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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 April 30, 2005

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.)

909 Third Avenue, New York, NY 10022
(Address of principal executive offices) (Zip Code)

(212) 652-6801
(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 June 1, 2005 was 200,276,974.



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

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

1. Condensed Consolidated Balance Sheets as
of January 31, 2005 and April 30, 2005 2

2. Condensed Consolidated Statements of Income
for the Three Month Periods Ended
April 30, 2004 and April 30, 2005 3

3. Condensed Consolidated Statements of Cash Flows
for the Three Month Periods Ended
April 30, 2004 and April 30, 2005 4

4. Notes to Condensed Consolidated Financial
Statements 5

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. 36

ITEM 4. CONTROLS AND PROCEDURES. 36

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS. 37

ITEM 6. EXHIBITS. 37

SIGNATURES 38


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, April 30,
2005* 2005
(Unaudited)

ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 721,350 $ 708,284
Bank time deposits and short-term investments 1,528,280 1,567,911
Accounts receivable, net 199,571 239,968
Inventories 107,552 121,748
Prepaid expenses and other current assets 70,335 75,439
------------ ------------
TOTAL CURRENT ASSETS 2,627,088 2,713,350
PROPERTY AND EQUIPMENT, net 122,174 123,231
OTHER ASSETS 176,024 160,714
------------ ------------
TOTAL ASSETS $ 2,925,286 $ 2,997,295
============ ============

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

CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 291,005 $ 296,160
Convertible debt 87,253 87,253
Bank loans and other debt 660 9,047
Advance payments from customers 108,381 123,199
------------ ------------
TOTAL CURRENT LIABILITIES 487,299 515,659
CONVERTIBLE DEBT 420,000 419,942
OTHER LIABILITIES 28,133 20,173
------------ ------------
TOTAL LIABILITIES 935,432 955,774
------------ ------------
MINORITY INTEREST 195,825 200,885
------------ ------------

STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value -
authorized, 600,000,000 shares;
issued and outstanding, 198,878,553 and 200,223,572 shares 19,887 20,022
Additional paid-in capital 1,284,298 1,302,060
Unearned stock compensation (14,432) (13,392)
Retained earnings 497,229 521,490
Accumulated other comprehensive income 7,047 10,456
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,794,029 1,840,636
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,925,286 $ 2,997,295
============ ============


* The Condensed Consolidated Balance Sheet as of January 31, 2005 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 INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)




Three months ended
April 30, April 30,
2004 2005


Sales $ 221,395 $ 272,801
Cost of sales 89,592 106,383
---------- ----------
Gross margin 131,803 166,418

Operating expenses:
Research and development, net 55,542 64,735
Selling, general and administrative 68,495 82,039
In-process research and development and other
acquisition-related charges 4,635 -
Workforce reduction, restructuring and impairment
charges (credits) 698 (153)
---------- ----------

Income from operations 2,433 19,797

Interest and other income, net 7,645 13,410
---------- ----------

Income before income tax provision, minority interest and
equity in the earnings (losses) of affiliates 10,078 33,207

Income tax provision 1,492 4,953

Minority interest and equity in the earnings (losses) of affiliates (1,585) (3,993)
---------- ----------

Net income $ 7,001 $ 24,261
========== ==========

Earnings per share:
Basic $ 0.04 $ 0.12
========== ==========
Diluted $ 0.03 $ 0.11
========== ==========


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)



Three months ended
April 30, April 30,
2004 2005

Cash flows from operating activities:
Net cash from operations after adjustment
for non-cash items $ 31,266 $ 43,779
Changes in operating assets and liabilities:
Accounts receivable, net (3,860) (40,397)
Inventories 1,016 (14,656)
Prepaid expenses and other current assets (7,610) (6,773)
Accounts payable and accrued expenses (5,721) 4,597
Advance payments from customers (18,405) 14,818
Other, net (2,392) 2,323
---------- ----------
Net cash provided by (used in) operating activities (5,706) 3,691
---------- ----------

Cash flows from investing activities:
Maturities and sales (purchases) of bank time deposits
and investments, net (9,413) (21,685)
Purchase of property and equipment (7,247) (13,010)
Capitalization of software development costs (1,093) (902)
Net assets acquired (35,599) -
---------- ----------
Net cash used in investing activities (53,352) (35,597)
---------- ----------
Cash flows from financing activities:
Repurchase of convertible debt (30,038) -
Net proceeds from issuance of stock 31,777 19,367
Other, net (215) (527)
---------- ----------
Net cash provided by financing activities 1,524 18,840
---------- ----------

Net decrease in cash and cash equivalents (57,534) (13,066)
Cash and cash equivalents, beginning of period 623,063 721,350
---------- ----------
Cash and cash equivalents, end of period $ 565,529 $ 708,284
========== ==========


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, 2005. 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 month period ended April 30, 2005 are not
necessarily indicative of the results to be expected for the full year.

RECLASSIFICATIONS. In connection with the preparation of its Annual
Report on Form 10-K for the year ended January 31, 2005, the Company concluded
that it was appropriate to classify investments in Auction Rate Securities
("ARS") as short-term investments. ARS generally have long-term stated
maturities; however, these investments have characteristics similar to
short-term investments because at pre-determined intervals, generally every 7 to
90 days, there is a new auction process at which these securities are reset to
current interest rates. Previously, such investments had been classified as cash
and cash equivalents due to their liquidity and pricing reset feature.
Accordingly, the Company has revised the classification to report these
securities as short-term investments in its (condensed) consolidated balance
sheets for all periods prior to January 31, 2005, and has reclassified
approximately $1,206,280,000 of investments in ARS as of April 30, 2004, that
were previously included in cash and cash equivalents to short-term investments.

The Company has also revised the presentation of the Condensed
Consolidated Statements of Cash Flows for the three month period ended April 30,
2004 to reflect the purchases and sales of ARS as investing activities rather
than as a component of cash and cash equivalents, which is consistent with the
presentation for the year ended January 31, 2005. In the previously reported
Condensed Consolidated Statements of Cash Flows for the three month period ended
April 30, 2004, net cash used in investing activities related to these
short-term investments of approximately $298,348,000 were included in cash and
cash equivalents. This change in classification does not affect previously
reported cash flows from operations or from financing activities in the
Condensed Consolidated Statements of Cash Flows or previously reported Condensed
Consolidated Statements of Income for any period.

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," ("APB No. 25") and
related Interpretations. Accordingly, no stock-based employee compensation cost
for stock options is reflected in net income 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. Refer to the "Recent Accounting
Pronouncements" footnote for a description of pending changes to this accounting
treatment.


5

During the years ended January 31, 2004 and 2005, 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 April 30, 2004 and 2005, of approximately $431,000 and
$1,040,000, respectively, is included in `Selling, general and administrative'
expenses in the Condensed Consolidated Statements of Income.

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.

The following table illustrates the effect on net income and earnings
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 APRIL 30,
----------------------------------
2004 2005
---- ----
(In thousands)


Net income, as reported $ 7,001 $ 24,261

Deduct: Total stock-based employee compensation cost for stock
options determined under fair value based method for all awards, net
of related tax effects (39,052) (8,808)
--------------- ---------------

Pro forma net income (loss) $ (32,051) $ 15,453
=============== ===============

Earnings (loss) per share:

Basic - as reported $ 0.04 $ 0.12
Basic - pro forma $ (0.16) $ 0.08

Diluted - as reported $ 0.03 $ 0.11
Diluted - pro forma $ (0.16) $ 0.07




Inventories. The composition of inventories at January 31, 2005 and
April 30, 2005 is as follows:



JANUARY 31, APRIL 30,
2005 2005
(In thousands)

Raw materials $ 34,364 $ 40,240
Work in process 23,640 25,560
Finished goods 49,548 55,948
--------------- ---------------
$ 107,552 $ 121,748
=============== ===============


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 conditional 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 up to the
amount of such funding, plus interest in certain circumstances. The terms of the
conditional grants limit those subsidiaries' abilities to manufacture products
outside of Israel if such products or technologies were developed using these
grants. The amounts reimbursed by the OCS for the three month periods ended
April 30, 2004 and 2005 were approximately $2,451,000 and $1,922,000,
respectively.

CONVERTIBLE DEBT. In May 2003, the Company issued $420,000,000
aggregate principal amount of Zero Yield Puttable Securities ("ZYPS") (the
"Existing ZYPS"). On January 26, 2005, the Company completed an offer to the
holders of the outstanding Existing ZYPS to exchange the Existing ZYPS for new
ZYPS (the "New ZYPS"). Of the $420,000,000 worth of Existing ZYPS outstanding
prior to the exchange offer, approximately $417,700,000 aggregate principal
amount representing approximately 99.5% of the original issue of Existing ZYPS
were validly tendered in exchange for an equal principal amount of New ZYPS.

Both the Existing ZYPS and the New ZYPS have a conversion price of
$17.97 per share. The ability of the holders to convert either the Existing ZYPS
or New 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 twenty days in the 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 or New ZYPS for that ten trading-day period was less than 105% of
the average conversion value for the Existing ZYPS or New ZYPS during that
period; (iii) during any period, if following the date on which the credit
rating assigned to the Existing ZYPS or New ZYPS by Standard & Poor's Rating
Services is lower than "B-" or upon the withdrawal or suspension of the Existing
ZYPS or New ZYPS rating at the Company's request; (iv) if the Company calls the
Existing ZYPS or New ZYPS for redemption; or (v) upon other specified corporate


7

transactions. Both the Existing ZYPS and the New ZYPS mature on May 15, 2023. In
addition, 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 New ZYPS have substantially similar terms as the Existing ZYPS,
except that the New ZYPS (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 each of May 15, 2008, 2009, 2013 and 2018. The net share
settlement feature of the New ZYPS provides 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, which is $417,676,000 as of
April 30, 2005, 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 "New Conversion Method").

The offer followed the September 30, 2004 conclusion by the Emerging
Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB")
on EITF Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share" ("EITF 04-8") requiring contingently convertible debt to be
included in diluted earnings per share computations (if dilutive) as if the
notes were converted into common shares at the time of issuance (the "if
converted" method) regardless of whether market price triggers or other
contingent features have been met. EITF 04-8 was effective for reporting periods
ending after December 15, 2004. Because these accounting changes would have
required the Company to include the shares of common stock underlying the
Existing ZYPS in its diluted earnings per share computations, pursuant to the
exchange offer, the Company offered to the Existing ZYPS holders, New ZYPS
convertible under the New Conversion Method.

Under EITF 04-8, the Company is not required to include any shares
issuable upon conversion of the New ZYPS issued in the exchange offer 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. Therefore, the New ZYPS are dilutive in
calculating diluted earnings per share if the Company's common stock is trading
above $17.97 to the extent of the number of shares the Company would be required
to issue to satisfy a conversion right of the New ZYPS over and above
$417,676,000, as of April 30, 2005. For the three month periods ended April 30,
2004 and 2005, this resulted in approximately 588,000 and 5,650,000,
respectively, of additional share dilution in calculating diluted earnings per
share. The Existing ZYPS are immediately dilutive in calculating diluted
earnings per share to the extent of the full number of shares underlying the
Existing ZYPS, which for the three month periods ended April 30, 2004 and 2005
was approximately 129,000 and 126,000 shares, respectively. These shares are
deemed to be outstanding for the purpose of calculating diluted earnings per
share, whether or not the Existing ZYPS may be converted pursuant to their
terms, and therefore decreases the Company's diluted earnings per share.


8

The adoption of EITF 04-8 did not have an effect on reported diluted
earnings (loss) per share for any prior periods presented. Although the diluted
share count for the three month period ended April 30, 2004 increased by
approximately 717,000 shares from the amount previously reported due to the
adoption of EITF 04-8, the additional shares did not change the reported diluted
earnings per share of $0.03 for that period.

During the fourth quarter of fiscal year 2004, the closing price per
share on at least 20 trading days in the 30 consecutive trading-day period
ending on January 31, 2005 was more than 120% of the conversion price per share
for both the Existing ZYPS and New ZYPS. As such, a conversion privilege for
both the Existing ZYPS and the New ZYPS was triggered and both the Existing ZYPS
and New ZYPS were convertible into cash and/or the Company's common stock at the
option of the holders during the first fiscal quarter of 2005. During the three
month period ended April 30, 2005, the holders converted $44,000 and $14,000 of
the Existing ZYPS and New ZYPS, respectively. As of April 30, 2005, there were
$2,266,000 of Existing ZYPS outstanding and $417,676,000 of New ZYPS
outstanding.

During the first quarter of fiscal year 2005, the closing price per
share on at least 20 trading days in the 30 consecutive trading-day period
ending on April 30, 2005 was more than 120% of the conversion price per share
for both the Existing ZYPS and New ZYPS. As such, a conversion privilege for
both the Existing ZYPS and the New ZYPS was triggered and both the Existing ZYPS
and New ZYPS are convertible into cash and/or the Company's common stock at the
option of the holders during the second fiscal quarter of 2005.

In November and December 2000, the Company issued $600,000,000
aggregate principal amount of its 1.50% convertible senior debentures due
December 2005 (the "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 April 30, 2004 and 2005, the
Company acquired, in open market purchases, $30,495,000 and $0 of face amount of
the Debentures, respectively, resulting in a pre-tax gain, net of debt issuance
costs, of approximately $244,000 and $0, respectively. This gain is included in
`Interest and other income, net' in the Condensed Consolidated Statements of
Income. As of April 30, 2005, the Company had outstanding Debentures of
$87,253,000, included in the current liabilities section of the Condensed
Consolidated Balance Sheets.


9

EARNINGS PER SHARE. The computation of basic earnings 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 per
share for the three month periods ended April 30, 2004 and 2005 is as follows:



THREE MONTHS ENDED THREE MONTHS ENDED
APRIL 30, 2004 APRIL 30, 2005
-------------- --------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
(In thousands, except per share data)


BASIC EPS
- ---------
Net income $ 7,001 194,797 $ 0.04 $ 24,261 198,847 $ 0.12
====== ======

EFFECT OF DILUTIVE SECURITIES
- -----------------------------
New and Existing ZYPS 717 5,776
Options 6,665 7,801
Restricted Stock 314 641
Subsidiary options (149) (234)
----------------------------------------- -------------------------------------------

DILUTED EPS $ 6,852 202,493 $ 0.03 $ 24,027 213,065 $ 0.11
======= ======= ====== ======== ======= ======


The shares issuable upon the conversion of the Debentures were not
included in the computation of diluted earnings per share for all periods
because the effect of including them would be antidilutive. Refer to the
"Convertible Debt" footnote for a comprehensive description of EITF 04-8 and the
impact of adoption on the Company's diluted earnings per share calculation for
the New ZYPS and the Existing ZYPS.

COMPREHENSIVE INCOME. Total comprehensive income was approximately
$2,937,000 and $27,670,000 for the three month periods ended April 30, 2004 and
2005, respectively. The elements of comprehensive income (loss) include net
income (loss), unrealized gains/losses on available for sale securities and
foreign currency translation adjustments.

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 four year period
ended January 31, 2005, the Company incurred net charges to operations primarily
pertaining to severance and other related costs, the elimination of excess
facilities and related leasehold improvements and the write-off of certain
property and equipment and other impaired assets. During the three month period
ended April 30, 2005, the Company reversed previously taken restructuring
charges for facilities and related costs of approximately $153,000, primarily as
a result of the sublet of a portion of the excess facilities.


10

As of April 30, 2005, the Company had an accrual of approximately
$20,163,000 relating to workforce reduction and restructuring. A roll-forward of
the workforce reduction and restructuring accrual from February 1, 2005 is as
follows:



WORKFORCE
ACCRUAL REDUCTION, ACCRUAL
BALANCE AT RESTRUCTURING BALANCE AT
FEBRUARY 1, & IMPAIRMENT CASH APRIL 30,
2005 CREDITS PAYMENTS 2005
---------- ---------- ---------- ----------
(In thousands)


Severance and related $ 121 $ - $ - $ 121
Facilities and related 21,482 (153) 1,287 20,042
---------- ---------- ---------- ----------
Total $ 21,603 $ (153) $ 1,287 $ 20,163
========== ========== ========== ==========


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 through July 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.



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.


11

Security and Business Intelligence - Provides analytic software-based
solutions for communications interception, networked video security and business
intelligence. The software generates actionable intelligence through the
collection, retention and analysis of unstructured information contained in
voice, fax, video, email, Internet and data transmissions from voice, video and
IP 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.

The table below presents information about sales, income (loss) from
operations and segment assets as of and for the three month periods ended April
30, 2004 and 2005:



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


THREE MONTHS ENDED APRIL 30, 2004:
Sales $ 150,081 $ 13,189 $ 56,638 $ 2,594 $ (1,107) $ 221,395
Income (loss) from
operations $ 1,841 $ 2,640 $ 861 $ (272) $ (2,637) $ 2,433

THREE MONTHS ENDED APRIL 30, 2005:
Sales $ 184,905 $ 14,141 $ 72,039 $ 2,371 $ (655) $ 272,801
Income (loss) from
operations $ 12,741 $ 3,110 $ 6,641 $ (159) $ (2,536) $ 19,797

TOTAL ASSETS:
April 30, 2004 $ 829,682 $ 246,412 $ 342,005 $ 36,333 $ 1,258,222 $ 2,712,654
April 30, 2005 $ 1,034,859 $ 274,437 $ 415,472 $ 39,685 $ 1,232,842 $ 2,997,295



LITIGATION. 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 pending legal action that could
reasonably be expected to have a material adverse effect on its business,
financial condition and results of operations.


12

RECENT ACCOUNTING PRONOUNCEMENTS. In December 2004, the FASB issued
Statement of Financial Accounting Standard ("SFAS") No. 123 (revised 2004),
"Share-Based Payment", ("SFAS No.123(R)") which revises SFAS No. 123 and
supersedes APB No. 25. In April 2005, the Securities and Exchange Commission
("SEC") amended Regulation S-X to modify the date for compliance with SFAS No.
123(R). The provisions of SFAS No. 123(R) must be applied beginning with the
first interim or annual reporting period of the first fiscal year beginning on
or after June 15, 2005, which for the Company is February 1, 2006 (the
"Effective Date"). SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be valued at fair
value on the date of grant, and to be expensed over the applicable vesting
period. Pro forma disclosure of the income statement effects of share-based
payments is no longer an alternative. Beginning on the Effective Date, the
Company must (i) expense all options granted after the Effective Date over the
applicable vesting period, and (ii) expense the non-vested portions of existing
option grants going forward over their remaining vesting period. Compensation
expense for the non-vested portions of existing option grants as of the
Effective Date will be recorded based on the fair value of the awards previously
calculated in developing the pro forma disclosures in accordance with the
provisions of SFAS No. 123. Under SFAS No. 123(R), the Company is required to
adopt a fair value-based method for measuring the compensation expense related
to employee stock and stock options awards, which will lead to substantial
additional compensation expense. Any such expense, although it will not affect
the Company's cash flows, will have a material negative impact on the Company's
reported results of operations.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) by requiring that such items be recognized as current-period
charges regardless of whether they meet the ARB No. 43, Chapter 4 criterion of
"so abnormal." In addition, SFAS No. 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS
No. 151 is not expected to have a material effect on the Company's condensed
consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29." SFAS No. 153 amends
APB No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
reporting periods beginning after June 15, 2005. The adoption of SFAS No. 153 is
not expected to have a material effect on the Company's condensed consolidated
financial statements.

In March 2004, the EITF of the FASB reached a consensus on EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments", which provides additional guidance for assessing
impairment losses on investments. Additionally, EITF 03-1 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the FASB delayed the accounting provisions of EITF
03-1; however the disclosure requirements were effective for annual periods
ending after June 15, 2004. The Company will evaluate the impact of EITF 03-1
once final guidance is issued, however the adoption of EITF 03-1 in its current
form is not expected to have a material effect on the Company's condensed
consolidated financial statements.


13

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
April 30, 2005, there have been no material changes to any of the critical
accounting policies contained therein.



14

RESULTS OF OPERATIONS

SUMMARY OF RESULTS

Consolidated results of operations in dollars and as a percentage of
sales for each of the three month periods ended April 30, 2004 and 2005 were as
follows:



Three months Three months
ended ended
April 30, 2004 % of sales April 30, 2005 % of sales
---------------------------------------------------------------------
(In thousands)


Sales $ 221,395 100.0% $ 272,801 100.0%
Cost of sales 89,592 40.5% 106,383 39.0%
----------------- -----------------
Gross margin 131,803 59.5% 166,418 61.0%

Operating expenses:
Research and development, net 55,542 25.1% 64,735 23.7%
Selling, general and administrative 68,495 30.9% 82,039 30.1%
In-process research and development and other
acquisition-related charges 4,635 2.1% - -
Workforce reduction, restructuring and
impairment charges (credits) 698 0.3% (153) (0.1)%
----------------- -----------------
Income from operations 2,433 1.1% 19,797 7.3%

Interest and other income, net 7,645 3.5% 13,410 4.9%
----------------- -----------------

Income before income tax provision,
minority interest and equity in the earnings
(losses) of affiliates 10,078 4.6% 33,207 12.2%

Income tax provision 1,492 0.7% 4,953 1.8%

Minority interest and equity in the earnings
(losses) of affiliates (1,585) (0.7)% (3,993) (1.5)%
----------------- -----------------

Net income $ 7,001 3.2% $ 24,261 8.9%
================= =================


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, operating income and net income
growth during the three month period ended April 30, 2005. Verint, which
services the security and business intelligence markets, achieved record revenue
during the three month period ended April 30, 2005. Overall, for the three month
period ended April 30, 2005, the Company experienced year over year sales growth
of approximately 23.2% and sequential sales growth of approximately 5.3%, with a
substantial majority of sales generated from activities serving the
telecommunications industry. The Company generated operating and net income for
the three month period ended April 30, 2005.


15

THREE MONTH PERIOD ENDED APRIL 30, 2005
COMPARED TO THREE MONTH PERIOD ENDED APRIL 30, 2004

Sales. Sales for the three month period ended April 30, 2005
increased by approximately $51.4 million, or 23%, compared to the three month
period ended April 30, 2004. This increase is attributable to an increase in
sales in the Company's three primary business units. CNS sales increased by
approximately $34.8 million due primarily to increased sales in Europe. Security
and business intelligence sales increased by approximately $15.4 million and
service enabling signaling software sales increased by approximately $1.0
million. On a consolidated basis, sales to customers in North America
represented approximately 28% and 40% of total sales for the three month periods
ended April 30, 2005 and 2004, respectively.

Cost of Sales. Cost of sales for the three month period ended April
30, 2005 increased by approximately $16.8 million, or 19%, compared to the three
month period ended April 30, 2004. The increase in cost of sales is primarily
attributable to increased materials and overhead costs, net of overhead
absorption, of approximately $10.6 million, due primarily to increased sales,
decreased recoveries of doubtful debts, which decreased from approximately $4.7
million in the 2004 period to approximately $0.5 million in the 2005 period, a
decrease of approximately $4.2 million, and increased personnel-related costs of
approximately $4.0 million. Such increases were partially offset by a net
decrease in various other costs of approximately $2.0 million. Gross margins for
the three month period ended April 30, 2005 increased to approximately 61.0%
from approximately 59.5% in the corresponding 2004 period.

Research and Development, Net. Net research and development expenses
for the three month period ended April 30, 2005 increased by approximately $9.2
million, or 17%, compared to the three month period ended April 30, 2004.
However, net research and development expenses as a percentage of sales
decreased to approximately 23.7% in the 2005 period from approximately 25.1% in
the 2004 period. The increase in the dollar amount of net research and
development expenses is primarily attributable to increased personnel-related
costs of approximately $4.3 million, increased overhead allocation of
approximately $2.4 million, increased subcontractor costs of approximately $1.5
million and a net increase in various other costs of approximately $1.0 million.

Selling, General and Administrative. Selling, general and
administrative expenses for the three month period ended April 30, 2005
increased by approximately $13.5 million, or 20%, compared to the three month
period ended April 30, 2004. However, selling, general and administrative
expenses as a percentage of sales decreased to approximately 30.1% in the 2005
period from approximately 30.9% in the 2004 period. The increase in the dollar
amount of selling, general and administrative expenses is primarily due to
increased personnel-related costs of approximately $7.9 million, increased
employee and agent sales commissions of approximately $2.4 million, increased
travel costs of approximately $1.6 million, a net increase in various other
costs of approximately $1.3 million and increased net bad debt expense of
approximately $0.3 million, which included recoveries of doubtful debts of
approximately $4.5 million and $1.0 million for the three month periods ended
April 30, 2004 and 2005, respectively.


16

In-process Research and Development and Other Acquisition-related
Charges. During the three month period ended April 30, 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
Ltd'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 three month period
ended April 30, 2004, the Company incurred charges to operations of
approximately $0.7 million for severance and other related costs. During the
three month period ended April 30, 2005, the Company reversed previously taken
restructuring charges for facilities and related costs and incurred a credit to
operations of approximately $0.2 million, primarily as a result of the sublet of
a portion of the excess facilities. The Company expects to pay out approximately
$0.1 million for severance and related obligations through July 2005 and
approximately $20.0 million for facilities and related obligations at various
dates through January 2011.

Interest and Other Income, Net. Interest and other income, net for
the three month period ended April 30, 2005 increased by approximately $5.8
million compared to the three month period ended April 30, 2004. The principal
reasons for the increase are (i) increased interest and dividend income of
approximately $6.7 million, due primarily to the rise in interest rates; and
(ii) an increase in the net gains from investments of approximately $1.5
million. Such items were offset by (i) a change in foreign currency gains/losses
of approximately $2.0 million; (ii) a decrease in the gain recorded as a result
of the Company's repurchases of its Debentures of approximately $0.2 million;
and (iii) other decrease of approximately $0.2 million, net.

Income Tax Provision. Provision for income taxes for the three month
period ended April 30, 2005 increased by approximately $3.5 million compared to
the three month period ended April 30, 2004, due primarily to increased pre-tax
income accompanied by shifts in the underlying mix of pre-tax income by entity
and tax jurisdiction. The Company's effective tax rate was approximately 15% for
each of the three month periods ended April 30, 2004 and 2005. 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 increased by
approximately $2.4 million as a result of increased minority interest expense of
approximately $2.1 million, primarily attributable to overall increased earnings
at majority-owned subsidiaries, and a change in equity in the earnings (losses)
of affiliates of approximately $0.3 million.


17

Net Income. Net income for the three month period ended April 30,
2005 increased by approximately $17.3 million compared to the three month period
ended April 30, 2004, and as a percentage of sales increased to approximately
8.9% from approximately 3.2% in the corresponding 2004 period. These variances
resulted primarily from the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital at April 30, 2005 and January 31, 2005
was approximately $2,197.7 million and $2,139.8 million, respectively. At April
30, 2005 and January 31, 2005, the Company had total cash and cash equivalents,
bank time deposits and short-term investments of approximately $2,276.2 million
and $2,249.6 million, respectively.

Operations for the three month periods ended April 30, 2005 and 2004,
after adjustment for non-cash items, provided cash of approximately $43.8
million and $31.3 million, respectively. During such periods, other changes in
operating assets and liabilities used cash of approximately $(40.1) million and
$(37.0) million, respectively. This resulted in net cash provided by (used in)
operating activities of approximately $3.7 million and $(5.7) million,
respectively.

Investing activities for the three month periods ended April 30, 2005
and 2004 used cash of approximately $(35.6) million and $(53.4) million,
respectively. These amounts include (i) net maturities and sales (purchases) of
bank time deposits and investments of approximately $(21.7) million and $(9.4)
million, respectively; (ii) purchases of property and equipment of approximately
$(13.0) million and $(7.2) million, respectively; (iii) capitalization of
software development costs of approximately $(0.9) million and $(1.1) million,
respectively; and (iv) net assets acquired as a result of an acquisition during
the three month period ended April 30, 2004 of approximately $(35.6) million.

Financing activities for the three month periods ended April 30, 2005
and 2004 provided cash of approximately $18.8 million and $1.5 million,
respectively. These amounts include (i) repurchases of Debentures of
approximately $(30.0) million during the three month period ended April 30,
2004; (ii) 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 $19.4 million and $31.8 million,
respectively, and (iii) other, net of approximately $(0.5) million and $(0.2)
million, respectively.

During the first quarter of fiscal year 2005, the closing price per
share on at least 20 trading days in the 30 consecutive trading-day period
ending on April 30, 2005 was more than 120% of the conversion price per share
for both the Existing ZYPS and New ZYPS. As such, a conversion privilege for
both the Existing ZYPS and the New ZYPS was triggered and both the Existing ZYPS
and New ZYPS are convertible into cash and/or the Company's common stock at the
option of the holders during the second fiscal quarter of 2005. As of April 30,
2005, there were approximately $2.3 million of Existing ZYPS outstanding and
$417.7 million of New ZYPS outstanding.


18

During the three month periods ended April 30, 2004 and 2005, the
Company acquired, in open market purchases, approximately $30.5 million and $0
of face amount of the Debentures, respectively, resulting in a pre-tax gain, net
of debt issuance costs, of approximately $0.2 million and $0, respectively. This
gain is included in `Interest and other income, net' in the Condensed
Consolidated Statements of Income. As of April 30, 2005, the Company had
outstanding Debentures of approximately $87.3 million, included in the current
liabilities section of the Condensed Consolidated Balance Sheets.

The ability of CTI's Israeli subsidiaries to pay dividends is
governed by Israeli law, which provides that dividends may be paid by an Israeli
corporation only out of its earnings as defined in accordance with the Israeli
Companies Law of 1999, provided that there is no reasonable concern that such
payment will cause such subsidiary to fail to meet its current and expected
liabilities as they come due. 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 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 liquidity and capital resources have not been, and are
currently 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, on both a consolidated and individual
business segment basis.


19

CERTAIN TRENDS AND UNCERTAINTIES

The Company derives the majority of its revenue from the
telecommunications industry, which has experienced 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 has experienced significant revenue declines from historical peak
revenue levels, and if capital spending and technology purchasing by
telecommunications service providers ("TSP") does not continue to improve or
declines, revenue may stagnate or decrease, and the Company's operating results
may be adversely affected. Although the Company currently has good near term
visibility, 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.

Recently, there have been announcements of several mergers in the
telecommunications industry. To the extent that the Company's customer base
consolidates, the Company may have an increased dependence on a smaller number
of customers who may be able to exert increased pressure on the Company's prices
and contractual terms in general. Consolidation also may result in the loss of
both existing and potential customers of the Company.

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 new products increases, the Company's
revenue and operating results will be adversely affected.


20

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 to retain or acquire market share.

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

The Company intends to continue to make significant investments in
its business, and to examine opportunities for growth. 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 examines opportunities for growth through merger and
acquisitions. If the Company does make acquisitions, it may not discover all
potential risks and liabilities of the newly acquired business through the due
diligence process, will inherit the acquired companies' past financial
statements with their associated risks and may enter an industry in which it has
limited or no experience. Also, the Company may not be able to successfully
incorporate the personnel, operations and customers of these companies into the
Company's business. In addition, the Company may fail to achieve the anticipated
synergies from the combined businesses, including marketing, product
integration, distribution, product development and other synergies. The
integration process may further strain the Company's existing financial and
managerial controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from the Company's core business
objectives. In addition, an acquisition or merger may require the Company to
utilize cash reserves, incur debt or issue equity securities, which may result
in a dilution of existing stockholders, and the Company may be negatively
impacted by the assumption of liabilities of the merged or acquired company. Due
to rapidly changing market conditions, the Company may find the value of its
acquired technologies and related intangible assets, such as goodwill as
recorded in the Company's financial statements, to be impaired, resulting in
charges to operations. The Company may also fail to retain the acquired or
merged companies' key employees and customers. The Company 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.

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 benefits from those investments.


21

Currently, the Company accounts for employee stock options in
accordance with Accounting Principles Board ("APB") Opinion No. 25 and related
Interpretations, which provide that any compensation expense relative to
employee stock options be measured based on intrinsic value of the stock
options. As a result, when options are priced at or above fair market value of
the underlying stock on the date of the grant, as currently is the Company's
practice, the Company incurs no compensation expense. In December 2004, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123(R)") which revises SFAS No. 123 and
supersedes APB Opinion No. 25. In April, 2005, the SEC amended Regulation S-X to
modify the date for compliance with SFAS No. 123(R). The provisions of SFAS No.
123(R) must be applied beginning with the first interim or annual reporting
period of the first fiscal year beginning on or after June 15, 2005, which for
the Company is February 1, 2006 (the "Effective Date"). SFAS No. 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be valued at fair value on the date of grant, and to be expensed
over the applicable vesting period. Pro forma disclosure of the income statement
effects of share-based payments is no longer an alternative. Beginning on the
Effective Date, the Company must (i) expense all options granted after the
Effective Date over the applicable vesting period, and (ii) expense the
non-vested portions of existing option grants going forward over their remaining
vesting period. Compensation expense for the non-vested portions of existing
option grants as of the Effective Date will be recorded based on the fair value
of the awards previously calculated in developing the pro forma disclosures in
accordance with the provisions of SFAS No. 123. Under SFAS No. 123(R), the
Company is required to adopt a fair value-based method for measuring the
compensation expense related to employee stock and stock options awards, which
will lead to substantial additional compensation expense. Any such expense,
although it would not affect the Company's cash flows, will have a material
negative impact on the Company's future reported results of operations.

In May 2003, the Company issued $420,000,000 aggregate principal
amount of Zero Yield Puttable Securities ("ZYPS") (the "Existing ZYPS"). On
January 26, 2005, the Company completed an offer to the holders of the
outstanding Existing ZYPS to exchange the Existing ZYPS for new ZYPS (the "New
ZYPS") in response to EITF Issue No. 04-8, "The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share" ("EITF 04-8"). Of the
$420,000,000 worth of Existing ZYPS outstanding prior to the exchange offer,
approximately $417,700,000 aggregate principal amount representing approximately
99.5% of the original issue of Existing ZYPS were validly tendered in exchange
for an equal principal amount of New ZYPS. Both the Existing ZYPS and the New
ZYPS have a conversion price of $17.97 per share. Under EITF 04-8, the Company
is not required to include any shares issuable upon conversion of the New ZYPS
issued in the exchange offer 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. Therefore,
the New ZYPS are dilutive in calculating diluted earnings per share if the
Company's common stock is trading above $17.97 to the extent of the number of
shares the Company would be required to issue to satisfy a conversion right of
the New ZYPS over and above $417,676,000, as of April 30, 2005. The Existing
ZYPS are immediately dilutive in calculating diluted earnings per share to the
extent of the full number of shares underlying the Existing ZYPS. The Company
cannot ensure that sufficient funds will be available at the time of payment
required on the Existing ZYPS and/or the New ZYPS or that the Company will be
able to arrange financing to make any such required cash payments.


22

During the first quarter of fiscal year 2005, the closing price per
share on at least 20 trading days in the 30 consecutive trading-day period
ending on April 30, 2005, was more than 120% of the conversion price per share
for both the Existing ZYPS and New ZYPS. As such, a conversion privilege for
both the Existing ZYPS and the New ZYPS was triggered and both the Existing ZYPS
and New ZYPS are convertible into cash and/or the Company's common stock at the
option of the holders during the second fiscal quarter of 2005.

The Company's products are complex and involve sophisticated
technology that performs critical functions to highly demanding standards. The
Company's existing and future products may develop operational problems and the
Company may incur fees and penalties in connection with such problems, which
could have a material adverse effect on the Company. In addition, when the
Company introduces a product to the market or as it releases new versions of an
existing product, the product may contain undetected defects or errors. The
Company may not discover such defects, errors or other operational problems
until after a product has been released and used by the customer. Significant
costs may be incurred to correct undetected defects, errors or operational
problems in the Company's products, including product liability claims. In
addition, defects or errors in the Company's products also may result in
questions regarding the integrity of the products, which could cause adverse
publicity and impair their market acceptance, resulting in lost future sales.

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.


23

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 may not be available on
favorable terms and conditions. Thus, if there is a shortage of supply for these
components, the Company may experience an interruption in its product supply. In
addition, loss of third-party software licensing could materially and adversely
affect the Company's business, financial condition and results of operations.

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

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

The 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


24

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 Company's business is subject to evolving corporate governance
and public disclosure regulations that have increased both costs and the risk of
noncompliance, which could have an adverse effect on the Company's stock price.
Because the Company's common stock is publicly traded on the Nasdaq stock
market, the Company is subject to rules and regulations promulgated by a number
of governmental and self-regulated organizations, including the SEC, Nasdaq and
the Public Company Accounting Oversight Board, which monitors the accounting
practices of public companies. Many of these regulations have only recently been
enacted, and continue to evolve, making compliance more difficult and uncertain.
In addition, the Company's efforts to comply with these new regulations have
resulted in, and are likely to continue to result in, increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. In particular, Section
404 of Sarbanes-Oxley Act of 2002 and related regulations required the Company
to include a management assessment of its internal control over financial
reporting and auditor attestation of that assessment in the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 2005. While the
Company has asserted, in the management assessment of its internal control over
financial reporting filed with the Company's Annual Report on Form 10-K, that
the Company's internal control over financial reporting is effective as of
January 31, 2005 and that no material weaknesses have been identified, the
Company must continue to monitor and assess the internal control over financial
reporting. The Company cannot provide any assurances that material weaknesses
will not be discovered in the future. If, in the future, the Company's
management identifies one or more material weaknesses in the internal control
over financial reporting that remain unremediated, the Company will be unable to
assert that such internal control over financial reporting is effective. If the
Company is unable to assert that the internal control over financial reporting
is effective for any given reporting period (or if the Company's auditors are
unable to attest that the management's report is fairly stated or are unable to
express an opinion on the effectiveness of the internal control over financial
reporting), the Company could lose investor confidence in the accuracy and
completeness of the Company's financial reports, which could have an adverse
effect on the Company's stock price. The effort regarding Section 404 has
required, and continues to require, the commitment of significant financial and
managerial resources.

Changes in existing accounting or taxation rules or practices, new
accounting pronouncements or taxation rules or new interpretations of existing
accounting principles could have a significant adverse effect on the Company's
results of operations and may affect the Company's reported financial results.

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


25

domestic or foreign government or any significant law enforcement agency, (iii)
levels of government expenditures and authorizations for law enforcement and
security related programs decrease, remain constant or shift to programs in
areas where Verint does not provide products and services, (iv) Verint is
prevented from entering into new government contracts or extending existing
government contracts based on violations or suspected violations of laws or
regulations, including those related to procurement, (v) Verint is not granted
security clearances required to sell products to domestic or foreign governments
or such security clearances are revoked, (vi) there is a change in government
procurement procedures or (vii) there is a change in political climate that
adversely affects Verint's existing or prospective relationships. Competitive
conditions in this sector also have been affected by the increasing use by
certain potential customers of their own internal development resources rather
than outside vendors to provide certain technical solutions. In addition,
Verint's markets include an increasing number of competitors, including
companies that are significantly larger and have more resources than Verint. 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 market for actionable intelligence solutions, such as Verint's
security and business intelligence products is 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. In addition, in markets where Verint is a sole supplier, Verint's growth
may be adversely impacted if customers seek to and succeed in developing
alternative sources for Verint's products. 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 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. To comply with the National
Industrial Security Program requirements, 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


26

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, Verint may lose all or a substantial portion of
its sales to U.S. government agencies and its business, financial condition and
results of operations would be harmed. In addition, concerns about the security
of Verint or its products may materially and adversely affect Verint
Technology's sales to U.S. government agencies.

Many of Verint's government contracts contain provisions that give
the governments party to those contracts rights and remedies not typically found
in private commercial contracts, including provisions enabling the governments
to: (i) terminate or cancel existing contracts for convenience; (ii) in the case
of the U.S. government, suspend Verint from doing business with a foreign
government or prevent Verint from selling its products in certain countries;
(iii) audit and object to Verint's contract-related costs and expenses,
including allocated indirect costs; and (iv) change specific terms and
conditions in Verint's contracts, including changes that would reduce the value
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 contracts themselves do not contain them. If a
government terminates a contract with Verint for convenience, Verint may not
recover its incurred or committed costs, and expenses or profit on work
completed prior to the termination. If a government terminates a contract for
default, Verint may not recover these amounts, and, in addition, 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, depending on the nature of the activity, 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, and
curtailment of Verint's ability to obtain export licenses, 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.


27

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
Telecommunications Standard Institute. The adoption of new laws or regulations
governing the use of Verint's products or changes made to existing laws or
regulations could cause a decline in the use of its products and could result in
increased expenses for Verint, particularly if Verint is required to modify or
redesign its products to accommodate these new or changing laws or regulations.

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 distribution channels 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.


28

Geopolitical, economic and military conditions could directly affect
the Company's operations. The outbreak of diseases, such as severe acute
respiratory syndrome ("SARS"), have curtailed and may in the future curtail
travel to and from certain countries. Restrictions on travel to and from these
and other 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. More recently, the U.S. military involvement in overseas
operations including, for example, the war in Iraq and other armed conflicts
throughout the world, could have a material adverse effect on the Company's
business, results of operations, and financial condition.

The Company is a highly automated business and a disruption or
failure of its systems in the event of a catastrophic event, such as a major
earthquake, tsunami or other natural disaster, cyber-attack or terrorist attack
could cause delays in completing sales and providing services. A catastrophic
event that results in the destruction or disruption of any of the Company's
critical business systems could severely affect its ability to conduct normal
business operations and, as a result, the financial condition and operating
results could be adversely affected. "Hackers" and others have in the past
created a number of computer viruses or otherwise initiated "denial of service"
attacks on computer networks and systems. The Company's information technology
infrastructure is regularly subject to various attacks and intrusion efforts of
differing seriousness and sophistication. If such "hackers" are 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 and could harm the Company's business, financial condition
and operating results. While the Company diligently maintains its information
technology infrastructure and continuously implements protections against such
viruses, electronic break-ins, disruptions or intrusions, if the defensive
measures fail or should similar defensive measures by the Company's customers
fail, the Company's business could be materially and adversely affected.

Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors, which in
the past and may in the future, lead to security and economic problems for
Israel. Current and future conflicts and political, economic and/or military
conditions in Israel and the Middle East region can directly affect the
Company's operations in Israel. From October 2000, until recently, terrorist
violence in Israel increased significantly, primarily in the West Bank and Gaza
Strip, and Israel has experienced terrorist incidents within its borders. There
can be no assurance that the recent relative calm and renewed discussions with
Palestinian representatives will continue. 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


29

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 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 may further reduce or eliminate some of these benefits in the future.

Certain subsidiaries of the Company have participated in a
conditional grant program administered by the Office of the Chief Scientist of
the Ministry of Industry and Trade of the State of Israel ("OCS") for the
financing of a portion of their research and development expenditures in Israel.
Until recently, the terms of the OCS grants prohibited those subsidiaries from
manufacturing products outside of Israel if such products or technologies were
developed using these grants. On March 30, 2005, the Israeli parliament approved
an amendment to Israeli Law for the Encouragement of Industrial Research and
Development, which permits the transfer of such technology outside of Israel
under certain conditions. If approval to manufacture the products outside of
Israel is received, a significantly increased amount of royalties, which may be
up to 300% of the grant amount, plus interest, on an accelerated basis may be
required to be paid to the Government of Israel, depending on the manufacturing
volume that is performed outside of Israel. If approval to transfer the
technology outside of Israel is received, a redemption price may be required to
be paid to the Government of Israel. The redemption price will be determined
under regulations that have not yet been promulgated. Failure to comply with any
of the conditions imposed by the OCS may result in criminal charges and
refunding of any grants previously received, together with interest and
penalties. From time to time, the Government of Israel may audit the sales of
products incorporating technology partially funded through OCS programs which,
while not increasing the aggregate amount of royalties that may be due, may
cause certain subsidiaries of the Company to have to pay royalties on additional
products, effectively accelerating the pace at which royalties are to be paid.
In recent years, the Government of Israel has accelerated the rate of repayment
of OCS grants and may further accelerate them in the future.


30

Certain of the Company's subsidiaries currently pay royalties, of
between 3% and 5% (or 6% under certain circumstances) of associated product
revenues (including service and other related revenues) to the Government of
Israel 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 such subsidiaries, 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 1st of the year in which approval is obtained. As of
April 30, 2005, such subsidiaries of the Company received approximately $58.9
million in cumulative grants from the OCS and recorded approximately $28.0
million in cumulative royalties to the OCS.

The Government of Israel has reduced the benefits available under
these programs in recent years and these programs may be discontinued or
curtailed in the future. OCS grants also may decrease in future periods due to
an expected increase in the portion of research and development activities not
reimbursed by the OCS and an expected increase in research and development
activities outside of Israel. The continued reduction in these benefits or the
termination of eligibility to receive these benefits may materially and
adversely affect the Company's operating results. 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. In addition, Verint, from time to time,
evaluates whether to pursue repayment of amounts due to the OCS in a single
payment. If Verint were to repay all or substantially all of the amounts due to
the OCS in a single payment, it will significantly reduce or eliminate Verint's
net income for a given fiscal year and may cause Verint to report a loss for the
fiscal year in which such a payment is made, which may adversely impact the
Company.

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, the full
utilization of net operating loss carry-forwards 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.


31

The ability of the Company's Israeli subsidiaries to pay dividends is
governed by Israeli law, which provides that dividends may be paid by an Israeli
corporation only out of its earnings as defined in accordance with the Israeli
Companies Law of 1999, provided that there is no reasonable concern that such
payment will cause such subsidiary to fail to meet its current and expected
liabilities as they come due. 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 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. The
Company's ability to attract and retain employees also may be affected by cost
control actions, which in the past and may again in the future, include
reductions in the Company's workforce and the associated reorganization of
operations.

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, local taxes, 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. Also, the Company's foreign subsidiaries hold a significant amount of
cash. The repatriation of such cash to the United States is subject to
withholding tax, which would reduce the total amount of cash the Company would
receive if such cash is repatriated into the United States.

In August 2005, the Waste Electrical and Electronic Equipment
Directive (the "WEEE Directive") will become effective in the European Union.
The WEEE Directive requires producers of certain electrical and electronic
equipment to be financially responsible for the future disposal costs of this
equipment sold within the European Union. In July 2006, the Restriction of the
Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the
"RoHS Directive") will become effective in the European Union. The RoHS


32

Directive restricts the use of certain hazardous substances, including mercury,
lead, cadmium, hexavalent chromium, and certain flame retardants, in the
construction of component parts of certain electrical and electronic equipment
sold within the European Union. The Company is currently making preparations to
comply with these directives to the extent applicable to the hardware contained
in its solutions. As part of this process, the Company will need to ensure that
it has a supply of compliant components from its suppliers. Ensuring compliance
with these directives and integrating compliance activities with suppliers will
result in additional costs to the Company and may result in disruptions to
operations. The Company cannot currently estimate the extent of such additional
costs or potential disruptions. However, to the extent that any such costs or
disruptions are substantial, the Company's financial results could be materially
and adversely affected.

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 the payments under such contracts and other factors, it is
often not practicable for the Company to effectively hedge the entire risk of
significant changes in currency rates during the contract period. The Company
may experience adverse consequences from not hedging its exchange rate risks
associated with contracts denominated in foreign currencies. The Company's
operating results have been negatively impacted for certain periods and
positively impacted for other 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 hedging activities that the Company does
undertake.

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

If others claim that the Company's products infringe their
intellectual property rights, the Company may be forced to seek expensive
licenses, reengineer its products, engage in expensive and time-consuming
litigation or stop marketing its products. The Company attempts to avoid
infringing known proprietary rights of third parties in its product development
efforts. The Company does not, 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 published or
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


33

continue offering 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.

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
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. 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. In addition, although interest rates have risen
recently, low interest rates have in the past and may in the future have an
adverse impact on the Company's results of operations.

The Company issues stock options as a key component of its overall
compensation. There is growing pressure on public companies from shareholders
generally and various organizations to reduce the rate at which companies,
including the Company, issue stock options to employees, which may make it more
difficult to obtain stockholder approval of equity compensation plans when
required. In addition, FASB has adopted changes to generally accepted accounting
principles (GAAP) that will require the Company to adopt a different method of
determining the compensation expense for its employee stock options and employee
stock purchase plans beginning in the first quarter of fiscal 2006. As a result,


34

CTI and certain of its subsidiaries have terminated their employee stock
purchase plans. In addition, the Company believes expensing stock options will
increase shareholder pressure to limit future option grants and could make it
more difficult for the Company to grant stock options to employees in the
future. As a result, the Company may lose top employees to non-public, start-up
companies or may generally find it more difficult to attract, retain and
motivate employees, either of which could materially and adversely affect the
Company's business, results of operations and financial condition.

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

The Company 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.


35

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and equity trading prices, which could
impact its results of operations and financial condition. The Company manages
its exposure to these market risks through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments.

The Company operates internationally and is therefore exposed to
potentially adverse movements in foreign currency exchange rates. The primary
currencies that the Company is exposed to are the Euro and the Israeli Shekel.
The Company may, from time to time, use foreign currency exchange contracts and
other derivative instruments to reduce its exposure to the risk that the
eventual net cash inflows and outflows resulting from the sale of its products
in foreign currency, primarily the Euro, will be adversely affected by changes
in exchange rates. The objective of these contracts is to neutralize the impact
of foreign currency exchange rate movements on the Company's operating results.
As of April 30, 2005, the Company had approximately $19.6 million of notional
amount of foreign exchange forward contracts to sell Euros with a fair value of
approximately $322,000 with an original maturity of up to six months. Neither a
10% increase nor decrease from current exchange rates would have a material
effect on the Company's consolidated financial statements.

Various financial instruments held by the Company are sensitive to
changes in interest rates. Interest rate changes would result in gains or losses
in the market value of the Company's investments in debt securities due to
differences between the market interest rates and rates at the date of purchase
of these financial instruments. Neither a 10% increase nor decrease from current
interest rates would have a material effect on the Company's consolidated
financial statements.

Equity investments held by the Company are subject to equity price
risks. Neither a 10% increase nor decrease in equity prices would have a
material effect on the Company's consolidated financial statements.

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 April 30, 2005. 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 April
30, 2005.

(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 April 30,
2005, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.



36

PART II
OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS.

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 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 Section
302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.







37

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: June 8, 2005 /s/ Kobi Alexander
-------------------------------
Kobi Alexander
Chairman of the Board
and Chief Executive Officer


Dated: June 8, 2005 /s/ David Kreinberg
-------------------------------
David Kreinberg
Executive Vice President
and Chief Financial Officer






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