant investments in its
business, and to examine opportunities for growth through acquisitions and
strategic investments. These activities may involve significant expenditures and
obligations that cannot readily be curtailed or reduced if anticipated demand
for the associated products does not materialize or is delayed. The impact of
these decisions on future financial results cannot be predicted with assurance,
and the Company's commitment to growth may increase its vulnerability to
downturns in its markets, technology changes and shifts in competitive
conditions. The Company also may not be able to identify future suitable merger
or acquisition candidates, and even if the Company does identify suitable
candidates, it may not be able to make these transactions on commercially
acceptable terms, or at all. If the Company does make acquisitions, it may not
be able to successfully incorporate the personnel, operations and customers of
these companies into the Company's business. In addition, the Company may fail
to achieve the anticipated synergies from the combined businesses, including
marketing, product integration, distribution, product development and other
synergies. The integration process may further strain the Company's existing
financial and managerial controls and reporting systems and procedures. This may
result in the diversion of management and financial resources from the Company's
core business objectives. In addition, an acquisition or merger may require the
Company to utilize cash reserves, incur debt or issue equity securities, which
may result in a dilution of existing stockholders, and the Company may be
negatively impacted by the assumption of liabilities of the merged or acquired
company. Due to rapidly changing market conditions, the Company may find the
value of its acquired technologies and related intangible assets, such as
goodwill as recorded in the Company's financial statements, to be impaired,
resulting in charges to operations. The Company may also fail to retain the
acquired or merged companies' key employees and customers.

The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 and related Interpretations, which
provide that any compensation expense relative to employee stock options be
measured based on the intrinsic value of the stock options. As a result, when
options are priced at or above the fair market value of the underlying stock on
the date of grant, as is the Company's practice, the Company incurs no
compensation expense. However, the Financial Accounting Standards Board has
proposed in its exposure draft entitled "Share-Based Payment, an amendment of
FASB Statements No 123 and 95" new accounting requirements that, if adopted,
would cause the Company to record compensation expense for all employee stock
option grants. Any such expense, although it would not affect the Company's cash
flows, will have a material impact on the Company's results of operations.

In May 2003, the Company issued $420,000,000 aggregate principal amount
of its ZYPS. The ZYPS are convertible into shares of the Company's common stock
at a conversion price of $17.97 per share, which would result in the issuance of
an aggregate of approximately 23.4 million shares, subject to adjustment upon
the occurrence of specified events. The ability of the holders to convert the
ZYPS into common stock is subject to certain conditions including: (i) during
any fiscal quarter, if the closing price per share for a period of at least a
thirty consecutive trading-day period ending on the last trading day of the
preceding fiscal quarter is more than 120% of the conversion price per share in
effect on that thirtieth day; (ii) on or before May 15, 2018, if during the five


22

business-day period following any ten consecutive trading-day period in which
the daily average trading price for the ZYPS for that ten trading-day period was
less than 105% of the average conversion value for the ZYPS during that period;
(iii) during any period, if following the date on which the credit rating
assigned to the ZYPS by Standard & Poor's Rating Services is lower than "B-" or
upon the withdrawal or suspension of the ZYPS rating at the Company's request;
(iv) if the Company calls the ZYPS for redemption; or (v) upon other specified
corporate transactions. The ZYPS mature on May 15, 2023. The Company has the
right to redeem the ZYPS for cash at any time on or after May 15, 2008, at their
principal amount. The holders have a series of put options, pursuant to which
they may require the Company to repurchase, at par, all or a portion of the ZYPS
on each of May 15 of 2008, 2013, and 2018 and upon the occurrence of certain
events. The ZYPS holders may require the Company to repurchase the ZYPS at par
in the event that the common stock ceases to be publicly traded and, in certain
instances, upon a change in control of the Company. The Company may not have
enough cash or have the ability to access enough cash to pay the ZYPS. If any of
the conditions for conversion of the ZYPS is achieved it will result in dilution
of the Company's earnings per share by adding approximately 23.4 million shares
to the share count in calculating the Company's earnings per share. If the ZYPS
are converted into the Company's shares it will result in dilution of existing
stockholders.

In July 2004, the EITF of the FASB issued a draft abstract for EITF
Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings
per Share". EITF 04-8 reflects the Task Force's tentative conclusion, to be
discussed further at the next EITF meeting scheduled for September 2004, that
contingently convertible debt should be included in diluted earnings per share
computations (if dilutive) regardless of whether the common stock price has
exceeded a predetermined threshold for a specified time period, or other market
price triggers or contingent features have been met. If adopted in its current
form, this consensus would be effective for reporting periods ending after
December 15, 2004. Prior period earnings per share amounts presented for
comparative purposes also would be required to be restated. The Company would be
required to include the approximately 23.4 million shares issuable upon the
conversion of the Company's ZYPS in diluted earnings per share computations for
all periods that the ZYPS are outstanding, using the "if-converted" method. In
the event the EITF implements Issue No. 04-8 as currently proposed, it will
negatively impact the Company's diluted earnings per share for the restated and
prospective periods.

The Company has made, and in the future, may continue to make strategic
and other investments in companies. These investments have been made in, and
future investments will likely be made in, immature businesses with unproven
track records and technologies. Such investments have a high degree of risk,
with the possibility that the Company may lose the total amount of its
investments. The Company may not be able to identify suitable investment
candidates, and, even if it does, the Company may not be able to make those
investments on acceptable terms, or at all. In addition, even if the Company
makes investments, it may not gain strategic or other benefits from those
investments.

The Company's products involve sophisticated hardware and software
technology that performs critical functions to highly demanding standards. There
can be no assurance that the Company's current or future products will not
develop operational problems, which could have a material adverse effect on the
Company. The Company offers complex products that may contain undetected defects
or errors, particularly when first introduced or as new versions are released.


23

The Company may not discover such defects or errors until after a product has
been released and used by the customer. Significant costs may be incurred to
correct undetected defects or errors in the Company's products and these defects
or errors could result in future lost sales. Defects or errors in the Company's
products also may result in product liability claims, which could cause adverse
publicity and impair their market acceptance. In addition, the Company may incur
fees or penalties in connection with problems associated with its products and
services.

The telecommunications industry is subject to rapid technological
change. The introduction of new technologies in the telecommunications market,
including the delay in the adoption of such new technologies, and new
alternatives for the delivery of services are having, and can be expected to
continue to have, a profound effect on competitive conditions in the market and
the success of market participants, including the Company. In addition, some of
the Company's products, such as call answering, have experienced declines in
usage resulting from, among other factors, the introduction of new technologies
and the adoption and increased use of existing technologies, which may include
enhanced areas of coverage for mobile telephones and Caller ID type services.
The Company's continued success will depend on its ability to correctly
anticipate technological trends in its industries, to react quickly and
effectively to such trends and to enhance its existing products and to introduce
new products on a timely and cost-effective basis. As a result, the life cycle
of the Company's products is difficult to estimate. The Company's new product
offerings may not enter the market in a timely manner for their acceptance. New
product offerings may not properly integrate into existing platforms, and the
failure of these offerings to be accepted by the market could have a material
adverse effect on the Company's business, results of operations, and financial
condition. The Company's sales and operating results may be adversely affected
in the event customers delay purchases of existing products as they await the
Company's new product offerings.

Changing industry and market conditions may dictate strategic decisions
to restructure some business units and discontinue others. Discontinuing a
business unit or product line may result in the Company recording accrued
liabilities for special charges, such as costs associated with a reduction in
workforce. These strategic decisions could result in changes to determinations
regarding a product's useful life and the recoverability of the carrying basis
of certain assets.

The Company has made and continues to make significant investments in
the areas of sales and marketing, and research and development. The Company's
research and development activities, which may be delayed and behind schedule,
include ongoing significant investment in the development of additional features
and functionality for its existing and new product offerings. The success of
these initiatives will be dependent upon, among other things, the emergence of a
market for these types of products and their acceptance by existing and new
customers. The Company's business may be adversely affected by its failure to
correctly anticipate the emergence of a market demand for certain products or
services, and changes in the evolution of market opportunities. If a sufficient
market does not emerge for new or enhanced product offerings developed by the
Company, if the Company is late in introducing new product offerings, or if the
Company is not successful in marketing such products, the Company's continued
growth could be adversely affected and its investment in those products may be
lost.


24

The Company relies on a limited number of suppliers and manufacturers
for specific components and may not be able to find alternate manufacturers that
meet its requirements and existing or alternative sources may not be available
on favorable terms and conditions. Thus, if there is a shortage of supply for
these components, the Company may experience an interruption in its product
supply. In addition, loss of third party software licensing could materially and
adversely affect the Company's business, financial condition and results of
operations.

The telecommunications industry continues to undergo significant change
as a result of deregulation and privatization worldwide, reducing restrictions
on competition in the industry. Unforeseen changes in the regulatory environment
also may have an impact on the Company's revenues and/or costs in any given part
of the world. The worldwide enhanced services industry is already highly
competitive and the Company expects competition to intensify. The Company
believes that existing competitors will continue to present substantial
competition, and that other companies, many with considerably greater financial,
marketing and sales resources than the Company, may enter the enhanced services
markets. Moreover, as the Company enters into new markets as a result of its own
research and development efforts or acquisitions, it is likely to encounter new
competitors.

The Company's competitors may be able to develop more quickly or adapt
faster to new or emerging technologies and changes in customer requirements, or
devote greater resources to the development, promotion and sale of their
products. Some of the Company's competitors have, in relation to it, longer
operating histories, larger customer bases, longer standing relationships with
customers, greater name recognition and significantly greater financial,
technical, marketing, customer service, public relations, distribution and other
resources. New competitors continue to emerge and there continues to be
consolidation among existing competitors, which may reduce the Company's market
share. In addition, some of the Company's customers may in the future decide to
develop internally their own solutions instead of purchasing them from the
Company. Increased competition could force the Company to lower its prices or
take other actions to differentiate its products.

The market for Verint's security and business intelligence products in
the past has been affected by weakness in general economic conditions, delays or
reductions in customers' information technology spending and uncertainties
relating to government expenditure programs. Verint's business generated from
government contracts may be adversely affected if: (i) Verint's reputation or
relationship with government agencies is impaired, (ii) Verint is suspended or
otherwise prohibited from contracting with a domestic or foreign government or
any significant law enforcement agency, (iii) levels of government expenditures
and authorizations for law enforcement and security related programs decrease,
remain constant or shift to programs in areas where Verint does not provide
products and services, (iv) Verint is prevented from entering into new
government contracts or extending existing government contracts based on
violations or suspected violations of laws or regulations, including those
related to procurement, (v) Verint is not granted security clearances required
to sell products to domestic or foreign governments or such security clearances
are revoked, (vi) there is a change in government procurement procedures, or
(vii) there is a change in political climate that adversely affects Verint's
existing or prospective relationships. Competitive conditions in this sector
also have been affected by the increasing use by certain potential customers of
their own internal development resources rather than outside vendors to provide
certain technical solutions. In addition, a number of established government
contractors, particularly developers and integrators of technology products,
have taken steps to redirect their marketing strategies and product plans in
reaction to cut-backs in their traditional areas of focus, resulting in an
increase in the number of competitors and the range of products offered in
response to particular requests for proposals.


25

The markets for Verint's security and business intelligence products
are still emerging. Verint's growth is dependent on, among other things, the
size and pace at which the markets for its products develop. If the markets for
its products decrease, remain constant or grow slower than Verint anticipates,
Verint will not be able to maintain its growth. Continued growth in the demand
for Verint's products is uncertain as, among other reasons, its existing
customers and potential customers may: (i) not achieve a return on their
investment in its products; (ii) experience technical difficulty in utilizing
its products; or (iii) use alternative solutions to achieve their security,
intelligence or business objectives. In addition, as Verint's enterprise
business intelligence products are sold primarily to contact centers, slower
than anticipated growth or a contraction in the number of contact centers will
have a material adverse effect on the Verint's ability to maintain its growth.

The global market for analytical solutions for security and business
applications is intensely competitive, both in the number and breadth of
competing companies and products and the manner in which products are sold. For
example, Verint often competes for customer contracts through a competitive
bidding process that subjects it to risks associated with: (i) the frequent need
to bid on programs in advance of the completion of their design, which may
result in unforeseen technological difficulties and cost overruns; and (ii) the
substantial time and effort, including design, development and marketing
activities, required to prepare bids and proposals for contracts that may not be
awarded to Verint.

A subsidiary of Verint, Verint Technology Inc. ("Verint Technology"),
which sells and supports its communications interception solutions to various
U.S. government agencies, is required by the National Industrial Security
Program to maintain facility security clearances and to be insulated from
foreign ownership, control or influence. The Company, Verint, Verint Technology
and the Department of Defense entered into a proxy agreement, under which
Verint, among other requirements, appointed three U.S. citizens holding the
requisite security clearances to exercise all prerogatives of ownership of
Verint Technology (including, without limitation, oversight of Verint
Technology's security arrangements) as holders of proxies to vote Verint
Technology stock. The proxy agreement may be terminated and Verint Technology's
facility security clearances may be revoked in the event of a breach of the
proxy agreement, or if it is determined by the Department of Defense that
termination is in the national interest. If Verint Technology's facility
security clearance is revoked, sales to U.S. government agencies will be
adversely affected and may adversely affect sales to other international
government agencies. In addition, concerns about the security of Verint, its
personnel or its products may have a material adverse affect on Verint's
business, financial condition and results of operations, including a negative
impact on sales to U.S. and international government agencies.

Many of Verint's government contracts contain provisions that give the
governments party to those contracts rights and remedies not typically found in
private commercial contracts, including provisions enabling the governments to:
(i) terminate or cancel existing contracts for convenience; (ii) in the case of
the U.S. government, suspend Verint from doing business with a foreign
government or prevent Verint from selling its products in certain countries;
(iii) audit and object to Verint's contract-related costs and expenses,
including allocated indirect costs; and (iv) change specific terms and
conditions in Verint's contracts, including changes that would reduce the value


26

of its contracts. In addition, many jurisdictions have laws and regulations that
deem government contracts in those jurisdictions to include these types of
provisions, even if the contract itself does not contain them. If a government
terminates a contract with Verint for convenience, Verint may not recover its
incurred or committed costs, any settlement expenses or profit on work completed
prior to the termination. If a government terminates a contract for default,
Verint may not recover those amounts, and, in addition, it may be liable for any
costs incurred by a government in procuring undelivered items and services from
another source. Further, an agency within a government may share information
regarding Verint's termination with other government agencies. As a result,
Verint's on-going or prospective relationships with such other government
agencies could be impaired.

Verint must comply with domestic and foreign laws and regulations
relating to the formation, administration and performance of government
contracts. These laws and regulations affect how Verint does business with
government agencies in various countries and may impose added costs on its
business. For example, in the United States, Verint is subject to the Federal
Acquisition Regulations, which comprehensively regulate the formation,
administration and performance of federal government contracts, and to the Truth
in Negotiations Act, which requires certification and disclosure of cost and
pricing data in connection with contract negotiations. Verint is subject to
similar regulations in foreign countries as well.

If a government review or investigation uncovers improper or illegal
activities, Verint may be subject to civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeiture of
profits, suspension of payments, fines and suspension or debarment from doing
business with government agencies, which could materially and adversely affect
its business, financial condition and results of operations. In addition, a
government may reform its procurement practices or adopt new contracting rules
and regulations that could be costly to satisfy or that could impair Verint's
ability to obtain new contracts.

Verint's products are often used by customers to compile and analyze
highly sensitive or confidential information and data, including information or
data used in intelligence gathering or law enforcement activities. Verint may
come into contact with such information or data when it performs support or
maintenance functions for its customers. While Verint has internal policies,
procedures and training for employees in connection with performing these
functions, even the perception that such potential contact may pose a security
risk or that any of Verint's employees has improperly handled sensitive or
confidential information and data of a customer could harm its reputation and
could inhibit market acceptance of its products.

As the communications industry continues to evolve, governments may
increasingly regulate products that monitor and record voice, video and data
transmissions over public communications networks, such as Verint's solutions.
For example, products which Verint sells in the United States to law enforcement
agencies and which interface with a variety of wireline, wireless and Internet
protocol networks, must comply with the technical standards established by the
Federal Communications Commission pursuant to the Communications Assistance for
Law Enforcement Act and products that it sells in Europe must comply with the
technical standards established by the European Telecommunications Standard
Institute. The adoption of new laws governing the use of Verint's products or
changes made to existing laws could cause a decline in the use of its products
and could result in increased expenses for Verint, particularly if it is
required to modify or redesign its products to accommodate these new or changing
laws.


27

The Company has historically derived a significant portion of its sales
and operating profit from contracts for large system installations with major
customers. The Company continues to emphasize large capacity systems in its
product development and marketing strategies. Contracts for large installations
typically involve a lengthy and complex bidding and selection process, and the
ability of the Company to obtain particular contracts is inherently difficult to
predict. The timing and scope of these opportunities and the pricing and margins
associated with any eventual contract award are difficult to forecast, and may
vary substantially from transaction to transaction. The Company's future
operating results may accordingly exhibit a higher degree of volatility than the
operating results of other companies in its industries that have adopted
different strategies, and also may be more volatile than the Company has
experienced in prior periods. The degree of dependence by the Company on large
system orders, and the investment required to enable the Company to perform such
orders, without assurance of continuing order flow from the same customers and
predictability of gross margins on any future orders, increase the risk
associated with its business. Because a significant proportion of the Company's
sales of these large system installations occur in the late stages of a quarter,
a delay, cancellation or other factor resulting in the postponement or
cancellation of such sales may cause the Company to miss its financial
projections, which may not be discernible until the end of a financial reporting
period. The Company's gross margins also may be adversely affected by increases
in material or labor costs, obsolescence charges, price competition and changes
in channels of distribution or in the mix of products sold.

During the period between the evaluation and purchase of a system,
customers may defer or scale down proposed orders of the Company's products for,
among other reasons: (i) changes in budgets and purchasing priorities; (ii)
reduced need to upgrade existing systems; (iii) deferrals in anticipation of
enhancements or new products; (iv) introduction of products by the Company's
competitors; and (v) lower prices offered by the Company's competitors.

Geopolitical, economic and military conditions could directly affect
the Company's operations. The outbreak of severe acute respiratory syndrome
("SARS") curtailed travel to and from certain countries (primarily in the
Asia-Pacific region). Restrictions on travel to and from these and other regions
on account of additional incidents of SARS could have a material adverse effect
on the Company's business, results of operations, and financial condition. The
continued threat of terrorism and heightened security and military action in
response to this threat, or any future acts of terrorism, may cause disruptions
to the Company's business. To the extent that such disruptions result in delays
or cancellations of customer orders, or the manufacture or shipment of the
Company's products, the Company's business, operating results and financial
condition could be materially and adversely affected. The U.S. military
involvement in overseas operations including, for example, the war with Iraq,
could have a material adverse effect on the Company's business, results of
operations, and financial condition.

Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors, and the
continued state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Since October 2000, there has been a
significant increase in violence, primarily in the West Bank and Gaza Strip, and
more recently Israel has experienced terrorist incidents within its borders.
During this period, peace negotiations between Israel and representatives of the
Palestinian Authority have been sporadic and currently are suspended. The
Company could be materially adversely affected by hostilities involving Israel,


28

the interruption or curtailment of trade between Israel and its trading
partners, or a significant downturn in the economic or financial condition of
Israel. In addition, the sale of products manufactured in Israel may be
materially adversely affected in certain countries by restrictive laws, policies
or practices directed toward Israel or companies having operations in Israel.
The continuation or exacerbation of violence in Israel or the outbreak of
violent conflicts involving Israel may impede the Company's ability to sell its
products or otherwise adversely affect the Company. In addition, many of the
Company's Israeli employees in Israel are required to perform annual compulsory
military service in Israel and are subject to being called to active duty at any
time under emergency circumstances. The absence of these employees may have an
adverse effect upon the Company's operations.

The Company's costs of operations have at times been affected by
changes in the cost of its operations in Israel, resulting from changes in the
value of the Israeli shekel relative to the United States dollar, which for
certain periods had a negative impact, and from difficulties in attracting and
retaining qualified scientific, engineering and technical personnel in Israel,
where the availability of such personnel has at times been severely limited.
Changes in these cost factors have from time to time been significant and
difficult to predict, and could in the future have a material adverse effect on
the Company's results of operations.

The Company's historical operating results reflect substantial benefits
received from programs sponsored by the Israeli government for the support of
research and development, as well as tax moratoriums and favorable tax rates
associated with investments in approved projects ("Approved Enterprises") in
Israel. Some of these programs and tax benefits have ceased and others may not
be continued in the future and the availability of such benefits to the Company
may be negatively affected by a number of factors, including budgetary
constraints resulting from adverse economic conditions, government policies and
the Company's ability to satisfy eligibility criteria.

The Israeli government has reduced the benefits available under some of
these programs in recent years, and Israeli government authorities have
indicated that the government may further reduce or eliminate some of these
benefits in the future. The Company has regularly participated in a conditional
grant program administered by the OCS under which it has received significant
benefits through reimbursement of up to 50% of qualified research and
development expenditures. Certain of the Company's subsidiaries currently pay
royalties, of between 3% and 5% (or 6% under certain circumstances) of
associated product revenues (including service and other related revenues) to
the Government of Israel for repayment of benefits received under this program.
Such royalty payments are currently required to be made until the government has
been reimbursed the amounts received by the Company, which is linked to the U.S.
dollar, plus, for amounts received under projects approved by the OCS after
January 1, 1999, interest on such amount at a rate equal to the 12-month LIBOR
rate in effect on January 1 of the year in which approval is obtained. As of
July 31, 2004, such subsidiaries of the Company received approximately $55.5
million in cumulative grants from the OCS and recorded approximately $24.3
million in cumulative royalties to the OCS. During the year ended January 31,
2003, one of the Company's subsidiaries finalized an arrangement with the OCS
whereby the subsidiary agreed to pay a lump sum royalty amount for all past
amounts received from the OCS. In addition, this subsidiary began to receive
lower amounts from the OCS than it had historically received, but will not have
to pay royalty amounts on such grants. The amount of reimbursement received by
the Company under this program has been reduced significantly, and the Company
does not expect to receive significant reimbursement under this program in the


29

future. In addition, permission from the Government of Israel is required for
the Company to manufacture outside of Israel products resulting from research
and development activities funded under these programs, or to transfer outside
of Israel related technology rights. In order to obtain such permission, the
Company may be required to increase the royalties to the applicable funding
agencies and/or repay certain amounts received as reimbursement of research and
development costs. The continued reduction in the benefits received by the
Company under the program, or the termination of its eligibility to receive
these benefits at all in the future, could adversely affect the Company's
operating results.

The Company's overall effective tax rate benefits from the tax
moratorium provided by the Government of Israel for Approved Enterprises
undertaken in that country. The Company's effective tax rate may increase in the
future due to, among other factors, the increased proportion of its taxable
income associated with activities in higher tax jurisdictions, and by the
relative ages of the Company's eligible investments in Israel. The tax
moratorium on income from the Company's Approved Enterprise investments made
prior to 1997 is four years, whereas subsequent Approved Enterprise projects are
eligible for a moratorium of only two years. Reduced tax rates apply in each
case for certain periods thereafter. To be eligible for these tax benefits, the
Company must continue to meet conditions, including making specified investments
in fixed assets and financing a percentage of investments with share capital. If
the Company fails to meet such conditions in the future, the tax benefits would
be canceled and the Company could be required to refund the tax benefits already
received. Israeli authorities have indicated that additional limitations on the
tax benefits associated with Approved Enterprise projects may be imposed for
certain categories of taxpayers, which would include the Company. If further
changes in the law or government policies regarding those programs were to
result in their termination or adverse modification, or if the Company were to
become unable to participate in, or take advantage of, those programs, the cost
of the Company's operations in Israel would increase and there could be a
material adverse effect on the Company's results of operations and financial
condition.

The Company's success is dependent on recruiting and retaining key
management and highly skilled technical, managerial, sales, and marketing
personnel. The market for highly skilled personnel remains very competitive
despite the current economic conditions. The Company's ability to attract and
retain employees also may be affected by recent cost control actions, including
reductions in the Company's workforce and the associated reorganization of
operations.

The occurrence or perception of security breaches within the Company
could harm the Company's business, financial condition and operating results.
While the Company implements sophisticated security measures, third parties may
attempt to breach the Company's security 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 the Company may be subject to lawsuits and other
liability. Even if the Company is not held liable, a security breach could harm
the Company's reputation, and even the perception of security risks, whether or
not valid, could inhibit market acceptance of the Company's products.


30

The Company currently derives a significant portion of its total sales
from customers outside of the United States. International transactions involve
particular risks, including political decisions affecting tariffs and trade
conditions, rapid and unforeseen changes in economic conditions in individual
countries, turbulence in foreign currency and credit markets, and increased
costs resulting from lack of proximity to the customer. The Company is required
to obtain export licenses and other authorizations from applicable governmental
authorities for certain countries within which it conducts business. The failure
to receive any required license or authorization would hinder the Company's
ability to sell its products and could adversely affect the Company's business,
results of operations and financial condition. In addition, legal uncertainties
regarding liability, compliance with local laws and regulations, labor laws,
employee benefits, currency restrictions, difficulty in accounts receivable
collection, longer collection periods and other requirements may have a negative
impact on the Company's operating results.

Volatility in international currency exchange rates may have a
significant impact on the Company's operating results. The Company has, and
anticipates that it will continue to receive, contracts denominated in foreign
currencies, particularly the euro. As a result of the unpredictable timing of
purchase orders and payments under such contracts and other factors, it is often
not practicable for the Company to effectively hedge the risk of significant
changes in currency rates during the contract period. The Company may experience
risk associated with the failure to hedge the exchange rate risks associated
with contracts denominated in foreign currencies and its operating results have
been negatively impacted for certain periods and may continue to be affected to
a material extent by the impact of currency fluctuations. Operating results may
also be affected by the cost of such hedging activities that the Company does
undertake.

While the Company generally requires employees, independent contractors
and consultants to execute non-competition and confidentiality agreements, the
Company's intellectual property or proprietary rights could be infringed or
misappropriated, which could result in expensive and protracted litigation. The
Company relies on a combination of patent, copyright, trade secret and trademark
law to protect its technology. Despite the Company's efforts to protect its
intellectual property and proprietary rights, unauthorized parties may attempt
to copy or otherwise obtain and use its products or technology. Effectively
policing the unauthorized use of the Company's products is time-consuming and
costly, and there can be no assurance that the steps taken by the Company will
prevent misappropriation of its technology, particularly in foreign countries
where in many instances the local laws or legal systems do not offer the same
level of protection as in the United States.

If others claim that the Company's products infringe their intellectual
property rights, the Company may be forced to seek expensive licenses,
reengineer its products, engage in expensive and time-consuming litigation or
stop marketing its products. The Company attempts to avoid infringing known
proprietary rights of third parties in its product development efforts. The
Company does not regularly conduct comprehensive patent searches to determine
whether the technology used in its products infringes patents held by third
parties, however. There are many issued patents as well as patent applications
in the fields in which the Company is engaged. Because patent applications in
the United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to the Company's software and
products. If the Company were to discover that its products violated or
potentially violated third-party proprietary rights, it might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can the
Company be certain that any licenses would be available on commercially
reasonable terms.


31

While the Company occasionally files patent applications, it cannot be
assured that patents will be issued on the basis of such applications or that,
if such patents are issued, they will be sufficiently broad to protect its
technology. In addition, the Company cannot be assured that any patents issued
to it will not be challenged, invalidated or circumvented.

Substantial litigation regarding intellectual property rights exists in
technology related industries, and the Company expects that its products may be
increasingly subject to third-party infringement claims as the number of
competitors in its industry segments grows and the functionality of software
products in different industry segments overlaps. In addition, the Company has
agreed to indemnify certain customers in certain situations should it be
determined that its products infringe on the proprietary rights of third
parties. Any third-party infringement claims could be time consuming to defend,
result in costly litigation, divert management's attention and resources, cause
product and service delays or require the Company to enter into royalty or
licensing agreements. Any royalty or licensing arrangements, if required, may
not be available on terms acceptable to the Company, if at all. A successful
claim of infringement against the Company and its failure or inability to
license the infringed or similar technology could have a material adverse effect
on its business, financial condition and results of operations.

The Company holds a large proportion of its net assets in cash
equivalents and short-term investments, including a variety of public and
private debt and equity instruments, and has made significant venture capital
and public equity investments, both directly and through private investment
funds. Such investments subject the Company to the risks inherent in the capital
markets generally, and to the performance of other businesses over which it has
no direct control. Given the relatively high proportion of the Company's liquid
assets relative to its overall size, the results of its operations are
materially affected by the results of the Company's capital management and
investment activities and the risks associated with those activities. Declines
in the public equity markets have caused, and may be expected to continue to
cause, the Company to experience realized and unrealized investment losses. In
addition, the prevailing interest rates or a reduction therein due to economic
conditions or government policies has had and may continue to have an adverse
impact on the Company's results of operations.

The severe decline in the public trading prices of equity securities,
particularly in the technology and telecommunications sectors, and corresponding
decline in values of privately-held companies and venture capital funds in which
the Company has invested, have, and may continue to have, an adverse impact on
the Company's financial results. The Company has in the past benefited from the
long-term rise in the public trading price of its shares in various ways,
including its ability to use equity incentive arrangements as a means of
attracting and retaining the highly qualified employees necessary for the growth
of its business and its ability to raise capital on relatively attractive
conditions. The decline in the price of the Company's shares, and the overall
decline in equity prices generally, and in the shares of technology companies in
particular, can be expected to make it more difficult for the Company to
significantly rely on equity incentive arrangements as a means to recruit and
retain talented employees.


32

The Company's operating results have fluctuated in the past and may do
so in the future. The trading price of the Company's shares has been affected by
the factors disclosed herein as well as prevailing economic and financial trends
and conditions in the public securities markets. Share prices of companies in
technology-related industries, such as the Company, tend to exhibit a high
degree of volatility, which at times is unrelated to the operating performance
of a company. The announcement of financial results that fall short of the
results anticipated by the public markets could have an immediate and
significant negative effect on the trading price of the Company's shares in any
given period. Such shortfalls may result from events that are beyond the
Company's immediate control, can be unpredictable and, since a significant
proportion of the Company's sales during each fiscal quarter tend to occur in
the latter stages of the quarter, may not be discernible until the end of a
financial reporting period. These factors may contribute to the volatility of
the trading value of its shares regardless of the Company's long-term prospects.
The trading price of the Company's shares may also be affected by developments,
including reported financial results and fluctuations in trading prices of the
shares of other publicly-held companies in the telecommunications equipment
industry in general, and the Company's business segments in particular, which
may not have any direct relationship with the Company's business or prospects.

The Company's board of directors' ability to designate and issue up to
2,500,000 shares of preferred stock and to issue additional shares of common
stock could adversely affect the voting power of the holders of common stock,
and could have the effect of making it more difficult for a person to acquire,
or could discourage a person from seeking to acquire, control of the Company. If
this occurs, investors could lose the opportunity to receive a premium on the
sale of their shares in a change of control transaction.


33

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Refer to Item 7A in the Company's Annual Report on Form 10-K for a
discussion about the Company's exposure to market risks.

ITEM 4. CONTROLS AND PROCEDURES.

(a) The Company's management evaluated, with the participation of the
Company's principal executive and principal financial officers, the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), as of July 31, 2004. Based on their evaluation,
the Company's principal executive and principal financial officers concluded
that the Company's disclosure controls and procedures were effective as of July
31, 2004.

(b) There has been no change in the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the Company's fiscal quarter ended July 31,
2004, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.


PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On March 16, 2004, BellSouth Intellectual Property Corp. ("BellSouth")
filed a complaint in the United States District Court for the Northern District
of Georgia against Comverse Technology, Inc. alleging infringement of Patent
Nos. 5,857,013 and 5,764,747, and, on March 17, 2004, BellSouth amended the
complaint, removing any and all references to Comverse Technology, Inc., and
naming Comverse, Inc., in an action captioned: BellSouth Intellectual Property
Corp. v. Comverse, Inc., Civil Action No. 1:04-CV-0739. BellSouth alleges that
Patent Nos. 5,857,013 and 5,764,747 cover certain aspects of some of Comverse
Inc.'s systems, and it seeks, among other relief, monetary damages and
injunctive relief. On May 5, 2004, Comverse, Inc. filed an answer and
counterclaims which, among other things, denies any infringement and seeks a
declaratory judgment that the patents at issue are invalid and unenforceable.
The Company believes all claims are without merit and Comverse, Inc. will
vigorously defend against BellSouth's claims.

From time to time, the Company is subject to claims in legal
proceedings arising in the normal course of its business. The Company does not
believe that it is currently party to any other pending legal action that could
reasonably be expected to have a material adverse effect on its business,
financial condition and results of operations.


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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

At the Company's annual meeting of shareholders held on June 15, 2004,
for which proxies were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, the following matters were voted upon by
shareholders:

1. The election of seven directors to serve as the Board of Directors
of the Company until the next annual meeting of shareholders and the election of
their qualified successors.

2. A proposal to adopt the Company's 2004 Stock Incentive Compensation
Plan, under which up to 2,500,000 shares of the Company's common stock, par
value $.10 per share, may be issued as equity-based compensation to employees,
directors and consultants of the Company and its subsidiaries and affiliates.

3. A proposal to ratify the engagement of Deloitte & Touche LLP as
independent auditors of the Company for the year ending January 31, 2005.

The nominees for directors were elected based upon the following votes:

Nominee Votes For Votes Withheld

Kobi Alexander 168,835,776 8,693,901

Raz Alon 179,325,989 3,203,688

Itsik Danziger 166,897,210 10,632,167

John H. Friedman 158,441,423 19,088,254

Ron Hiram 156,345,262 21,184,415

Sam Oolie 154,349,757 23,179,920

William F. Sorin 163,022,354 14,507,323

The adoption of the Company's 2004 Stock Incentive Compensation Plan
was approved as follows:

112,260,613 Votes for Approval

36,952,151 Votes Against

936,459 Abstentions

The ratification of the engagement of Deloitte & Touche LLP as
independent auditors of the Company for the year ending January 31, 2005 was
approved as follows:

174,701,362 Votes for Approval

2,073,776 Votes Against

754,538 Abstentions



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibit Index.
-------------

10.1 Employment Agreement, dated as of August 19, 2004, between the
Company and David Kreinberg.

31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

32.1 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.
-------------------

During the second quarter of 2004, the Company furnished a report on
Form 8-K dated June 2, 2004, reporting under Items 7 and 12 that on
June 2, 2004, the Company issued a press release announcing its
financial results for the first quarter ended April 30, 2004.


36



SIGNATURES
----------

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


COMVERSE TECHNOLOGY, INC.


Dated: September 9, 2004 /s/ Kobi Alexander
------------------------------
Kobi Alexander
Chairman of the Board
and Chief Executive Officer


Dated: September 9, 2004 /s/ David Kreinberg
------------------------------
David Kreinberg
Executive Vice President
and Chief Financial Officer






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