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


                                    FORM 10-K

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

                   For the fiscal year ended January 31, 2005


                         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, NEW YORK 10022
                    (Address of principal executive offices)

        Registrant's telephone number, including area code: 212-652-6801


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

                                                     Name of each exchange
             Title of each class                      on which registered
             -------------------                      -------------------

               Not applicable                           Not applicable

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

                     COMMON STOCK, $.10 PAR VALUE PER SHARE
                                (Title of Class)

           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

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<PAGE>
           Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

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

                                [X] Yes [ ] No

           The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price as of the last
business day of the registrant's most recently completed second fiscal quarter,
July 31, 2004, was approximately $3,336,772,000.

           There were 199,543,867 shares of the registrant's common stock
outstanding on March 24, 2005.

                       DOCUMENTS INCORPORATED BY REFERENCE

           Portions of the registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held on June 14, 2005, are incorporated by reference in
Part III.

                       ___________________________________



Comverse, Comverse Technology, Total Communication and InSight, are trademarks
or service marks of the Company. Verint(R), Powering Actionable Intelligence(R),
LORONIX(R) Intelligent Recording(R), OpenStorage Portal(R), and SmartSight(R)
are registered trademarks and Actionable Intelligence, RELIANT, STAR-GATE,
ULTRA, VANTAGE, Universal Database and Verint Systems are trademarks of Verint
Systems Inc., a subsidiary of the Company. Signalware(R) and Ulticom(R) are
registered trademarks of Ulticom, Inc., a subsidiary of the Company.


                                       ii
<PAGE>
FORWARD-LOOKING STATEMENTS

      Certain statements discussed in Item 1 (Business), Item 3 (Legal
Proceedings), Item 7 (Management's Discussion and Analysis of Financial
Condition and Results of Operations), and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of results to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Important risks, uncertainties and other important
factors that could cause actual results to differ materially include, among
others: changes in the demand for the company's products; changes in capital
spending among the company's current and prospective customers; the risks
associated with the sale of large, complex, high capacity systems and with new
product introductions as well as the uncertainty of customer acceptance of these
new or enhanced products from either the company or its competition; risks
associated with rapidly changing technology and the ability of the company to
introduce new products on a timely and cost-effective basis; aggressive
competition may force the company to reduce prices; a failure to compensate any
decrease in the sale of the company's traditional products with a corresponding
increase in sales of new products; risks associated with changes in the
competitive or regulatory environment in which the company operates; risks
associated with prosecuting or defending allegations or claims of infringement
of intellectual property rights; risks associated with significant foreign
operations and international sales and investment activities, including
fluctuations in foreign currency exchange rates, interest rates, and valuations
of public and private equity; the volatility of macroeconomic and industry
conditions and the international marketplace; risks associated with the
company's ability to retain existing personnel and recruit and retain qualified
personnel; and other risks described in filings with the Securities and Exchange
Commission. These risks and uncertainties, as well as other factors, are
discussed in greater detail at the end of Item 7 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) of this Form 10-K.
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.


                                       1
<PAGE>
                           COMVERSE TECHNOLOGY, INC.

                                    FORM 10-K

                   FOR THE FISCAL YEAR ENDED JANUARY 31, 2005

                                      INDEX

<TABLE>
<S>          <C>                                                                                            <C>
                                                                                                                  PAGE
                                                                                                                  ----
                                     PART I

Item 1.         Business.                                                                                           3
Item 2.         Properties.                                                                                        14
Item 3.         Legal Proceedings.                                                                                 14
Item 4.         Submission of Matters to a Vote of Security Holders.                                               14

                                     PART II

Item 5.         Market For Registrant's Common Equity And Related Stockholder Matters.                             15
Item 6.         Selected Financial Data.                                                                           16
Item 7.         Management's Discussion And Analysis Of Financial Condition And Results Of Operations.             17
Item 7A.        Quantitative And Qualitative Disclosures About Market Risk.                                        46
Item 8.         Financial Statements And Supplementary Data.                                                       47
Item 9.         Changes In And Disagreements With Accountants On Accounting And Financial Disclosure               47
Item 9A.        Controls And Procedures.                                                                           47
Item 9B.        Other Information.                                                                                 47

                                    PART III

Item 10.        Directors And Executive Officers Of The Registrant.                                                47
Item 11.        Executive Compensation.                                                                            48
Item 12.        Security Ownership Of Certain Beneficial Owners And Management And
                 Related Stockholder Matters.                                                                      48
Item 13.        Certain Relationships And Related Transactions.                                                    48
Item 14.        Principal Accounting Fees And Services.                                                            48

                                     PART IV

Item 15.        Exhibits and Financial Statement Schedules.                                                        49

</TABLE>


                                       2
<PAGE>
                                     PART I
ITEM 1.  BUSINESS.

           Comverse Technology, Inc. ("CTI" and, together with its subsidiaries,
the "Company"), a New York corporation incorporated in 1984, designs, develops,
manufactures, markets and supports software, systems, and related services for
multimedia communication and information processing applications. The Company's
products are used in a broad range of applications by wireless and wireline
telecommunications network operators and service providers, call centers, and
other government, public and commercial organizations worldwide.

           The Company's subsidiary Comverse, Inc. ("Comverse") provides
telecommunications software, systems, and related services to telecommunications
service providers ("TSPs") that enable voice and data value-added enhanced
services and real-time billing of communication services. These products
comprise Comverse's Total Communication portfolio and address 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. These products are designed to enhance the communication
experience and generate TSP traffic and revenue. Comverse's principal market for
its systems consists of organizations that use the systems to provide services
to the public, often on a subscription or pay-per-usage basis, and includes both
wireless and wireline telecommunications network operators.

           Comverse markets its systems throughout the world, with its own
direct sales force and in cooperation with a number of leading international
vendors of telecommunications infrastructure equipment.

           Approximately 400 wireless and wireline TSPs in more than 110
countries, including the majority of the 20 largest telecom companies in the
world, have selected Comverse's products to provide enhanced telecommunications
services to their customers. Major network operators and service providers using
Comverse's systems include, among others, AT&T (USA), China Mobile, Cingular
(USA), Deutsche Telekom (multiple countries), O2 (Germany and UK), Orange
(multiple countries), Reliance Infocomm (India), SBC Communications (USA),
Sprint (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia),
Verizon (USA), Vimpelcom (Russia), Vivo (Brazil), and Vodafone (multiple
countries).

           Through its subsidiary, Verint Systems Inc. ("Verint"), the Company
provides analytic software-based solutions for communications interception,
networked video security and business intelligence. Verint's 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. Verint's analytic
solutions are designed to extract critical intelligence and deliver this
intelligence to decision makers for more effective action. The security market
consists primarily of communications interception by law enforcement and other
government agencies and networked video security utilized by government agencies
and public and private organizations for use in transportation, critical
infrastructure, public buildings and other government and corporate sites. The
business intelligence market consists primarily of solutions for enterprises
that rely on contact centers for voice, email and Internet interactions with
their customers. Additionally, an emerging segment of business intelligence
utilizes digital video information to allow enterprises and institutions to
generate actionable intelligence to enhance their operations, processes and
performance. Verint sells its business actionable intelligence solutions to
contact center service bureaus, financial institutions, retailers, utilities,
communication service providers, manufacturers and other enterprises. Verint has
established marketing relationships with a variety of global value-added
resellers and a network of systems integrators. Verint is listed on the NASDAQ
National Market System under the symbol "VRNT." CTI held approximately 59% of
Verint's outstanding common stock as of January 31, 2005.


                                       3
<PAGE>
           Through its subsidiary Ulticom, Inc. ("Ulticom"), the Company
provides service enabling signaling software for wireline, wireless and Internet
communications. Ulticom's Signalware family of products are used by equipment
manufacturers, application developers and communication service providers to
deploy revenue generating infrastructure and enhanced services within the
mobility, messaging, payment and location segments. Signalware products are also
embedded in a range of packet softswitching products to interoperate or converge
voice and data networks and facilitate services such as voice-over-IP ("VoIP"),
hosted IP telephony, and virtual private networks. Ulticom is listed on the
NASDAQ National Market System under the symbol "ULCM." CTI held approximately
69% of Ulticom's outstanding common stock as of January 31, 2005.

           The Company markets other telecommunication products and services,
including enhanced wireless roaming services, and automatic call distribution
and messaging systems for telephone answering service bureaus. The Company also
engages in venture capital investment and capital market activities for its own
account.

           Throughout this document, references are made to technologies,
features, capabilities, capacities and specifications in conjunction with the
Company's products and technological resources. Such references do not
necessarily apply to all product lines, models and system configurations.

           The Company was incorporated in the State of New York in October
1984. Its headquarters are located at 909 Third Avenue, New York, New York 10022
and its telephone number is (212) 652-6801.

           The Company's Internet address is www.cmvt.com. The information
contained on the Company's website is not included as a part of, or incorporated
by reference into, this Annual Report on Form 10-K. The Company makes available,
free of charge, on its Internet website, its annual report on Form 10-K, its
quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments
to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable
after the Company has electronically filed such material with, or furnished it
to, the United States Securities and Exchange Commission.


                                       4
<PAGE>
THE COMPANY'S PRODUCTS

TOTAL COMMUNICATION PORTFOLIO

           Comverse is a leading supplier of telecommunication software,
systems, and related services for voice and data value-added enhanced services.
These value-added enhanced services solutions along with Comverse's real-time
billing solutions from our Network Systems Division ("CNS") comprise Comverse's
Total Communication portfolio. Comverse's Total Communication portfolio
addresses four primary categories: call completion and call management solutions
(e.g., Call Answering, Who Called Service, and Interactive Voice Response
applications); advanced messaging solutions for groups, communities and
person-to-person communication (e.g., Voice Messaging, Short Messaging Service
(SMS), Videomail, Multimedia Messaging Service (MMS), Instant Messaging and
Mobile Email); solutions and enablers for the management and delivery of data
and content-based services (e.g., Video Portal, Presence Server, Personal
Address Book, Mobile Data Gateway, Media Server, Ringback Tones, Media and
Content Adaptation); and real-time billing and account management for dynamic
service environments (e.g., Prepaid Calling, Real-Time Data Billing, and
Converged Prepaid/Post-paid/Voice/Data Billing).

           Comverse's InSight solution, a part of Comverse's Total Communication
portfolio, provides a single, open, modular architecture on which a wide variety
of advanced messaging and content services can be hosted. Insight is designed to
improve network efficiencies and leverage the built-in synergies between
next-generation communication and infotainment services to increase revenues for
wireline and wireless service providers.

           Comverse's principal market for its software, systems, and related
services consists of organizations that use the systems to provide services to
the public, often on a subscription or pay-per-usage basis, and includes both
wireless and wireline telecommunications network operators. With Total
Communication, TSPs benefit from revenue generated by the increase in billable
completed calls, service-related fees, and increased customer loyalty that
results in an overall reduction in churn. Wireless TSPs are almost universally
adding call answering and messaging to their service offerings, often as part of
their basic service package, not only because of these benefits, but also
because wireless call answering and messaging services directly increase
billable airtime by stimulating outbound calls and increase billable
transactions by stimulating person-to-person messaging and information
retrieval.

           Comverse's carrier grade Total Communication software, systems, and
related services have been designed and packaged to meet the capacity,
reliability, availability, scalability, maintainability, network and OMAP
(Operations, Maintenance, Administration, and Provisioning) interfaces and
physical requirements of large telecommunications network operators. The systems
are offered in a variety of sizes and configurations and can be clustered for
larger capacity installations. The systems are available with redundancy of
critical components, so that no single failure will interrupt the service.
Comverse's products are available in both centralized and distributed
configurations.

           Comverse's systems also incorporate components that are compatible
with the Intelligent Network ("IN") and Advanced Intelligent Network ("AIN")
protocols for Service Control Points and Intelligent Peripherals, permitting
Comverse's network operator customers to develop and deploy services based on
the overall IN architecture.

           Comverse's products incorporate both Comverse-developed and
third-party developed software, and Comverse-designed and third-party hardware,
and are available in an open, modular, IP standards-based system architecture.
The systems support a wide variety of digital telephony and IP interfaces and
signaling systems, allowing them to adapt to a variety of different network
environments and IN/AIN applications, and enable a "universal port" -- a single
port that supports multiple applications and services at any time during a
single call.


                                       5
<PAGE>
SECURITY AND BUSINESS INTELLIGENCE

           Verint is a leading provider of analytic software-based solutions for
the security and business intelligence markets. Verint's software generates
actionable intelligence through the collection, retention and analysis of voice,
fax, video, email, Internet and data transmissions from multiple types of
communication networks.

           Verint's STAR-GATE product line enables communications service
providers, Internet service providers, and communication equipment manufacturers
to overcome the complexities posed by global digital communication and comply
with governmental requirements. STAR-GATE enables communication service
providers in receipt of proper legal authorization to intercept simultaneous
communications over a variety of wireline, wireless and IP networks for delivery
to law enforcement and other government agencies. STAR-GATE's flexibility
supports multi-network, multi-vendor switch environments for a common interface
across communication networks and supports switches from communications
equipment manufacturers, such as Alcatel, Ericsson, Lucent, Nokia, Nortel and
Siemens. STAR-GATE also supports interfaces to packet data networks, such as the
Internet and Voice over Internet Protocol (VoIP), as well as general packet
radio services.

           Verint's RELIANT and VANTAGE product lines provide intelligent
recording and analysis solutions for communications interception activities for
law enforcement organizations and intelligence agencies. The RELIANT and VANTAGE
solutions are comprised of a system administration workstation, an operator
workstation, and collection and storage databases and servers. RELIANT and
VANTAGE collect intercepted communications from multiple channels and stores
them for immediate access and further analysis. The system enables the review of
intercepted voice, fax and data transmissions in their original forms through an
easy to use interface and analytics to generate actionable intelligence from the
large amounts of information that can be collected. Law enforcement agencies,
ranging from local police agencies to national law enforcement agencies, are
using RELIANT to comply with communications interception legal regulations and
to generate evidence from intercepted communications that is admissible in a
court of law.

           Verint Networked Video Solutions enable government and commercial
organizations to enhance the security of their facilities and infrastructure and
improve the performance of their operations by networking video across multiple
locations and applying advanced content analytics to extract actionable
intelligence from live and stored video. By alerting security personnel to
potential security threats, Verint Networked Video Solutions are designed to
help organizations prevent security breaches, improve response time and enhance
operational efficiency.

           Verint's ULTRA products record and analyze customer interactions to
provide enterprises with business intelligence about their customers and help
monitor and improve the performance of their contact centers.

SERVICE ENABLING SIGNALING SOFTWARE

           The Company's Ulticom subsidiary provides service enabling signaling
software for wireline, wireless and Internet communications. Ulticom's
Signalware family of products are used by equipment manufacturers, application
developers and communication service providers to deploy revenue generating
infrastructure and enhanced services within the mobility, messaging, payment and
location segments. Signalware products also are 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.


                                       6
<PAGE>
           Signalware supports a range of applications across multiple networks.
In wireline networks, Signalware has been deployed as part of applications such
as voice messaging, calling name, and 800 number services. Signalware enables
wireless infrastructure applications such as global roaming and emergency-911,
and enhanced services such as text messaging and prepaid calling. Signalware
also enables the deployment of broadband services such as VoIP in wireline,
wireless and cable service provider networks.

           Signalware provides signaling system #7 ("SS7"), the globally
accepted signaling standard protocol, which interconnects the complex switching,
database and messaging systems, and manages vital number, routing and billing
information that form the backbone of today's telecommunications networks.
Signalware works with multiple SS7 networks, supports a wide variety of SS7
protocol elements, and enables analog or digital wireline and wireless
transmissions. It provides the functionality needed for call set-up/termination
and call routing/billing. Signalware products also include features that enable
the transition from SS7 signaling to emerging packet signaling standards, as
defined by the Internet Engineering Task Force, such as Signaling Transport
("SIGTRAN") and Session Initiation Protocol ("SIP"). New solutions include a
Signalware SIGTRAN Gateway for enabling circuit to packet network
interoperability and Signalware SIP for developing next generation services for
all IP networks.

           Signalware solutions run on a range of hardware platforms and
operating systems, including Sun Solaris, IBM AIX and Red Hat Linux. These
solutions can be used in single or multiple computing configurations for fault
resiliency and reliability. Signalware customers include equipment
manufacturers, such as Alcatel, Ericsson and Siemens; application developers,
such as Comverse, Fujitsu and Sonus; and service providers, such as Orange
Personal Communications, Reliance Infocomm, and Telefonica.

OTHER TELECOMMUNICATIONS PRODUCTS AND SERVICES

           The Company's other telecommunications products and services are
developed and marketed through subsidiaries in the United States and
internationally. These include enhanced wireless roaming services, and automatic
call distribution and messaging systems for telephone answering service bureaus
and other organizations.

MARKETS, SALES AND MARKETING

           Comverse is a leading supplier of telecommunications software,
systems, and related services for voice and data value-added enhanced services.
Comverse's Total Communication software, systems, and related services are
marketed by Comverse throughout the world, with its own direct sales force as
well as local distributors, and in cooperation with a number of leading
international vendors of telecommunications infrastructure equipment.

           Approximately 400 wireless and wireline TSPs in more than 110
countries, including the majority of the 20 largest telecom companies in the
world, have selected Comverse's products to provide enhanced telecommunications
services to their customers. Major network operators and service providers using
Comverse's systems include, among others, AT&T (USA), China Mobile, Cingular
(USA), Deutsche Telekom (multiple countries), O2 (Germany and UK), Orange
(multiple countries), Reliance Infocomm (India), SBC Communications (USA),
Sprint (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia),
Verizon (USA), Vimpelcom (Russia), Vivo (Brazil) and Vodafone (multiple
countries).


                                       7
<PAGE>
           Comverse provides its customers with marketing consultation, seminars
and materials designed to assist them in marketing enhanced telecommunications
services, and also undertakes to play an ongoing supporting role in their
business and market planning processes.

           Verint's products are marketed primarily through a combination of its
direct sales force and channels, including agents, distributors, value-added
resellers and systems integrators. Verint develops strategic marketing alliances
with leading companies in the industry to expand the coverage and support of its
direct sales force.

           Verint's products are used by over 1000 organizations and are
deployed in over 50 countries, across many industries and markets. Many users of
the products are large corporations or government agencies that operate from
multiple locations and facilities across large geographic areas and sometimes
across several countries. These organizations typically implement Verint's
solutions in stages, with implementation in one or more sites and then gradually
expanding to a full enterprise, networked-based solution.

           Verint's customers include Charter One Bank, CIBC, the Home Depot,
HSBC, the Internal Revenue Service, the London Underground, Orange, Target, the
U.S. Capitol, and U.S. Department of Defense. These are examples of Verint's
customers, though not necessarily representative, because Verint is often
restricted from disclosing the names of its customers for security reasons,
particularly its communications interception customers.

           Ulticom's products are used by more than 50 customers and are
deployed by more than 300 service providers in more than 100 countries. Ulticom
markets its products and services primarily through a direct sales organization
and through distributors. Customers include network equipment manufacturers such
as Alcatel, Ericsson and Siemens; application developers such as Comverse,
Fujitsu, and Sonus; and service providers such as Orange Personal
Communications, Reliance Infocomm, and Telefonica.

           See "Financial Statements" in Item 15 for information on revenues,
operating profit and total assets of each of the Company's segments.

RESEARCH AND DEVELOPMENT

           Because of the continuing technological changes that characterize the
telecommunications and computer industries, the Company's success will depend,
to a considerable extent, upon its ability to continue to develop competitive
products through its research and development efforts. The Company currently
employs more than 2,000 scientists, engineers and technicians in its research
and development efforts, located predominantly in the United States and Israel
with additional offices in France, Germany, India and Malaysia, with broad
experience in the areas of digital signal processing, computer architecture,
telephony, IP, data networking, multi-processing, databases, real-time software
design and application software design, among others.

           A portion of the Company's research and development operations
benefit from financial incentives provided by government agencies to promote
research and development activities performed in Israel. The cost of such
operations is and will continue to be affected by the continued availability of
financial incentives under such programs. During the past fiscal year, the
Company's research and development activities included projects submitted for
partial funding under a program administered by the Office of the Chief
Scientist of the Ministry of Industry and Trade of the State of Israel ("OCS"),
under which reimbursement of a portion of the Company's research and development
expenditures will be made subject to final approval of project budgets. During
the year ended January 31, 2003, Comverse finalized an arrangement with the OCS
under which Comverse no longer would owe royalties to the OCS in return for a
lump sum payment for all past amounts received from the OCS. Under the
arrangement, Comverse began to receive lower amounts from the OCS than it had


                                       8
<PAGE>
historically received, but is not required to pay royalty amounts on such future
grants. Other subsidiaries of CTI were not part of Comverse's arrangement with
the OCS and they continue to owe royalties on their sale of certain products
developed, in part, with funding supplied under such programs. Permission from
the Government of Israel is required for the Company to manufacture outside of
Israel products resulting from research and development activities funded under
such programs. In order to obtain such permission the Company will be required
to increase the royalties to the applicable funding agencies and/or repay
certain amounts received as reimbursement of research and development costs. The
transfer outside of Israel of any intellectual property rights resulting from
research and development activities funded under OCS programs is not permitted.
See "Financial Statements" in Item 15, "Licenses and Royalties" and "Operations
in Israel" in Item 1 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7.

PATENTS AND INTELLECTUAL PROPERTY RIGHTS

           The Company holds a number of United States and foreign patents.
While the Company files patent applications periodically, no assurance can be
given that patents will be issued on the basis of such applications or that, if
patents are issued, the claims allowed will be sufficiently broad to protect the
Company's technology. In addition, no assurance can be given that any patents
issued to the Company will not be challenged, invalidated or circumvented or
that the rights granted under the patents will provide significant benefits to
the Company.

           In order to safeguard its unpatented proprietary know-how, trade
secrets and technology, the Company relies primarily upon trade secret
protection and non-disclosure provisions in agreements with employees and others
having access to confidential information. There can be no assurance that these
measures will adequately protect the Company from disclosure or misappropriation
of its proprietary information.

           The Company and its customers from time to time receive
communications from third parties, including some of the Company's competitors,
alleging infringement by the Company of such parties' patent rights. While such
communications are common in the computer and telecommunications industries and
the Company has in the past been able to obtain any necessary licenses on
commercially reasonable terms, there can be no assurance that the Company would
prevail in any litigation to enjoin the Company from selling certain of its
products on the basis of such alleged infringement, or that the Company would be
able to license any valid patents on reasonable terms.

           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.

           In January 2000, the Company and Lucent Technologies GRL Corp.
("Lucent") entered into a non-exclusive cross-licensing arrangement covering
current and certain future patents issued to the Company and its affiliates and
a portfolio of current and certain future patents in the area of
telecommunications technology issued to Lucent and its affiliates.

LICENSES AND ROYALTIES

           The Company licenses certain technology, know-how and related rights
for use in the manufacture and marketing of its products, and pays royalties to
third parties under such licenses and under other agreements. The Company
believes that its rights under such licenses and other agreements are sufficient
for the manufacturing and marketing of its products and, in the case of
licenses, extend for periods at least equal to the estimated useful lives of the
related technology and know-how.


                                       9
<PAGE>
DOMESTIC AND INTERNATIONAL SALES AND LONG-LIVED ASSETS

           See "Financial Statements" in Item 15 for a breakdown of the domestic
and international sales and long-lived assets for the years ended January 31,
2003, 2004 and 2005, and see "Certain Trends and Uncertainties" in Item 7 for a
description of risks attendant to the Company's foreign operations.

BACKLOG

           At January 31, 2005, the backlog of the Company amounted to
approximately $568 million compared to approximately $400 million as of January
31, 2004. The Company believes that substantially all of such backlog will be
delivered within the next 12 months.

SERVICE AND SUPPORT

           The Company has a strong commitment to provide product service and
support to its customers and emphasizes such commitment in its marketing.
Because of the intensity of use of systems by telecommunications network
operators and other customers of the Company's products, and their low tolerance
for down-time, the Company is required to make a greater commitment to service
and support of systems used by these customers, and such commitment increases
operating costs.

           The Company's general warranty policy is to replace or repair any
component that fails during a specified warranty period. Broader warranty and
service coverage is provided in many cases, and is sometimes made available to
customers on a contractual basis for an additional charge.

           The Company provides technical assistance from several locations
around the world. Technical support is available for the Company's customers 24
hours-a-day, seven days-a-week.

COMPETITION

           The Company faces strong competition in the markets for all of its
products. The market for Total Communication software, systems, and related
services is highly competitive, and includes numerous products offering a broad
range of features and capacities. The primary competitors are suppliers of
turnkey systems and software, and indirect competitors that supply certain
components to systems integrators. Many of Comverse's competitors specialize in
a subset of Comverse's portfolio of products. Direct and/or indirect competitors
include, among others, Alcatel, Boston Communications, Ericsson, Glenayre,
Huawei, IBM, InterVoice, LogicaCMG, Lucent, Motorola, NEC, Nokia, Openwave, SS8
Networks, Tecnomen, Telcordia, and Unisys. Competitors of Comverse that
manufacture other telecommunications equipment may derive a competitive
advantage in selling systems to customers that are purchasing or have previously
purchased other compatible equipment from such manufacturers.

           The Company faces indirect competition is from messaging and other
enhanced communication products employed at end-user sites as an alternative to
the use of services available through telecommunications network operators. This
"enterprise-based equipment" includes a broad range of products, such as
stand-alone voicemail systems, answering machines, telephone handsets with call
answering and other enhanced services capabilities, products offering "call
processing" services that are supplied with voicemail features or integrated
with other voicemail systems, as well as personal computer modems and add-on
cards and software designed to furnish enhanced communication capabilities.

           Comverse believes that competition in the sale of Total Communication
systems is based on a number of factors, the most important of which are product
features and functionality, system capacity and reliability, marketing and
distribution capability and price. Other important competitive factors include


                                       10
<PAGE>
service and support and the capability to integrate systems with a variety of
telecom networks, IP networks and Operation and Support Systems (OSS). Comverse
believes that the range of capabilities provided by, and the ease of use of, its
systems compare favorably with other products currently marketed. Comverse
anticipates that a number of its direct and indirect competitors will introduce
new or improved systems during the next several years.

           Verint faces strong competition in the markets for its products, both
in the United States and internationally. Verint expects competition to persist
and intensify in the security market, primarily due to increased demand for
homeland defense and security solutions. Verint's primary competitors are
suppliers of security and recording systems and software, and indirect
competitors that supply certain components to systems integrators. In the
business intelligence market, Verint faces competition from organizations
emerging from the traditional call logging or call recording market as well as
software companies that develop and sell products that perform specific
functions for this market. In addition, many of Verint's competitors specialize
in a subset of Verint's portfolio of products and services. Primary competitors
include, among others, Bosch, eTalk, ETI, General Electric, JSI Telecom, March
Networks, NICE Systems, Pelco, Raytheon, Siemens, SS8 Networks, Tyco, Honeywell
and Witness Systems. Verint believes it competes principally on the basis of
product performance and functionality, knowledge and experience in the industry,
product quality and reliability, customer service and support, and price.

           Verint believes that its success depends primarily on its ability to
provide technologically advanced and cost effective solutions and to continue to
provide its customers with prompt and responsive customer support. Competitors
that manufacture other security-related systems or other recording systems may
derive a competitive advantage in selling to customers that are purchasing or
have previously purchased other compatible equipment from such manufacturers.
Further, Verint expects that competition will increase as other established and
emerging companies enter its markets and as new products, services and
technologies are introduced.

           Competitors of Ulticom primarily are internal development
organizations within equipment manufactures and application developers who seek,
in a build-versus-buy decision, to develop substitutes for its products. Ulticom
also competes with a number of companies ranging from SS7 software solution
providers, such as Hughes Software Systems and SS8 Networks, to vendors of
communication and computing platforms, such as Continuous Computing Corporation
and Hewlett-Packard Company. Ulticom believes it competes principally on the
basis of product performance and functionality, product quality and reliability,
customer service and support, and price.

           Many of the Company's present and potential competitors are
considerably larger than the Company, are more established, have a larger
installed base of customers and have greater financial, technical, marketing and
other resources.

MANUFACTURING AND SOURCES OF SUPPLIES

           The Company's manufacturing operations consist primarily of final
assembly and testing, involving the application of extensive testing and quality
control procedures to materials, components, subassemblies and systems. The
Company primarily uses third parties to perform modules and subsystem assembly,
component testing and sheet metal fabrication. Although the Company generally
uses standard parts and components in its products, certain components and
subassemblies are presently available only from a limited number of sources. To
date, the Company has been able to obtain adequate supplies of all components
and subassemblies in a timely manner from existing sources or, when necessary,
from alternative sources or redesign the system to incorporate new modules, when
applicable. However, the inability to obtain sufficient quantities of components
or to locate alternative sources of supply if and as required in the future,
would adversely affect the Company's operations.


                                       11
<PAGE>
           The Company maintains organization-wide quality assurance procedures,
coordinating the quality control activities of the Company's research and
development, manufacturing and service departments.

CAPITAL MARKET ACTIVITIES

           The Company seeks to identify and implement suitable investments, and
engages in portfolio investment and capital market activities, including venture
capital investments directly and indirectly through private equity funds. Both
directly and through a joint venture formed by the Company in partnership with
Quantum Industrial Holdings Ltd., an investment company managed by Soros Fund
Management LLC, the Company invests in venture capital in high technology firms,
and engages in other investment activities. The Company has significantly
reduced its new venture capital investments in recent periods.

OPERATIONS IN ISRAEL

           A substantial portion of the Company's research and development,
manufacturing and other operations are located in Israel and, accordingly, may
be affected by economic, political and military conditions in that country.
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 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.

           Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development, and the
International Finance Corporation, and is a signatory to the General Agreement
on Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United States, Australia, Canada, and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs.

           Israel has entered into free trade agreements with its major trading
partners. Israel and the European Union are parties to a Free Trade Agreement
pursuant to which, subject to rules of origin, Israel's industrial exports to
the European Union are exempt from customs duties and other non-tariff barriers
and import restrictions. Israel also has an agreement with the United States
that established a Free Trade Area eliminating all tariff and certain non-tariff
barriers on most trade between the two countries. Israel has also entered into
an agreement with the European Free Trade Association ("EFTA"), which currently
includes Iceland, Liechtenstein, Norway and Switzerland, that established a
free-trade zone between Israel and EFTA nations exempting manufactured goods and
some agricultural goods and processed foods from customs duties, while reducing
duties on other goods. Israel also has free trade agreements with a number of
other countries, such as Canada, Mexico and various European countries. The end
of the Cold War has also enabled Israel to establish commercial and trade
relations with a number of nations, including Russia and certain countries from
the former Soviet Union, China, India and the nations of Eastern Europe, with
whom Israel had not previously had such relations.


                                       12
<PAGE>
           The Company's business is dependent to some extent on trading
relationships between Israel and other countries. Certain of the Company's
products incorporate components imported into Israel from the United States and
other countries and most of the Company's products are sold outside of Israel.
Accordingly, the Company's operations would be adversely affected if trade
between Israel and its current trading partners were interrupted or curtailed.
The sale of products manufactured in Israel has been adversely affected in
certain markets by restrictive laws, policies or practices directed toward
Israel or companies having operations in Israel. The continuation or
exacerbation of conflicts involving Israel and other nations may impede the
Company's ability to sell its products in certain markets.

           The Company benefits from various policies of the Government of
Israel, including reduced taxation and special subsidy programs, designed to
stimulate economic activity, particularly the high technology exporting
industry, in that country. As a condition of its receipt of funds for various
research and development projects conducted under programs sponsored by the
Government of Israel, permission from the Government of Israel is required for
the Company to manufacture outside of Israel products resulting from the
research and development activities funded under these programs. In addition,
the transfer outside of Israel of any intellectual property rights resulting
from research and development activities funded under the program is not
permitted.

           The results of operations of the Company have been favorably affected
by participation in Israeli government programs related to research and
development, as well as utilization of certain tax incentives and other
incentives available under applicable Israeli laws and regulations, some of
which have been reduced, discontinued or otherwise modified in recent years. In
addition, the Company's ability to obtain benefits under various discretionary
funding programs has declined and may continue to decline. The results of
operations of the Company could be adversely affected if these programs were
further reduced or eliminated and not replaced with equivalent programs or if
its ability to participate in these programs were to be reduced significantly.

EMPLOYEES

           At January 31, 2005, the Company employed approximately 5,050
individuals, of whom approximately 80% are scientists, engineers and technicians
engaged in research and development, marketing, support and operations
activities. The Company considers its relationship with its employees to be
good.

           The Company is not a party to any collective bargaining or other
agreement with any labor organization; however, certain provisions of the
collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordinating Bureau of Economic Organizations
(including the Industrialists' Association) are applicable to the Company's
Israeli employees by order of the Israeli Ministry of Labor. Israeli law
generally requires the payment by employers of severance pay upon the death of
an employee, his or her retirement or upon termination of his or her employment,
and the Company provides for such payment obligations through monthly
contributions to an insurance fund. Israeli employees are required to pay and
employers are required to pay and withhold certain payroll, social security and
health tax payments, in respect of national health insurance and social security
benefits.

           The continuing success of the Company will depend, to a considerable
extent, on the contributions of its senior management and key employees, many of
whom would be difficult to replace, and on the Company's ability to attract and
retain qualified employees in all areas of its business. Competition for such


                                       13
<PAGE>
personnel is intense. In order to attract and retain talented personnel, and to
provide incentives for their performance, the Company has emphasized the award
of stock options as an important element of its compensation program, including
options to purchase shares in certain of the Company's subsidiaries, and
provides cash bonuses based on several parameters, including the profitability
of the recipients' respective business units.

ITEM 2.  PROPERTIES.

           As of January 31, 2005, the Company leased an aggregate of
approximately 2,199,000 square feet of office space and manufacturing and
related facilities for its operations worldwide, including approximately
1,284,000 square feet in Tel Aviv, Israel, approximately 367,000 square feet in
Wakefield, Massachusetts, approximately 63,000 square feet in Long Island, New
York, approximately 85,000 square feet in Mt. Laurel, New Jersey, an aggregate
of approximately 132,000 square feet at various other locations in the United
States and an aggregate of approximately 268,000 square feet at various
locations in Europe, Asia-Pacific, South America, Africa and Canada.
Approximately 161,000 square feet of this space is sub-leased to others. The
aggregate base monthly rent for the facilities under lease as of January 31,
2005, net of sub-lease income, was approximately $2,548,000, and all of such
leases are subject to various pass-throughs and escalation adjustments.

           In addition, the Company owns office space and manufacturing and
related facilities of approximately 40,000 square feet in Durango, Colorado,
approximately 29,000 square feet in Bexbach, Germany, and approximately 423,000
square feet of unimproved land in Ra'anana, Israel and 25 acres of land in
Durango, Colorado.

           The Company believes that its facilities currently under lease are
more than adequate for its current operations, and may endeavor selectively to
reduce its existing facilities commitments as circumstances may warrant.

ITEM 3.  LEGAL PROCEEDINGS.

           On March 16, 2004, BellSouth Intellectual Property Corp.
("BellSouth") filed a complaint in the United States District Court for the
Northern District of Georgia against Comverse Technology, Inc. alleging
infringement of Patent Nos. 5,857,013 and 5,764,747 (the "Patents"), and it
subsequently amended the complaint to include Comverse Inc., in an action
captioned: BellSouth Intellectual Property Corp. v. Comverse Technology, Inc.
and Comverse, Inc., Civil Action No. 1:04-CV-0739. BellSouth alleged that the
Patents cover certain aspects of some of the Company's voicemail systems. The
Company retained outside legal counsel specializing in patent litigation, and
filed an Answer and Counterclaim denying all allegations. On or about December
20, 2004, the Company executed a settlement agreement with BellSouth and some of
its related entities covering the Company and the Company's customers.

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

           No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 2004.


                                       14
<PAGE>
                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
         AND RELATED STOCKHOLDER MATTERS.

           The Common Stock of CTI trades on the NASDAQ National Market System
under the symbol CMVT. The following table sets forth the range of closing
prices of the Common Stock as reported on NASDAQ for the past two fiscal years:

          YEAR              FISCAL QUARTER              LOW         HIGH

          2003           2/1/03   -    4/30/03         $ 8.82      $13.33
                         5/1/03   -    7/31/03         $12.08      $16.64
                         8/1/03   -   10/31/03         $13.41      $18.04
                        11/1/03   -    1/31/04         $16.55      $19.95

          2004           2/1/04   -    4/30/04         $16.36      $20.69
                         5/1/04   -    7/31/04         $16.10      $19.94
                         8/1/04   -   10/31/04         $15.48      $20.99
                        11/1/04   -    1/31/05         $20.59      $25.03

           There were 1,584 holders of record of Common Stock at March 24, 2005.
Such record holders include a number of holders who are nominees for an
undetermined number of beneficial owners. The Company believes that the number
of beneficial owners of the shares of Common Stock outstanding at such date was
approximately 40,000.

           The Company has not declared or paid any cash dividends on its equity
securities and currently does not expect to pay any cash dividends in the near
future, but rather intends to retain its earnings to finance the development of
the Company's business. Any future determination as to the declaration and
payment of dividends will be made by the Board of Directors in its discretion,
and will depend upon the Company's earnings, financial condition, capital
requirements and other relevant factors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."


                                       15
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA.

The following tables present selected consolidated financial data for the
Company for the years ended January 31, 2001, 2002, 2003, 2004 and 2005. Such
information has been derived from the Company's audited consolidated financial
statements and should be read in conjunction with the Company's consolidated
financial statements and the notes to the consolidated financial statements
included elsewhere in this report. All per share data has been restated to
reflect a two-for-one stock split effected as a 100% stock dividend to
shareholders of record on March 27, 2000, distributed on April 3, 2000.

<TABLE>
<CAPTION>

                                                                          YEAR ENDED JANUARY 31,
                                               ---------------------------------------------------------------------------
                                                     2001             2002           2003          2004           2005
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>              <C>             <C>            <C>           <C>
Statement of Operations Data:

Sales                                              $1,225,058      $1,270,218      $735,889       $765,892       $959,442

Acquisition expenses                                   15,971               -             -              -          4,635

Workforce reduction, restructuring and
impairment charges (credits)                                -          63,562        66,714         (2,123)            62


Income (loss) from operations                         234,624          64,844      (182,741)       (30,378)        46,933

Net income (loss)                                     249,136          54,619      (129,478)        (5,386)        57,330

Earnings (loss) per share - diluted                      1.39            0.29         (0.69)         (0.03)          0.28

                                                                                 JANUARY 31,
                                               ---------------------------------------------------------------------------
                                                     2001             2002           2003          2004           2005
                                                                                (IN THOUSANDS)
Balance Sheet Data:

Working capital                                    $1,860,379      $2,030,250    $1,766,507     $2,141,277     $2,139,789

Total assets                                        2,625,264       2,704,163     2,403,659      2,728,042      2,925,286

Long-term debt, including current portion             906,723         648,611       439,628        555,941        518,254

Stockholders' equity                                1,236,165       1,616,408     1,549,692      1,672,546      1,794,029

</TABLE>

                                       16
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

CRITICAL ACCOUNTING POLICIES

           Critical accounting policies are those that are both most important
to the portrayal of a company's financial position and results of operations,
and require management's most difficult, subjective or complex judgments.
Although not all of the Company's critical accounting policies require
management to make difficult, subjective or complex judgments or estimates, the
following policies and estimates are those that the Company deems most critical.

           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 Company recognizes revenues in accordance with the provisions of
Statement of Position 97-2, "Software Revenue Recognition", and related
Interpretations. The Company's systems are generally a bundled hardware and
software solution that are shipped together. Revenue is generally recognized at
the time of shipment for sales of systems which do not require significant
customization to be performed by the Company when the following criteria are
met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred
and acceptance is determinable, (3) the fee is fixed or determinable and (4)
collectibility is probable.

           Amounts received from customers pursuant to the terms specified in
contracts but for which revenue has not yet been recognized are recorded as
advance payments from customers.

           Post-contract customer support ("PCS") services are sold separately
or as part of a multiple element arrangement, in which case the related PCS
element is determined based upon vendor-specific objective evidence of fair
value, such that the portion of the total fee allocated to PCS services is
generally recognized as revenue ratably over the term of the PCS arrangement.

           Revenues from certain development contracts are recognized under the
percentage-of-completion method on the basis of physical completion to date or
using actual costs incurred to total expected costs under the contract.
Revisions in estimates of costs and profits are reflected in the accounting
period in which the facts that require the revision become known. At the time a
loss on a contract is known, the entire amount of the estimated loss is accrued.
Amounts received from customers in excess of revenues earned under the
percentage-of-completion method are recorded as advance payments from customers.

           Cost of sales include material costs, subcontractor costs,
personnel-related costs for the operations and service departments, depreciation
and amortization of equipment used in the operations and service departments,
amortization of capitalized software development costs, royalties and license
fee costs, travel costs and an overhead allocation. Research and development
costs include subcontractor costs, personnel-related costs, travel, depreciation
and amortization of research and development equipment, an overhead allocation,
as well as other costs associated with research and development activities.
Selling, general and administrative costs include personnel-related costs, sales
commissions, bad debt expense, travel, depreciation and amortization, marketing
and promotional materials, professional fees, insurance costs, facility costs,
as well as other costs associated with sales, marketing, finance and
administrative departments.


                                       17
<PAGE>
           Accounts receivable are generally diversified due to the large number
of commercial and government entities comprising the Company's customer base and
their dispersion across many geographical regions. As of January 31, 2005, there
was no single customer balance that comprised 10% of the overall accounts
receivable balance. The Company is required to estimate the collectibility of
its accounts receivable each accounting period and record a reserve for bad
debts. A considerable amount of judgment is required in assessing the
realization of these receivables, including the current creditworthiness of each
customer, current and historical collection history and the related aging of
past due balances. The Company evaluates specific accounts when it becomes aware
of information indicating that a customer may not be able to meet its financial
obligations due to deterioration of its financial condition, lower credit
ratings, bankruptcy or other factors affecting the ability to render payment.
Reserve requirements are based on the facts available and are re-evaluated and
adjusted as additional information is received. The Company's policy is to
account for recoveries of previously reserved for doubtful accounts upon the
receipt of cash where there is no evidence of recoverability for items
specifically reserved for prior to the receipt of cash. During the year ended
January 31, 2005, the Company recorded expenses of approximately $7.1 million,
which increased the allowance for doubtful accounts. The Company recorded
recoveries of approximately $19.4 million for the year ended January 31, 2005,
which reduced the allowance for doubtful accounts. The recoveries were recorded
in the period that the cash was received from customers for items that had
previously been reserved for as doubtful of collection.

           Software development costs are capitalized upon the establishment of
technological feasibility and are amortized over the estimated useful life of
the software, which to date has been four years or less. Amortization begins in
the period in which the related product is available for general release to
customers. During the year ended January 31, 2005, the Company capitalized
approximately $4.2 million of software development costs and amortized
approximately $14.3 million of such costs. In addition, during the year ended
January 31, 2005, the Company recorded write-downs of approximately $5.0 million
of capitalized software development costs to its estimated net realizable value,
primarily as a result of the Company's transition to its newer product line as
well as duplicative technology that arose as a result of Verint's acquisitions
during the period.



                                       18
<PAGE>
RESULTS OF OPERATIONS

HISTORICAL RESULTS

           Consolidated results of operations in dollars and as a percentage of
sales for each of the three years in the period ended January 31, 2005 were as
follows:

<TABLE>
<CAPTION>

                                           January 31,                    January 31,                 January 31,
                                              2003           %               2004           %            2005           %
                                              ----          ----             ----          ----          ----          ----
                                                                             (In thousands)
<S>                                   <C>               <C>         <C>               <C>        <C>             <C>
Sales:
   Product revenues                       $   547,141       74.4%       $   534,585       69.8%     $   700,970       73.1%
   Service revenues                           188,748       25.6%           231,307       30.2%         258,472       26.9%
                                          ------------                  ------------                ------------
                                              735,889      100.0%           765,892      100.0%         959,442      100.0%

Cost of sales:
   Product costs                              184,413       33.7%           181,059       33.9%         215,023       30.7%
   Service costs                              153,708       81.4%           146,501       63.3%         165,687       64.1%
                                          ------------                  ------------                ------------
                                              338,121       45.9%           327,560       42.8%         380,710       39.7%

Gross margin                                  397,768       54.1%           438,332       57.2%         578,732       60.3%

Operating expenses:
Research and development, net                 232,593       31.6%           216,457       28.3%         236,657       24.7%
Selling, general and administrative           281,202       38.2%           254,376       33.2%         290,445       30.3%
In-process research and development
   and other acquisition-related charges            -        0.0%                 -        0.0%           4,635        0.5%
Workforce reduction, restructuring
   and impairment charges (credits)            66,714        9.1%            (2,123)      -0.3%              62        0.0%
                                          ------------                  ------------                ------------

Income (loss) from operations                (182,741)     -24.8%           (30,378)      -4.0%          46,933        4.9%

Interest and other income, net                 58,902        8.0%            38,958        5.1%          36,223        3.8%
                                          ------------                  ------------                ------------

Income (loss) before income tax
 provision, minority interest and
 equity in the earnings
 (losses) of affiliates                      (123,839)     -16.8%             8,580        1.1%          83,156        8.7%

Income tax provision                            3,294        0.4%             8,206        1.1%          13,214        1.4%

Minority interest and equity in the
   earnings (losses) of affiliates             (2,345)      -0.3%            (5,760)      -0.8%         (12,612)      -1.3%
                                          ------------                  ------------                ------------

Net income (loss)                         $  (129,478)     -17.6%       $    (5,386)      -0.7%     $    57,330        6.0%
                                          ============                  ============                ============

</TABLE>


                                       19
<PAGE>
           A detailed description of the Company's business segments as well as
additional financial data, can be found in Note 19 of the Notes to the
Consolidated Financial Statements. The following is a summary of sales and
income (loss) from operations by segment in dollars and as a percentage of
sales, for each segment and in total, for each of the three years in the period
ended January 31, 2005:

<TABLE>
<CAPTION>

                                            January 31,                   January 31,                  January 31,
                                               2003            %             2004              %          2005              %
                                               ----           ---            ----             ---         ----             ---
                                                                            (In thousands)
<S>                                     <C>             <C>          <C>               <C>         <C>               <C>
Sales:
------

   CNS                                     $   542,984       73.8%       $   529,597        69.1%     $   642,692         67.0%
   Ulticom                                      29,231        4.0%            38,378         5.0%          63,436          6.6%
   Verint                                      157,775       21.4%           192,744        25.2%         249,824         26.0%
   All other                                     9,602        1.3%             9,983         1.3%          10,132          1.1%
   Reconciling items                            (3,703)      -0.5%            (4,810)       -0.6%          (6,642)        -0.7%
                                           ------------                  ------------                 ------------

Consolidated total                         $   735,889      100.0%          $765,892       100.0%        $959,442        100.0%
                                           ============                  ============                 ============

Income (loss) from operations:
------------------------------

   CNS                                     $  (179,492)     -33.1%       $   (40,913)       -7.7%     $    20,550          3.2%
   Ulticom                                      (8,362)     -28.6%             2,824         7.4%          20,566         32.4%
   Verint                                       10,051        6.4%            17,189         8.9%          17,384          7.0%
   All other                                      (615)      -6.4%            (1,152)      -11.5%            (788)        -7.8%
   Reconciling items                            (4,323)        n/m            (8,326)         n/m         (10,779)          n/m
                                           ------------                  ------------                 ------------

Consolidated total                         $  (182,741)     -24.8%       $   (30,378)       -4.0%     $    46,933          4.9%
                                           ============                  ============                 ============
</TABLE>

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 year ended January 31, 2005. Verint, which services the
security and business intelligence markets, achieved record revenue, operating
income and net income during the year ended January 31, 2005 based, in part, on
increased sales due to heightened awareness surrounding homeland defense and
security related initiatives in the United States and abroad as well as
increased business intelligence sales. Overall, for the year ended January 31,
2005, the Company experienced year over year sales growth of approximately
25.3%, with a substantial majority of sales generated from activities serving
the telecommunications industry. The Company generated operating and net income
for the year ended January 31, 2005.

           During the year ended January 31, 2005, the Company recorded
recoveries of approximately $19.4 million, which reduced the allowance for
doubtful accounts and increased the Company's operating and net income. The
recoveries were recorded as a result of cash being collected from approximately
20 customers for items that previously had been reserved for as doubtful of
collection during the period that the telecommunications industry experienced a
severe capital spending recession. Such recoveries, which the Company attributes
to factors including the improved environment for the telecommunications
industry as a whole, and the Company's wireless carrier customers in particular,
were recorded in the period that the cash was received. In addition, the Company
recorded expenses of approximately $7.1 million during the year ended January
31, 2005, which increased the allowance for doubtful accounts thereby reducing
the Company's operating and net income.


                                       20
<PAGE>
           During the year ended January 31, 2005, the Company recorded
write-downs of approximately $4.1 million of fixed assets to its estimated net
realizable value, primarily as a result of the obsolescence of such fixed
assets. Such write-downs reduced Property and Equipment, Net and decreased
operating and net income. In addition, during the year ended January 31, 2005,
the Company recorded write-downs of approximately $5.0 million of capitalized
software development costs to its estimated net realizable value, primarily as a
result of the Company's transition to its newer product line as well as
duplicative technology that arose as a result of Verint's acquisitions during
the period. Such write-downs reduced Other Assets and decreased operating and
net income. In addition, during the year ended January 31, 2005, the Company
incurred approximately $0.9 million of transaction costs as a result of the
Company's offer to exchange its Zero Yield Puttable Securities ("ZYPS") (the
"Existing ZYPS") for new ZYPS (the "New ZYPS"). Such costs are included in
`Interest and other income, net' in the Consolidated Statements of Operations.
Also, during the year ended January 31, 2005, the Company incurred a charge of
approximately $3.1 million of purchased in-process research and development as a
result of Verint's purchase of ECtel's government surveillance business.

YEAR ENDED JANUARY 31, 2005 COMPARED TO YEAR ENDED JANUARY 31, 2004

           Sales. Sales for the fiscal year ended January 31, 2005 ("fiscal
2004") increased by approximately $193.6 million, or 25%, compared to the fiscal
year ended January 31, 2004 ("fiscal 2003"). This increase is attributable to an
increase in sales in the Company's three primary business units. CNS sales
increased by approximately $113.1 million, due primarily to increased business
in Europe and the Americas. Security and business intelligence recording sales
increased by approximately $57.1 million, and service enabling signaling
software sales increased by approximately $25.1 million. On a consolidated
basis, service revenues represented approximately 27% and 30% of sales for
fiscal 2004 and fiscal 2003, respectively, and sales to international customers
represented approximately 69% and 66% of sales for fiscal 2004 and fiscal 2003,
respectively.

           Cost of Sales. Cost of sales for fiscal 2004 increased by
approximately $53.2 million, or 16%, compared to fiscal 2003. The increase in
cost of sales is primarily attributable to increased materials and overhead
costs net of overhead absorption of approximately $35.9 million, due primarily
to increased sales, increased personnel-related costs of approximately $18.0
million and write-downs of approximately $3.6 million of capitalized software
development costs to its estimated net realizable value, primarily as a result
of the Company's transition to its newer product line. Such increases were
partially offset by increased recoveries of doubtful debts, which increased from
approximately $1.5 million in fiscal 2003 to approximately $5.8 million in
fiscal 2004, an increase of approximately $4.3 million. Gross margins increased
to approximately 60.3% in fiscal 2004 from approximately 57.2% in fiscal 2003.

           Research and Development, Net. Net research and development expenses
for fiscal 2004 increased by approximately $20.2 million, or 9%, compared to
fiscal 2003. However, net research and development expenses as a percentage of
sales decreased to approximately 24.7% in fiscal 2004 from approximately 28.3%
in fiscal 2003. The increase in the dollar amount of net research and
development expenses is primarily attributable to increased subcontractor costs
of approximately $12.0 million and increased personnel-related costs of
approximately $8.7 million, partially offset by a net decrease in various other
costs of approximately $0.5 million.

           Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 2004 increased by approximately $36.1
million, or 14%, compared to fiscal 2003. However, selling, general and
administrative expenses as a percentage of sales decreased to approximately
30.3% in fiscal 2004 from approximately 33.2% in fiscal 2003. The increase in
the dollar amount of selling, general and administrative expenses is primarily
attributable to increased personnel-related costs, employee and agent sales
commissions, professional fees and travel costs of approximately $20.7 million,
$14.4 million, $4.0 million and $3.2 million, respectively, and net increase in
various other costs of approximately $2.1 million. Such increases were partially
offset by decreased bad debt expense of approximately $5.4 million and increased
recoveries of doubtful debts, which increased from approximately $10.7 million
in fiscal 2003 to approximately $13.6 million in fiscal 2004, an increase of
approximately $2.9 million.


                                       21
<PAGE>
           In-process Research and Development and Other Acquisition-related
Charges. During fiscal 2004, the Company incurred approximately $4.6 million for
in-process research and development and other acquisition-related charges
resulting from Verint's purchase of ECtel's government surveillance business, as
follows: (i) approximately $3.1 million of purchased in-process research and
development, which was charged to expense at the acquisition, and (ii)
approximately $1.5 million for the write-down of certain capitalized software
development costs to their net realizable value at the date of acquisition, due
to impairment caused by the existence of duplicative technology.

           Workforce reduction, restructuring and impairment charges (credits).
During the year ended January 31, 2002, the Company committed to and began
implementing a restructuring program to better align its cost structure with the
business environment and to improve the efficiency of its operations via
reductions in workforce, restructuring of operations and the write-off of
impaired assets. In connection with the restructuring, the Company changed its
organizational structure and product offerings, resulting in the impairment of
certain assets. In connection with these actions, during fiscal 2003 and fiscal
2004, the Company incurred net charges (credits) to operations of approximately
$(2.1) million and $0.1 million, respectively. The fiscal 2003 net credit of
approximately $2.1 million is comprised of a charge of approximately $4.5
million for severance and other related costs, a credit of approximately $8.0
million for the reversal of a previously taken charge for the elimination of
excess facilities and related leasehold improvements, primarily as a result of
the sublet of a portion of the excess facilities, and a charge of approximately
$1.4 million for the write-off of certain property and equipment. The fiscal
2004 net charge of approximately $0.1 million is comprised of a charge of
approximately $0.6 million for severance and other related costs, a credit of
approximately $0.7 million for the reversal of a previously taken charge for the
elimination of excess facilities and related leasehold improvements, primarily
as a result of the sublet of a portion of the excess facilities, and a charge of
approximately $0.2 million for the write-off of certain property and equipment.
The Company expects to pay out approximately $0.1 million for severance and
related obligations through July 31, 2005 and approximately $21.5 million for
facilities and related obligations at various dates through January 2011.

           Income (Loss) from Operations. Income (loss) from operations for
fiscal 2004 increased by approximately $77.3 million compared to fiscal 2003,
and as a percentage of sales was approximately 4.9% in fiscal 2004 compared to
approximately (4.0)% in fiscal 2003. These changes resulted primarily from the
factors described above.

           On a business segment basis, income (loss) from operations for CNS
for fiscal 2004 increased by approximately $61.5 million compared to fiscal
2003, and as a percentage of sales was approximately 3.2% in fiscal 2004
compared to approximately (7.7)% in fiscal 2003. Income from operations for
Verint for fiscal 2004 increased by approximately $0.2 million compared to
fiscal 2003, but as a percentage of sales decreased to approximately 7.0% in
fiscal 2004 from approximately 8.9% in fiscal 2003. Income from operations for
Ulticom for fiscal 2004 increased by approximately $17.7 million compared to
fiscal 2003, and as a percentage of sales increased to approximately 32.4% in
fiscal 2004 from approximately 7.4% in fiscal 2003.

           Interest and Other Income, Net. Interest and other income, net for
fiscal 2004 decreased by approximately $2.7 million compared to fiscal 2003. The
principal reasons for the decrease are (i) a decrease in the gain recorded as a
result of the Company's repurchases of its 1.50% convertible senior debentures
due December 2005 (the "Debentures") of approximately $9.9 million; (ii) a
decrease in foreign currency gains of approximately $2.2 million; (iii)
approximately $0.9 million of transaction costs incurred during fiscal 2004 as a
result of the Company's offer to exchange the Existing ZYPS for the New ZYPS;
and (vi) other decreases of approximately $1.1 million, net. Such items were


                                       22
<PAGE>
offset by (i) increased interest and dividend income of approximately $6.5
million, due primarily to the rise in interest rates; (ii) decreased interest
expense of approximately $3.0 million, due primarily to the Company's
repurchases of its Debentures and other debt reduction; and (iii) a change in
the net gains/losses from the sale and write-down of investments of
approximately $1.9 million.

           Income Tax Provision. Provision for income taxes for fiscal 2004
increased by approximately $5.0 million, or 61%, compared to fiscal 2003, 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 16% for fiscal 2004 compared to approximately 96% for
fiscal 2003. 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 $6.9 million as a result of increased minority interest expense of
approximately $5.6 million, primarily attributable to overall increased earnings
at majority-owned subsidiaries, and a change in equity in the earnings (losses)
of affiliates of approximately $1.3 million.

           Net Income (Loss). Net income (loss) increased by approximately $62.7
million in fiscal 2004 compared to fiscal 2003, while as a percentage of sales
was approximately 6.0% in fiscal 2004 compared to approximately (0.7)% in fiscal
2003. These changes resulted primarily from the factors described above.

YEAR ENDED JANUARY 31, 2004 COMPARED TO YEAR ENDED JANUARY 31, 2003

           Sales. Sales for fiscal 2003 increased by approximately $30.0
million, or 4%, compared to the fiscal year ended January 31, 2003 ("fiscal
2002"). This increase is primarily attributable to an increase in security and
business intelligence recording sales of approximately $35.0 million, primarily
as a result of increased security and surveillance sales, and increased service
enabling signaling software sales of approximately $9.1 million. These increases
were partially offset by a decrease in CNS sales of approximately $13.4 million.
The decrease in CNS sales was due primarily to decreased business in Asia
Pacific and the Americas, only partially offset by increased business in Europe.
On a consolidated basis, service revenues represented approximately 30% and 26%
of sales for fiscal 2003 and fiscal 2002, respectively, and sales to
international customers represented approximately 66% and 65% of sales for
fiscal 2003 and fiscal 2002, respectively.

           Cost of Sales. Cost of sales for fiscal 2003 decreased by
approximately $10.6 million, or 3%, compared to fiscal 2002. The decrease in
cost of sales is primarily attributable to decreased personnel-related and
travel costs of approximately $18.1 million and $4.9 million, respectively,
primarily the result of workforce reduction and other cost reduction efforts,
and net decrease in various other costs of approximately $0.1 million, partially
offset by increased royalty expense of approximately $12.5 million, primarily
the result of a prior period credit realized upon a settlement with the OCS.
Gross margins increased to approximately 57.2% in fiscal 2003 from approximately
54.1% in fiscal 2002.

           Research and Development, Net. Net research and development expenses
for fiscal 2003 decreased by approximately $16.1 million, or 7%, compared to
fiscal 2002. This decrease is primarily attributable to decreased
personnel-related costs of approximately $17.2 million, which is primarily the
result of workforce reduction and other cost reduction efforts and a reduction
of research and development projects.


                                       23
<PAGE>
           Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 2003 decreased by approximately $26.8
million, or 10%, compared to fiscal 2002, and as a percentage of sales decreased
to approximately 33.2% in fiscal 2003 from approximately 38.2% in fiscal 2002.
The decrease in the dollar amount of selling, general and administrative
expenses is primarily attributable to lower bad debt expense of approximately
$42.2 million, partially offset by increased personnel-related costs of
approximately $13.6 million, due primarily to an overall increase in sales and
marketing staff, increased headcount at Verint and increased sales commissions,
and net increase in various other costs of approximately $1.8 million.

           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 fiscal 2002 and fiscal
2003, the Company incurred charges (credits) to operations of approximately
$66.7 million and $(2.1) million, respectively. The fiscal 2002 charge of
approximately $66.7 million is comprised of approximately $26.8 million for
severance and other related costs, approximately $19.4 million for the
elimination of excess facilities and related leasehold improvements and
approximately $20.5 million for the write-off of certain property and equipment,
including a reduction in the value of certain unimproved land in Israel, that
the Company had acquired with a view to the future construction of facilities
for its Israeli operations. The fiscal 2003 net credit of approximately $2.1
million is comprised of a charge of approximately $4.5 million for severance and
other related costs, a credit of approximately $8.0 million for the reversal of
a previously taken charge for the elimination of excess facilities and related
leasehold improvements, primarily as a result of the sublet of a portion of the
excess facilities, and a charge of approximately $1.4 million for the write-off
of certain property and equipment. The Company expects to pay out approximately
$3.1 million for severance and related obligations during the year ended January
31, 2005 and approximately $26.4 million for facilities and related obligations
at various dates through January 2011.

           Loss from Operations. Loss from operations for fiscal 2003 decreased
by approximately $152.4 million, or 83%, compared to fiscal 2002, and as a
percentage of sales was approximately (4.0)% in fiscal 2003 compared to
approximately (24.8)% in fiscal 2002. These changes resulted primarily from the
factors described above.

           On a business segment basis, loss from operations for CNS for fiscal
2003 decreased by approximately $138.6 million, or 77%, compared to fiscal 2002,
and as a percentage of sales was approximately (7.7)% in fiscal 2003 compared to
approximately (33.1)% in fiscal 2002, as a result of the decrease in workforce
reduction, restructuring and impairment charges (credits) of approximately $66.2
million and the decrease in other costs and expenses of approximately $85.8
million, primarily the result of workforce reduction and other cost reduction
efforts, partially offset by decreased sales of approximately $13.4 million.
Income from operations for Verint for fiscal 2003 increased by approximately
$7.1 million, or 71%, compared to fiscal 2002, and as a percentage of sales
increased to approximately 8.9% in fiscal 2003 from approximately 6.4% in fiscal
2002. Income (loss) from operations for Ulticom for fiscal 2003 increased by
approximately $11.2 million compared to fiscal 2002, and as a percentage of
sales increased to approximately 7.4% in fiscal 2003 from approximately (28.6)%
in fiscal 2002.

           Interest and Other Income (Expense), Net. Interest and other income
(expense), net for fiscal 2003 decreased by approximately $19.9 million compared
to fiscal 2002. The principal reasons for the decrease are (i) a decrease in the
gain recorded as a result of the Company's repurchases of its 1.50% convertible
senior debentures due December 2005 (the "Debentures") of approximately $29.2
million; (ii) a decrease in foreign currency gains of approximately $22.8
million; (iii) decreased interest and dividend income of approximately $12.7


                                       24
<PAGE>
million due primarily to the decline in interest rates partially offset by an
increase in invested assets; and (iv) other decrease of approximately $0.2
million, net. Such items were offset by (i) a decrease in net losses from the
sale and write-down of investments of approximately $40.4 million; and (ii)
decreased interest expense of approximately $4.6 million due primarily to the
Company's repurchases of its Debentures and other debt reduction.

           Income Tax Provision. Provision for income taxes increased from
fiscal 2002 to fiscal 2003 by approximately $4.9 million, or 149%, due primarily
to shifts in the underlying mix of pre-tax income by entity and tax
jurisdiction. The Company's overall rate of tax is reduced significantly by the
existence of net operating loss carryforwards for Federal income tax purposes in
the United States, as well as the tax benefits associated with qualified
activities of certain of its Israeli subsidiaries, which are entitled to
favorable income tax rates under a program of the Israeli Government for
"Approved Enterprise" investments in that country.

           Minority Interest and Equity in the Earnings (Losses) of Affiliates.
Minority interest and equity in the earnings (losses) of affiliates increased by
approximately $3.4 million as a result of increased minority interest expense of
approximately $5.7 million, primarily attributable to overall increased earnings
at majority-owned subsidiaries, partially offset by a change in equity in the
earnings (losses) of affiliates of approximately $2.3 million.

           Net Loss. Net loss decreased by approximately $124.1 million in
fiscal 2003 compared to fiscal 2002, while as a percentage of sales was
approximately (0.7)% in fiscal 2003 compared to approximately (17.6)% in fiscal
2002. These changes resulted primarily from the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

           The Company's working capital at January 31, 2005 and 2004 was
approximately $2,139.8 million and $2,141.3 million, respectively. At January
31, 2005 and 2004, the Company had total cash and cash equivalents, bank time
deposits and short-term investments of approximately $2,249.6 million and
$2,198.5 million, respectively.

           Operations for fiscal 2004, fiscal 2003 and fiscal 2002, after
adjustment for non-cash items, provided (used) cash of approximately $150.6
million, $80.3 million and $(34.1) million, respectively. During such years,
other changes in operating assets and liabilities provided (used) cash of
approximately $(33.6) million, $48.3 million and $130.9 million, respectively.
This resulted in net cash provided by operating activities of approximately
$117.0 million, $128.6 million and $96.8 million during fiscal 2004, fiscal 2003
and fiscal 2002, respectively.

           Investing activities for fiscal 2004, fiscal 2003 and fiscal 2002
used cash of approximately $(57.9) million, $(500.8) million and $(436.6)
million, respectively. These amounts include (i) net maturities and sales
(purchases) of bank time deposits and investments of approximately $38.1
million, $(451.8) million and $(358.0) million, respectively; (ii) purchases of
property and equipment of approximately $(46.2) million, $(35.4) million and
$(34.1) million, respectively; (iii) capitalization of software development
costs of approximately $(4.2) million, $(7.8) million and $(13.4) million,
respectively; and (iv) net assets acquired as a result of acquisitions of
approximately $(45.6) million, $(5.9) million and $(31.1) million in fiscal
2004, fiscal 2003 and fiscal 2002, respectively.

           Financing activities for fiscal 2004, fiscal 2003 and fiscal 2002
provided (used) cash of approximately $39.1 million, $310.2 million and $(91.8)
million, respectively. These amounts include (i) net proceeds from the issuance
of the Company's Existing ZYPS of approximately $412.8 million during fiscal
2003; (ii) the partial repurchase of the Company's Debentures of approximately
$(36.9) million, $(253.3) million and $(169.8) million, respectively; (iii)
proceeds from the issuance of common stock in connection with the exercise of


                                       25
<PAGE>
stock options and employee stock purchase plan of approximately $45.5 million,
$61.3 million and $12.4 million, respectively; (iv) net proceeds from the
issuance of common stock of subsidiaries in connection with stock sales and the
exercise of stock options and employee stock purchase plans of approximately
$32.2 million, $129.0 million and $68.7 million, respectively; (v) repayment of
bank loan of $(42.0) million in fiscal 2003; and (vi) other, net of
approximately $(1.7) million, $2.4 million and $(3.1) million in fiscal 2004,
fiscal 2003 and fiscal 2002, respectively.

           In May 2003, the Company issued $420,000,000 aggregate principal
amount of its Existing ZYPS for net proceeds of approximately $412.8 million. 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. 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. In connection with this offer, the
Company incurred transaction costs, consisting primarily of professional fees,
amounting to approximately $903,000 included in `Interest and other income, net'
in the Consolidated Statements of Operations.

           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
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 currently
$417,700,000, 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


                                       26
<PAGE>
contingent features have been met. EITF 04-8 was effective for reporting periods
ending after December 15, 2004. Because these recent 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
$417,700,000. For the year ended January 31, 2005, this resulted in
approximately 1,610,000 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 as of January 31, 2005 is 128,516 shares. 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. The
adoption of EITF 04-8 did not have an effect on reported diluted earnings (loss)
per share for any periods presented.

           During the fourth quarter of fiscal 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 for the first fiscal quarter of 2005.

           During fiscal 2004, 2003 and 2002 the Company acquired, in open
market purchases, approximately $37.5 million, $266.1 million and $209.2 million
of face amount of the Debentures, respectively, for approximately $36.9 million,
$253.3 million and $169.8 million in cash, respectively, resulting in pre-tax
gains, net of debt issuance costs, of approximately $0.3 million, $10.2 million
and $39.4 million, respectively, included in `Interest and other income, net' in
the Consolidated Statements of Operations. As of January 31, 2005, the Company
had outstanding Debentures of approximately $87.3 million, included in the
current liabilities section of the Consolidated Balance Sheets.

           In January 2002, Verint took a bank loan in the amount of $42.0
million. The loan, which matured in February 2003, bore interest at LIBOR plus
0.55% and was guaranteed by CTI. During February 2003, Verint repaid the bank
loan.

           In May 2002, Verint issued 4,500,000 shares of its common stock in an
initial public offering. Proceeds from the offering, based on the offering price
of $16.00 per share, totaled approximately $65.4 million, net of offering
expenses. The Company recorded a gain of approximately $48.1 million during the
year ended January 31, 2003, which was recorded as an increase in stockholders'
equity as a result of the issuance.

           In June 2003, Verint completed a public offering of 5,750,000 shares
of its common stock at a price of $23.00 per share. The shares offered included
149,731 shares issued to Smartsight Networks Inc.'s ("Smartsight") former
shareholders in connection with its acquisition. The proceeds of the offering
were approximately $122.2 million, net of offering expenses. The Company
recorded a gain of approximately $62.9 million, which was recorded as an
increase in stockholders' equity as a result of the issuance. As of January 31,
2005, the Company's ownership interest in Verint was approximately 58.9%.


                                       27
<PAGE>
           In February 2004, Starhome B.V. ("Starhome"), a subsidiary of CTI,
received equity financing from an unaffiliated investor group of approximately
$14.5 million, net of expenses. The Company recorded a gain of approximately
$11.8 million, which was recorded as an increase in stockholders' equity as a
result of the issuance. Upon the completion of this transaction, the Company's
ownership interest in Starhome was approximately 69.5%; this interest was
unchanged as of January 31, 2005. In addition, during the year ended January 31,
2005, Starhome received a commitment for an additional $5.0 million in equity
financing from the unaffiliated investor group, which funds are currently being
held in escrow.

           In September 2004, Verint, through a subsidiary, acquired all of the
outstanding stock of RP Sicherheitssysteme GmbH ("RP Security"), a company in
the business of developing and selling mobile digital video security solutions
for transportation applications. The purchase price consisted of approximately
$9.0 million in cash and 90,144 shares of Verint's common stock. In addition,
the shareholders of RP Security will be entitled to receive earn-out payments
over three years based on Verint's worldwide sales, profitability and backlog of
mobile video products in the transportation market during that period. Shares
issued as part of the purchase price were accounted for with a value of
approximately $3.0 million, or $33.03 per share. In connection with this
acquisition, Verint incurred transaction costs, consisting primarily of
professional fees, amounting to approximately $0.5 million.

           In March 2004, Verint acquired certain assets and assumed certain
liabilities of the government surveillance business of ECtel Ltd. ("ECtel"),
which provided Verint with additional communications interception capabilities
for the mass collection and analysis of voice and data communications. The
purchase price was approximately $35.0 million in cash. Verint incurred
transaction costs, consisting primarily of professional fees, amounting to
approximately $1.1 million in connection with this acquisition.

           In May 2003, Verint acquired all of the issued and outstanding shares
of Smartsight, a Canadian corporation that develops IP-based video edge devices
and software for wireless video transmission. The purchase price consisted of
approximately $7.1 million in cash and 149,731 shares of Verint common stock,
valued at approximately $3.1 million, or $20.46 per share.

           In February 2002, Verint acquired the digital video recording
business of Lanex, LLC ("Lanex"). The Lanex business provides digital video
recording solutions for security and surveillance applications primarily to
North American banks. The purchase price consisted of approximately $9.5 million
in cash and a $2.2 million non-interest bearing note, guaranteed by CTI, and
convertible in whole or in part, into shares of Verint's common stock at a
conversion price of $16.06 per share. The note matured and was converted into
shares of Verint common stock on February 1, 2004.

           In June 2002, the Company acquired Odigo, Inc. ("Odigo"), a
privately-held provider of instant messaging and presence management solutions
to service providers. The purchase price was approximately $20.1 million in
cash. Prior to the acquisition, the Company was a strategic partner with Odigo,
holding an equity position which it previously acquired for approximately $3
million.

           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


                                       28
<PAGE>
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.

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.


                                       29
<PAGE>
           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.

           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.


                                       30
<PAGE>
           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.

           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. 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. SFAS No. 123(R) is effective for reporting
periods beginning after June 15, 2005, which for the Company is August 1, 2005
(the "Effective Date"). 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; this 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 beginning on the Effective Date. The
Company currently anticipates such expense may be up to $12 million per quarter
for each of the quarters ending October 31, 2005 and January 31, 2006.

           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
transactions. Both the Existing ZYPS and the New ZYPS mature on May 15, 2023.


                                       31
<PAGE>
           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 Company cannot
ensure, however, that sufficient funds will be available at the time of payment
required on the Existing ZYPS or that the Company will be able to arrange
financing to make any such required cash payments.

           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 Company cannot
ensure, however, that sufficient funds will be available at the time of payment
required on the New ZYPS or that the Company will be able to arrange financing
to make any such required cash payments.

           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 currently $417,700,000, 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's ("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 recent 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
$417,700,000. For the year ended January 31, 2005 this resulted in approximately
1,610,000 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 as of January 31, 2005 is 128,516 shares. 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. The
adoption of EITF 04-8 did not have an effect on reported diluted earnings (loss)
per share for any periods presented.


                                       32
<PAGE>
           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 for the first fiscal quarter of 2005.

           The Company's products involve sophisticated hardware and software
technology that performs critical functions to highly demanding standards. If
the Company's current or future products develop operational problems, the
Company may incur fees and penalties in connection with such problems, which
could have a material adverse effect on the Company. The Company offers complex
products that may contain undetected defects or errors, particularly when first
introduced or as new versions are released. The Company may not discover such
defects or errors until after a product has been released and used by the
customer. Significant costs may be incurred to correct undetected defects or
errors in the Company's products and these defects or errors could result in
future lost sales. Defects or errors in the Company's products also may result
in product liability claims, which could cause adverse publicity and impair
their market acceptance.

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

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


                                       33
<PAGE>
           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
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 require the Company to
include a management assessment of its internal controls over financial
reporting and auditor attestation of that assessment in its annual report for
the Company's fiscal year ending January 31, 2005. While the Company is able to
assert, in the management certifications filed with this 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


                                       34
<PAGE>
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 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 controls), the Company
could lose investor confidence in the accuracy and completeness of the Company's
financial reports, which would 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
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. 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.

                                       35
<PAGE>

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

           Many of Verint's government contracts contain provisions that give
the governments party to those contracts rights and remedies not typically found
in private commercial contracts, including provisions enabling the governments
to: (i) terminate or cancel existing contracts for convenience; (ii) in the case
of the U.S. government, suspend Verint from doing business with a foreign
government or prevent Verint from selling its products in certain countries;
(iii) audit and object to Verint's contract-related costs and expenses,
including allocated indirect costs; and (iv) change specific terms and
conditions in Verint's contracts, including changes that would reduce the value
of its contracts. In addition, many jurisdictions have laws and regulations that
deem government contracts in those jurisdictions to include these types of
provisions, even if the contract itself does not contain them. If a government
terminates a contract with Verint for convenience, Verint may not recover its
incurred or committed costs, and expenses or profit on work completed prior to
the termination. If a government terminates a contract for default, Verint may
not recover those amounts, and, in addition, it may be liable for any costs
incurred by a government in procuring undelivered items and services from
another source. Further, an agency within a government may share information
regarding Verint's termination with other government agencies. As a result,
Verint's on-going or prospective relationships with such other government
agencies could be impaired.

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

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


                                       36
<PAGE>
           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 governing the
use of Verint's products or changes made to existing laws could cause a decline
in the use of its products and could result in increased expenses for Verint,
particularly if it is required to modify or redesign its products to accommodate
these new or changing laws.

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

           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


                                       37
<PAGE>
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
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.


                                       38
<PAGE>
           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.

           The Company has regularly 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") under which it has received significant
benefits through reimbursement of up to 50% of qualified research and
development expenditures. Certain of the Company's subsidiaries currently pay
royalties, of between 3% and 5% (or 6% under certain circumstances) of
associated product revenues (including service and other related revenues) to
the Government of Israel in consideration of benefits received under this
program. Such royalty payments are currently required to be made until the
government has been reimbursed the amounts received by the Company, which is
linked to the U.S. dollar, plus, for amounts received under projects approved by
the OCS after January 1, 1999, interest on such amount at a rate equal to the
12-month LIBOR rate in effect on January 1 of the year in which approval is
obtained. As of January 31, 2005, such subsidiaries of the Company received
approximately $57.7 million in cumulative grants from the OCS and recorded
approximately $26.7 million in cumulative royalties to the OCS. During the year
ended January 31, 2003, one of the Company's subsidiaries finalized an
arrangement with the OCS whereby the subsidiary agreed to pay a lump sum royalty
amount for all past amounts received from the OCS. In addition, this subsidiary
began to receive lower amounts from the OCS than it had historically received,
but will not have to pay royalty amounts on such grants. The amount of
reimbursement received by the Company under this program has been reduced
significantly, and the Company does not expect to receive significant
reimbursement under this program in the future. In addition, permission from the
Government of Israel is required for the Company to manufacture outside of
Israel products resulting from research and development activities funded under
these programs. In order to obtain such permission, the Company will be required
to increase the royalties to the applicable funding agencies and/or repay
certain amounts received as reimbursement of research and development costs. The
transfer outside of Israel of any intellectual property rights resulting from
research and development activities funded under OCS programs is not permitted.
The continued reduction in the benefits received by the Company under the
program, or the termination of its eligibility to receive these benefits at all
in the future, could adversely affect the Company's operating results.

           The Company's overall effective tax rate benefits from the tax
moratorium provided by the Government of Israel for Approved Enterprises
undertaken in that country. The Company's effective tax rate may increase in the
future due to, among other factors, the increased proportion of its taxable
income associated with activities in higher tax jurisdictions, 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.


                                       39
<PAGE>
           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.

           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. Although
recently the Company has significantly increased the amount of its foreign
currency exposure that it has hedged, the Company may experience adverse
consequences from not hedging all of 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.


                                       40
<PAGE>
           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
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


                                       41
<PAGE>
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 third quarter of fiscal 2005. As a result,
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.


                                       42
<PAGE>
           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.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

           As part of our ongoing business, we do not participate in
transactions that generate relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities ("SPEs"), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of January 31, 2005, we were not involved in any
unconsolidated SPE transactions.

           The Company has obtained bank guaranties primarily for the
performance of certain obligations under contracts with customers as well as for
the guarantee of certain payment obligations. These guaranties, which aggregated
approximately $33.9 million at January 31, 2005, are generally to be released by
the Company's performance of specified contract milestones, which are scheduled
to be completed at various dates primarily through 2008.

           The Company is exposed to market risk from changes in foreign
currency exchange rates and 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. These instruments are not designated as hedges and
the change in fair value is included in income currently. As of January 31,
2005, the Company had approximately $32.6 million of notional amount of foreign
exchange forward contracts to sell Euros with an original maturity of up to six
months. The fair value of these contracts as of January 31, 2005 of
approximately $(66,000) is included in `Interest and other income, net' in the
Consolidated Statements of Operations.


                                       43
<PAGE>
           The impact that our aggregate contractual obligations as of January
31, 2005 are expected to have on our liquidity and cash flow in future periods
is as follows:

<TABLE>
<CAPTION>

                                                               PAYMENTS DUE BY PERIOD
                                      ---------------------------------------------------------------------
                                                       LESS THAN                                  MORE THAN
                                         TOTAL          1 YEAR       1-3 YEARS      3-5 YEARS      5 YEARS
                                         -----          ------       ---------      ---------      -------
                                                                 (IN THOUSANDS)

<S>                                 <C>            <C>            <C>            <C>          <C>
Long-term debt  obligations,
 including current portion (1)        $ 518,254       $  87,913      $   9,259      $     501    $ 420,581
Operating lease obligations             118,023          28,616         45,587         21,431       22,389
Purchase obligations (2)                 59,727          54,672          4,322            733            -
Other long-term liabilities               4,976              -           4,976              -            -
                                      ---------------------------------------------------------------------

Total                                 $ 700,980        $171,201      $  64,144      $  22,665    $ 442,970
                                      ---------------------------------------------------------------------
</TABLE>


           (1) Includes (as > 5 Years) approximately $417.7 million and
approximately $2.3 million, respectively, aggregate principal amount of the New
ZYPS and Existing ZYPS, which mature on May 15, 2023. See "Liquidity and Capital
Resources" for a description of the New ZYPS and Existing ZYPS including the
series of put options giving the holders the right to require the Company to
repurchase all or a portion of the New ZYPS and Existing ZYPS prior to May 2023
and the Company the right to redeem the New ZYPS and Existing ZYPS prior to May
2023. The New ZYPS have a net share settlement feature that 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 currently $417.7 million, 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.


           (2) Purchase obligations include agreements to purchase goods or
services that are enforceable and legally binding on the Company and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Purchase obligations exclude agreements that are
cancelable without penalty.

           In 1997, a subsidiary of CTI and Quantum Industrial Holdings Ltd.
organized two new companies to make investments, including investments in high
technology ventures. Each participant committed a total of $37.5 million to the
capital of the new companies, for use as suitable investment opportunities are
identified. Quantum Industrial Holdings Ltd. is a member of the Quantum Group of
Funds managed by Soros Fund Management LLC and affiliated management companies.
As of January 31, 2005, the Company had invested approximately $26.5 million
related to these ventures. In addition, the Company has committed approximately
$9.8 million to various funds, ventures and companies which may be called at the
option of the investee.

           The Company licenses certain technology, "know-how" and related
rights for use in the manufacture and marketing of its products, and pays
royalties to third parties, typically ranging up to 6% of net sales of the
related products, under such licenses and under other agreements entered into in
connection with research and development financing, including projects partially
funded by 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 in
varying amounts based upon the revenues attributed to the various components of
such products. Royalties due to the OCS in respect of research and development
projects are required to be paid until the OCS has received total royalties up
to the amounts received by the Company under the approved project budgets, plus
interest in certain circumstances. As of January 31, 2005, such subsidiaries had
received approximately $57.7 million in cumulative grants from the OCS, and have
recorded approximately $26.7 million in cumulative royalties to the OCS.


                                       44
<PAGE>
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

           Refer to "Liquidity and Capital Resources" for a description of EITF
04-8 and its impact on the Company's diluted earnings per share calculation for
the New ZYPS and the Existing ZYPS. For the year ended January 31, 2005, the
adoption of EITF 04-8 resulted in approximately 1,739,000 (comprised of
approximately 1,610,000 for New ZYPS and approximately 129,000 for Existing
ZYPS) of additional share dilution in calculating diluted earnings per share.
The adoption of EITF 04-8 did not have an effect on reported diluted earnings
(loss) per share for any periods presented.

           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. 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.
SFAS No. 123(R) is effective for reporting periods beginning after June 15,
2005, which for the Company is August 1, 2005 (the "Effective Date"). 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; this
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 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 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 remain 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 consolidated
financial statements.


                                       45
<PAGE>
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.

ITEM 7A.   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 January 31, 2005, the Company had approximately $32.6 million of notional
amount of foreign exchange forward contracts to sell Euros with a fair value of
approximately $(66,000) 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.


                                       46
<PAGE>
           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 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

           The financial information required by Item 8 is included elsewhere in
this report.

           See Part IV, Item 15.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.

           None.

ITEM 9A.  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 January 31, 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 January 31, 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 January
31, 2005, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.

           See the Management Report on Internal Control Over Financial
Reporting, which appears on page F-2 of this report. The Company's management,
including the Chief Executive Officer and Chief Financial Officer, does not
expect the Company's disclosure controls and procedures or its internal
controls, to prevent all error and fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, with the Company have been detected.

ITEM 9B.  OTHER INFORMATION.

           Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

           Information required by this item is incorporated herein by reference
to the information in the Company's Notice of Annual Meeting of Shareholders and
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
June 14, 2005 (the "Proxy Statement") under the captions "Codes of Business
Conduct and Ethics", "Background of Directors and Executive Officers", "Audit
Committee", and "Section 16(a) Beneficial Ownership Reporting Compliance".


                                       47
<PAGE>
ITEM 11.  EXECUTIVE COMPENSATION.

           Information required by this Item is incorporated by reference to
"Executive Compensation" and "Compensation of Directors" in the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS.

           Information required by this Item is incorporated by reference to
"Security Ownership of Management and Principal Shareholders" and "Equity
Compensation Plan Information" in the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

           Information required by this Item is incorporated by reference to
"Certain Relationships and Related Transactions" in the Proxy Statement.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES.

           Information required by this Item is incorporated by reference to
"Independent Accounting Firm Fees" and "Policy for Audit, Audit Related and
Non-Audit Services" in the Proxy Statement.






                                       48
<PAGE>
                                     PART IV

ITEM 15.          EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<S>              <C>                                                                 <C>

                                                                                                  Page
                                                                                                  ----

(a) Documents filed as part of this report.
    --------------------------------------

         (1)      Financial Statements.
                  --------------------

                  Index to Consolidated Financial Statements                                       F-1

                  Management Report on Internal Control Over Financial Reporting                   F-2

                  Report of Independent Registered Public Accounting Firm on
                  Internal Control over Financial Reporting                                        F-3

                  Report of Independent Registered Public Accouting Firm on
                  the Consolidated Financial Statements                                            F-4

                  Consolidated Balance Sheets as of
                  January 31, 2004 and 2005                                                        F-5

                  Consolidated Statements of Operations for the
                  Years Ended January 31, 2003, 2004 and 2005                                      F-6

                  Consolidated Statements of Stockholders' Equity for the
                  Years Ended January 31, 2003, 2004 and 2005                                      F-7

                  Consolidated Statements of Cash Flows for the
                  Years Ended January 31, 2003, 2004 and 2005                                      F-8

                  Notes to Consolidated Financial Statements                                       F-9

</TABLE>

         (2) Financial Statement Schedules.
             -----------------------------

                           None.

         (3) Exhibits.
             --------

               The Index of Exhibits commences on the following page. Exhibits
               numbered 10.1 through 10.4, 10.6 through 10.12 and 10.19 through
               10.21 comprise material compensatory plans and arrangements of
               the registrant.

(c)      Index of Exhibits
         -----------------

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

3        Articles of Incorporation and By-Laws:

         3.1*       Certificate of Incorporation. (Incorporated by reference to
                    the Registrant's Annual Report on Form 10-K under the
                    Securities Exchange Act of 1934 for the year ended December
                    31, 1987.)


                                       49
<PAGE>
         3.2*       Certificate of Amendment of Certificate of Incorporation
                    effective February 26, 1993. (Incorporated by reference to
                    the Registrant's Annual Report on Form 10-K under the
                    Securities Exchange Act of 1934 for the year ended December
                    31, 1992.)

         3.3*       Certificate of Amendment of Certificate of Incorporation
                    effective January 12, 1995. (Incorporated by reference to
                    the Registrant's Annual Report on Form 10-K under the
                    Securities Exchange Act of 1934 for the year ended December
                    31, 1994.)

         3.4*       Certificate of Amendment of Certificate of Incorporation
                    dated October 18, 1999. (Incorporated by reference to the
                    Registrant's Annual Report on Form 10-K under the Securities
                    Exchange Act of 1934 for the year ended January 31, 2000.)

         3.5*       Certificate of Amendment of Certificate of Incorporation
                    dated September 19, 2000. (Incorporated by reference to the
                    Registrant's Annual Report on Form 10-K under the Securities
                    Exchange Act of 1934 for the year ended January 31, 2001.)

         3.6*       By-Laws, as amended. (Incorporated by reference to the
                    Registrant's Annual Report on Form 10-K under the Securities
                    Exchange Act of 1934 for the year ended January 31, 2003.)

4    Instruments defining the rights of security holders including indentures:

         4.1*       Specimen stock certificate. (Incorporated by reference to
                    the Registrant's Annual Report on Form 10-K under the
                    Securities Exchange Act of 1934 for the year ended December
                    31, 1992.)

         4.2*       Indenture dated as of November 22, 2000 from Comverse
                    Technology, Inc. to The Chase Manhattan Bank, Trustee.
                    (Incorporated by reference to the Registrant's Registration
                    Statement on Form S-3 under the Securities Act of 1933,
                    Registration No. 333-55526.)

         4.3*       Specimen 1 1/2% Convertible Senior Debenture Due 2005.
                    (Incorporated by reference to the Registrant's Registration
                    Statement on Form S-3 under the Securities Act of 1933,
                    Registration No. 333-55526.)

         4.4*       Indenture dated as of May 7, 2003 from Comverse Technology,
                    Inc., to JPMorgan Chase Bank, Trustee. (Incorporated by
                    reference to the Registrant's Registration Statement on Form
                    S-3 under the Securities Act of 1933, Registration No.
                    333-106391.)

         4.5*       Specimen Zero Yield Puttable Securities Due May 15, 2023.
                    (Incorporated by reference to the Registrant's Registration
                    Statement on Form S-3 under the Securities Act of 1933,
                    Registration No. 333-106391.)

         4.6*       Specimen for New Zero Yield Puttable Securities Due May 15,
                    2023. (Incorporated by reference to the Registrant's Current
                    Report on Form 8-K under the Securities Exchange Act of 1934
                    filed on January 26, 2005.)

         4.7*       Indenture, dated as of January 26, 2005, between Comverse
                    Technology, Inc., and JPMorgan Chase Bank, N.A. as Trustee.
                    (Incorporated by reference to the Registrant's Current
                    Report on Form 8-K under the Securities Exchange Act of 1934
                    filed on January 26, 2005.)


                                       50
<PAGE>
10       Material contracts:

         10.1*      Form of Stock Option Agreement pertaining to shares of
                    certain subsidiaries of Comverse Technology, Inc.
                    (Incorporated by reference to the Registrant's Annual Report
                    on Form 10-K under the Securities Exchange Act of 1934 for
                    the year ended December 31, 1993.)

         10.2*      Form of Incentive Stock Option Agreement. (Incorporated by
                    reference to the Registrant's Registration Statement on Form
                    S-1 under the Securities Act of 1933, Registration No.
                    33-9147.)

         10.3*      Form of Stock Option Agreement for options other than
                    Incentive Stock Options. (Incorporated by reference to the
                    Registrant's Annual Report on Form 10-K under the Securities
                    Exchange Act of 1934 for the year ended December 31, 1987.)

         10.4*      Form of Restricted Stock Agreement. (Incorporated by
                    reference to the Registrant's Annual Report on Form 10-K
                    under the Securities Exchange Act of 1934 for the year ended
                    January 31, 2004.)

         10.5*      Form of Indemnity Agreement between Comverse Technology,
                    Inc. and its Officers and Directors. (Incorporated by
                    reference to the Registrant's Annual Report on Form 10-K
                    under the Securities Exchange Act of 1934 for the year ended
                    January 31, 2003.)

         10.6*      1997 Employee Stock Purchase Plan, as amended. (Incorporated
                    by reference to the Definitive Proxy Materials for the
                    Registrant's Annual meeting of Shareholders held June 15,
                    2001.)

         10.7*      2004 Management Incentive Plan. (Incorporated by reference
                    to the Definitive Proxy Materials for the Registrant's
                    Annual Meeting of Shareholders held December 16, 2003.)

         10.8*      2002 Employee Stock Purchase Plan, as amended. (Incorporated
                    by reference to the Definitive Proxy Materials for the
                    Registrant's Annual Meeting of Shareholders held December
                    16, 2003.)

         10.9*      1997 Stock Incentive Compensation Plan. (Incorporated by
                    reference to the Definitive Proxy Materials for the
                    Registrant's Annual Meeting of Shareholders held January 13,
                    1998.)

         10.10*     1999 Stock Incentive Compensation Plan. (Incorporated by
                    reference to the Definitive Proxy Materials for the
                    Registrant's Annual Meeting of Shareholders held October 8,
                    1999.)

         10.11*     2000 Stock Incentive Compensation Plan. (Incorporated by
                    reference to the Definitive Proxy Materials for the
                    Registrant's Annual Meeting of Shareholders held September
                    15, 2000.)

         10.12*     2001 Stock Incentive Compensation Plan. (Incorporated by
                    reference to the Definitive Proxy Materials for the
                    Registrant's Annual Meeting of Shareholders held June 15,
                    2001.)


                                       51
<PAGE>
         10.13*     Lease dated November 5, 1990 between Boston Technology, Inc.
                    and Wakefield Park Limited Partnership ("Lease").
                    (Incorporated by reference to the Annual Report of Boston
                    Technology, Inc. on Form 10-K under the Securities Exchange
                    Act of 1934 for the year ended January 31, 1991.)

         10.14*     First Amendment to Lease dated as of March 31, 1993 between
                    Boston Technology, Inc. and WBAM Limited Partnership.
                    (Incorporated by reference to the Quarterly Report of Boston
                    Technology, Inc. on Form 10-Q under the Securities Exchange
                    Act of 1934 for the quarter ended October 31, 1993.)

         10.15*     Second Amendment to Lease dated as of August 31, 1994
                    between Boston Technology, Inc. and WBAM Limited
                    Partnership. (Incorporated by reference to the Annual Report
                    of Boston Technology, Inc. on Form 10-K under the Securities
                    Exchange Act of 1934 for the year ended January 31, 1995.)

         10.16*     Third Amendment to Lease dated as of June 7, 1996 between
                    Boston Technology, Inc. and WBAM Limited Partnership.
                    (Incorporated by reference to the Annual Report of Boston
                    Technology, Inc. on Form 10-K under the Securities Exchange
                    Act of 1934 for the year ended January 31, 1997.)

         10.17*     Fourth Amendment to Lease dated as of December 21, 1998
                    between Wakefield 100 LLC and Comverse Technology, Inc.
                    (Incorporated by reference to the Registrant's Annual Report
                    on Form 10-K under the Securities Exchange Act of 1934 for
                    the year ended January 31, 2003.)

         10.18*     Fifth Amendment to Lease dated as of September 5, 2002
                    between SC Wakefield 200, Inc. and Comverse Technology, Inc.
                    (Incorporated by reference to the Registrant's Annual Report
                    on Form 10-K under the Securities Exchange Act of 1934 for
                    the year ended January 31, 2003.)

         10.19*     Employment, Non-Disclosure and Non-Competition Agreement,
                    dated as of August 19, 2004 between Comverse Technology,
                    Inc. and David Kreinberg. (Incorporated by reference to the
                    Registrant's Quarterly Report on Form 10-Q under the
                    Securities Exchange Act of 1934 for the quarter ended July
                    31, 2004.)

         10.20*     2004 Stock Incentive Compensation Plan (Incorporated by
                    reference to the Definitive Proxy Materials for the
                    Registrant's Annual meeting of Shareholders held June 15,
                    2004.)

          10.21*    Form of Agreement evidencing a grant of Stock Options under
                    the Comverse Technology, Inc. Stock Incentive Compensation
                    Plans. (Incorporated by reference to the Registrant's
                    Current Report on Form 8-K under the Securities Exchange Act
                    of 1934 filed on December 7, 2004.)

         10.22*     Form of Agreement evidencing a grant of Stock Options under
                    the Comverse Technology, Inc. Stock Incentive Compensation
                    Plans to its directors. (Incorporated by reference to the
                    Registrant's Current Report on Form 8-K under the Securities
                    Exchange Act of 1934 on February 3, 2005.)

         21.1**     Subsidiaries of Registrant.


                                       52
<PAGE>
         23.1**     Consent of Deloitte & Touche LLP.

         24.1       Powers of Attorney (see signature page to this report.)

         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.

-----------------

*    Incorporated by reference.

**   Filed herewith.

***  This exhibit is being "furnished" pursuant to Item 601(b)(32) of SEC
     Regulation S-K and are not deemed "filed" with the Securities and Exchange
     Commission and are not incorporated by reference in any filing of the
     Company under the Securities Act of 1933 or the Securities Exchange Act of
     1934.





                                       53
<PAGE>
                                   SIGNATURES
                                   ----------

Pursuant to the requirements of Section 13 or 15(d) 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.
                                                     (Registrant)

                             April 4, 2005       By:  /s/ Kobi Alexander
                                                     ---------------------------
                                                     Kobi Alexander
                                                     Chairman of the Board
                                                     and Chief Executive Officer

                             April 4, 2005       By: /s/ David Kreinberg
                                                     ---------------------------
                                                     David Kreinberg
                                                     Executive Vice President
                                                     and Chief Financial Officer


KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kobi Alexander and David Kreinberg and
each of them, jointly and severally, his attorneys-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorneys-in-fact
or his substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

/s/ Kobi Alexander                                              April 4, 2005
---------------------------------
Kobi Alexander,
Chairman and CEO, Director

/s/ David Kreinberg                                             April 4, 2005
---------------------------------
David Kreinberg,
Executive Vice President and CFO

/s/ Raz Alon                                                    April 4, 2005
---------------------------------
Raz Alon, Director

/s/ Itsik Danziger                                              April 4, 2005
---------------------------------
Itsik Danziger, Director

/s/ John H. Friedman                                            April 4, 2005
---------------------------------
John H. Friedman, Director

/s/ Ron Hiram                                                   April 4, 2005
---------------------------------
Ron Hiram, Director

/s/ Sam Oolie                                                   April 4, 2005
---------------------------------
Sam Oolie, Director

/s/ William F. Sorin                                            April 4, 2005
---------------------------------
William F. Sorin, Director



                                       54
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                                                    PAGE

Management Report on Internal Control Over Financial Reporting       F-2

Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting                            F-3

Report of Independent Registered Public Accouting Firm on
the Consolidated Financial Statements                                F-4

Consolidated Balance Sheets as of January 31, 2004 and 2005          F-5

Consolidated Statements of Operations for the
   Years Ended January 31, 2003, 2004 and 2005                       F-6

Consolidated Statements of Stockholders' Equity for the
   Years Ended January 31, 2003, 2004 and 2005                       F-7

Consolidated Statements of Cash Flows for the
   Years Ended January 31, 2003, 2004 and 2005                       F-8

Notes to Consolidated Financial Statements                           F-9





                                      F-1
<PAGE>
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

           The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934. Those
rules define internal control over financial reporting as a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:

     o    Pertain to the maintenance of records that in reasonable detail
          accurately and fairly reflect the transactions and dispositions of the
          assets of the Company;

     o    Provide reasonable assurance that transactions are recorded as
          necessary to permit preparation of financial statements in accordance
          with generally accepted accounting principles, and that receipts and
          expenditures of the Company are being made only in accordance with
          authorizations of management and directors of the Company; and

     o    Provide reasonable assurance regarding prevention or timely detection
          of unauthorized acquisition, use or disposition of the Company's
          assets that could have a material effect on the financial statements.

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

           The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of January 31, 2005. In making this
assessment, the Company's management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.

           Based on our assessment and those criteria, the Company's management
believes that, as of January 31, 2005, the Company's internal control over
financial reporting is effective.

The Company's independent registered public accounting firm, Deloitte & Touche
LLP, has issued an attestation report on management's assessment of the
Company's internal control over financial reporting, which appears on pages F-3
and F-4.



                                      F-2
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

To the Board of Directors and Stockholders of Comverse Technology, Inc.
New York, New York

           We have audited management's assessment, included in the accompanying
Management Report On Internal Control Over Financial Reporting, that Comverse
Technology, Inc. and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of January 31, 2005, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.

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

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

           Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

           In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of January 31, 2005, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of January 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

           We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended January 31, 2005 of the Company and our
report dated April 1, 2005 expressed an unqualified opinion on those financial
statements.

/s/ Deloitte & Touche LLP

Jericho, New York
April 1, 2005

                                      F-3
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED
FINANCIAL STATEMENTS

To the Board of Directors and Stockholders of Comverse Technology, Inc.
New York, New York

           We have audited the accompanying consolidated balance sheets of
Comverse Technology, Inc. and subsidiaries (the "Company") as of January 31,
2005 and 2004, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended January 31, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

           In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Comverse Technology,
Inc. and subsidiaries as of January 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2005, in conformity with accounting principles generally accepted in
the United States of America.

           We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of January 31, 2005,
based on the criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated April 1, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Jericho, New York
April 1, 2005

                                      F-4
<PAGE>
<TABLE>
<CAPTION>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2004 AND 2005
(IN THOUSANDS, EXCEPT SHARE DATA)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                      2004                       2005
                                                                                      ----                       ----
<S>                                                                             <C>                    <C>
ASSETS
------
CURRENT ASSETS:
     Cash and cash equivalents                                                    $   623,063               $   721,350
     Bank time deposits                                                                   888                     2,317
     Short-term investments                                                         1,574,548                 1,525,963
     Accounts receivable, net                                                         158,236                   199,571
     Inventories                                                                       54,751                   107,552
     Prepaid expenses and other current assets                                         50,798                    70,335
                                                                                  ------------              ------------
TOTAL CURRENT ASSETS                                                                2,462,284                 2,627,088
PROPERTY AND EQUIPMENT, net                                                           125,023                   122,174
OTHER ASSETS                                                                          140,735                   176,024
                                                                                  ------------              ------------
TOTAL ASSETS                                                                      $ 2,728,042               $ 2,925,286
                                                                                  ============              ============

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

CURRENT LIABILITIES:
     Accounts payable and accrued expenses                                        $   229,296               $   291,005
     Convertible debt                                                                       -                    87,253
     Bank loans and other debt                                                          2,649                       660
     Advance payments from customers                                                   89,062                   108,381
                                                                                  ------------              ------------
TOTAL CURRENT LIABILITIES                                                             321,007                   487,299
CONVERTIBLE DEBT                                                                      544,723                   420,000
LIABILITY FOR SEVERANCE PAY                                                            12,324                    15,803
OTHER LIABILITIES                                                                      15,964                    12,330
                                                                                  ------------              ------------
TOTAL LIABILITIES                                                                     894,018                   935,432
                                                                                  ------------              ------------

MINORITY INTEREST                                                                     161,478                   195,825
                                                                                  ------------              ------------
COMMITMENTS AND CONTINGENCIES (Note 20)
STOCKHOLDERS' EQUITY:
     Preferred stock, $0.01 par value - authorized, 2,500,000
         shares; issued, none
     Common stock, $0.10 par value -
         authorized, 600,000,000 shares;
         issued and outstanding 194,549,886 and 198,878,553 shares                     19,454                    19,887
     Additional paid-in capital                                                     1,210,547                 1,284,298
     Unearned stock compensation                                                       (6,707)                  (14,432)
     Retained earnings                                                                439,899                   497,229
     Accumulated other comprehensive income                                             9,353                     7,047
                                                                                  ------------              ------------
TOTAL STOCKHOLDERS' EQUITY                                                          1,672,546                 1,794,029
                                                                                  ------------              ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                        $ 2,728,042               $ 2,925,286
                                                                                  ============              ============
</TABLE>

                See notes to consolidated financial statements.


                                      F-5
<PAGE>
<TABLE>
<CAPTION>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 2003, 2004 AND 2005
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------------------------------------------------------
                                                                          JANUARY 31,       JANUARY 31,        JANUARY 31,
                                                                             2003              2004               2005
                                                                             ----              ----               ----

<S>                                                                   <C>               <C>              <C>
Sales:
      Product revenues                                                    $  547,141        $  534,585       $  700,970
      Service revenues                                                       188,748           231,307          258,472
                                                                          -----------       -----------      -----------
                                                                             735,889           765,892          959,442
                                                                          -----------       -----------      -----------
Cost of sales:
      Product costs                                                          184,413           181,059          215,023
      Service costs                                                          153,708           146,501          165,687
                                                                          -----------       -----------      -----------
                                                                             338,121           327,560          380,710
                                                                          -----------       -----------      -----------

Gross margin                                                                 397,768           438,332          578,732

Operating expenses:
      Research and development, net                                          232,593           216,457          236,657
      Selling, general and administrative                                    281,202           254,376          290,445
      In-process research and development
            and other acquisition-related charges                                  -                 -            4,635
      Workforce reduction, restructuring
            and impairment charges (credits)                                  66,714            (2,123)              62
                                                                          -----------       -----------      -----------

      Income (loss) from operations                                         (182,741)          (30,378)          46,933

      Interest and other income, net                                          58,902            38,958           36,223
                                                                          -----------       -----------      -----------

Income (loss) before income tax provision, minority
      interest and equity in the earnings (losses) of affiliates            (123,839)            8,580           83,156

Income tax provision                                                           3,294             8,206           13,214

Minority interest and equity in the earnings (losses)
      of affiliates                                                           (2,345)           (5,760)         (12,612)
                                                                          -----------       -----------      -----------

Net income (loss)                                                         $ (129,478)       $   (5,386)      $   57,330
                                                                          ===========       ===========      ===========

Earnings (loss) per share:
            Basic                                                         $    (0.69)       $    (0.03)      $     0.29
                                                                          ===========       ===========      ===========
            Diluted                                                       $    (0.69)       $    (0.03)      $     0.28
                                                                          ===========       ===========      ===========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-6
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2003, 2004 AND 2005
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                               Accumulated Other
                                                                                              Comprehensive Income
                                           Common Stock                                       --------------------
                                           ------------   Additional    Unearned              Unrealized  Cumulative      Total
                                   Number of       Par      Paid-in       Stock       Retained    Gains   Translation  Stockholders'
                                    Shares        Value     Capital    Compensation   Earnings   (Losses)  Adjustment     Equity
                                    ------        -----     -------    ------------   --------   --------  ----------     ------

<S>                             <C>           <C>        <C>          <C>          <C>         <C>        <C>        <C>
BALANCE, FEBRUARY 1, 2002         186,248,350   $ 18,625  $ 1,018,232   $    -       $ 574,763    $ 4,299   $    489   $ 1,616,408
Comprehensive loss:
Net loss                                                                              (129,478)
Unrealized gain on
 available-for-sale securities                                                                        827
Translation adjustment                                                                                         1,297
Total comprehensive loss                                                                                                  (127,354)
Common stock issued for employee
 stock purchase plan                  975,396         97        8,097                                                        8,194
Exercise of stock options             530,661         53        4,121                                                        4,174
Issuance of subsidiary shares                                  47,996                                                       47,996
Tax benefit of dispositions of
 stock options                                                    274                                                          274
------------------------------------------------------------------------------------------------------------------------------------

BALANCE, JANUARY 31, 2003         187,754,407     18,775    1,078,720        -         445,285      5,126      1,786     1,549,692
Comprehensive loss:
Net loss                                                                                (5,386)
Unrealized loss on
 available-for-sale securities                                                                        (53)
Translation adjustment                                                                                         2,494
Total comprehensive loss                                                                                                    (2,945)
Common stock issued for employee
 stock purchase plan                  711,138         71        6,012                                                        6,083
Common stock issued for restricted
 stock grant                          314,300         31        5,218     (5,249)                                              -
Exercise of stock options           5,770,041        577       54,610                                                       55,187
Issuance of subsidiary shares                                  64,616     (1,672)                                           62,944
Tax benefit of dispositions of
 stock options                                                  1,371                                                        1,371
Amortization of unearned
 stock compensation                                                          214                                               214
------------------------------------------------------------------------------------------------------------------------------------

BALANCE, JANUARY 31, 2004         194,549,886     19,454    1,210,547     (6,707)      439,899      5,073      4,280     1,672,546
Comprehensive income:
Net income                                                                              57,330
Unrealized loss on
 available-for-sale securities                                                                     (3,588)
Translation adjustment                                                                                         1,282
Total comprehensive income                                                                                                  55,024
Common stock issued for employee
 stock purchase plan                  554,586         55        7,718                                                        7,773
Common stock issued for restricted
 stock grant                          327,100         33        7,508     (7,541)                                              -
Exercise of stock options           3,446,981        345       37,415                                                      37,760
Issuance of subsidiary shares                                  19,193     (2,281)                                          16,912
Tax benefit of dispositions of
 stock options                                                  1,917                                                       1,917
Amortization of unearned stock
 compensation                                                              2,097                                            2,097
------------------------------------------------------------------------------------------------------------------------------------

BALANCE, JANUARY 31, 2005         198,878,553   $ 19,887  $ 1,284,298  $ (14,432)    $ 497,229    $ 1,485    $ 5,562  $ 1,794,029
                                  ===========   ========  ===========  ==========    =========    =======    =======  ===========
</TABLE>

                 See notes to consolidated financial statements.



                                      F-7
<PAGE>
<TABLE>
<CAPTION>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED JANUARY 31, 2003, 2004 AND 2005
(IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------------------

                                                                                     JANUARY 31,    JANUARY 31,     JANUARY 31,
                                                                                        2003            2004            2005
                                                                                        ----            ----            ----
<S>                                                                             <C>              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                                              $  (129,478)   $    (5,386)     $   57,330
     Adjustments to reconcile net income (loss) to net cash provided
           by operating activities:
        Depreciation and amortization                                                    67,355         71,771          66,692
        Minority interest                                                                 1,570          7,246          12,861
        Operating asset write-downs and impairments                                      26,445          6,684          13,681
        Changes in operating assets and liabilities:
           Accounts receivable, net                                                     161,737         56,395         (40,545)
           Inventories                                                                   13,446        (14,071)        (52,696)
           Prepaid expenses and other current assets                                     19,728         11,123         (13,262)
           Accounts payable and accrued expenses                                        (74,856)       (33,302)         57,146
           Advance payments from customers                                               13,822         35,565          19,319
           Liability for severance pay                                                     (426)         2,407           3,380
           Other, net                                                                    (2,497)        (9,812)         (6,878)
                                                                                    ------------   ------------     -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                                96,846        128,620         117,028
                                                                                    ------------   ------------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Maturities and sales (purchases) of bank time deposits
        and investments, net                                                           (358,007)      (451,826)         38,119
     Purchase of property and equipment                                                 (34,092)       (35,352)        (46,151)
     Capitalization of software development costs                                       (13,391)        (7,759)         (4,198)
     Net assets acquired                                                                (31,130)        (5,910)        (45,634)
                                                                                    ------------   ------------     -----------
NET CASH USED IN INVESTING ACTIVITIES                                                  (436,620)      (500,847)        (57,864)
                                                                                    ------------   ------------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Net proceeds from issuance of convertible debt                                           -        412,766               -
     Repurchase of convertible debt                                                    (169,788)      (253,254)        (36,873)
     Proceeds from issuance of common stock in connection
        with exercise of stock options and employee stock purchase plan                  12,368         61,270          45,533
     Net proceeds from issuance of common stock of subsidiaries                          68,695        129,032          32,161
     Repayment of bank loan                                                                   -        (42,000)              -
     Other, net                                                                          (3,058)         2,381          (1,698)
                                                                                    ------------   ------------     -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                     (91,783)       310,195          39,123
                                                                                    ------------   ------------     -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   (431,557)       (62,032)         98,287
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                          1,116,652        685,095         623,063
                                                                                    ------------   ------------     -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                              $   685,095    $   623,063       $ 721,350
                                                                                    ============   ============     ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid during the year for interest                                         $    10,458    $     4,512       $   1,975
                                                                                    ============   ============     ===========
     Cash paid during the year for income taxes                                     $    11,682    $    10,503       $   8,015
                                                                                    ============   ============     ===========

</TABLE>

                 See notes to consolidated financial statements.


                                      F-8
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2003, 2004 AND 2005
--------------------------------------------------------------------------------

1.   ORGANIZATION AND BUSINESS

     Comverse Technology, Inc. ("CTI" and, together with its subsidiaries, the
     "Company") was organized as a New York corporation in October 1984. The
     Company is engaged in the design, development, manufacture, marketing and
     support of special purpose computer and telecommunications systems and
     software for multimedia communications and information processing
     applications.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
     the accounts of CTI and its wholly-owned and majority-owned subsidiaries.
     All material intercompany balances and transactions have been eliminated.

     MINORITY INTEREST - The interest of minority stockholders in the net assets
     of consolidated subsidiaries, relating primarily to CTI's Verint Systems
     Inc. ("Verint") and Ulticom, Inc. ("Ulticom") majority-owned subsidiaries,
     are presented in the Consolidated Balance Sheets separately from
     liabilities and stockholders' equity. The minority interest included in the
     Consolidated Statements of Operations represents the interest of minority
     stockholders in the net income of such consolidated subsidiaries.

     CASH, CASH EQUIVALENTS AND BANK TIME DEPOSITS - The Company considers all
     highly liquid investments purchased with original maturities of three
     months or less to be cash equivalents. Bank deposits with maturities in
     excess of three months are classified as bank time deposits.

     SHORT-TERM INVESTMENTS - The Company classifies all of its short-term
     investments as available-for-sale, accounted for at fair value, with
     resulting unrealized gains or losses reported as a separate component of
     stockholders' equity.

     In connection with the preparation of this report, 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 the Consolidated
     Balance Sheets. As of January 31, 2005, the Company held approximately
     $1,061,121,000 of investments in ARS that are classified as short-term
     investments. The Company reclassified approximately $907,932,000,
     $717,688,000 and $245,210,000 of investments in ARS as of January 31, 2004,
     2003 and 2002, respectively, that were previously included in cash and cash
     equivalents to short-term investments.

     The Company has also revised the presentation of the Consolidated
     Statements of Cash Flows for the years ended January 31, 2004 and 2003 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 Consolidated Statements of Cash Flows for the years ended January
     31, 2004 and 2003, net cash used in investing activities related to these
     short-term investments of approximately $190,244,000 and $472,478,000,
     respectively, were included in cash and cash equivalents.


                                      F-9
<PAGE>
     This change in classification does not affect previously reported cash
     flows from operations or from financing activities in the Consolidated
     Statements of Cash Flows or previously reported Consolidated Statements of
     Operations for any period.

     INVENTORIES - Inventories are stated at the lower of cost or market. Cost
     is determined by the first-in, first-out method.

     PROPERTY AND EQUIPMENT, NET - Property and equipment are carried at cost
     less accumulated depreciation and amortization. The Company depreciates its
     property and equipment primarily on a straight-line basis over periods
     generally ranging from three to seven years. Leasehold improvements are
     amortized over the shorter of their estimated useful lives or the related
     lease term. The cost of maintenance and repairs is charged to operations as
     incurred. Significant renewals and improvements are capitalized.

     INCOME TAXES - The Company accounts for income taxes using the asset and
     liability method. Under this method, deferred tax assets and liabilities
     are determined based on differences between financial reporting and tax
     bases of assets and liabilities, and are measured using the enacted tax
     rates and laws that are expected to be in effect when the differences are
     expected to reverse.

     REVENUE AND EXPENSE RECOGNITION - The Company recognizes revenues in
     accordance with the provisions of Statement of Position 97-2, "Software
     Revenue Recognition", and related Interpretations. The Company's systems
     are generally a bundled hardware and software solution that are shipped
     together. Revenue is generally recognized at the time of shipment for sales
     of systems which do not require significant customization to be performed
     by the Company when the following criteria are met: (1) persuasive evidence
     of an arrangement exists, (2) delivery has occurred and acceptance is
     determinable, (3) the fee is fixed or determinable and (4) collectibility
     is probable.

     Amounts received from customers pursuant to the terms specified in
     contracts but for which revenue has not yet been recognized are recorded as
     advance payments from customers.

     Post-contract customer support ("PCS") services are sold separately or as
     part of a multiple element arrangement, in which case the related PCS
     element is determined based upon vendor-specific objective evidence of fair
     value, such that the portion of the total fee allocated to PCS services is
     generally recognized as revenue ratably over the term of the PCS
     arrangement.

     Revenues from certain development contracts are recognized under the
     percentage-of-completion method on the basis of physical completion to date
     or using actual costs incurred to total expected costs under the contract.
     Revisions in estimates of costs and profits are reflected in the accounting
     period in which the facts that require the revision become known. At the
     time a loss on a contract is known, the entire amount of the estimated loss
     is accrued. Amounts received from customers in excess of revenues earned
     under the percentage-of-completion method are recorded as advance payments
     from customers. Related contract costs include all direct material and
     labor costs and those indirect costs related to contract performance, and
     are included in `Cost of sales' in the Consolidated Statements of
     Operations.

     Expenses incurred in connection with research and development activities,
     other than certain software development costs that are capitalized, and
     selling, general and administrative expenses are charged to operations as
     incurred.

     SOFTWARE DEVELOPMENT COSTS - Software development costs are capitalized
     upon the establishment of technological feasibility and are amortized over
     the estimated useful life of the software, which to date has been four
     years or less. The amounts capitalized for the years ended January 31,
     2003, 2004 and 2005 were approximately $13,391,000, $7,759,000 and
     $4,198,000, respectively. Amortization begins in the period in which the
     related product is available for general release to customers. Amortization
     expense amounted to approximately $12,594,000, $15,149,000 and $14,311,000


                                      F-10
<PAGE>
     for the years ended January 31, 2003, 2004 and 2005, respectively. In
     addition, during the year ended January 31, 2005, the Company recorded
     write-downs of approximately $5,049,000 of capitalized software development
     costs to its estimated net realizable value, primarily as a result of the
     Company's transition to its newer product line as well as duplicative
     technology that arose as a result of Verint's acquisitions during the
     period.

     FUNCTIONAL CURRENCY AND FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES - The
     United States dollar (the "dollar") is the functional currency of the major
     portion of the Company's foreign operations. Most of the Company's sales,
     and materials purchased for manufacturing, are denominated in or linked to
     the dollar. Certain operating costs, principally salaries, of foreign
     operations are denominated in local currencies. In those instances where a
     foreign subsidiary has a functional currency other than the dollar, the
     Company records any necessary foreign currency translation adjustment,
     reflected in stockholders' equity, at the end of each reporting period.

     DERIVATIVE FINANCIAL INSTRUMENTS - The Company is exposed to market risk
     from changes in foreign currency exchange rates and 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. These instruments are not designated as hedges and the change in
     fair value is included in income currently. As of January 31, 2004 and
     2005, the Company had approximately $31,668,000 and $32,583,000,
     respectively, of notional amount of foreign exchange forward contracts to
     sell Euros with an original maturity of up to six months. The fair value of
     these contracts as of January 31, 2004 and 2005 of approximately $(183,000)
     and $(66,000), respectively, is included in `Interest and other income,
     net' in the Consolidated Statements of Operations.

     GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill represents the excess of
     the purchase price over the fair value of net assets acquired. Other
     intangible assets include identifiable acquired software and technology,
     trade name, customer relationships, sales backlog and non-compete
     agreements. In accordance with the provisions of Statement of Financial
     Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
     Assets", goodwill and certain intangible assets are no longer amortized,
     but rather are reviewed for impairment on at least an annual basis. The
     Company has performed these reviews and deemed there to be no such
     impairment as of January 31, 2004 and 2005. Other intangible assets with
     finite lives are amortized using the straight-line method over their
     estimated useful lives of up to ten years.

     OTHER ASSETS - Licenses of patent rights and acquired "know-how" are
     recorded at cost and amortized using the straight-line method over the
     estimated useful lives of the related technology, generally not exceeding
     four years. Debt issue costs are amortized using the effective interest
     method over the term of the related debt.

     LONG-LIVED ASSETS - The Company reviews for the impairment of long-lived
     assets whenever events or changes in circumstances indicate that the
     carrying amount of an asset may not be recoverable. An impairment loss
     would be recognized when estimated future undiscounted cash flows expected
     to result from the use of the asset and proceeds from its eventual
     disposition are less than its carrying amount. Impairment is measured at
     fair value. In connection with its restructuring plan, during the years
     ended January 31, 2003, 2004 and 2005, the Company identified certain
     impairment losses that are included in `Workforce reduction, restructuring
     and impairment charges (credits)' in the Consolidated Statements of
     Operations. Refer to Note 9 for details. In addition, during the year ended
     January 31, 2005, the Company recorded write-downs of approximately
     $3,849,000 of fixed assets to its estimated net realizable value, primarily
     as a result of the obsolescence of such fixed assets.



                                      F-11
<PAGE>
     CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
     expose the Company to concentration of credit risk, consist primarily of
     cash investments and accounts receivable. The Company places its cash
     investments with high-credit quality financial institutions and currently
     invests primarily in money market funds placed with major banks and
     financial institutions, bank time deposits, corporate commercial paper,
     ARS, corporate and municipal short and medium term notes, mortgage and
     asset backed securities, U.S. government and U.S. government corporation
     and agency obligations, mutual funds, trusts and closed-end funds investing
     in the like and common and preferred stock. The Company believes no
     significant concentration of credit risk exists with respect to these cash
     investments.

     Accounts receivable are generally diversified due to the large number of
     commercial and government entities comprising the Company's customer base
     and their dispersion across many geographical regions. As of January 31,
     2004 and 2005, there was no single customer balance that comprised 10% of
     the overall accounts receivable balance. The Company believes no
     significant concentration of credit risk exists with respect to these
     accounts receivable.

     The Company is required to estimate the collectibility of its accounts
     receivable each accounting period and record a reserve for bad debts. A
     considerable amount of judgment is required in assessing the realization of
     these receivables, including the current creditworthiness of each customer,
     current and historical collection history and the related aging of past due
     balances. The Company evaluates specific accounts when it becomes aware of
     information indicating that a customer may not be able to meet its
     financial obligations due to deterioration of its financial condition,
     lower credit ratings, bankruptcy or other factors affecting the ability to
     render payment. Reserve requirements are based on the facts available and
     are re-evaluated and adjusted as additional information is received. The
     Company's policy is to account for recoveries of previously reserved for
     doubtful accounts upon the receipt of cash where there is no evidence of
     recoverability for items specifically reserved for prior to the receipt of
     cash.




                                      F-12
<PAGE>
        The roll forward of the allowance for doubtful accounts is as follows:

<TABLE>
<CAPTION>
                                                        YEARS ENDED JANUARY 31,
                                                  ------------------------------------
                                                      2003       2004         2005
                                                  ----------   ----------   ----------
                                                           (IN THOUSANDS)

<S>                                           <C>            <C>           <C>
         Balance at beginning of period           $  41,955    $  56,759    $  49,958
         Charges to costs and expenses               45,300       12,014        7,063
         Recoveries                                       -      (12,200)     (19,425)
         Deductions                                 (30,559)      (9,072)      (7,151)
         Other                                           63        2,457         (503)
                                                  ----------   ----------   ----------
         Balance at end of period                 $  56,759    $  49,958    $  29,942
                                                  ==========   ==========   ==========
</TABLE>

     The recoveries of approximately $12,200,000 and $19,425,000 for the years
     ended January 31, 2004 and 2005, respectively, were recorded as a result of
     cash being collected from customers for items that had previously been
     reserved for as doubtful of collection, in the period that the cash was
     received.

     BANK LOANS - In January 2002, Verint took a bank loan in the amount of
     $42,000,000. The loan, which matured in February 2003, bore interest at
     LIBOR plus 0.55% and was guaranteed by CTI. During February 2003, Verint
     repaid the bank loan.

     ISSUANCE OF SUBSIDIARY STOCK - Sales of stock by subsidiaries are accounted
     for as capital transactions with the adjustment to additional paid-in
     capital. No gain or loss is recognized on these transactions.

     STOCK-BASED COMPENSATION - At January 31, 2005, the Company had in place
     the Comverse Stock Incentive Plans, as fully described in Note 14. 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 (loss) for any periods, as all options granted had
     an exercise price at least equal to the market value of the underlying
     common stock on the date of grant. Refer to Note 22 for a description of
     pending changes to this accounting treatment.

     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. For the years ended January 31, 2003, 2004 and 2005,
     respectively, stock-based employee compensation expense relating to
     restricted stock of approximately $0, $214,000 and $2,097,000 is included
     in `Selling, general and administrative' expenses in the Consolidated
     Statements of Operations.

     The Company estimated the fair value of employee stock options utilizing
     the Black-Scholes option valuation model, using the assumptions as
     described in Note 14, 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.


                                      F-13
<PAGE>
        The following table illustrates the effect on net income (loss) and
        earnings (loss) per share if the Company had applied the fair value
        recognition provisions of SFAS No. 123, "Accounting for Stock-Based
        Compensation", to stock-based employee compensation for all periods:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED JANUARY 31,
                                                                             ----------------------
                                                                   2003                2004              2005
                                                                   ----                ----              ----
                                                                                 (IN THOUSANDS)

<S>                                                           <C>               <C>                <C>
         Net income (loss), as reported                          $ (129,478)         $   (5,386)       $   57,330

           Deduct: Total stock-based employee compensation
         expense determined under fair value based method
         for all awards, net of related tax effects                (149,782)           (122,537)         (104,477)
                                                                 -----------         -----------       -----------


         Pro forma net loss                                      $ (279,260)         $ (127,923)       $  (47,147)
                                                                 ===========         ===========       ===========


         Earnings (loss) per share:

         Basic - as reported                                     $    (0.69)         $    (0.03)       $     0.29
         Basic - pro forma                                       $    (1.49)         $    (0.67)       $    (0.24)

         Diluted - as reported                                   $    (0.69)         $    (0.03)       $     0.28
         Diluted - pro forma                                     $    (1.49)         $    (0.67)       $    (0.24)

</TABLE>

     PERVASIVENESS OF ESTIMATES - 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.

     RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
     conform to the manner of presentation in the current year. Refer to the
     description under Short-Term Investments found earlier in this Note 2
     regarding revisions to the presentation of certain investments in the
     consolidated financial statements.

3.   RESEARCH AND DEVELOPMENT

     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.
     During the year ended January 31, 2003, one of the Company's subsidiaries
     finalized an agreement with the OCS whereby the subsidiary agreed to pay a
     lump sum royalty of approximately $26 million for all past amounts received
     from the OCS. The amount and timing of the payments to the OCS under this
     agreement were approximately $3 million in March 2002 and approximately $23
     million in June 2002. In addition, this subsidiary began to receive lower
     amounts from the OCS than it had historically received, but is not required
     to pay royalties on such future grants. Under the terms of the applicable


                                      F-14
<PAGE>
     funding agreements, permission from the Government of Israel is required
     for the Company to manufacture outside of Israel products resulting from
     research and development activities funded under these programs. In order
     to obtain such permission, the Company would be required to increase the
     royalties to the applicable funding agencies and/or repay certain amounts
     received as reimbursement of research and development costs. The transfer
     outside of Israel of any intellectual property rights resulting from
     research and development activities funded under OCS programs is not
     permitted. The amounts reimbursed by the OCS for the years ended January
     31, 2003, 2004 and 2005 were approximately $10,540,000, $10,013,000 and
     $9,444,000, respectively.

4.   SHORT-TERM INVESTMENTS

     As previously noted under Short-Term Investments in Note 2, the Company
     concluded that it was appropriate to classify investments in 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 the Consolidated Balance Sheets.
     The Company classifies all of its short-term investments as
     available-for-sale securities. The following is a summary of
     available-for-sale securities as of January 31, 2005:

<TABLE>
<CAPTION>
                                                                       GROSS            GROSS              ESTIMATED
                                                                     UNREALIZED        UNREALIZED            FAIR
                                                      COST             GAINS            LOSSES               VALUE
                                               -----------------------------------------------------------------------
                                                                           (IN THOUSANDS)

<S>                                          <C>                <C>              <C>                <C>
        Corporate debt securities              $       6,748      $         548    $             8      $        7,288
        U.S. municipal debt securities                10,134                  -                 45              10,089
        U.S. Government corporation
           and agency bonds                          428,645                  -              4,507             424,138
        Auction rate securities                    1,061,121                  -                  -           1,061,121
                                               --------------     --------------    ---------------     ---------------
        Total debt securities                      1,506,648                548              4,560           1,502,636
                                               --------------     --------------    ---------------     ---------------

        Common stock and
           closed-end funds                           12,587              5,242                  5              17,824
        Mutual funds (1)                               1,863                139                  -               2,002
        Preferred stock                                3,468                109                 76               3,501
                                               --------------     --------------    ---------------     ---------------
        Total equity securities                       17,918              5,490                 81              23,327
                                               --------------     --------------    ---------------     ---------------

                                               $   1,524,566      $       6,038     $        4,641      $    1,525,963
                                               ==============     ==============    ===============     ===============
</TABLE>

(1)  Investing in U.S. Government and U.S. Government corporation and agency
     obligations, corporate debt securities, commercial paper and/or
     asset-backed securities.


                                      F-15
<PAGE>
The following is a summary of available-for-sale securities as of January 31,
2004:

<TABLE>
<CAPTION>
                                                                       GROSS              GROSS          ESTIMATED
                                                                    UNREALIZED         UNREALIZED          FAIR
                                                     COST              GAINS             LOSSES            VALUE
                                             ------------------------------------------------------------------------
                                                                         (IN THOUSANDS)

<S>                                        <C>                <C>                <C>                  <C>
        Corporate debt securities            $      35,573     $       1,054      $           -        $      36,627
        U.S. Government corporation
           and agency bonds                        309,531                 -              1,649              307,882
        Auction rate securities                    907,932                 -                  -              907,932
                                             --------------    --------------     --------------       --------------
        Total debt securities                    1,253,036             1,054              1,649            1,252,441
                                             --------------    --------------     --------------       --------------

        Common stock and
           closed-end funds                         27,038             4,951                  -               31,989
        Mutual funds and trust (1)                 286,057               196                  -              286,253
        Preferred stock                              3,518               347                  -                3,865
                                             --------------    --------------     --------------       --------------
        Total equity securities                    316,613             5,494                  -              322,107
                                             --------------    --------------     --------------       --------------

                                             $   1,569,649     $       6,548      $       1,649        $   1,574,548
                                             ==============    ==============     ==============       ==============
</TABLE>

     (1) Investing in U.S. Government and U.S. Government corporation and agency
     obligations, corporate debt securities, commercial paper and/or
     asset-backed securities.

     As of January 31, 2005, the Company held certain investments in U.S.
     Government corporation and agency bonds that had been in a continuous
     unrealized loss position for 12 months or greater, aggregating to a total
     estimated fair value of approximately $196,470,000 and with total gross
     unrealized losses of approximately $3,528,000; the Company held no other
     significant investments that had been in a continuous unrealized loss
     position for 12 months or greater as of January 31, 2005. The Company held
     no significant investments that had been in a continuous unrealized loss
     position for 12 months or greater as of January 31, 2004. The Company
     evaluates investments with unrealized losses to determine if the losses are
     other-than-temporary. The gross unrealized losses as of January 31, 2005
     are due primarily to changes in interest rates and the Company has
     determined that such diminution in value is temporary. In making this
     determination, the Company considered its ability to hold the investments
     to maturity, the financial condition and near-term prospects of the
     issuers, the magnitude of the losses compared to the investments' cost and
     the length of time the investments have been in an unrealized loss
     position.

     During the year ended January 31, 2005, the gross realized gains on sales
     of securities totaled approximately $4,163,000, and the gross realized
     losses totaled approximately $3,265,000. During the year ended January 31,
     2004, the gross realized gains on sales of securities totaled approximately
     $5,439,000, and the gross realized losses totaled approximately $1,558,000.
     During the year ended January 31, 2003, the gross realized gains on sales
     of securities totaled approximately $3,588,000, and the gross realized
     losses totaled approximately $13,644,000. The basis on which cost is
     generally determined in computing realized gain or loss is by the first-in,
     first-out method.


                                      F-16
<PAGE>
       The cost and estimated fair value of debt securities at January 31, 2005,
       by contractual maturity, are as follows; substantially all securities
       with maturities after three years are ARS:

<TABLE>
<CAPTION>
                                                                                         ESTIMATED
                                                                      COST              FAIR VALUE
                                                                      ----              ----------
                                                                            (IN THOUSANDS)

<S>                                                           <C>                <C>
             Due in one year or less                              $   196,953           $   196,192
             Due after one year through three years                   299,095               295,342
             Due after three years through five years                  23,200                23,200
             Due after five years through ten years                    30,694                31,196
             Due after ten years through twenty years                  68,265                68,265
             Due after twenty years                                   888,441               888,441
                                                                  ------------          ------------

                                                                  $ 1,506,648           $ 1,502,636
                                                                  ============          ============



5.      INVENTORIES

                Inventories consist of:
                                                                               JANUARY 31,
                                                                               -----------
                                                                        2004                2005
                                                                        ----                ----
                                                                             (IN THOUSANDS)

                     Raw materials                                $    23,157           $    34,364
                     Work in process                                   12,802                23,640
                     Finished goods                                    18,792                49,548
                                                                  ------------          ------------

                                                                  $    54,751           $   107,552
                                                                  ============          ============



6.       PROPERTY AND EQUIPMENT, NET

                Property and equipment consist of:
                                                                               JANUARY 31,
                                                                               -----------
                                                                        2004                 2005
                                                                        ----                 ----
                                                                             (IN THOUSANDS)

                     Fixtures and equipment                       $   300,946           $   294,867
                     Land and buildings                                22,765                21,942
                     Software                                          33,670                35,855
                     Transportation vehicles                            1,293                 1,790
                     Leasehold improvements                            14,604                15,553
                                                                  ------------          ------------
                                                                      373,278               370,007
                     Less accumulated depreciation
                            and amortization                         (248,255)             (247,833)
                                                                  ------------          ------------

                                                                  $   125,023           $   122,174
                                                                  ============          ============
</TABLE>

                                      F-17
<PAGE>
7.      OTHER ASSETS

<TABLE>
<CAPTION>
             Other assets consist of:
                                                                           JANUARY 31,
                                                                           -----------
                                                                    2004                  2005
                                                                    ----                  ----
                                                                         (IN THOUSANDS)

<S>                                                       <C>                 <C>
                  Software development costs, net of
                      accumulated amortization
                      of $52,731 and $53,798                   $    32,824           $    17,662

                  Investments                                       35,262                38,672

                  Other assets                                      72,649               119,690
                                                               ------------          ------------

                                                               $   140,735           $   176,024
                                                               ============          ============

</TABLE>

8.   BUSINESS COMBINATIONS

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

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

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


                                      F-18
<PAGE>
The following is a summary of the allocation of the purchase price for this
acquisition:

                                                           (IN THOUSANDS)

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


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


     The value allocated to goodwill in ECtel will be deducted for income tax
     purposes. A summary of pro forma results of operations has not been
     presented as the effect of this acquisition was not deemed material.

     In September 2004, Verint, through a subsidiary, acquired all of the
     outstanding stock of RP Sicherheitssysteme GmbH ("RP Security"), a company
     in the business of developing and selling mobile digital video security
     solutions for transportation applications. The purchase price consisted of
     approximately $9,028,000 in cash and 90,144 shares of Verint's common
     stock. In addition, the shareholders of RP Security will be entitled to
     receive earn-out payments over three years based on Verint's worldwide
     sales, profitability and backlog of mobile video products in the
     transportation market during that period. Shares issued as part of the
     purchase price were accounted for with a value of approximately $2,977,000,
     or $33.03 per share. In connection with this acquisition, Verint incurred
     transaction costs, consisting primarily of professional fees, amounting to
     approximately $520,000.

     In May 2003, Verint acquired all of the issued and outstanding shares of
     Smartsight Networks Inc. ("Smartsight"), a Canadian corporation that
     develops IP-based video edge devices and software for wireless video
     transmission. The purchase price consisted of approximately $7,144,000 in
     cash and 149,731 shares of Verint common stock, valued at approximately
     $3,063,000, or $20.46 per share.

     In February 2002, Verint acquired the digital video recording business of
     Lanex, LLC ("Lanex"). The Lanex business provides digital video recording
     solutions for security and surveillance applications primarily to North
     American banks. The purchase price consisted of $9,510,000 in cash and a
     $2,200,000 non-interest bearing note, guaranteed by CTI, and convertible in
     whole or in part, into shares of Verint's common stock at a conversion
     price of $16.06 per share. The note matured and was converted into shares
     of Verint common stock on February 1, 2004.

     In June 2002, the Company acquired Odigo, Inc. ("Odigo"), a privately-held
     provider of instant messaging and presence management solutions to service
     providers. The purchase price was approximately $20,100,000 in cash. Prior
     to the acquisition, the Company was a strategic partner with Odigo, holding
     an equity position which it previously acquired for approximately
     $3,000,000.

     The RP Security, Smartsight, Lanex and Odigo acquisitions were accounted
     for using the purchase method and, accordingly, the Consolidated Statements
     of Operations include the results of operations from the date of
     acquisition. Assets acquired and liabilities assumed were recorded at
     estimated fair values as determined by the Company's management based on


                                      F-19
<PAGE>
     information then available and through the assistance of independent
     appraisal specialists, where applicable. After allocating the purchase
     price, including the direct costs of the acquisition, to net tangible and
     identifiable intangible assets, any excess of cost over fair value of net
     assets acquired was recorded as goodwill, included in `Other assets' in the
     Consolidated Balance Sheets. A summary of the assets acquired and
     liabilities assumed in these acquisitions as well as pro forma results of
     operations have not been presented because the effects of these
     acquisitions were not deemed material.

9.   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 years ended January 31, 2003, 2004 and 2005, the Company incurred net
     charges (credits) to operations of approximately $66,714,000, $(2,123,000)
     and $62,000, respectively, 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.

     An analysis of the total charges of approximately $66,714,000 incurred
     during the year ended January 31, 2003 as well as a rollforward of the
     workforce reduction and restructuring accrual for that period is as
     follows:

<TABLE>
<CAPTION>

                                                          WORKFORCE
                                                          REDUCTION,                                       ACCRUAL
                                    ACCRUAL BALANCE    RESTRUCTURING &                                    BALANCE AT
                                     AT FEBRUARY 1,       IMPAIRMENT         CASH        NON-CASH         JANUARY 31,
                                          2002             CHARGES         PAYMENTS       CHARGES           2003
                                          ----             -------         --------       -------           ----
                                                                      (IN THOUSANDS)

<S>                                <C>               <C>              <C>            <C>             <C>
       Severance and related           $    11,862       $   26,857      $   29,352    $        -       $      9,367
       Facilities and related               24,347           19,360           3,253             -             40,454
       Property and equipment                    -           20,497               -        20,497                  -
                                       -------------     -----------     -----------   -----------      -------------
       Total                           $    36,209       $   66,714      $   32,605    $   20,497       $     49,821
                                       =============     ===========     ===========   ===========      =============

</TABLE>

       An analysis of the net credit of approximately $2,123,000 incurred during
       the year ended January 31, 2004 as well as a rollforward of the workforce
       reduction and restructuring accrual for that period is as follows:

<TABLE>
<CAPTION>

                                                         WORKFORCE
                                                         REDUCTION,
                                                      RESTRUCTURING &                                      ACCRUAL
                                  ACCRUAL BALANCE       IMPAIRMENT                                        BALANCE AT
                                    AT FEBRUARY 1,        CHARGES             CASH        NON-CASH        JANUARY 31,
                                         2003            (CREDITS)          PAYMENTS       CHARGES          2004
                                         ----            ---------          --------       -------          ----
                                                                  (IN THOUSANDS)

<S>                                <C>               <C>              <C>            <C>             <C>

       Severance and related           $      9,367      $    4,494      $   10,793    $        -       $      3,068
       Facilities and related                40,454          (8,051)          5,976             -             26,427
       Property and equipment                     -           1,434               -         1,434                  -
                                       -------------     -----------     -----------   -----------      -------------
       Total                           $     49,821      $   (2,123)     $   16,769    $    1,434       $     29,495
                                       =============     ===========     ===========   ===========      =============
</TABLE>



                                      F-20
<PAGE>
     An analysis of the net charge of approximately $62,000 incurred during the
     year ended January 31, 2005 as well as a rollforward of the workforce
     reduction and restructuring accrual for that period is as follows:

<TABLE>
<CAPTION>

                                                         WORKFORCE
                                                         REDUCTION,
                                                      RESTRUCTURING &                                      ACCRUAL
                                  ACCRUAL BALANCE       IMPAIRMENT                                        BALANCE AT
                                    AT FEBRUARY 1,        CHARGES             CASH        NON-CASH        JANUARY 31,
                                         2004            (CREDITS)          PAYMENTS       CHARGES          2005
                                         ----            ---------          --------       -------          ----
                                                                  (IN THOUSANDS)
<S>                                <C>               <C>              <C>            <C>             <C>

       Severance and related           $      3,068      $      596      $    3,543    $        -       $        121
       Facilities and related                26,427            (743)          4,202             -             21,482
       Property and equipment                     -             209               -           209                  -
                                       -------------     -----------     -----------   -----------      -------------
       Total                           $     29,495      $       62      $    7,745    $      209       $     21,603
                                       =============     ===========     ===========   ===========      =============

</TABLE>

     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. During the years ended January 31, 2004 and 2005, the
     Company reversed approximately $8,051,000 and $743,000, respectively, in
     previously taken restructuring charges for facilities and related costs,
     primarily as a result of the sublet of a portion of the excess facilities.
     The balance of these facilities and related costs is expected to be paid at
     various dates through January 2011.

     Property and equipment costs consist primarily of the write-down of various
     assets to their current estimable fair value, including the value of
     certain unimproved land in Israel, written down during the year ended
     January 31, 2003, that the Company had acquired with a view to the future
     construction of facilities for its Israeli operations.

10.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

        Accounts payable and accrued expenses consist of:

<TABLE>
<CAPTION>
                                                                        JANUARY 31,
                                                                        -----------
                                                                   2004             2005
                                                                   ----             ----
                                                                      (IN THOUSANDS)

<S>                                                         <C>              <C>
             Accounts payable                                  $    67,110      $    84,875
             Accrued compensation                                   37,088           55,951
             Accrued vacation                                       21,704           24,352
             Accrued royalties                                       7,704            9,976
             Accrued workforce reduction and restructuring          29,495           21,603
             Accrued warranty                                        8,333           10,185
             Other accrued expenses                                 57,862           84,063
                                                               ------------     ------------

                                                               $   229,296      $   291,005
                                                               ============     ============
</TABLE>


                                      F-21
<PAGE>
11.  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. In connection with this offer, the Company incurred transaction
     costs, consisting primarily of professional fees, amounting to
     approximately $903,000 included in `Selling, general and administrative'
     expenses in the Consolidated Statements of Operations.

     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 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 currently $417,700,000, 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 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 recent 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.


                                      F-22
<PAGE>
     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 $417,700,000. For the year ended January 31, 2005,
     this resulted in approximately 1,610,000 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 as of January 31,
     2005 is 128,516 shares. 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. The adoption of EITF
     04-8 did not have an effect on reported diluted earnings (loss) per share
     for any periods presented.

     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 for the first 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 years ended January 31, 2003, 2004 and 2005, the Company
     acquired, in open market purchases, $209,162,000, $266,115,000 and
     $37,470,000 of face amount of the Debentures, respectively, resulting in
     pre-tax gains, net of debt issuance costs, of approximately $39,374,000,
     $10,224,000 and $341,000, respectively, included in `Interest and other
     income, net' in the Consolidated Statements of Operations. As of January
     31, 2005, the Company had outstanding Debentures of $87,253,000, included
     in the current liabilities section of the Consolidated Balance Sheets.

12.  LIABILITY FOR SEVERANCE PAY

     Liability for severance pay consists primarily of the Company's unfunded
     liability for severance pay to employees of certain foreign subsidiaries
     and accrued severance to the Company's chief executive officer.

     Under Israeli law, the Company is obligated to make severance payments to
     employees of its Israeli subsidiaries on the basis of each individual's
     current salary and length of employment. These liabilities are currently
     provided primarily by premiums paid by the Company to insurance providers.


                                      F-23
<PAGE>
     The Company is obligated under agreements with its chief executive officer
     ("CEO") and chief financial officer ("CFO") to provide a severance payment
     upon the termination of their employment with the Company. Approximately
     $3,480,000 and $220,000 has been accrued as of January 31, 2004,
     respectively, and approximately $4,010,000 and $266,000 has been accrued as
     of January 31, 2005, respectively, relating to these agreements with the
     CEO and CFO.

13.  ISSUANCE OF SUBSIDIARY STOCK

     In April and October 2000, Ulticom issued shares of its common stock in
     public offerings. As of January 31, 2005, the Company's ownership interest
     in Ulticom was approximately 68.6%.

     In May 2002, Verint issued 4,500,000 shares of its common stock in an
     initial public offering. Proceeds from the offering, based on the offering
     price of $16.00 per share, totaled approximately $65.4 million, net of
     offering expenses. The Company recorded a gain of approximately $48.1
     million during the year ended January 31, 2003, which was recorded as an
     increase in stockholders' equity as a result of the issuance.

     In June 2003, Verint completed a public offering of 5,750,000 shares of its
     common stock at a price of $23.00 per share. The shares offered included
     149,731 shares issued to Smartsight's former shareholders in connection
     with its acquisition. The proceeds of the offering were approximately
     $122.2 million, net of offering expenses. The Company recorded a gain of
     approximately $62.9 million, which was recorded as an increase in
     stockholders' equity as a result of the issuance. As of January 31, 2005,
     the Company's ownership interest in Verint was approximately 58.9%.

     In February 2004, Starhome B.V. ("Starhome"), a subsidiary of CTI, received
     equity financing from an unaffiliated investor group of approximately
     $14,481,000, net of expenses. The Company recorded a gain of approximately
     $11,767,000, which was recorded as an increase in stockholders' equity as a
     result of the issuance. Upon the completion of this transaction, the
     Company's ownership interest in Starhome was approximately 69.5%; this
     interest was unchanged as of January 31, 2005. In addition, during the year
     ended January 31, 2005, Starhome received a commitment for an additional
     $5,000,000 in equity financing from the unaffiliated investor group, which
     funds are currently being held in escrow.

14.  STOCK-BASED COMPENSATION

     OPTION EXCHANGE PROGRAM - In May 2002, the Company announced the
     commencement of a voluntary stock option exchange program for its eligible
     employees. Under the program, which was approved by the Company's
     shareholders, participating employees were given the opportunity to have
     unexercised stock options previously granted to them cancelled, in exchange
     for replacement options that were granted at a future date. Replacement
     options were granted at a ratio of 0.85 new options for each existing
     option cancelled, at an exercise price equal to the fair market value of
     the Company's stock on the date of the re-grant. The exchange program was
     designed in accordance with FASB Interpretation No. 44, "Accounting for
     Certain Transactions Involving Stock Compensation (an interpretation of APB
     Opinion No. 25)", under which, the grant of replacement options not less
     than six months and one day after cancellation will not result in any
     variable compensation charges relating to these options.

     On the date of re-grant, December 23, 2002, replacement options to acquire
     14,208,987 shares of the Company's common stock were granted at an exercise
     price of $10.52 per share, the closing fair market value of the Company's
     stock on that date.

     STOCK OPTIONS - At January 31, 2005, 22,603,387 shares of common stock were
     reserved for issuance upon the exercise of stock options then outstanding
     and 4,333,276 shares were available for future grant under Comverse's Stock
     Incentive Plans, under which options and restricted stock may be granted to
     key employees, directors, and other persons rendering services to the
     Company. Options which are designated as "incentive stock options" under


                                      F-24
<PAGE>
     the plans may be granted with an exercise price not less than the fair
     market value of the underlying shares at the date of grant and are subject
     to certain quantity and other limitations specified in Section 422 of the
     Internal Revenue Code. Options which are not intended to qualify as
     incentive stock options may be granted at a price below fair market value.
     The options and the underlying shares are subject to adjustment in
     accordance with the terms of the plans in the event of stock dividends,
     recapitalizations and similar transactions. The right to exercise the
     options generally vests in increments over periods of up to four years from
     the date of grant or the date of commencement of the grantee's employment
     with the Company, up to a maximum term of ten years for all options
     granted.

       The changes in the number of options were as follows:

<TABLE>
<CAPTION>

                                                                  YEAR ENDED JANUARY 31,
                                                  -------------------------------------------------------
                                                         2003                2004               2005
                                                         ----                ----               ----

<S>                                            <C>                   <C>                <C>
       Outstanding at beginning of period              33,089,823         25,079,827          23,287,332
       Granted during the period                       15,851,028          5,297,836           3,764,790
       Exercised during the period                       (530,661)        (5,770,041)         (3,446,981)
       Canceled, terminated and expired               (23,330,363)        (1,320,290)         (1,001,754)
                                                  ----------------    ---------------    ----------------

       Outstanding at end of period                    25,079,827         23,287,332          22,603,387
                                                  ================    ===============    ================

</TABLE>

       At January 31, 2005, options to purchase an aggregate of 13,936,807
       shares were vested and currently exercisable under the plans and options
       to purchase an additional 8,666,580 shares vest at various dates
       extending through the year 2008.

       Weighted average option exercise price information was as follows:

<TABLE>
<CAPTION>
                                                                YEAR ENDED JANUARY 31,
                                                  ---------------------------------------------------
                                                       2003              2004              2005
                                                       ----              ----              ----

<S>                                             <C>               <C>              <C>
       Outstanding at beginning of period              $38.24           $12.73            $14.09
       Granted during the period                        10.30            16.56             22.17
       Exercised during the period                       7.87             9.56             10.95
       Canceled, terminated and expired                 47.42            18.08             25.20
       Outstanding at end of period                     12.73            14.09             15.42
       Exercisable at end of period                     15.24            13.84             13.81

</TABLE>


                                      F-25
<PAGE>
       Significant option groups outstanding at January 31, 2005 and related
       weighted average price and life information were as follows:

<TABLE>
<CAPTION>
                                                      Weighted
                                                       Average           Weighted                           Weighted
                                                      Remaining          Average                            Average
          Range of                    Number          Contractual        Exercise         Number            Exercise
         Exercise Price             Outstanding          Life             Price         Exercisable          Price
       ----------------------    ---------------    --------------    --------------   ---------------    -------------
<S>                            <C>                <C>                 <C>              <C>               <C>
       $0.01 - 10.42                  3,967,964              3.80             $9.58         3,623,404            $9.82
       $10.52                         8,113,518              5.78             10.52         7,250,345            10.52
       $10.95 - 16.05                 1,640,881              5.92             15.04         1,258,041            14.92
       $16.70                         4,468,968              8.87             16.70         1,104,511            16.70
       $17.60 - 25.00                 3,867,864              9.63             22.12           156,611            20.00
       $25.49 - 119.69                  544,192              4.47             73.96           543,895            73.97
                                 ---------------    --------------    --------------   ---------------    -------------
                                     22,603,387              6.68            $15.42        13,936,807           $13.81
                                 ===============                                       ===============
</TABLE>

     The weighted average fair value of the options granted for the years ended
     January 31, 2003, 2004 and 2005, respectively, is estimated at $4.66, $9.88
     and $12.98 on the date of grant (using the Black-Scholes option pricing
     model) with the following weighted average assumptions for the years ended
     January 31, 2003, 2004 and 2005, respectively: volatility of 75%, 73% and
     70%; risk-free interest rate of 1.8%, 3.2% and 3.6%; and an expected life
     of 2.6, 4.6 and 4.6 years.

     OPTIONS ON SUBSIDIARY SHARES - The Company has granted options to certain
     employees to acquire shares of certain subsidiaries, other than Comverse,
     Inc. Such option issuances are not tied to the performance of the
     subsidiaries, but are intended to incentivize employees in the units for
     which they have direct responsibility. Options outstanding for each
     subsidiary do not exceed 20% of the shares outstanding of such subsidiary
     assuming exercise in full. The options have terms of up to 15 years and
     become exercisable and vest over various periods ranging up to seven years
     from the date of initial grant. The exercise price of each option is equal
     to the higher of the book value of the underlying shares at the date of
     grant or the fair market value of such shares at that date determined on
     the basis of an arms'-length transaction with a third party or, if no such
     transactions have occurred, on a reasonable basis as determined by a
     committee of the Board of Directors.

     RESTRICTED STOCK - In December 2003 and 2004, CTI granted 314,300 and
     327,100 shares of restricted stock, respectively, to certain key employees
     of the Company. Unearned stock compensation of approximately $5,249,000 and
     $7,541,000, respectively, was recorded based on the fair market value of
     the Company's common stock at the date of grant. Unearned stock
     compensation is shown as a separate component of stockholders' equity and
     is being amortized to expense pro-rata over the four year vesting period of
     the restricted stock. Amortization of unearned stock compensation for the
     years ended January 31, 2004 and 2005 was approximately $157,000 and
     $1,596,000, respectively, and was included in `Selling, general and
     administrative' expenses in the Consolidated Statements of Operations. The
     restricted stock has all the rights and privileges of the Company's common
     stock, subject to certain restrictions and forfeiture provisions. At
     January 31, 2005, a total of 641,400 shares of restricted stock had been
     granted and all were subject to restriction.

     In December 2003 and 2004, Verint granted shares of its common stock as
     restricted stock to certain of its key employees. Unearned stock
     compensation of approximately $1,672,000 and $2,281,000, respectively, was
     recorded based on the fair market value of its common stock at the date of
     grant and is being amortized to expense pro-rata over the four year vesting
     period of the restricted stock. Amortization of unearned stock compensation
     for the years ended January 31, 2004 and 2005 was approximately $57,000 and
     $501,000, respectively, and was included in `Selling, general and
     administrative' expenses in the Consolidated Statements of Operations.


                                      F-26
<PAGE>
15.  EMPLOYEE STOCK PURCHASE PLANS

     Under Comverse's Employee Stock Purchase Plans (the "Plans"), all employees
     who have completed three months of employment are entitled, through payroll
     deductions of amounts up to 10% of their base salary, to purchase shares of
     the Company's common stock at 85% of the lesser of the market price at the
     offering commencement date or the offering termination date. The total
     number of shares available under Comverse's Employee Stock Purchase Plans
     is 5,000,000, of which approximately 3,456,000 had been issued as of
     January 31, 2005. CTI has terminated the Plans effective April 1, 2005.

16.  EARNINGS PER SHARE ("EPS")

     Basic earnings (loss) per share is determined by using the weighted average
     number of shares of common stock outstanding during each period. Diluted
     earnings per share further assumes the issuance of common shares for all
     dilutive potential common shares outstanding. The calculation of earnings
     (loss) per share for the years ended January 31, 2003, 2004 and 2005 was as
     follows:

<TABLE>
<CAPTION>

                                  JANUARY 31, 2003                      JANUARY 31, 2004                 JANUARY 31, 2005
                                  ----------------                      ----------------                 ----------------
                                                   Per                                  Per                                 Per
                                                  Share          Net                   Share           Net                 Share
                          Net Loss      Shares    Amount         Loss       Shares     Amount        Income     Shares     Amount
                          --------      ------    ------         ----       ------     ------        ------     ------     ------
                                                      (In thousands, except per share data)
<S>                     <C>           <C>        <C>          <C>          <C>        <C>          <C>       <C>       <C>
BASIC EPS
---------
Net Income (loss)          $(129,478)   187,212    $(0.69)       $(5,386)    190,351    $(0.03)       $57,330   196,033      $0.29
                                                   =======                              =======                              ======

EFFECT OF DILUTIVE
SECURITIES
----------
New and Existing ZYPS                                                                                             1,739
Options                                                                                                           6,668
Restricted Stock                                                                                                    364
Subsidiary options                                                                                     (953)
                           -------------------------------      -------------------------------     -------------------------------
DILUTED EPS                $(129,478)   187,212    $(0.69)       $(5,386)    190,351    $(0.03)      $56,377    204,804      $0.28
                           ==========   =======    =======       ========    ========   =======      ========   ========     ======
</TABLE>

     The diluted loss per share computation for the years ended January 31, 2003
     and 2004 excludes incremental shares of approximately 632,000 and
     5,466,000, respectively, primarily related to employee stock options. These
     shares are excluded due to their antidilutive effect as a result of the
     Company's loss during these periods. The shares issuable upon the
     conversion of the Debentures were not included in the computation of
     diluted earnings (loss) per share for all periods because the effect of
     including them would be antidilutive. Refer to Note 11 for a 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. For the year
     ended January 31, 2005, the adoption of EITF 04-8 resulted in approximately
     1,739,000 (comprised of approximately 1,610,000 for New ZYPS and
     approximately 129,000 for Existing ZYPS) of additional share dilution in
     calculating diluted earnings per share. The adoption of EITF 04-8 did not
     have an effect on reported diluted earnings (loss) per share for any
     periods presented.


                                      F-27
<PAGE>
17.  INTEREST AND OTHER INCOME, NET

     Interest and other income, net, consists of the following:

<TABLE>
<CAPTION>
                                                                      YEAR ENDED JANUARY 31,
                                                                      ----------------------
                                                        2003                    2004                     2005
                                                        ----                    ----                     ----
                                                                          (IN THOUSANDS)
<S>                                             <C>                  <C>                      <C>
       Interest and dividend income                  $   45,171              $   32,441              $   38,941
       Interest expense                                 (11,552)                 (6,980)                 (4,030)
       Investment gains (losses), net                   (41,666)                 (1,240)                    615
       Foreign currency gains, net                       27,752                   4,938                   2,757
       Gain on repurchase of Debentures                  39,374                  10,224                     341
       Other, net                                          (177)                   (425)                 (2,401)
                                                     -----------             -----------             -----------
                                                     $   58,902              $   38,958              $   36,223
                                                     ===========             ===========             ===========
</TABLE>

18.  INCOME TAXES

     The provision for income taxes consists of the following:

<TABLE>
<CAPTION>

                                                                         YEAR ENDED JANUARY 31,
                                                                         ----------------------
                                                          2003                   2004                    2005
                                                          ----                   ----                    ----
                                                                            (IN THOUSANDS)
<S>                                              <C>                  <C>                     <C>
       Current provision:
          Federal                                    $        -              $    1,782              $    6,470
           State                                            886                   1,662                   2,482
           Foreign                                        2,257                   3,744                   3,497
                                                     -----------             -----------             -----------


                                                          3,143                   7,188                  12,449
                                                     -----------             -----------             -----------


       Deferred provision:
           Federal                                         (956)                      -                     143
           State                                            (20)                      -                      54
           Foreign                                        1,127                   1,018                     568
                                                     -----------             -----------             -----------


                                                            151                   1,018                     765
                                                     -----------             -----------             -----------


                                                     $    3,294              $    8,206              $   13,214
                                                     ===========             ===========             ===========
</TABLE>

                                      F-28
<PAGE>
     The reconciliation of the U.S. Federal statutory tax rate to the Company's
     effective tax rate is as follows:

<TABLE>
<CAPTION>

                                                                          YEAR ENDED JANUARY 31,
                                                                          ----------------------
                                                              2003                 2004                2005
                                                              ----                 ----                ----

<S>                                                     <C>                 <C>                 <C>
        U.S. Federal statutory rate                            35%                  35%                 35%
        Consolidated worldwide income
           (in excess of) less than U.S. income               (38)                  46                 (23)
        Foreign income taxes (benefit)                          2                   (7)                  2
        Permanent differences                                  (2)                  22                   2
                                                         -------------        -------------       -------------

        Company's effective tax rate                           (3)%                96%                  16%
                                                         =============        =============       =============
</TABLE>

     Deferred income taxes reflect the net tax effects of (a) temporary
     differences between the carrying amounts of assets and liabilities for
     financial reporting purposes and the amounts used for income tax purposes
     and (b) operating loss carryforwards. The tax effects of significant items
     comprising the Company's deferred tax asset and liability at January 31,
     2004 and 2005 is as follows:

<TABLE>
<CAPTION>
                                                                        JANUARY 31,
                                                                    2004            2005
                                                                    ----            ----
                                                                        (IN THOUSANDS)

<S>                                                        <C>               <C>
       Deferred tax liability:
           Expenses deductible for tax purposes and
           not for financial reporting purposes                $     4,169       $    1,289
                                                               ============      ===========


       Deferred tax asset:
           Reserves not currently deductible                   $    28,230       $   26,641
           Tax loss carryforwards                                  280,247          277,624
           Inventory capitalization                                     57               60
                                                               ------------      -----------

                                                                   308,534          304,325
       Less: valuation allowance                                  (297,740)        (288,897)
                                                               ------------      -----------


           Total deferred tax asset                            $    10,794       $   15,428
                                                               ============      ===========
</TABLE>

     At January 31, 2005, the Company had net operating loss carryforwards for
     Federal income tax purposes of approximately $731.0 million which will
     begin to expire in 2019.

     Income tax has not been provided on unrepatriated earnings of foreign
     subsidiaries as currently it is the intention of the Company to reinvest
     such foreign earnings in their operations.



                                      F-29
<PAGE>
19.  BUSINESS SEGMENT INFORMATION

     The Company's reporting segments are as follows:

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

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

     Security and Business Intelligence Recording - Provides analytic
     software-based solutions for communications interception, networked video
     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.

     Depreciation and Amortization - corporate operations.

     Total Assets - elimination of intersegment receivables and unallocated
     corporate assets.


                                      F-30
<PAGE>
     The table below presents information about sales, income (loss) from
     operations, depreciation and amortization, significant non-cash items
     consisting of operating asset write-downs and impairments, and total assets
     as of and for the years ended January 31, 2003, 2004 and 2005:

<TABLE>
<CAPTION>

                                                Service         Security and
                              Comverse          Enabling          Business
                               Network          Signaling       Intelligence                           Reconciling      Consolidated
                               Systems          Software          Recording             All Other        Items            Totals
                          ----------------------------------------------------------------------------------------------------------
                                                                       (In thousands)
<S>                     <C>                  <C>               <C>                   <C>              <C>            <C>
YEAR ENDED
JANUARY 31, 2003
----------------
Sales                          $542,984           $29,231           $157,775             $9,602          $ (3,703)         $735,889

Income (Loss) from
Operations                     (179,492)           (8,362)            10,051               (615)           (4,323)         (182,741)

Depreciation and
Amortization                     53,166             2,502              9,407                506             1,774            67,355

Significant Non-Cash
Items                            26,315               130                  -                  -                 -            26,445

Total Assets                    989,357           237,102            207,050             32,706           937,444         2,403,659

YEAR ENDED
JANUARY 31, 2004
----------------
Sales                           529,597            38,378            192,744              9,983            (4,810)          765,892

Income (Loss) from
Operations                      (40,913)            2,824             17,189             (1,152)           (8,326)          (30,378)

Depreciation and
Amortization                     57,619             1,933             10,069                511             1,639            71,771

Significant Non-Cash
Items                             6,170                 -                514                  -                 -             6,684

Total Assets                    843,340           242,817            328,706             34,265         1,278,914         2,728,042

YEAR ENDED
JANUARY 31, 2005
----------------
Sales                           642,692            63,436            249,824             10,132            (6,642)          959,442

Income (Loss) from
Operations                       20,550            20,566             17,384              (788)           (10,779)           46,933

Depreciation and
Amortization                     50,341             1,322             12,903                351             1,775            66,692

Significant Non-Cash
Items                             7,507                 -              6,174                  -                 -            13,681

Total Assets                  1,011,272            271,992           398,978             39,219         1,203,825         2,925,286

</TABLE>


                                      F-31
<PAGE>
     Sales by country, based on end-user location, as a percentage of total
     sales, for the years ended January 31, 2003, 2004 and 2005 were as follows:

<TABLE>
<CAPTION>
                                                    JANUARY 31,
                                                    -----------
                                         2003           2004         2005
                                         ----           ----         ----

<S>                                 <C>            <C>           <C>
          United States                   35%            34%           31%
          Foreign                         65             66            69
                                       -------        -------       -------
          Total                          100%           100%          100%
                                       =======        =======       =======
</TABLE>

     No customer accounted for 10% or more of sales for the years ended January
     31, 2003, 2004 or 2005.

     Long-lived assets by country of domicile consist of:

<TABLE>
<CAPTION>
                                                          JANUARY 31,
                                                          -----------
                                                  2004                  2005
                                                  ----                  ----
                                                         (IN THOUSANDS)
<S>                                        <C>                  <C>

                United States                   $ 70,317              $  69,006
                Israel                           123,454                113,337
                Other                             11,162                 13,122
                                                ---------             ----------

                                                $204,933              $ 195,465
                                                =========             ==========
</TABLE>

20.  COMMITMENTS AND CONTINGENCIES

     LEASES - The Company leases office, manufacturing, and warehouse space
     under non-cancelable operating leases. Rent expense for all leased premises
     approximated $36,032,000, $31,616,000 and $33,279,000 in the years ended
     January 31, 2003, 2004 and 2005, respectively.

     As of January 31, 2005, the minimum annual rent obligations of the Company
     were approximately as follows:

             TWELVE MONTHS ENDED
                 JANUARY 31,                         AMOUNT
                 -----------                         ------
                                                 (IN THOUSANDS)

                     2006                     $      28,616
                     2007                            24,366
                     2008                            21,221
                     2009                            11,053
             2010 and thereafter                     32,767
                                              --------------

                                              $     118,023
                                              ==============




                                      F-32
<PAGE>
     The Company has entered into various sub-lease agreements to rent out
     excess space. As of January 31, 2005, the minimum annual sub-lease income
     obligation to the Company under such agreements was approximately
     $1,217,000, $1,008,000, $1,008,000, $960,000 and $252,000 for the twelve
     months ending January 31, 2006, 2007, 2008, 2009 and 2010 and thereafter,
     respectively, for a total of approximately $4,445,000.

     EMPLOYMENT AGREEMENTS - The Company is obligated under employment contracts
     with Kobi Alexander, its Chairman and Chief Executive Officer, to provide
     compensation, severance, insurance and fringe benefits through February 1,
     2007. Minimum salary payments under the contracts currently amount to
     $672,000 per year. Mr. Alexander also is eligible to receive an annual cash
     bonus determined by specific quantitative targets established in advance by
     the Compensation Committee of the Board of Directors. Following termination
     of his employment with the Company the executive is entitled to receive a
     severance payment equal to $181,585 times the number of years from January
     1983, the amount of which payment increases at the rate of 10% per annum
     compounded for each year of employment following December 31, 2005, plus
     continued fringe benefits for three years. In addition to the severance
     payment, if the executive's employment is terminated by the Company without
     "cause", or by the executive for "good reason", the executive is entitled
     to his salary and pro-rata bonus through the date of termination plus three
     times the executive's annual salary and three times his annual bonus. If
     such termination occurs within three months before or within two years
     following a change in control of the Company, the executive is additionally
     entitled to the accelerated vesting of all stock options and restricted
     stock, and payments sufficient to reimburse any associated excise tax
     liability and income tax resulting from such reimbursement. Stock options
     and restricted stock granted the executive become fully vested, exercisable
     and nonforfeitable in the event of the executive's death or disability.
     Insurance benefits include life insurance providing cumulative death
     benefits of approximately $30,000,000, including amounts provided under an
     arrangement through which the Company is to be reimbursed premiums from the
     benefit payments or cash surrender value.

     The Company is obligated under an employment contract with David Kreinberg,
     its Executive Vice President and Chief Financial Officer, to provide
     compensation, severance, insurance and fringe benefits through February 1,
     2007. Minimum salary payments under the contract currently amount to
     $325,000 per year. Mr. Kreinberg also is eligible to receive an annual cash
     bonus determined by specific quantitative targets established in advance by
     the Compensation Committee of the Board of Directors. Following termination
     of his employment with the Company the executive is entitled to receive a
     severance payment equal to $24,200 times the number of years from and
     including 1994, the first year of his employment with the Company, the
     amount of which payment increases at the rate of 10% per annum compounded
     for each year of employment following January 31, 2005, plus continued
     fringe benefits for eighteen months. In addition to the severance payment,
     if the executive's employment is terminated by the Company without "cause",
     or by the executive for "good reason", the executive is entitled to his
     salary and pro-rata bonus through the date of termination plus one year of
     additional annual salary and bonus. If such termination occurs within three
     months before or within two years following a change in control of the
     Company, the executive is entitled to his salary and pro-rata bonus through
     the date of termination plus three times the executive's annual salary and
     three times his annual bonus, the accelerated vesting of all stock options
     and restricted stock, and payments sufficient to reimburse any associated
     excise tax liability and income tax resulting from such reimbursement.
     Stock options and restricted stock granted the executive become fully
     vested, exercisable and nonforfeitable in the event of the executive's
     death or disability. Insurance benefits include life insurance providing
     cumulative death benefits of approximately $17,500,000, including amounts
     provided under an arrangement through which the Company is to be reimbursed
     premiums from the benefit payments or cash surrender value.

     The Company is obligated under an agreement with Zeev Bregman, the Chief
     Executive Officer of one of its subsidiaries, to provide compensation and
     fringe benefits through February 1, 2007. Minimum salary payments under the
     agreement amount to approximately $275,000 per year. Mr. Bregman also is
     eligible to receive an annual cash bonus determined by specific
     quantitative targets established in advance by the Compensation Committee
     of the Board of Directors. Following termination of his employment with the
     Company the executive is entitled to continued fringe benefits for eighteen
     months. If the executive's employment is terminated by the Company without
     "cause", or by the executive for "good reason", the executive is entitled


                                      F-33
<PAGE>
     to his salary and pro-rata bonus through the date of termination plus one
     year of additional annual salary and bonus. If such termination occurs
     within three months before or within two years following a change in
     control of the Company, the executive is entitled to his salary and
     pro-rata bonus through the date of termination plus three times the
     executive's annual salary and three times his annual bonus, the accelerated
     vesting of all stock options and restricted stock. Stock options and
     restricted stock granted the executive become fully vested, exercisable and
     nonforfeitable in the event of the executive's death or disability.

     Most other employment agreements of the Company are terminable with or
     without cause with prior notice of 90 days or less. In certain instances,
     the termination of employment agreements without cause entitles the
     employees to certain benefits, including severance payments of as much as
     one year's compensation.

     LICENSES AND ROYALTIES - The Company licenses certain technology,
     "know-how" and related rights for use in the manufacture and marketing of
     its products, and pays royalties to third parties, typically ranging up to
     6% of net sales of the related products, under such licenses and under
     other agreements entered into in connection with research and development
     financing, including projects partially funded by 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 in varying amounts
     based upon the revenues attributed to the various components of such
     products. Royalties due to the OCS in respect of research and development
     projects are required to be paid until the OCS has received total royalties
     up to the amounts received by the Company under the approved project
     budgets, plus interest in certain circumstances. As of January 31, 2005,
     such subsidiaries had received approximately $57,700,000 in cumulative
     grants from the OCS, and have recorded approximately $26,700,000 in
     cumulative royalties to the OCS.

     DIVIDEND RESTRICTIONS - 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.

     INVESTMENTS - In 1997, a subsidiary of CTI and Quantum Industrial Holdings
     Ltd. organized two new companies to make investments, including investments
     in high technology ventures. Each participant committed a total of
     $37,500,000 to the capital of the new companies, for use as suitable
     investment opportunities are identified. Quantum Industrial Holdings Ltd.
     is a member of the Quantum Group of Funds managed by Soros Fund Management
     LLC and affiliated management companies. As of January 31, 2004 and 2005,
     the Company had invested approximately $26,420,000 and $26,451,000
     respectively, related to these ventures, included in `Other assets' in the
     Consolidated Balance Sheets. In addition, the Company has committed
     approximately $9,807,000 to various funds, ventures and companies which may
     be called at the option of the investee.

     GUARANTIES - The Company has obtained bank guaranties primarily for the
     performance of certain obligations under contracts with customers as well
     as for the guarantee of certain payment obligations. These guaranties,
     which aggregated approximately $33,884,000 at January 31, 2005 are
     generally to be released by the Company's performance of specified contract
     milestones, which are scheduled to be completed at various dates primarily
     through 2008.


                                      F-34
<PAGE>
     LITIGATION - On March 16, 2004, BellSouth Intellectual Property Corp.
     ("BellSouth") filed a complaint in the United States District Court for the
     Northern District of Georgia against Comverse Technology, Inc. alleging
     infringement of Patent Nos. 5,857,013 and 5,764,747 (the "Patents"), and it
     subsequently amended the complaint to include Comverse Inc., in an action
     captioned: BellSouth Intellectual Property Corp. v. Comverse Technology,
     Inc. and Comverse, Inc., Civil Action No. 1:04-CV-0739. BellSouth alleged
     that the Patents cover certain aspects of some of the Company's voicemail
     systems. The Company retained outside legal counsel specializing in patent
     litigation, and filed an Answer and Counterclaim denying all allegations.
     On or about December 20, 2004, the Company executed a settlement agreement
     with BellSouth and some of its related entities covering the Company and
     the Company's customers.

     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.

21.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair value amounts have been determined by the Company, using
     available market information and appropriate valuation methodologies.
     However, considerable judgment is necessarily required in interpreting
     market data to develop the estimates of fair value. Accordingly, the
     estimates presented herein are not necessarily indicative of the amounts
     that the Company could realize in a current market exchange. The use of
     different market assumptions and/or estimation methodologies may have a
     material effect on the estimated fair value amounts.

<TABLE>
<CAPTION>
                                                            JANUARY 31,
                                  ---------------------------------------------------------------------
                                                2004                                 2005
                                                ----                                 ----
                                   CARRYING            ESTIMATED           CARRYING          ESTIMATED
                                    AMOUNT             FAIR VALUE           AMOUNT           FAIR VALUE
                                    ------             ----------           ------           ----------
                                                              (IN THOUSANDS)
<S>                              <C>                 <C>                 <C>              <C>
Liabilities:
    Debentures                    $ 124,723            $ 122,229          $   87,253         $   85,944
    Existing ZYPS                 $ 420,000            $ 489,300          $    2,310         $    3,116
    New ZYPS                      $       -            $       -          $  417,690         $  563,359
</TABLE>


     CASH AND CASH EQUIVALENTS, BANK TIME DEPOSITS, SHORT-TERM INVESTMENTS,
     ACCOUNTS RECEIVABLE, INVESTMENTS, AND ACCOUNTS PAYABLE - The carrying
     amounts of these items are a reasonable estimate of their fair value.

     CONVERTIBLE DEBT - The fair value of these securities is estimated based on
     quoted market prices or recent sales for those securities.

     The fair value estimates presented herein are based on pertinent
     information available to management as of January 31, 2004 and 2005. Such
     amounts have not been comprehensively revalued for purposes of these
     financial statements since January 31, 2005, and current estimates of fair
     value may differ significantly from the amounts presented herein.


                                      F-35
<PAGE>
22.  EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

     Refer to Note 11 for a description of EITF 04-8 and its impact on the
     Company's diluted earnings per share calculation for the New ZYPS and the
     Existing ZYPS. For the year ended January 31, 2005, the adoption of EITF
     04-8 resulted in approximately 1,739,000 (comprised of approximately
     1,610,000 for New ZYPS and approximately 129,000 for Existing ZYPS) of
     additional share dilution in calculating diluted earnings per share. The
     adoption of EITF 04-8 did not have an effect on reported diluted earnings
     (loss) per share for any periods presented.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
     Payment", ("SFAS No.123(R)") which revises SFAS No. 123 and supersedes APB
     No. 25. 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. SFAS No. 123(R) is effective for
     reporting periods beginning after June 15, 2005, which for the Company is
     August 1, 2005 (the "Effective Date"). 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;
     this 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 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 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 remain 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 consolidated financial statements.


                                      F-36
<PAGE>
23.      QUARTERLY INFORMATION (UNAUDITED)

        The following table shows selected results of operations for each of the
        quarters during the years ended January 31, 2004 and 2005:

<TABLE>
<CAPTION>
                                                       FISCAL QUARTER ENDED
                           APRIL 30,     JULY 31,   OCT. 31,      JAN. 31,      APRIL 30,    JULY 31,   OCT. 31,     JAN. 31,
                            2003          2003       2003          2004           2004         2004       2004         2005
                            ----          ----       ----          ----           ----         ----       ----         ----
                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S>                     <C>          <C>         <C>          <C>            <C>           <C>         <C>         <C>
Sales                    $ 180,552    $ 188,468   $ 193,843     $ 203,029      $ 221,395    $ 233,427   $ 245,479   $ 259,141
Gross margin               100,179      107,144     111,174       119,835        131,803      140,303     148,543     158,083
Net income (loss)           (5,819)      (1,058)     (3,437)        4,928          7,001       13,327      15,959      21,043

Diluted earnings (loss)
         per share       $   (0.03)   $   (0.01)  $   (0.02)    $    0.02      $    0.03    $    0.06   $    0.08   $    0.10
                         ==========   ==========  ==========    ==========     ==========   ==========  ==========  ==========
</TABLE>



                                      F-37