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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 October 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 December 1, 2004 was 197,652,679.


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

Page
----

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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

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

3. Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended
October 31, 2003 and October 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. 16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 38

ITEM 4. CONTROLS AND PROCEDURES. 38

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS. 39

ITEM 6. EXHIBITS. 39

SIGNATURES 40


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, OCTOBER 31,
2004* 2004
(Unaudited)

ASSETS
- ------

CURRENT ASSETS:
Cash and cash equivalents $ 1,530,995 $ 1,779,783
Bank time deposits and short-term investments 667,504 410,675
Accounts receivable, net 158,236 215,619
Inventories 54,751 88,032
Prepaid expenses and other current assets 50,798 76,184
------------ ------------
TOTAL CURRENT ASSETS 2,462,284 2,570,293
PROPERTY AND EQUIPMENT, net 125,023 121,953
OTHER ASSETS 140,735 180,865
------------ ------------
TOTAL ASSETS $ 2,728,042 $ 2,873,111
============ ============

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

CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 229,296 $ 283,697
Bank loans and other debt 2,649 9,752
Advance payments from customers 89,062 102,966
------------ ------------
TOTAL CURRENT LIABILITIES 321,007 396,415
CONVERTIBLE DEBT 544,723 507,253
OTHER LIABILITIES 28,288 21,521
------------ ------------
TOTAL LIABILITIES 894,018 925,189
------------ ------------

MINORITY INTEREST 161,478 190,434
------------ ------------

STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value -
authorized, 600,000,000 shares;
issued and outstanding, 194,549,886 and 197,254,609 shares 19,454 19,725
Additional paid-in capital 1,210,547 1,259,597
Unearned stock compensation (6,707) (5,410)
Retained earnings 439,899 476,186
Accumulated other comprehensive income 9,353 7,390
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,672,546 1,757,488
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,728,042 $ 2,873,111
============ ============


*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)



NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2003 2004 2003 2004


Sales $ 562,863 $ 700,301 $ 193,843 $ 245,479
Cost of sales 244,366 279,652 82,669 96,936
----------- ----------- ----------- -----------
Gross margin 318,497 420,649 111,174 148,543

Operating expenses:
Research and development, net 162,102 172,851 53,810 60,782
Selling, general and administrative 188,956 213,769 63,891 73,767
In-process research and development and other
acquisition-related charges - 4,635 - -
Workforce reduction, restructuring and impairment
charges (credits) (233) 62 - (102)
----------- ----------- ----------- -----------
Income (loss) from operations (32,328) 29,332 (6,527) 14,096

Interest and other income, net 31,420 24,970 6,366 9,541
----------- ----------- ----------- -----------
Income (loss) before income tax provision, minority interest
and equity in the earnings (losses) of affiliates (908) 54,302 (161) 23,637

Income tax provision 6,094 9,211 1,888 4,051

Minority interest and equity in the earnings (losses) of affiliates (3,312) (8,804) (1,388) (3,627)
----------- ----------- ----------- -----------
Net income (loss) $ (10,314) $ 36,287 $ (3,437) $ 15,959
=========== =========== =========== ===========

Earnings (loss) per share:
Basic $ (0.05) $ 0.19 $ (0.02) $ 0.08
=========== =========== =========== ===========
Diluted $ (0.05) $ 0.18 $ (0.02) $ 0.08
=========== =========== =========== ===========



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)




NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2003 2004

Cash flows from operating activities:
Net cash from operations after adjustment
for non-cash items $ 53,496 $ 103,448
Changes in operating assets and liabilities:
Accounts receivable, net 24,302 (56,593)
Inventories (6,031) (32,655)
Prepaid expenses and other current assets 4,303 (13,608)
Accounts payable and accrued expenses (5,182) 49,593
Advance payments from customers (10,648) 13,904
Other, net (10,282) 2,208
------------ ------------
Net cash provided by operating activities 49,958 66,297
------------ ------------
Cash flows from investing activities:
Maturities and sales (purchases) of bank time deposits
and investments, net (408,419) 239,942
Purchase of property and equipment (26,359) (33,023)
Capitalization of software development costs (6,607) (3,165)
Net assets acquired (5,910) (45,389)
------------ ------------
Net cash provided by (used in) investing activities (447,295) 158,365
------------ ------------

Cash flows from financing activities:
Net proceeds from issuance of convertible debt 412,852 -
Repurchase of convertible debt (248,156) (36,873)
Repayment of bank loan (42,000) -
Net proceeds from issuance of stock 171,846 61,395
Other, net (6,193) (396)
------------ ------------
Net cash provided by financing activities 288,349 24,126
------------ ------------

Net increase (decrease) in cash and cash equivalents (108,988) 248,788
Cash and cash equivalents, beginning of period 1,402,783 1,530,995
------------ ------------
Cash and cash equivalents, end of period $ 1,293,795 $ 1,779,783
============ ============


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 nine month periods ended October 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 October 31, 2003 and 2004, of
approximately $0 and $433,000, respectively, and for the nine month periods
ended October 31, 2003 and 2004, of approximately $0 and $1,297,000,
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 NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-----------------------------------------------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)


Net income (loss), as reported $ (3,437) $ 15,959 $ (10,314) $ 36,287

Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (37,718) (22,883) (114,767) (93,537)
----------- ----------- ----------- -----------

Pro forma net loss $ (41,155) $ (6,924) $ (125,081) $ (57,250)
=========== =========== =========== ===========

Earnings (loss) per share:

Basic - as reported $ (0.02) $ 0.08 $ (0.05) $ 0.19
Basic - pro forma $ (0.22) $ (0.04) $ (0.66) $ (0.29)

Diluted - as reported $ (0.02) $ 0.08 $ (0.05) $ 0.18
Diluted - pro forma $ (0.22) $ (0.04) $ (0.66) $ (0.29)



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



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


Raw materials $ 23,157 $ 25,865
Work in process 12,802 17,642
Finished goods 18,792 44,525
-------- --------
$ 54,751 $ 88,032
======== ========




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
October 31, 2003 and 2004 were approximately $1,881,000 and $2,319,000,
respectively, and for the nine month periods ended October 31, 2003 and 2004
were approximately $6,870,000 and $7,143,000, 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 nine month periods ended October 31, 2003 and 2004
is as follows:




THREE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, 2003 OCTOBER 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) $ (3,437) 190,996 $ (0.02) $ 15,959 196,077 $ 0.08
========= =========

EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Options 6,368
Subsidiary options (283)
------------------------------- --------------------------------
DILUTED EPS $ (3,437) 190,996 $ (0.02) $ 15,676 202,445 $ 0.08
========= ========= ========= ========= ========= =========





7




NINE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, 2003 OCTOBER 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) $ (10,314) 189,397 $ (0.05) $ 36,287 195,452 $ 0.19
========== ==========

EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Options 6,495
Subsidiary options (649)
-------------------------------- --------------------------------
DILUTED EPS $ (10,314) 189,397 $ (0.05) $ 35,638 201,947 $ 0.18
========== ========= ========== ========== ========= ==========



The diluted loss per share computation for the three and nine month
periods ended October 31, 2003 excludes incremental shares of approximately
6,206,000 and 4,889,000, 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" ("SFAS 128"). However, refer to the "Recent Accounting
Pronouncement" and "Subsequent Event" footnotes for a description of pending
changes to this accounting treatment, an exchange offer relating to the ZYPS and
the related accounting implications. 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 $1,993,000 and $18,921,000 for the three month periods ended
October 31, 2003 and 2004, respectively, and $(12,577,000) and $34,324,000 for
the nine month periods ended October 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.
Refer to the "Subsequent Event" footnote for a description of an exchange offer
relating to the ZYPS.

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 October 31, 2003 and 2004, the
Company acquired, in open market purchases, $32,917,000 and $0 of face amount of
the Debentures, respectively, resulting in a pre-tax gain, net of debt issuance
costs, of approximately $1,007,000 and $0, respectively, and during the nine
month periods ended October 31, 2003 and 2004, the Company acquired, in open
market purchases, $265,925,000 and $37,470,000 of face amount of the Debentures,
respectively, resulting in a pre-tax gain, net of debt issuance costs, of
approximately $10,221,000 and $341,000, respectively. These gains are included
in `Interest and other income, net' in the Condensed Consolidated Statements of
Operations. As of October 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.

ACQUISITIONS. On September 2, 2004, Verint, through a subsidiary,
acquired all of the outstanding stock of RP Sicherheitssysteme GmbH ("RP
Security"), a company in the business of developing and selling mobile digital
video security solutions for transportation applications. The purchase price
consisted of approximately $9,028,000 in cash and 90,144 shares of Verint's
common stock. In addition, the shareholders of RP Security 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. Shares issued as part of the purchase price were accounted
for with a value of approximately $2,977,000, or $33.03 per share. In connection
with this acquisition, Verint incurred transaction costs, consisting primarily
of professional fees, amounting to approximately $520,000.

The acquisition was accounted for using the purchase method. The
purchase price was allocated to the assets and liabilities of RP Security based
on the estimated fair value of those assets and liabilities as of September 2,
2004. The results of operations of RP Security have been included in the
Company's results of operations since September 2, 2004. A summary of the assets
acquired and liabilities assumed in the acquisition as well as pro forma results
of operations has not been presented as the effect of this acquisition was not
deemed material.

On March 31, 2004, 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


10

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.

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


11

facilities and related leasehold improvements and the write-off of certain
property and equipment and other impaired assets. During the three and nine
month periods ended October 31, 2004, the Company incurred net charges (credits)
to operations of approximately $(102,000) and $62,000, respectively.

As of October 31, 2004, the Company had an accrual of approximately
$22,748,000 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 OCTOBER 31,
2004 CHARGES (CREDITS) PAYMENTS CHARGES 2004
---- ----------------- -------- ------- ----
(IN THOUSANDS)


Severance and related $ 3,068 $ 596 $ 3,398 $ - $ 266
Facilities and related 26,427 (743) 3,202 - 22,482
Property and equipment - 209 - 209 -
---------- ---------- ---------- ---------- ----------
Total $ 29,495 $ 62 $ 6,600 $ 209 $ 22,748
========== ========== ========== ========== ==========



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.


12

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.

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.


13

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


Sales $ 134,470 $ 9,691 $ 49,012 $ 2,136 $ (1,466) $ 193,843
Income (loss) from
operations $ (8,454) $ 661 $ 4,456 $ (628) $ (2,562) $ (6,527)

THREE MONTHS ENDED OCTOBER 31, 2004:

Sales $ 163,579 $ 17,034 $ 63,989 $ 2,786 $ (1,909) $ 245,479
Income (loss) from
operations $ 5,534 $ 6,408 $ 5,055 $ (156) $ (2,745) $ 14,096

NINE MONTHS ENDED OCTOBER 31, 2003:

Sales $ 390,747 $ 28,254 $ 140,319 $ 7,053 $ (3,510) $ 562,863
Income (loss) from
operations $ (39,272) $ 1,893 $ 12,088 $ (1,080) $ (5,957) $ (32,328)

NINE MONTHS ENDED OCTOBER 31, 2004:

Sales $ 469,953 $ 46,310 $ 180,794 $ 7,931 $ (4,687) $ 700,301
Income (loss) from
operations $ 12,100 $ 14,360 $ 11,268 $ (553) $ (7,843) $ 29,332

TOTAL ASSETS:

October 31, 2003 $ 863,738 $ 241,376 $ 323,923 $ 33,185 $ 1,207,127 $ 2,669,349
October 31, 2004 $ 911,285 $ 263,513 $ 387,076 $ 39,484 $ 1,271,753 $ 2,873,111



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.


14

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.

RECENT ACCOUNTING PRONOUNCEMENT. At its September 2004 meeting, the
Emerging Issues Task Force ("EITF") of the FASB reached a conclusion on EITF
Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings
Per Share," ("EITF 04-8") that will require the contingent shares issuable under
the ZYPS to be included in the diluted earnings per share calculation (if
dilutive) retroactive to the date of issuance of the ZYPS, regardless of whether
market price triggers or other contingent features have been met, by applying
the "if converted" method under SFAS 128. The Company has followed the existing
interpretation of SFAS 128, which requires inclusion of the impact of the
conversion of the ZYPS only when and if the conversion thresholds are reached.
As the conversion thresholds had not been satisfied as of October 31, 2004, the
Company has not included the impact of the conversion of the ZYPS in the
computation of diluted earnings per share through the periods ended October 31,
2004.

The new rule has been approved by the FASB and will be effective for
reporting periods ending after December 15, 2004. Once effective, the Company
will be required to include the approximately 23.4 million shares of common
stock 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. For the three and nine month periods ended October 31,
2004 this would have resulted in a reduction of $0.01 and $0.02, respectively,
to reported diluted earnings per share. See "Subsequent Event" footnote.

SUBSEQUENT EVENT. On November 30, 2004 the Company announced that it
had filed a registration statement (which has not yet become effective) with the
Securities and Exchange Commission to register its offer to holders of its
outstanding ZYPS, to exchange such ZYPS (hereinafter the "Existing ZYPS") for
new ZYPS (the "New ZYPS") that will have substantially similar terms as the
Existing ZYPS (the "Exchange Offer"), except that the New ZYPS will (i) have a
net share settlement feature, (ii) allow the Company to redeem some or all of
the New ZYPS at any time on or after May 15, 2009 (rather than May 15, 2008 as
provided for in the Existing ZYPS) and (iii) allow the holders of the New ZYPS
to require the Company to repurchase their New ZYPS for cash on May 15, 2009 (in
addition to the repurchase dates provided for in the Existing ZYPS).

Pursuant to the Exchange Offer, the Company will offer to the Existing
ZYPS holders New ZYPS with a net share settlement feature which would provide
that, upon conversion, the Company would pay to the holder cash equal to the
lesser of the conversion value and the principal amount of the New ZYPS being
converted and would issue to the holder the remainder of the conversion value in
excess of the principal amount, if any, in shares of the Company's common stock.
Under EITF 04-8, the Company would not be required to include any shares
issuable upon conversion of the New ZYPS in its diluted shares outstanding
unless the market price of the Company's common stock exceeds the conversion
price, and would then only have to include that number of shares as would then
be issuable based upon the in-the-money value of the conversion rights under the
New ZYPS.

The Company intends to complete the Exchange Offer before January 31,
2005. If the Company does not meet the requirements of EITF 04-8 by January 31,
2005, or to the extent the Existing ZYPS remain outstanding after that date, the
shares of the Company's common stock issuable upon conversion of the Existing
ZYPS will be considered outstanding on a diluted basis, and therefore will lower
the Company's diluted earnings per share.


15

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
October 31, 2004, there have been no material changes to any of the critical
accounting policies contained therein.

RESULTS OF OPERATIONS

SUMMARY OF RESULTS

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



Nine months Nine months
ended ended
Oct. 31, 2003 % of sales Oct. 31, 2004 % of sales
-------------------------------------------------------------

(In thousands)


Sales $ 562,863 100.0% $ 700,301 100.0%
Cost of sales 244,366 43.4% 279,652 39.9%
---------- ----------
Gross margin 318,497 56.6% 420,649 60.1%

Operating expenses:
Research and development, net 162,102 28.8% 172,851 24.7%
Selling, general and administrative 188,956 33.6% 213,769 30.5%
In-process research and development and other
acquisition-related charges - - 4,635 0.7%
Workforce reduction, restructuring and
impairment charges (credits) (233) (0.0)% 62 0.0%
---------- ----------
Income (loss) from operations (32,328) (5.7)% 29,332 4.2%

Interest and other income, net 31,420 5.6% 24,970 3.6%
---------- ----------

Income (loss) before income tax provision,
minority interest and equity in the earnings
(losses) of affiliates (908) (0.2)% 54,302 7.8%

Income tax provision 6,094 1.1% 9,211 1.3%

Minority interest and equity in the earnings
(losses) of affiliates (3,312) (0.6)% (8,804) (1.3)%
---------- ----------
Net income (loss) $ (10,314) (1.8)% $ 36,287 5.2%
========== ==========



16

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



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


Sales $ 193,843 100.0% $ 245,479 100.0%
Cost of sales 82,669 42.6% 96,936 39.5%
---------- ----------
Gross margin 111,174 57.4% 148,543 60.5%

Operating expenses:
Research and development, net 53,810 27.8% 60,782 24.8%
Selling, general and administrative 63,891 33.0% 73,767 30.1%
Workforce reduction, restructuring and
impairment charges (credits) - - (102) 0.0%
---------- ----------
Income (loss) from operations (6,527) (3.4)% 14,096 5.7%

Interest and other income, net 6,366 3.3% 9,541 3.9%
---------- ----------
Income (loss) before income tax provision,
minority interest and equity in the earnings
(losses) of affiliates (161) (0.1)% 23,637 9.6%

Income tax provision 1,888 1.0% 4,051 1.7%

Minority interest and equity in the earnings
(losses) of affiliates (1,388) (0.7)% (3,627) (1.5)%
---------- ----------
Net income (loss) $ (3,437) (1.8)% $ 15,959 6.5%
========== ==========




17

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 evidence of recent improvement. Both
business units achieved year over year revenue growth, operating income and net
income during the nine and three month periods ended October 31, 2004 as well as
sequential revenue growth during the three month period ended October 31, 2004.
Verint, which services the security and business intelligence markets, achieved
record revenue during the nine and three month periods ended October 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 nine
and three month periods ended October 31, 2004, the Company experienced year
over year sales growth of approximately 24.4% and 26.6%, respectively, and
sequential sales growth of approximately 5.2% for the three month period ended
October 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 nine and three month periods ended October 31,
2004.

NINE MONTH AND THREE MONTH PERIODS ENDED OCTOBER 31, 2004
COMPARED TO NINE MONTH AND THREE MONTH PERIODS ENDED OCTOBER 31, 2003

Sales. Sales for the nine and three month periods ended October 31,
2004 increased by approximately $137.4 million, or 24%, and $51.6 million, or
27%, respectively, compared to the nine and three month periods ended October
31, 2003. These increases are attributable to an increase in sales in the
Company's three primary business units. CNS sales increased by approximately
$79.2 million and $29.1 million, respectively, during the nine and three month
periods ended October 31, 2004 due primarily to increased business in Europe and
the Americas. Security and business intelligence recording sales increased by
approximately $40.5 million and $15.0 million, respectively, and service
enabling signaling software sales increased by approximately $18.1 million and
$7.3 million, respectively, during the nine and three month periods ended
October 31, 2004. On a consolidated basis, sales to customers in North America
represented approximately 33% and 34% of total sales for the nine month periods
ended October 31, 2004 and 2003, respectively, and approximately 32% and 30% of
total sales for the three month periods ended October 31, 2004 and 2003,
respectively.

Cost of Sales. Cost of sales for the nine and three month periods ended
October 31, 2004 increased by approximately $35.3 million, or 14%, and $14.3
million, or 17%, respectively, compared to the nine and three month periods
ended October 31, 2003. The increase in cost of sales is primarily attributable
to increased materials and overhead net of overhead absorption of approximately
$22.9 million and $9.7 million, respectively, increased personnel-related costs
of approximately $10.8 million and $3.9 million, respectively, and net increase
in various other costs of approximately $1.6 million and $0.7 million,
respectively, for the nine and three month periods ended October 31, 2004. Gross
margins for the nine and three month periods ended October 31, 2004 increased to
approximately 60.1% and 60.5% from approximately 56.6% and 57.4% in the
corresponding 2003 periods.


18

Research and Development, Net. Net research and development expenses
for the nine and three month periods ended October 31, 2004 increased by
approximately $10.7 million, or 7%, and $7.0 million, or 13%, respectively,
compared to the nine and three month periods ended October 31, 2003. The
increase in net research and development expenses is primarily attributable to
increased personnel-related costs of approximately $8.3 million and $4.2
million, respectively, and increased subcontractor costs of approximately $2.4
million and $3.2 million, respectively, for the nine and three month periods
ended October 31, 2004, partially offset by a net decrease in various other
costs of approximately $0.4 million for the three month period ended October 31,
2004.

Selling, General and Administrative. Selling, general and
administrative expenses for the nine and three month periods ended October 31,
2004 increased by approximately $24.8 million, or 13%, and $9.9 million, or 15%,
respectively, compared to the nine and three month periods ended October 31,
2003. However, selling, general and administrative expenses as a percentage of
sales for the nine and three month periods ended October 31, 2004 decreased to
approximately 30.5% and 30.1% from approximately 33.6% and 33.0% in the
corresponding 2003 periods. The increase in the dollar amount of selling,
general and administrative expenses for the nine month period is primarily due
to increased employee and agent sales commissions, personnel-related costs,
professional fees and travel costs of approximately $9.8 million, $9.0 million,
$2.8 million and $1.4 million, respectively, and net increase in various other
costs of approximately $3.3 million due primarily to decreased SG&A allocations
to other expense categories, partially offset by lower bad debt expense of
approximately $1.5 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, personnel-related costs and
bad debt expense of approximately $4.5 million, $3.8 million and $1.5 million,
respectively, and net increase in various other costs of approximately $0.1
million.

In-process Research and Development and Other Acquisition-related
Charges. During the nine month period ended October 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 nine and three
month periods ended October 31, 2004, the Company incurred net charges (credits)
to operations of approximately $0.1 million and $(0.1) million, respectively,
and during the nine month period ended October 31, 2003, the Company recorded a
credit to operations of approximately $0.2 million. The Company expects to pay
out approximately $0.3 million for severance and related obligations during the
year ended January 31, 2005 and approximately $22.5 million for facilities and
related obligations at various dates through January 2011.


19

Interest and Other Income, Net. Interest and other income, net, for the
nine month period ended October 31, 2004 decreased by approximately $6.5 million
compared to the nine month period ended October 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 $9.9 million; (ii) a
decrease in foreign currency gains of approximately $2.7 million; and (iii)
other decreases of approximately $0.3 million, net. Such items were offset by
(i) a decrease in the net losses from the sale and write-down of investments of
approximately $2.4 million; (ii) decreased interest expense of approximately
$2.1 million, due primarily to the Company's repurchases of its Debentures and
other debt reduction; and (iii) increased interest and dividend income of
approximately $1.9 million. Interest and other income, net, for the three month
period ended October 31, 2004 increased by approximately $3.2 million compared
to the three month period ended October 31, 2003. The principal reasons for the
increase are (i) a decrease in the net losses from the sale and write-down of
investments of approximately $1.9 million; (ii) increased interest and dividend
income of approximately $1.4 million; (iii) an increase in foreign currency
gains of approximately $0.6 million; and (iv) decreased interest expense of
approximately $0.5 million, due primarily to the Company's repurchases of its
Debentures and other debt reduction. Such items were offset by (i) a decrease in
the gain recorded as a result of the Company's repurchases of its Debentures of
approximately $1.0 million; and (ii) other decreases of approximately $0.2
million, net.

Income Tax Provision. Provision for income taxes for the nine and three
month periods ended October 31, 2004 increased by approximately $3.1 million and
$2.2 million, respectively, compared to the nine and three month periods ended
October 31, 2003, due primarily to shifts in the underlying mix of pre-tax
income by entity and tax jurisdiction. The Company had an effective tax rate of
approximately 17% for each of the nine and three month periods ended October 31,
2004. 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.

Minority Interest and Equity in the Earnings (Losses) of Affiliates.
Minority interest and equity in the earnings (losses) of affiliates for the nine
and three month periods ended October 31, 2004 increased by approximately $5.5
million and $2.2 million, respectively, as a result of increased minority
interest expense of approximately $4.0 million and $1.7 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 $1.5 million and $0.5 million, respectively.

Net Income (Loss). Net income (loss) for the nine and three month
periods ended October 31, 2004 increased by approximately $46.6 million and
$19.4 million, respectively, compared to the nine and three month periods ended
October 31, 2003, while as a percentage of sales was approximately 5.2% and
6.5%, respectively, in the nine and three month periods ended October 31, 2004
compared to (1.8)% in each of the corresponding 2003 periods. These variances
resulted primarily from the factors described above.


20

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital at October 31, 2004 and January 31, 2004
was approximately $2,173.9 million and $2,141.3 million, respectively. At
October 31, 2004 and January 31, 2004, the Company had total cash and cash
equivalents, bank time deposits and short-term investments of approximately
$2,190.5 million and $2,198.5 million, respectively.

Operations for the nine month periods ended October 31, 2004 and 2003,
after adjustment for non-cash items, provided cash of approximately $103.4
million and $53.5 million, respectively. During such periods, other changes in
operating assets and liabilities used cash of approximately $(37.1) million and
$(3.5) million, respectively. This resulted in net cash provided by operating
activities of approximately $66.3 million and $50.0 million, respectively.

Investing activities for the nine month periods ended October 31, 2004
and 2003 provided (used) cash of approximately $158.4 million and $(447.3)
million, respectively. These amounts include (i) net maturities and sales
(purchases) of bank time deposits and investments of approximately $239.9
million and $(408.4) million, respectively; (ii) purchases of property and
equipment of approximately $(33.0) million and $(26.4) million, respectively;
(iii) capitalization of software development costs of approximately $(3.2)
million and $(6.6) million, respectively; and (iv) net assets acquired as a
result of acquisitions of approximately $(45.4) million and $(5.9) million,
respectively.

Financing activities for the nine month periods ended October 31, 2004
and 2003 provided cash of approximately $24.1 million and $288.3 million,
respectively. These amounts include (i) net proceeds from the issuance of
Existing ZYPS of approximately $412.9 million for the nine months ended October
31, 2003; (ii) repurchases of Debentures of approximately $(36.9) million and
$(248.2) million, respectively; (iii) repayment of bank loan of $(42.0) million
for the nine months ended October 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
$61.4 million and $171.8 million, respectively, and (v) other, net of
approximately $(0.4) million and $(6.2) million, respectively.

During the nine month periods ended October 31, 2004 and 2003, the
Company acquired, in open market purchases, approximately $37.5 million and
$265.9 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
$10.2 million, respectively, included in `Interest and other income, net' in the
Condensed Consolidated Statements of Operations. As of October 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.


21

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

On September 2, 2004, Verint, through a subsidiary, acquired all of the
outstanding stock of RP Security, a company in the business of developing and
selling mobile digital video security solutions for transportation applications.
The purchase price consisted of approximately $9.0 million in cash and 90,144
shares of Verint's common stock. In addition, the shareholders of RP Security
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. Shares issued as part of the purchase
price were accounted for with a value of approximately $3.0 million, or $33.03
per share. In connection with this acquisition, Verint incurred transaction
costs, consisting primarily of professional fees, amounting to approximately
$0.5 million.

On November 30, 2004 the Company announced that it had filed a
registration statement (which has not yet become effective) with the Securities
and Exchange Commission to register its offer to holders of its outstanding
Existing ZYPS, to exchange such Existing ZYPS for New ZYPS that will have
substantially similar terms as the Existing ZYPS, except that the New ZYPS will
(i) have a net share settlement feature, (ii) allow the Company to redeem some
or all of the New ZYPS at any time on or after May 15, 2009 (rather than May 15,
2008 as provided for in the Existing ZYPS) and (iii) allow the holders of the
New ZYPS to require the Company to repurchase their New ZYPS for cash on May 15,
2009 (in addition to the repurchase dates provided for in the Existing ZYPS).

Pursuant to the Exchange Offer, the Company will offer to the Existing
ZYPS holders New ZYPS with a net share settlement feature which would provide
that, upon conversion, the Company would pay to the holder cash equal to the
lesser of the conversion value and the principal amount of the New ZYPS being
converted and would issue to the holder the remainder of the conversion value in
excess of the principal amount, if any, in shares of the Company's common stock.
The Company intends to complete the Exchange Offer before January 31, 2005.

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.


22

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.

Certain TSPs also 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.


23

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 us to retain or acquire market share.

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

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 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 negative impact on the Company's results of
operations.


24

In May 2003, the Company issued $420,000,000 aggregate principal amount
of its Existing ZYPS. The Existing 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 of
common stock, subject to adjustment upon the occurrence of specified events. The
ability of the holders to convert the Existing 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
Existing ZYPS for that ten trading-day period was less than 105% of the average
conversion value for the Existing ZYPS during that period; (iii) during any
period, if following the date on which the credit rating assigned to the
Existing ZYPS by Standard & Poor's Rating Services is lower than "B-" or upon
the withdrawal or suspension of the Existing ZYPS rating at the Company's
request; (iv) if the Company calls the Existing ZYPS for redemption; or (v) upon
other specified corporate transactions. The Existing ZYPS mature on May 15,
2023. The Company has the right to redeem the Existing 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 Existing ZYPS on each of May 15 of 2008, 2013, and
2018 and upon the occurrence of certain events. The Existing ZYPS holders may
require the Company to repurchase the Existing 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 cannot assure, however, that
sufficient funds will be available at the time of payment required on the
Existing ZYPS or that the Company will be able to arrange financing to make any
such required cash payments. In addition, if the Existing ZYPS are converted
into the Company's shares it will result in dilution of existing stockholders.

At its September 2004 meeting, the Emerging Issues Task Force ("EITF")
of the FASB reached a conclusion on EITF Issue No. 04-8, "The Effect of
Contingently Convertible Debt on Diluted Earnings Per Share," ("EITF 04-8") that
will require the contingent shares issuable under the Existing ZYPS to be
included in the diluted earnings per share calculation (if dilutive) retroactive
to the date of issuance of the Existing ZYPS, regardless of whether market price
triggers or other contingent features have been met, by applying the "if
converted" method under SFAS 128. The Company has followed the existing
interpretation of SFAS 128, which requires inclusion of the impact of the
conversion of the Existing ZYPS only when and if the conversion thresholds are
reached. As the conversion thresholds had not been satisfied as of October 31,
2004, the Company has not included the impact of the conversion of the Existing
ZYPS in the computation of diluted earnings per share through the periods ended
October 31, 2004.

The new rule has been approved by the FASB and will be effective for
reporting periods ending after December 15, 2004. Once effective, the Company
will be required to include the approximately 23.4 million shares of common
stock issuable upon the conversion of the Company's Existing ZYPS in diluted
earnings per share computations for all periods that the Existing ZYPS are
outstanding, using the "if-converted" method. For the three and nine month
periods ended October 31, 2004 this would have resulted in a reduction of $0.01
and $0.02, respectively, to reported diluted earnings per share.


25

On November 30, 2004 the Company announced that it had filed a
registration statement (which has not yet become effective) with the Securities
and Exchange Commission to register its offer to holders of its outstanding
Existing ZYPS, to exchange such Existing ZYPS for New ZYPS that will have
substantially similar terms as the Existing ZYPS, except that the New ZYPS will
(i) have a net share settlement feature, (ii) allow the Company to redeem some
or all of the New ZYPS at any time on or after May 15, 2009 (rather than May 15,
2008 as provided for in the Existing ZYPS) and (iii) allow the holders of the
New ZYPS to require the Company to repurchase their New ZYPS for cash on May 15,
2009 (in addition to the repurchase dates provided for in the Existing ZYPS).
The Company cannot assure, however, that sufficient funds will be available at
the time of payment required on the New ZYPS or that the Company will be able to
arrange financing to make any such required cash payments. In addition, if the
New ZYPS are converted into the Company's shares it may result in dilution of
existing stockholders.

Pursuant to the Exchange Offer, the Company will offer to the Existing
ZYPS holders New ZYPS with a net share settlement feature which would provide
that, upon conversion, the Company would pay to the holder cash equal to the
lesser of the conversion value and the principal amount of the New ZYPS being
converted and would issue to the holder the remainder of the conversion value in
excess of the principal amount, if any, in shares of the Company's common stock.
Under EITF 04-8, the Company would not be required to include any shares
issuable upon conversion of the New ZYPS in its diluted shares outstanding
unless the market price of the Company's common stock exceeds the conversion
price, and would then only have to include that number of shares as would then
be issuable based upon the in-the-money value of the conversion rights under the
New ZYPS.

The Company intends to complete the Exchange Offer before January 31,
2005. If the Company does not meet the requirements of EITF 04-8 by January 31,
2005, or to the extent the Existing ZYPS remain outstanding after that date, the
shares of the Company's common stock issuable upon conversion of the Existing
ZYPS will be considered outstanding on a diluted basis, and therefore will lower
the Company's diluted earnings per share.

The Company has made, and in the future, may continue to make strategic
investments in other 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. If
the Company's current or future products develop operational problems, this
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. 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.


26

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.

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. Existing or alternative sources also 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.


27

The telecommunications industry continues to undergo significant change
as a result of deregulation and privatization worldwide, reducing restrictions
on competition in the industry. 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. 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 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 Company's recent growth has strained its managerial and operational
resources. The Company's continued growth may further strain its resources,
which could hurt its business and results of operations. There can be no
assurance that the Company's managers will be able to manage growth effectively.
To manage future growth, the Company's management must continue to improve the
Company's operational and financial systems, procedures and controls and expand,
train, retain and manage its employee base. If the Company's systems, procedures
and controls are inadequate to support its operations, the Company's expansion
could slow or come to a halt, and it could lose its opportunity to gain
significant market share. Any inability to manage growth effectively could
materially harm the Company's business, results of operations and financial
condition.

The market for Verint's digital 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 materially and 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


28

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.

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 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 markets, 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.


29

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
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 the solutions that
Verint offers. 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


30

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.

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 diseases, such as severe acute
respiratory syndrome ("SARS") have and may in the future curtail travel to and
from certain countries. Restrictions on travel to and from these regions on
account of additional incidents of diseases, such as 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.


31

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 recent
death of the former President of the Palestinian Authority and the resultant
political uncertainty raises concerns regarding the ability of the Palestinian
Authority to maintain order in the Palestinian areas. Civil unrest in these
areas could significantly increase violence between Palestinians and Israelis.
The Company could be materially adversely affected by hostilities involving
Israel, 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. Recently, the
weakening of the dollar relative to the shekel has increased the costs of the
Company's Israeli operations, stated in United States dollars. The Company's
operations have at times also been affected by 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. 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 plans to
continue to 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 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


32

service and other related revenues) to the Government of Israel in consideration
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 October 31, 2004, such
subsidiaries of the Company received approximately $56.9 million in cumulative
grants from the OCS and recorded approximately $25.5 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 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 any related intellectual property 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 ability of the Company's Israeli subsidiaries to pay dividends to
the Company is governed by Israeli law, which provides that cash dividends may
be paid by an Israeli corporation only out of retained earnings as determined
for statutory purposes in Israeli currency. In the event of a devaluation of the
Israeli currency against the dollar, the amount in dollars available for payment
of cash dividends out of prior years' earnings will decrease accordingly. Cash
dividends paid by an Israeli corporation to United States resident corporate


33

parents are subject to the Convention for the Avoidance of Double Taxation
between Israel and the United States. Under the terms of the Convention, such
dividends are subject to taxation by both Israel and the United States and, in
the case of Israel, such dividends out of income derived in respect of a period
for which an Israeli company is entitled to the reduced tax rate applicable to
an Approved Enterprise are generally subject to withholding of Israeli income
tax at source at a rate of 15%. The Israeli company is also subject to
additional Israeli taxes in respect of such dividends, generally equal to the
tax benefits previously granted in respect of the underlying income by virtue of
the Approved Enterprise status.

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 utilizes 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.

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
adverse consequences from 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.


34

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, however, regularly conduct comprehensive patent searches to
determine whether the technology used in its products infringes patents held by
third parties. 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
continue to offer these products without obtaining licenses for those products
or without substantial reengineering of the products. Any reengineering effort
may not be successful and the Company cannot be certain as to whether such
licenses would be available. Even if such licenses were available, the Company
cannot be certain that any licenses would be offered to the Company on
commercially reasonable terms.

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.


35

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 in
the past, 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 past decline in the price of the Company's shares,
and the overall decline in equity prices between 2000 and 2003 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.

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.


36

The Company has not declared or paid any cash dividends on its common
stock and currently does not expect to pay cash dividends in the near future.
Consequently, any economic return to a shareholder may be derived, if at all,
from appreciation in the price of the Company's stock, and not as a result of
dividend payments.

The Company may issue additional equity securities, which would lead to
dilution of its issued and outstanding common stock. The Company has used and
may continue to use its common stock or securities convertible into common stock
to acquire technology, products, product rights and businesses, or reduce or
retire existing indebtedness, among other purposes. The issuance of additional
equity securities or securities convertible into equity securities for these or
other purposes would result in dilution of existing shareholders' equity
interests in the Company.

In addition, the Company's board of directors has the authority to
cause the Company to issue, without vote or action of the Company's
shareholders, up to 2,500,000 shares of preferred stock in one or more series,
and has the ability to fix the rights, preferences, privileges and restrictions
of any such series. Any such series of preferred stock could contain dividend
rights, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences or other rights superior to the rights of
holders of its common stock. The Company's board of directors has no present
intention of issuing any such preferred series, but reserves the right to do so
in the future. The Company is also authorized to issue, without shareholder
approval, common stock under certain circumstances. The issuance of either
preferred or common stock 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.



37

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 October 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 October 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 October
31, 2004, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.




38

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.


ITEM 6. EXHIBITS.

Exhibit Index.
--------------

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.




39

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: December 8, 2004 /s/ Kobi Alexander
----------------------------
Kobi Alexander
Chairman of the Board
and Chief Executive Officer


Dated: December 8, 2004 /s/ David Kreinberg
----------------------------
David Kreinberg
Executive Vice President
and Chief Financial Officer







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