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TMCNet:  COMVERSE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[December 14, 2012]

COMVERSE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read together with the audited combined financial statements and related notes for the fiscal year ended January 31, 2012 included in the Preliminary Information Statement filed as Exhibit 99.1 to our Registration Statement on Form 10 filed with the SEC on October 10, 2012, and the unaudited condensed consolidated and combined financial statements and notes thereto and financial information appearing elsewhere in this Quarterly Report.



This discussion and analysis contains forward-looking statements based on current expectations relating to future events and our future financial performance that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Forward-Looking Statements" on page i of this Quarterly Report. Percentages and amounts within this section may not calculate due to rounding differences.

The Share Distribution On October 31, 2012, CTI completed its spin-off the Company as an independent, publicly-traded company, accomplished by means of a pro rata distribution of 100% of our outstanding common shares to CTI's shareholders (the "Share Distribution"). Following the Share Distribution, CTI no longer holds any of our outstanding capital stock, and we are an independent, publicly-traded company.

Immediately prior to the Share Distribution, CTI contributed to us Exalink Ltd.

("Exalink"), its wholly-owned subsidiary. Other than holding certain intellectual property rights, Exalink has no operations. Following the Share Distribution, we and CTI operate independently, and neither have any ownership interest in the other. In order to govern certain ongoing relationships between CTI and us after the Share Distribution and to provide mechanisms for an orderly transition, we and CTI entered into agreements pursuant to which certain services and rights are provided for following the Share Distribution, and we and CTI have indemnified each other against certain liabilities arising from their respective businesses and the services that will be provided under such agreements. For more information, see note 3 to our condensed consolidated and combined financial statements included in this Quarterly Report.

Subsequent to the Share Distribution, we expect to incur increased costs as a result of becoming an independent, publicly-traded company, including compensation costs attributable to the enhancement of our senior management, compensation of non-employee directors and compensation expense and professional fees related to financial reporting and compliance with our periodic reporting obligations under federal securities laws. We believe our cash flow from operations will be sufficient to fund these additional costs.

Sale of Starhome As a result of the Starhome Disposition, the results of operations of Starhome, including the gain on the sale of Starhome, net of tax, are included in discontinued operations, less applicable income taxes, as a separate component of net income (loss) in our condensed consolidated and combined statements of operations for all periods presented. The assets and liabilities of Starhome are included in discontinued operations as separate components of our condensed combined balance sheet as of January 31, 2012. For more information, see note 14 to our condensed consolidated and combined financial statements included in this Quarterly Report.

Starhome is a provider of wireless service mobility solutions that enhance international roaming. Wireless operators use Starhome's software-based solutions to generate additional revenue and to improve profitability by directing international roaming traffic to preferred networks and by providing a wide range of services to subscribers traveling outside their home network.

EXECUTIVE SUMMARY Overview We are a leading provider of software-based products, systems and related services that: • provide converged, prepaid and postpaid billing and active customer management systems (referred to as Business Support Systems or BSS) for wireless, wireline and cable network operators delivering a value proposition 36-------------------------------------------------------------------------------- Table of Contents designed to ensure timely and efficient service monetization, consistent customer experience, reduced complexity and cost, and enable real-time marketing based on all relevant customer profile information; • enable wireless and wireline (including cable) network-based Value-Added Services (or VAS), comprised of two categories-Voice and Messaging-that include voicemail, visual voicemail, call completion, short messaging service (or SMS) text messaging (or texting), multimedia picture and video messaging, and Internet Protocol (or IP) communications; and • provide wireless users with optimized access to Internet websites, content and applications, manage and enforce policy and generate data usage and revenue for wireless operators.

Our products and services are used by more than 450 wireless, wireline and cable network communication service provider customers in more than 125 countries, including the majority of the world's 100 largest wireless network operators.

Our products and services are designed to generate voice and data network traffic, increase revenue and customer loyalty, monetize services and improve operational efficiency.

Our reportable segments are: • Comverse BSS-comprised of Comverse's BSS operating segment; and • Comverse VAS-comprised of Comverse's VAS operating segment.

The results of operations of all of our other operations, including the Comverse Mobile Internet (or Comverse MI) operating segment, our Netcentrex operations (or Netcentrex), our global corporate functions that support our business units and Exalink Ltd., are included in the column captioned "Comverse Other" as part of our business segment presentation. Starhome's results of operations are included in discontinued operations and therefore not presented in segment information.

Significant Events During the three months ended October 31, 2012 and subsequent thereto, the following additional significant events occurred: Separation of Chief Operating Officer. On August 5, 2012, Comverse Ltd. and Oded Golan, our Senior Vice President and Chief Operating Officer, entered into a separation agreement in which they mutually agreed upon the terms of transition and separation of employment of Mr. Golan. Pursuant to the separation agreement, Mr. Golan will continue to serve in his current capacity through January 31, 2013, at which time he will resign from his position.

Merger of Verint and CTI. On August 12, 2012, CTI entered into an agreement and plan of merger (referred to as the Verint Merger Agreement) with Verint pursuant to which CTI will merge with and into a subsidiary of Verint and become a wholly-owned subsidiary of Verint (referred to as the Verint Merger). The completion of the Verint Merger is subject to certain conditions.

Under the Distribution Agreement we and CTI entered into in connection with the Share Distribution, we have agreed to indemnify CTI and its affiliates (including Verint after the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution. Certain of our indemnification obligations are capped at $25.0 million and certain are uncapped. CTI has agreed to place $25.0 million in cash in escrow, upon the closing of the Verint merger, to support indemnification claims to the extent made against us by CTI and its affiliates (including Verint after the Verint Merger). The escrow funds cannot be used for claims related to the Israeli Optionholder suit. We will also assume all pre-Share Distribution tax obligations of each of us and CTI. For more information, see note 3 to our condensed consolidated and combined financial statements included in this Quarterly Report.

Contribution and Sale of Starhome. On August 1, 2012, CTI, certain Starhome shareholders and Starhome entered into a Share Purchase Agreement (the "Starhome Share Purchase Agreement") with Fortissimo Capital Fund II (Israel), L.P., Fortissimo Capital Fund III (Israel), L.P. and Fortissimo Capital Fund III (Cayman), L.P. (collectively, "Fortissimo") pursuant to which Fortissimo agreed to purchase all of the outstanding share capital of Starhome (the "Starhome Disposition"). On September 19, 2012, CTI, in order to ensure it could meet the conditions of the Verint Merger, contributed to us its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement. The Starhome Disposition was completed on October 19, 2012.

37-------------------------------------------------------------------------------- Table of Contents Under the terms of the Starhome Share Purchase Agreement, Starhome's shareholders received aggregate cash proceeds of approximately $81.3 million, subject to adjustment for fees, transaction expenses and certain taxes. Of this amount, $10.5 million is held in escrow to cover potential post-closing indemnification claims, with $5.5 million being released after 18 months and the remainder released after 24 months, in each case, less any claims made on or prior to such dates. We received aggregate net cash consideration (including $4.9 million deposited in escrow at closing) of approximately $37.2 million, after payments that CTI agreed to make to certain other Starhome shareholders of approximately $4.5 million.

As a result of the Starhome Disposition, the results of operations of Starhome, including the gain on sale of Starhome, net of tax, are included in discontinued operations, less applicable income taxes, as separate components of net income (loss) in our condensed combined statements of operations for all periods presented. The assets and liabilities of Starhome are included in discontinued operations as a separate component of our condensed consolidated and combined balance sheets as of January 31, 2012. See note 14 to the condensed consolidated and combined financial statements included in this Quarterly Report.

Liquidity Forecast During the nine months ended October 31, 2012, we experienced significant negative cash flows from operations. We continue our efforts to aggressively market our solutions and services, improve profitability and cash collections and implement cost reduction measures. We currently forecast that available cash and cash equivalents will be sufficient to meet our liquidity needs, including capital expenditures, for at least the next 12 months. For a more comprehensive discussion of our liquidity forecast, see "-Liquidity and Capital Resources-Financial Condition-Liquidity Forecast." Consolidated and Combined Financial Highlights The following table presents certain financial highlights for the three and nine months ended October 31, 2012 and 2011 including Comverse performance, a non-GAAP measure, and Comverse performance margin (reflecting Comverse performance as a percentage of revenue) for our company on a consolidated and combined basis: Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 2012 2011 (Dollars in thousands) Total revenue $ 185,200 $ 243,797 $ 494,176 $ 589,616 Gross margin 36.2 % 40.9 % 35.9 % 38.0 % Income (loss) from operations 1,312 29,501 (7,781 ) 1,417 Operating margin 0.7 % 12.1 % (1.6 )% 0.2 % Net (loss) income from continuing operations (10,575 ) 16,040 (31,071 ) (26,220 ) Income from discontinued operations, net of tax 21,831 2,509 26,542 5,713 Net income (loss) 11,256 18,549 (4,529 ) (20,507 ) Less: Net income attributable to noncontrolling interest (157 ) (619 ) (1,167 ) (2,026 ) Net income (loss) attributable to Comverse Inc. 11,099 17,930 (5,696 ) (22,533 ) Net cash provided by (used in) operating activities - continuing operations 21,089 3,163 (29,407 ) (34,871 ) Non-GAAP Financial Measures Comverse performance 13,645 43,405 18,513 54,022 Comverse performance margin 7.4 % 17.8 % 3.7 % 9.2 % Reconciliation of Income (Loss) from Operations to Comverse Performance Comverse performance, a non-GAAP financial measure, represents our operating results without the impact of significant expenditures incurred by us in connection with CTI's efforts to become or remain current in periodic reporting obligations under the federal securities laws and the remediation of material weaknesses in internal control over financial reporting, certain non-cash charges, and certain other gains and charges.

We provide Comverse performance, a non-GAAP financial measure, as additional information for our operating results. This measure is not in accordance with, or an alternative for, GAAP financial measures and may be different from, or not 38-------------------------------------------------------------------------------- Table of Contents comparable to similarly titled or other non-GAAP financial measures used by other companies. We believe that the presentation of this non-GAAP financial measure provides useful information to investors regarding certain additional financial and business trends relating to our results of operations as viewed by management in monitoring our businesses, reviewing our financial results and for planning purposes.

As previously disclosed by CTI, during the fiscal year ended January 31, 2012, CTI changed its reportable segments as a result of the implementation of the Phase II Business Transformation and the manner in which its chief operating decision maker reviewed our financial results and allocated resources to CTI's operating segments. Prior to the change in its reportable segments, we were a reportable segment of CTI and CTI used the financial measure of segment performance to present the results of operations of its previous Comverse reportable segment. As a result of the change in reportable segments, each of our BSS and VAS businesses became a separate reportable segment of CTI, and the results of operations of all of our other operations were included in the column captioned "All Other" as part of CTI's business segment presentation. Following the change in reportable segments at CTI, the measure segment performance as used with respect to our company was renamed Comverse performance (as our company was no longer a CTI reportable segment) but its calculation continued to be made consistent with prior practice. We believe that the presentation of Comverse performance provides useful information to investors regarding our performance, including comparability with financial information previously reported by CTI.

The following table provides a reconciliation of income (loss) from operations to Comverse performance for the three and nine months ended October 31, 2012 and 2011: Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 2012 2011 (Dollars in thousands) Income (loss) from operations $ 1,312 $ 29,501 $ (7,781 ) $ 1,417 Expense Adjustments: Stock-based compensation expense 1,880 974 5,512 2,671 Amortization of acquisition-related intangibles 3,976 4,245 12,048 13,241 Compliance-related professional fees 176 4,162 189 14,629 Compliance-related compensation and other expenses 288 1,575 1,841 5,482 Impairment of goodwill 5,605 - 5,605 - Impairment of property and equipment 15 1,118 50 1,275 Litigation settlements and related costs 413 - 170 474 Restructuring charges (23 ) 1,838 1,084 14,888 Other 3 (8 ) (205 ) (55 ) Total expense adjustments 12,333 13,904 26,294 52,605 Comverse performance $ 13,645 $ 43,405 $ 18,513 $ 54,022 Segment Performance We evaluate our business by assessing the performance of each of our operating segments. Our Chief Executive Officer is our chief operating decision maker (or CODM). The CODM uses segment performance, as defined below, as the primary basis for assessing the financial results of the operating segments and for the allocation of resources. Segment performance, as we define it in accordance with the Financial Accounting Standards Board's (or the FASB) guidance relating to segment reporting, is not necessarily comparable to other similarly titled captions of other companies.

Segment performance is computed by management as income (loss) from operations adjusted for the following: (i) stock-based compensation expense; (ii) amortization of acquisition-related intangibles; (iii) compliance-related professional fees; (iv) compliance-related compensation and other expenses; (v) impairment of goodwill; (vi) impairment of property and equipment; (vii) litigation settlements and related costs; (viii) restructuring charges; and (ix) certain other gains and charges. Compliance-related professional fees and compliance-related compensation and other expenses relate to fees and expenses recorded in connection with CTI's efforts to (a) complete certain financial statements and audits of such financial statements, (b) become current in periodic reporting obligations under the federal securities laws, and (c) remediate material weaknesses in internal 39-------------------------------------------------------------------------------- Table of Contents control over financial reporting. Although following the Share Distribution we will not continue to incur compliance-related professional fees and compliance-related compensation and other expenses for the filing of CTI's periodic reports, we do expect to incur significant fees and expenses related to compliance with our periodic reporting obligations under the federal securities laws. For additional information on how we apply segment performance to evaluate the operating results of our segments for the three and nine months ended October 31, 2012 and 2011, see note 20 to the condensed consolidated and combined financial statements included in this Quarterly Report.

In evaluating each segment's performance, management uses segment revenue, which consists of revenue generated by the segment. Certain segment performance adjustments relate to expenses included in the calculation of income (loss) from operations, while, from time to time, certain segment performance adjustments may be presented as adjustments to revenue. We had no segment performance adjustments to revenue for the three and nine months ended October 31, 2012 and 2011.

Segment Financial Highlights The following table presents, for the three and nine months ended October 31, 2012 and 2011, segment revenue, gross margin, income (loss) from operations, operating margin, segment performance and segment performance margin (reflecting segment performance as a percentage of segment revenue) for each of our reportable segments and Comverse Other: Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 2012 2011 (Dollars in thousands) SEGMENT RESULTS Comverse BSS Segment revenue $ 65,947 $ 117,731 $ 192,679 $ 278,403 Gross margin 29.4 % 44.9 % 33.7 % 44.6 % Income from operations 6,860 30,413 25,889 56,261 Operating margin 10.4 % 25.8 % 13.4 % 20.2 % Segment performance 10,838 34,657 38,617 71,568 Segment performance margin 16.4 % 29.4 % 20.0 % 25.7 % Comverse VAS Segment revenue $ 111,457 $ 112,655 $ 268,668 $ 276,234 Gross margin 48.5 % 50.6 % 46.3 % 45.2 % Income from operations 43,879 48,372 90,899 99,017 Operating margin 39.4 % 42.9 % 33.8 % 35.8 % Segment performance 43,879 48,667 91,815 100,553 Segment performance margin 39.4 % 43.2 % 34.2 % 36.4 % Comverse Other Segment revenue $ 7,796 $ 13,411 $ 32,829 $ 34,979 Gross margin (82.5 )% (75.3 )% (36.5 )% (71.1 )% Loss from operations (49,427 ) (49,284 ) (124,569 ) (153,861 ) Operating margin (634.0 )% (367.5 )% (379.4 )% (439.9 )% Segment performance (41,072 ) (39,919 ) (111,919 ) (118,099 ) Segment performance margin (526.8 )% (297.7 )% (340.9 )% (337.6 )% For a discussion of the results of our segments, see "-Results of Operations," and note 20 to the condensed consolidated and combined financial statements included in this Quarterly Report.

40-------------------------------------------------------------------------------- Table of Contents Business Trends and Uncertainties For the three and nine months ended October 31, 2012 compared to the three and nine months ended October 31, 2011, we experienced decreases in revenue, which were partially offset by decreases in costs and operating expenses, resulting in a decrease in income from operations for the three months ended October 31, 2012 compared to the three months ended October 31, 2011 and a change to loss from operations for the nine months ended October 31, 2012 from income from operations for the nine months ended October 31, 2011. Comverse performance for the three and nine months ended October 31, 2012 decreased compared to the three and nine months ended October 31, 2011. For more information, see note 20 to the condensed consolidated financial statements included in this Quarterly Report.

The decreases in revenue were primarily attributable to decreases in revenue from Comverse BSS customer solutions and maintenance revenue at our Comverse BSS and Comverse VAS segments, partially offset by increases in revenue from Comverse VAS customer solutions. For a discussion of the reasons for the changes in revenue from customer solutions at our Comverse BSS and Comverse VAS segments, see "Comverse BSS," "Comverse VAS," "Results of Operations-Segment Results-Comverse BSS" and "Results of Operations-Segment Results-Comverse VAS." The decreases in maintenance revenue was primarily attributable to decreased collections that resulted in a delay in the recognition of revenue, timing of entering into renewals of maintenance contracts, termination of maintenance contracts and a decrease in maintenance revenue attributable to maintenance services provided to customers during the initial service period corresponding to a decline in new installed base value.

During the three months ended October 31, 2012, our cash and cash equivalents and restricted cash were favorably impacted primarily by CTI's cash contribution in connection with the Share Distribution, cash proceeds from the Starhome Disposition and a decline in costs, operating expenses and disbursements, partially offset by a decrease in cash collections, that resulted in positive operating cash flow in the three months ended October 31, 2012. The decrease in cash collections was primarily attributable to reduced customer order activity in recent years, the adverse impact of the timing of acceptances in certain projects and the timing of completion of project milestones.

Our costs, operating expenses and disbursements decreased during the three and nine months ended October 31, 2012 primarily due to our continued focus on closely monitoring our costs and operating expenses as part of our efforts to improve our cash position and achieve long-term improved operating performance and positive operating cash flows. These cost reductions were partially offset by, among other factors, the increasing complexity of project deployment which resulted in higher product delivery costs. In addition, following the Share Distribution we will incur expenses in connection with financial reporting and compliance with the federal securities laws certain of which were previously borne by CTI, our former parent company.

In order to improve operating performance and cash flow from operations, we intend to continue to implement initiatives that we believe will enhance efficiency and result in significant reductions in costs and operating expenses.

The initiatives include: • Prioritizing the industrialization of our BSS offerings to meet or exceed our customer requirements for ease of use and faster deployment times; • Establishing and expanding low cost centers of excellence and research and development centers in Eastern Europe and Asia; and • Realigning our cost structure to our current size and business environment by primarily reducing our selling, general and administrative expenses.

We intend to implement these initiatives during the fiscal year ending January 31, 2014 and expect that some of these initiatives will continue to be implemented during the fiscal year ending January 31, 2015. In addition, for the fiscal year ending January 31, 2014, we plan to make significant capital expenditures relating to upgrades of systems and tools that we believe will increase operational efficiency and result in significant cost reductions in future fiscal periods. As a result of these initiatives, we expect that selling, general and administrative expenses will decline as a percentage of revenue in future fiscal periods.

41-------------------------------------------------------------------------------- Table of Contents Our principal business activities are reported through the following segments: • Comverse BSS, which conducts our converged, prepaid and postpaid billing and active customer management systems business and includes groups engaged in product management, professional services, research and development and product sales support; and • Comverse VAS, which conducts our value-added services business and includes groups engaged in VAS delivery, Rich Communication, Voice and Messaging product research and development and product sales support.

Comverse BSS In the nine months ended October 31, 2012, customer orders for BSS customer solutions decreased slightly compared to the nine months ended October 31, 2011.

We believe that BSS customer solutions order activity was impacted by uncertainty in economic conditions that prompted existing and potential customers to defer significant capital investments involved in deploying our BSS solutions and upgrading existing prepaid or postpaid systems to our converged BSS solution. In addition, customers are more closely monitoring their operating expenses. We believe a portion of the decline was also attributable to the maturation of certain markets that historically accounted for a significant portion of our BSS growth.

Revenue from BSS customer solutions for the three and nine months ended October 31, 2012 decreased compared to the three and nine months ended October 31, 2011.

The decrease in revenue from Comverse BSS customer solutions was primarily attributable to material modifications of contracts that allowed the recognition of additional revenue during the three and nine months ended October 31, 2011, decreases in revenue from customer acceptances and changes in scope and settlements of certain customer contracts during the three and nine months ended October 31, 2012. Revenue from Comverse BSS customer solutions continued to be adversely affected by (i) the increasing complexity of project deployment resulting in extended periods of time required to complete project milestones, delaying receipt of customer acceptance and (ii) lower volume of BSS projects in the current fiscal periods resulting from reduced customer order activity in recent years. In addition, as we focus our efforts to further industrialize our BSS offerings to offer a stronger pre-packaged solution that improves ease of use and faster deployment times, near-term bookings may be impacted. For a more detailed discussion relating to revenue from Comverse BSS customer solutions, see "Results of Operations-Segment Results-Comverse BSS-Revenue." We have a leading industry position in the BSS converged billing market and believe that we are well positioned to leverage our leading market position and our BSS solution offering to take advantage of the growth in the emerging converged BSS market. As part of our strategy, Comverse BSS is continuing its efforts to expand its presence and market share in the BSS market with BSS solutions that we believe offer several advantages over competitors' offerings, including faster time to market and lower total cost of ownership. Comverse BSS continues to offer its existing prepaid and postpaid customer base upgrades to its Comverse ONE converged billing solution, which we believe better addresses the enhanced business needs of communication service providers. In addition, Comverse BSS continues to aggressively pursue opportunities to market its BSS solutions, primarily Comverse ONE, to new customers as part of its efforts to increase its customer base. As a result, Comverse BSS is experiencing a shift in product mix as the portion of sales of its advanced Comverse ONE converged billing solution continues to increase and the portion of sales of its traditional stand-alone prepaid and postpaid BSS solutions continues to decrease. In addition, to maintain its market leadership in BSS convergence and monetization of new business models, Comverse BSS continues to expend significant resources on research and development to further enhance Comverse ONE and its advanced monetization capabilities, including support for new business models such as machine to machine and cloud services.

Communication service providers are experiencing growth in global wireless subscriptions and traffic and a rapid growth in the use of advanced services, such as data services and Internet browsing. In response to these market trends, communication service providers require enhanced BSS system functionality to accommodate their business needs. As a result, Comverse BSS is facing increasing complexity of project deployment resulting in extended periods of time required to complete project milestones and receive customer acceptance which are generally required for revenue recognition and receipt of payment. To address these challenges, Comverse BSS continues its efforts to improve its delivery and implementation capabilities to reduce costs and expenses. In addition, Comverse BSS continues to focus on increasing its revenue and improving its margins by broadening its customer solution and service offerings to existing and new customers.

As part of its service offering, Comverse BSS offers a suite of managed services that enable it to assume responsibility for the operation and management of its customers' billing systems. Comverse's managed services suite is designed to provide 42-------------------------------------------------------------------------------- Table of Contents customers with improved efficiencies relating to the operation and management of their systems, thereby allowing them to focus on their own internal business needs and strengths with reduced management distraction. Managed services provide Comverse with recurring and predictable revenue and are used by Comverse to create and establish long-term relationships with customers as well as cross-sell additional solutions and system enhancements. We believe that the longevity of Comverse's customer relationships and the recurring revenue that such relationships generate provide it with stability and a competitive advantage in marketing its solutions to its existing customer base.

We believe that Comverse BSS's solutions offering has the potential to become a key driver of growth going forward. We expect that as a leader in the converged BSS market, we will continue to build on the strength of our Comverse ONE solution, particularly in the converged billing segment of the BSS market, which is expected to grow rapidly over the next few years. We also expect that growth in mobile data traffic will increase the demand for Comverse's mobile Internet solutions, which include policy management and enforcement, deep packet inspection, traffic management and video optimization capabilities, all of which are integrated into our BSS solution. In implementing our growth strategy, we plan to focus our efforts on increasing our presence primarily in APAC, the Middle East and certain countries in Latin America, including Brazil and Mexico and leveraging our existing customer base by offering upgrades to Comverse ONE primarily in Europe.

Comverse VAS Customer orders for Comverse VAS customer solutions for the nine months ended October 31, 2012 decreased compared to the nine months ended October 31, 2011.

This decrease is attributable to a decline in customer order activity related to Comverse VAS' traditional solutions, such as voicemail and SMS text messaging, which was not fully offset by customer orders for Comverse VAS' advanced offerings, and the implementation of Comverse's strategy to pursue primarily higher margin VAS projects which contributed to lower levels of VAS customer order activity.

Revenue from Comverse VAS customer solutions for the three and nine months ended October 31, 2012 increased compared to the three and nine months ended October 31, 2011 primarily resulting from an increase in revenue recognized upon cash collection due to increased collections from certain customers. The increase in revenue for the nine months ended October 31, 2012 was also attributable to the timing of completion of project milestones. These increases were partially offset by a decrease in revenue resulting from customer acceptances of large-scale deployments of next generation voicemail products during the three and nine months ended October 31, 2011 with no comparable customer acceptances in the three and nine months ended October 31, 2012. For a more detailed discussion relating to revenue from Comverse VAS customer solutions, see "Results of Operations-Segment Results-Comverse VAS-Revenue." Comverse VAS continues to maintain its market leadership in voice-based products, such as voicemail and call completion. However, in the VAS market, wireless subscriber preferences have changed in recent years as consumers transitioned to alternative messaging applications, such as SMS text messaging, in part as a substitute for voicemail usage, and increased the use of data in connection with the deployment of smartphones and other devices, such as tablets. This transition resulted in intensified competition due to the change in the business mix of Comverse VAS from the voicemail product line, in which we continue to hold a leading market position, to other applications and products in which Comverse VAS is continuing to face significant competitive challenges as part of its efforts to increase market share. In addition, Comverse VAS faces increasing competition from changing technologies that may provide alternatives to its products and services. For example, the introduction of open access to web-based applications from wireless devices allows end users to utilize web-based services, such as Facebook, Google, Yahoo or Hotmail, to access, among other things, instant messaging and electronic mail free of charge rather than use wireless carriers' service offerings. Furthermore, Comverse VAS continues to face competition from low-cost competitors from emerging markets. We believe these changes have reduced demand for Comverse VAS's products and services and increased pricing pressures, which have in turn reduced revenue and margins.

At the same time, the growth in global wireless subscriptions, and emerging wireless segments, such as data services and Internet browsing, support demand for several of our products. As part of our efforts to maintain our market position and leverage these recent trends, Comverse VAS is engaged in the promotion of advanced offerings, such as visual voicemail, call management, IP messaging, a Service Enablement Middleware, Rich Communication Solutions (RCS), and Software as a Service (SaaS) cloud-based solutions. We believe demand for advanced offerings may grow due to the increasing deployment of smartphones by wireless communication service providers. Accordingly, we continue to expend significant resources on VAS research and development activities in order to enhance existing products and develop new solutions.

We plan to continue to aggressively market our VAS products, leveraging our leading market position to replace competitors and sell capacity expansions and other solutions to existing customers. We plan to do so while maintaining pricing 43-------------------------------------------------------------------------------- Table of Contents profitability disciplines, which may subject VAS customer order activity to fluctuations in future fiscal periods. In addition, we believe we are in a position to benefit from recent consolidations of customers, primarily in North America.

Uncertainties Impacting Future Performance Mix of Revenue As part of our strategy, we continue our efforts to expand our BSS business and pursue primarily higher margin VAS projects which have resulted in lower VAS revenue. Currently, we are unable to predict whether increases in BSS revenue, if any, will exceed or fully offset declines in VAS revenue. If BSS revenue does not increase, or if increases in BSS revenue do not exceed or fully offset declines in VAS revenue, our revenue, profitability and cash flows would likely be materially adversely affected.

It is unclear whether our advanced offerings will be widely adopted by existing and potential customers. Currently, we are unable to predict whether sales of advanced offerings will exceed or fully offset declines that we may experience in the sale of traditional solutions. If sales of advanced offerings do not increase or if increases in sales of advanced offerings do not exceed or fully offset any declines in sales of traditional solutions, due to adverse market trends, changes in consumer preferences or otherwise, our revenue, profitability and cash flows would likely be materially adversely affected.

Customer Confidence We believe that we may have lost business opportunities due to concerns on the part of customers about our financial condition. We believe that the completion of the Share Distribution and the listing of our common stock on NASDAQ will enhance our market perception and the willingness of customers and partners to purchase our solutions and services.

Global Economic Conditions The business of Comverse BSS and Comverse VAS is impacted by general economic conditions. The weakness in the global economy in recent years has materially and adversely affected the telecommunications industry. Many customers experienced significant declines in revenue and profitability and some customers were required to reduce excessive debt levels. In response to these challenges, many of our customers have implemented cost cutting measures, including more closely managing their operating expenses and capital investment budgets. This resulted in reduced demand for our products, services and solutions, longer customer purchasing decisions and pricing pressures.

Recently, there have been adverse developments in global debt markets (including European sovereign debt) and other indications of a slowdown in the global economic recovery. These conditions have adversely impacted financial markets and have created substantial volatility and uncertainty, which we believe has had an adverse impact on the timing of certain customer spending decisions, and may continue to do so. If the recovery in the global economy is curtailed and market conditions worsen, our existing and potential customers could reduce their spending, which, in turn, could reduce the demand for our products and services.

Difficulty in Forecasting Operating Results Our operating results are difficult to predict. A high percentage of our customer orders has typically been generated late in fiscal quarters. In addition, based on historical industry spending patterns of communication service providers, we typically forecast our highest customer order activity to occur in our fourth fiscal quarter. This trend makes it difficult for us to forecast our annual customer order activity and to implement effective measures to cover any shortfalls of prior fiscal quarters if customer orders for the fourth fiscal quarter fail to meet our expectations. Furthermore, we continue to emphasize large capacity systems in our product development and marketing strategies. Contracts for BSS and VAS installations typically involve a lengthy, complex and highly competitive bidding and selection process, and our ability to obtain particular contracts is inherently difficult to predict. A delay, cancellation or other factor resulting in the postponement or cancellation of significant orders may cause us to miss our financial projections, which may not be discernible until the end of a financial reporting period.

Share Distribution In connection with the Share Distribution, we entered into the Distribution Agreement with CTI pursuant to which, among other things, we agreed to indemnify CTI and its affiliates (including Verint after the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution. To the extent that we are required to make payments to satisfy these indemnification obligations, our liquidity could be impacted. See Part II, Item 1A, "Risk Factors" of 44-------------------------------------------------------------------------------- Table of Contents this Quarterly Report-Risks Related to our Operation as an Independent, Publicly-Traded Company "We are required to indemnify CTI and its affiliates (including Verint following the Verint Merger) after the Verint Merger against certain claims or losses that may arise in connection with the Verint Merger and the Share Distribution." RESULTS OF OPERATIONS The following discussion provides an analysis of our consolidated and combined results and the results of operations of each of our segments for the fiscal periods presented. The discussion of the results of operations of each of our segments provides a more detailed analysis of the results of each segment presented. Accordingly, the discussion of our consolidated and combined results should be read in conjunction with the discussions of the results of operations of our segments.

Three and Nine Months Ended October 31, 2012 Compared to Three and Nine Months Ended October 31, 2011 Condensed Consolidated and Combined Results Three Months Ended October 31, Change Nine Months Ended October 31, Change 2012 2011 Amount Percent 2012 2011 Amount Percent (Dollars in thousands, except per share data) Total revenue $ 185,200 $ 243,797 $ (58,597 ) (24.0 )% $ 494,176 $ 589,616 $ (95,440 ) (16.2 )% Costs and expenses Cost of revenue 118,171 143,968 (25,797 ) (17.9 )% 316,772 365,485 (48,713 ) (13.3 )% Research and development, net 20,379 25,273 (4,894 ) (19.4 )% 59,243 73,990 (14,747 ) (19.9 )% Selling, general and administrative 39,756 43,217 (3,461 ) (8.0 )% 119,253 133,836 (14,583 ) (10.9 )% Other operating expenses 5,582 1,838 3,744 203.7 % 6,689 14,888 (8,199 ) (55.1 )% Total costs and expenses 183,888 214,296 (30,408 ) (14.2 )% 501,957 588,199 (86,242 ) (14.7 )% Income (loss) from operations 1,312 29,501 (28,189 ) (95.6 )% (7,781 ) 1,417 (9,198 ) (649.1 )% Interest income 163 377 (214 ) (56.8 )% 606 1,260 (654 ) (51.9 )% Interest expense (218 ) (283 ) 65 (23.0 )% (594 ) (754 ) 160 (21.2 )% Interest expense on notes payable to CTI (205 ) (204 ) (1 ) N/M (455 ) (386 ) (69 ) 17.9 % Other income (expense), net 147 (2,670 ) 2,817 (105.5 )% (3,749 ) (5,226 ) 1,477 (28.3 )% Income tax provision (11,774 ) (10,681 ) (1,093 ) 10.2 % (19,098 ) (22,531 ) 3,433 (15.2 )% Net (loss) income from continuing operations (10,575 ) 16,040 (26,615 ) (165.9 )% (31,071 ) (26,220 ) (4,851 ) 18.5 % Income from discontinued operations, net of tax 21,831 2,509 19,322 N/M 26,542 5,713 20,829 N/M Net income (loss) 11,256 18,549 (7,293 ) (39.3 )% (4,529 ) (20,507 ) 15,978 (77.9 )% Less: Net income attributable to noncontrolling interest (157 ) (619 ) 462 (74.6 )% (1,167 ) (2,026 ) 859 (42.4 )% Net income (loss) attributable to Comverse, Inc. $ 11,099 $ 17,930 $ (6,831 ) (38.1 )% $ (5,696 ) $ (22,533 ) $ 16,837 (74.7 )% Net income (loss) attributable to Comverse, Inc.: Net income (loss) from continuing operations $ (10,575 ) $ 16,040 $ (26,615 ) $ (31,071 ) $ (26,220 ) $ (4,851 ) Income from discontinued operations, net of tax 21,674 1,890 19,784 25,375 3,687 21,688 Net income (loss) attributable to Comverse, Inc. $ 11,099 $ 17,930 $ (6,831 ) $ (5,696 ) $ (22,533 ) $ 16,837 Earnings (loss) per share attributable to Comverse, Inc.'s stockholders: Basic and diluted earnings (loss) per share(1) Continuing operations $ (0.48 ) $ 0.73 $ (1.21 ) $ (1.42 ) $ (1.20 ) $ (0.22 ) Discontinued operations $ 0.99 $ 0.09 $ 0.90 $ 1.16 $ 0.17 $ 0.99 (1) On November 1, 2012, we issued 724,807 restricted stock units, 132,473 deferred stock units and 495,894 options to purchase our shares of common stock to replace CTI Awards previously granted to our employees. As these awards were not outstanding as of October 31, 2012, they were not required to be 45-------------------------------------------------------------------------------- Table of Contents considered in our diluted earnings (loss) per share calculation; however they will be considered in subsequent periods diluted earnings (loss) per share calculations. See note 22 to the condensed consolidated and combined financial statements included in this Quarterly Report.

Total Revenue Management analyzes our revenue by: (i) revenue generated from customer solutions, and (ii) maintenance revenue. Revenue generated from customer solutions consists primarily of the licensing of our customer solutions, hardware and related professional services and training. Professional services primarily include installation, customization and consulting services. Certain revenue arrangements that require significant customization of a product to meet the particular requirements of a customer are recognized under the percentage-of-completion method. The vast majority of the percentage-of-completion method arrangements are fixed-fee contracts.

Maintenance revenue consists primarily of post-contract customer support (or PCS), including technical software support services, unspecified software updates or upgrades to customers on a when-and-if-available basis.

Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Revenue from customer solutions was $115.1 million for the three months ended October 31, 2012, a decrease of $45.5 million, or 28.3%, compared to the three months ended October 31, 2011. The decrease was attributable to a decline of $50.1 million and $3.0 million in customer solutions revenue at the Comverse BSS segment and Comverse Other, respectively, partially offset by an increase of $7.5 million at the Comverse VAS segment. Revenue recognized using the percentage-of-completion method was $53.0 million and $81.6 million for the three months ended October 31, 2012 and 2011, respectively, and comprised approximately 29% and 33% of total revenue for such periods, respectively.

Maintenance revenue was $70.1 million for the three months ended October 31, 2012, a decrease of $13.1 million, or 15.7%, compared to the three months ended October 31, 2011. This decrease was primarily attributable to declines of $8.7 million, $2.6 million and $1.7 million in maintenance revenue at the Comverse VAS segment, Comverse Other and Comverse BSS segment, respectively.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Revenue from customer solutions was $287.6 million for the nine months ended October 31, 2012, a decrease of $57.3 million, or 16.6%, compared to the nine months ended October 31, 2011. The decrease was attributable to a decline of $75.9 million in customer solutions revenue at the Comverse BSS segment, partially offset by increases of $18.0 million and $0.7 million in customer solutions revenue at the Comverse VAS segment and Comverse Other, respectively.

Revenue recognized using the percentage-of-completion method was $109.9 million and $146.8 million for the nine months ended October 31, 2012 and 2011, respectively, and comprised approximately 22% and 25% of total revenue for such periods, respectively.

Maintenance revenue was $206.6 million for the nine months ended October 31, 2012, a decrease of $38.1 million, or 15.6%, compared to the nine months ended October 31, 2011. This decrease was primarily attributable to declines of $25.5 million, $9.8 million and $2.8 million in maintenance revenue at the Comverse VAS segment, Comverse BSS segment and Comverse Other, respectively.

Revenue by Geographic Region Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Revenue in the Americas, Europe, Middle East and Africa (or EMEA) and Asia Pacific (or APAC) represented approximately 36%, 30%, and 34% of our revenue, respectively, for the three months ended October 31, 2012 compared to approximately 20%, 52%, and 28% of our revenue, respectively, for the three months ended October 31, 2011. The presentation of revenue by geographic region is based on the location of customers.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Revenue in the Americas, Europe, Middle East and Africa (or EMEA) and Asia Pacific (or APAC) represented approximately 34%, 35%, and 31% of our revenue, respectively, for the nine months ended October 31, 2012 compared to approximately 22%, 51%, and 27% of our revenue, respectively, for the nine months ended October 31, 2011.

Foreign Currency Impact on Revenue Fluctuations in the U.S. dollar relative to foreign currencies in which we conducted business for the three months ended October 31, 2012 compared to the three months ended October 31, 2011 unfavorably impacted revenue by $2.3 million.

Our functional currency for financial reporting purposes is the U.S. dollar. The majority of our revenue for the nine months ended October 31, 2012 was derived from transactions denominated in U.S. dollars. All other revenue was derived from transactions denominated in various foreign currencies, primarily the British pound, euro and Japanese yen. Fluctuations in the 46-------------------------------------------------------------------------------- Table of Contents U.S. dollar relative to foreign currencies in which we conducted business for the nine months ended October 31, 2012 compared to the nine months ended October 31, 2011 unfavorably impacted revenue by $7.1 million.

Foreign Currency Impact on Costs A significant portion of our expenses, principally personnel-related costs, is incurred in new Israeli shekel (or NIS), whereas our functional currency for financial reporting purposes is the U.S. dollar. A strengthening of the NIS against the U.S. dollar would increase the U.S. dollar value of our expenses in Israel. We enter into foreign currency forward contracts to mitigate risk attributable to foreign currency exchange rate fluctuations.

Cost of revenue Cost of revenue primarily consists of hardware and software material costs and compensation and related expenses for personnel involved in the customization of our products for customer delivery, contractor costs, maintenance and professional services, such as installation costs and training, royalties and license fees, depreciation of equipment used in operations, amortization of capitalized software costs and certain purchased intangible assets and related overhead costs.

Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Cost of revenue was $118.2 million for the three months ended October 31, 2012, a decrease of $25.8 million, or 17.9%, compared to the three months ended October 31, 2011. The decrease was attributable to declines in costs of $18.3 million and $9.3 million at the Comverse BSS segment and Comverse Other, respectively, offset by an increase in costs of $1.7 million at the Comverse VAS segment for the three months ended October 31, 2012 compared to the three months ended October 31, 2011.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Cost of revenue was $316.8 million for the nine months ended October 31, 2012, a decrease of $48.7 million, or 13.3%, compared to the nine months ended October 31, 2011. The decrease was attributable to declines in costs of $26.5 million, $15.0 million and $7.1 million at the Comverse BSS segment, Comverse Other, and Comverse VAS segment, respectively, for the nine months ended October 31, 2012 compared to the nine months ended October 31, 2011.

Research and Development, Net Research and development expenses, net primarily consist of personnel-related costs involved in product development, net of reimbursement under government programs. Research and development expenses also include third party development and programming costs and the amortization of purchased software code and services content used in research and development activities.

Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Research and development expenses, net, were $20.4 million for the three months ended October 31, 2012, a decrease of $4.9 million, or 19.4%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to a decline of $7.0 million at the Comverse BSS segment, partially offset by an increase of $2.2 million at the Comverse VAS segment.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Research and development expenses, net, were $59.2 million for the nine months ended October 31, 2012, a decrease of $14.7 million, or 19.9%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to declines of $21.5 million and $2.2 million at the Comverse BSS segment and Comverse Other, respectively, partially offset by an increase of $9.0 million at the Comverse VAS segment.

Selling, General and Administrative Selling, general and administrative expenses consist primarily of compensation and related expenses of personnel, professional services, sales and marketing expenses, facility costs and unallocated overhead expenses.

Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Selling, general and administrative expenses were $39.8 million for the three months ended October 31, 2012, a decrease of $3.5 million, or 8.0%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to a declines of $3.0 million and $0.6 million at the Comverse BSS and Comverse VAS segments, respectively, partially offset by an increase of $0.1 million at Comverse Other.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Selling, general and administrative expenses were $119.3 million for the nine months ended October 31, 2012, a decrease of $14.6 million, or 10.9%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to declines of $7.3 47-------------------------------------------------------------------------------- Table of Contents million, $6.1 million and $1.3 million at the Comverse BSS segment, Comverse Other, and the Comverse VAS segment, respectively.

Other Operating Expenses Other operating expenses consist of operating expenses not included in research and development, net and selling, general and administrative expenses and for the fiscal periods presented include primarily restructuring charges and impairments of intangible assets.

Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Other operating expenses were $5.6 million for the three months ended October 31, 2012, an increase of $3.7 million, compared to the three months ended October 31, 2011. The increase was primarily attributable to an increase at Comverse Other.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Other operating expenses were $6.7 million for the nine months ended October 31, 2012, a decrease of $8.2 million, or 55.1%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to a decline at Comverse Other.

Income (Loss) from Operations Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Income from operations was $1.3 million for the three months ended October 31, 2012, a decrease of $28.2 million, or 95.6%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to a decrease in income from operations of $23.6 million and $4.5 million at the Comverse BSS and Comverse VAS segments, respectively.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Loss from operations was $7.8 million for the nine months ended October 31, 2012, a change of $9.2 million compared to income from operations of $1.4 million for nine months ended October 31, 2011. The change was primarily attributable to a decline in income from operations of $30.4 million and $8.1 million at the Comverse BSS and Comverse VAS segments partially offset by a decrease in loss from operations of $29.3 million at Comverse Other.

Interest Income Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Interest income was $0.2 million for the three months ended October 31, 2012, a decrease of $0.2 million, or 56.8%, compared to the three months ended October 31, 2011.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Interest income was $0.6 million for the nine months ended October 31, 2012, a decrease of $0.7 million, or 51.9%, compared to the nine months ended October 31, 2011.

Interest Expense Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Interest expense was $0.2 million for the three months ended October 31, 2012, a decrease of $0.1 million, or 23.0%, compared to the three months ended October 31, 2011.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Interest expense was $0.6 million for the nine months ended October 31, 2012, a decrease of $0.2 million, or 21.2%, compared to the nine months ended October 31, 2011.

Interest Expense on Notes Payable to CTI Interest expense on notes payable to CTI consists of interest expense payable by us to CTI under a promissory note dated January 11, 2011 and a revolving loan agreement dated May 9, 2012 (referred to as the loan agreement).

Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Interest expense on notes payable to CTI was $0.2 million for the three months ended October 31, 2012, and October 31, 2011. For more information about this note and the loan agreement, see note 9 of the condensed consolidated and combined financial statements included in this Quarterly Report.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Interest expense on notes payable to CTI was $0.5 million for the nine months ended October 31, 2012, an increase of $0.1 million, or 17.9% , compared 48-------------------------------------------------------------------------------- Table of Contents to the nine months ended October 31, 2011. For more information about this note and the loan agreement, see note 9 of the condensed consolidated and combined financial statements included in this Quarterly Report.

Other Income (Expense), Net Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Other income, net was $0.1 million for the three months ended October 31, 2012, a change of $2.8 million compared to other expense, net of $2.7 million for the three months ended October 31, 2011. The change was primarily attributable to a $2.7 million increase related to the recognition of net foreign currency transaction gains of $0.2 million for the three months ended October 31, 2012, compared to net foreign currency transaction losses of $2.5 million for the three months ended October 31, 2011.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Other expense, net was $3.7 million for the nine months ended October 31, 2012, a decrease of $1.5 million, or 28.3%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to a $0.8 million decrease related to the recognition of net foreign currency transaction losses of $3.5 million for the nine months ended October 31, 2012, compared to $4.3 million for the nine months ended October 31, 2011.

Income Tax Provision Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. We recorded an income tax provision from continuing operations of $11.8 million for the three months ended October 31, 2012, representing an effective tax rate of 982.0%, compared with an income tax provision from continuing operations of $10.7 million, representing an effective tax rate of 40.0% for the three months ended October 31, 2011. During the three months ended October 31, 2012 and 2011, the effective tax rates were greater than the US statutory rate primarily due to the fact that we did not record an income tax benefit on losses incurred in certain of our U.S. and foreign jurisdictions in which we maintain valuation allowances against our net deferred tax assets. The income tax provisions from continuing operations are comprised of income tax expense recorded in non-loss jurisdictions, withholding taxes and certain tax contingencies. The change in our effective tax rate for the three months ended October 31, 2012, compared to the three months ended October 31, 2011 is primarily attributable to changes in the relative mix of income and losses across various jurisdictions.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. We recorded an income tax provision from continuing operations of $19.1 million for the nine months ended October 31, 2012, representing an effective tax rate of (159.5)%, compared with an income tax provision from continuing operations of $22.5 million, representing an effective tax rate of (610.8)% for the nine months ended October 31, 2011. During the nine months ended October 31, 2012 and 2011, the effective tax rates were negative due to the fact that we reported income tax expense on loss before income tax provision. We did not record an income tax benefit on the losses for the periods, primarily because we maintain valuation allowances against certain of our U.S. and foreign net deferred tax assets. The income tax provisions from continuing operations are comprised of income tax expense recorded in non-loss jurisdictions, withholding taxes and certain tax contingencies. The change in our effective tax rate for the nine months ended October 31, 2012, compared to the nine months ended October 31, 2011 is primarily attributable to changes in the relative mix of income and losses across various jurisdictions.

Income from Discontinued Operations, Net of Tax Income from discontinued operations represents the results of operations of Starhome, including the gain on sale of Starhome, net of tax.

Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Income from discontinued operations, net of tax, was $21.8 million for the three months ended October 31, 2012, compared to $2.5 million for the three months ended October 31, 2011. The increase was primarily attributable to $22.6 million gain on sale of Starhome recorded during the three months ended October 31, 2012. See note 14 of the condensed consolidated and combined financial statements included in this Quarterly Report.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Income from discontinued operations, net of tax, was $26.5 million for the nine months ended October 31, 2012, compared to $5.7 million for the nine months ended October 31, 2011. The increase was primarily attributable to $22.6 million gain on sale of Starhome recorded during the nine months ended October 31, 2012.

See note 14 of the condensed consolidated and combined financial statements included in this Quarterly Report.

49-------------------------------------------------------------------------------- Table of Contents Net Income (Loss) Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Net income was $11.3 million for the three months ended October 31, 2012, a decrease in income of $7.3 million, or 39.3%, compared to the three months ended October 31, 2011 due primarily to the reasons discussed above.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Net loss was $4.5 million for the nine months ended October 31, 2012, a decrease in loss of $16.0 million, or 77.9% compared to the nine months ended October 31, 2011 due primarily to the reasons discussed above.

Net Income Attributable to Noncontrolling Interest Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Net income attributable to noncontrolling interest was $0.2 million for the three months ended October 31, 2012, a decrease of $0.5 million, or 74.6%, compared to the three months ended October 31, 2011. The decrease was attributable to a decrease in Starhome's net income for the three months ended October 31, 2012 compared to the three months ended October 31, 2011.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Net income attributable to noncontrolling interest was $1.2 million for the nine months ended October 31, 2012, a decrease of $0.9 million, or 42.4%, compared to the nine months ended October 31, 2011. The decrease was attributable to a decrease in Starhome's net income for the nine months ended October 31, 2012 compared to the nine months ended October 31, 2011.

50-------------------------------------------------------------------------------- Table of Contents Segment Results Comverse BSS Three Months Ended October 31, Change Nine Months Ended October 31, Change 2012 2011 Amount Percent 2012 2011 Amount Percent (Dollars in thousands) Revenue: Total revenue $ 65,947 $ 117,731 $ (51,784 ) (44.0 )% $ 192,679 $ 278,403 $ (85,724 ) (30.8 )% Costs and expenses: Cost of revenue 46,561 64,823 (18,262 ) (28.2 )% 127,793 154,320 (26,527 ) (17.2 )% Research and development, net 8,499 15,458 (6,959 ) (45.0 )% 25,482 46,967 (21,485 ) (45.7 )% Selling, general and administrative 4,027 7,022 (2,995 ) (42.7 )% 13,515 20,774 (7,259 ) (34.9 )% Other operating expenses - 15 (15 ) (100.0 )% - 81 (81 ) (100.0 )% Total costs and expenses 59,087 87,318 (28,231 ) (32.3 )% 166,790 222,142 (55,352 ) (24.9 )% Income from operations $ 6,860 $ 30,413 $ (23,553 ) (77.4 )% $ 25,889 $ 56,261 $ (30,372 ) (54.0 )% Computation of segment performance: Segment revenue $ 65,947 $ 117,731 $ (51,784 ) (44.0 )% $ 192,679 $ 278,403 $ (85,724 ) (30.8 )% Total costs and expenses $ 59,087 $ 87,318 $ (28,231 ) (32.3 )% $ 166,790 $ 222,142 $ (55,352 ) (24.9 )% Segment expense adjustments: Amortization of acquisition-related intangibles 3,976 4,245 (269 ) (6.3 )% 12,048 13,241 (1,193 ) (9.0 )% Compliance-related compensation and other expenses - (1 ) 1 N/M 678 2,066 (1,388 ) (67.2 )% Other 2 - 2 N/M 2 - 2 N/M Segment expense adjustments 3,978 4,244 (266 ) (6.3 )% 12,728 15,307 (2,579 ) (16.8 )% Segment expenses 55,109 83,074 (27,965 ) (33.7 )% 154,062 206,835 (52,773 ) (25.5 )% Segment performance $ 10,838 $ 34,657 $ (23,819 ) (68.7 )% $ 38,617 $ 71,568 $ (32,951 ) (46.0 )% Revenue Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Revenue from Comverse BSS customer solutions was $32.2 million for the three months ended October 31, 2012, a decrease of $50.1 million, or 60.8%, compared to the three months ended October 31, 2011. The decrease in revenue from Comverse BSS customer solutions was primarily attributable to (i) material modifications of certain existing contracts during the three months ended October 31, 2011 that allowed the recognition of additional revenue of approximately $30.8 million during the prior period (ii) a 28.6% decrease in revenue from customer acceptances in the three months ended October 31, 2012 compared to the three months ended October 31, 2011 and (iii) changes in scope and settlements of certain customer contracts.

Comverse BSS maintenance revenue was $33.7 million for the three months ended October 31, 2012, a decrease of $1.7 million, or 4.9%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to timing of entering into renewals of maintenance contracts with customers.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Revenue from Comverse BSS customer solutions was $92.4 million for the nine months ended October 31, 2012, a decrease of $75.9 million, or 45.1%, compared to the nine months ended October 31, 2011. The decrease in revenue from Comverse BSS customer solutions was primarily attributable to (i) material modifications of certain existing contracts during the nine months ended October 31, 2011 that allowed the recognition of additional revenue of approximately $24.0 million during the prior period (ii) a 23.6% decrease in revenue from customer acceptances in the nine months ended October 31, 2012 compared to the nine months ended October 31, 2011 and (iii) changes in scope and settlements of certain customer contracts.

Comverse BSS maintenance revenue was $100.3 million for the nine months ended October 31, 2012, a decrease of $9.8 million, or 8.9%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to decreased collections that resulted in a delay in the recognition of revenue, timing of entering into renewals of maintenance contracts, termination of maintenance contracts and a reduction in maintenance fees compared to the prior period.

51-------------------------------------------------------------------------------- Table of Contents Revenue by Geographic Region Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Revenue in the Americas, Europe, Middle East and Africa (or EMEA) and Asia Pacific (or APAC) represented approximately 28%, 42% and 30% of Comverse BSS's revenue, respectively, for the three months ended October 31, 2012 compared to approximately 12%, 53% and 35% of Comverse BSS's revenue, respectively, for the three months ended October 31, 2011.

Europe continued to suffer from significant weakness in market conditions and, accordingly, European customers continued to closely monitor their costs and maintain lower levels of spending. In addition, the decrease in Comverse BSS's revenue in Europe was impacted by material modifications of certain existing contracts entered into during the prior period that allowed the recognition of additional revenue of approximately $24.4 million as well as changes in scope and settlements of certain customer contracts. As a result, Comverse BSS's revenue from its European customers declined during the three months ended October 31, 2012 compared to the three months ended October 31, 2011. The decrease in total revenue for Comverse BSS in APAC was primarily attributable to a decrease in revenue recognized due to changes in scope and settlements of certain customer contracts and customer acceptances in certain large-scale projects with no comparable projects in the prior period.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Revenue in the Americas, Europe, Middle East and Africa (or EMEA) and Asia Pacific (or APAC) represented approximately 24%, 45% and 31% of Comverse BSS's revenue, respectively, for the nine months ended October 31, 2012 compared to approximately 17%, 53% and 30% of Comverse BSS's revenue, respectively, for the nine months ended October 31, 2011.

Europe continued to suffer from significant weakness in market conditions and, accordingly, European customers continued to closely monitor their costs and maintain lower levels of spending. In addition, the decrease in Comverse BSS's revenue in Europe was impacted by material modifications of certain existing contracts entered into during the prior period that allowed the recognition of additional revenue of approximately $22.9 million as well as changes in scope and settlements of certain customer contracts. As a result, Comverse BSS's revenue from its European customers declined during the nine months ended October 31, 2012 compared to the nine months ended October 31, 2011. The decrease in total revenue for Comverse BSS in APAC was primarily attributable to a decrease in revenue recognized due to changes in scope and settlements of certain customer contracts and customer acceptances in certain large-scale projects with no comparable projects in the prior period.

Foreign Currency Impact on Revenue Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Fluctuations in the U.S. dollar relative to foreign currencies in which Comverse BSS conducted business for the three months ended October 31, 2012 compared to the three months ended October 31, 2011 unfavorably impacted revenue by $1.5 million.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Fluctuations in the U.S. dollar relative to foreign currencies in which Comverse BSS conducted business for the nine months ended October 31, 2012 compared to the nine months ended October 31, 2011 unfavorably impacted revenue by $5.7 million.

Cost of Revenue Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Cost of revenue was $46.6 million for the three months ended October 31, 2012, a decrease of $18.3 million, or 28.2%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to: • a $14.9 million decrease in material costs and overhead primarily due to decreased revenue; and • an $7.3 million decrease in personnel-related costs principally due to progress of projects accounted for under the percentage of completion method.

These decreases were partially offset by a $3.9 million increase in sub-contractor costs on certain projects.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Cost of revenue was $127.8 million for the nine months ended October 31, 2012, a decrease of $26.5 million, or 17.2%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to: • a $19.5 million decrease in material costs primarily due to decreased revenue and decreases in provisions for contract loss; • a $13.8 million decrease in personnel-related costs principally due to progress of projects accounted for under the percentage of completion method.

These decreases were partially offset by a $5.0 million increase in sub-contractor costs on certain projects.

52-------------------------------------------------------------------------------- Table of Contents Research and Development, Net Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Research and development expenses, net, were $8.5 million for the three months ended October 31, 2012, a decrease of $7.0 million, or 45.0%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to a $3.4 million decrease in personnel-related costs and a $1.4 million decrease in allocated overhead costs relating to research and development, both principally due to workforce reductions as part of the Phase II Business Transformation, and a $1.7 million decrease in personnel-related costs due to allocation of research and development personnel to specific revenue generating projects recorded in cost of revenue in lieu of research and development expenses, net.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Research and development expenses, net, were $25.5 million for the nine months ended October 31, 2012, a decrease of $21.5 million, or 45.7%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to an $11.5 million decrease in personnel-related costs and bonus expenses and a $3.6 million decrease in allocated overhead costs relating to research and development, both principally due to workforce reductions as part of the Phase II Business Transformation and a $5.5 million decrease in personnel-related costs due to allocation of research and development personnel to specific revenue generating projects recorded in cost of revenue in lieu of research and development expenses, net.

Selling, General and Administrative Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Selling, general and administrative expenses were $4.0 million for the three months ended October 31, 2012, a decrease of $3.0 million, or 42.7%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to: • a $1.9 million decrease in personnel-related costs; • a $0.4 million decrease in bad debt expense related to specific customers in the prior period; and • a $0.2 million decrease in overhead allocations related to selling, general and administrative expenses.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Selling, general and administrative expenses were $13.5 million for the nine months ended October 31, 2012, a decrease of $7.3 million, or 34.9%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to: • a $3.5 million decrease in personnel-related costs principally due to workforce reductions as part of the Phase II Business Transformation; • a $1.6 million decrease in agent and employee sales commissions expense principally due to the mix of bookings generated from certain projects and in certain geographic locations with respect to which Comverse BSS pays lower sales commissions; and • a $0.6 million decrease in overhead allocations related to selling, general and administrative expenses.

Segment Performance Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Segment performance was $10.8 million for the three months ended October 31, 2012 based on segment revenue of $65.9 million, representing a segment performance margin of 16.4% as a percentage of segment revenue. Segment performance was $34.7 million for the three months ended October 31, 2011 based on segment revenue of $117.7 million, representing a segment performance margin of 29.4% as a percentage of segment revenue. The decrease in segment performance margin was primarily attributable to a decrease in segment revenue, partially offset by a decrease in segment expenses for the three months ended October 31, 2012 compared to the three months ended October 31, 2011.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Segment performance was $38.6 million for the nine months ended October 31, 2012 based on segment revenue of $192.7 million, representing a segment performance margin of 20.0% as a percentage of segment revenue. Segment performance was $71.6 million for the nine months ended October 31, 2011 based on segment revenue of $278.4 million, representing a segment performance margin of 25.7% as a percentage of segment revenue. The decrease in segment performance margin was primarily attributable to a decrease in segment revenue, partially offset by a decrease in segment expenses for the nine months ended October 31, 2012 compared to the nine months ended October 31, 2011.

53-------------------------------------------------------------------------------- Table of Contents Comverse VAS Three Months Ended October 31, Change Nine Months Ended October 31, Change 2012 2011 Amount Percent 2012 2011 Amount Percent (Dollars in thousands) Revenue: Total revenue $ 111,457 $ 112,655 $ (1,198 ) (1.1 )% $ 268,668 $ 276,234 $ (7,566 ) (2.7 )% Costs and expenses: Cost of revenue 57,380 55,632 1,748 3.1 % 144,179 151,325 (7,146 ) (4.7 )% Research and development, net 8,936 6,786 2,150 31.7 % 28,398 19,434 8,964 46.1 % Selling, general and administrative 1,262 1,865 (603 ) (32.3 )% 5,192 6,454 (1,262 ) (19.6 )% Other operating expenses - - - - - 4 (4 ) N/M Total costs and expenses 67,578 64,283 3,295 5.1 % 177,769 177,217 552 0.3 % Income from operations $ 43,879 $ 48,372 $ (4,493 ) (9.3 )% $ 90,899 $ 99,017 $ (8,118 ) (8.2 )% Computation of segment performance: Segment revenue $ 111,457 $ 112,655 $ (1,198 ) (1.1 )% $ 268,668 $ 276,234 $ (7,566 ) (2.7 )% Total costs and expenses $ 67,578 $ 64,283 $ 3,295 5.1 % $ 177,769 $ 177,217 $ 552 0.3 % Segment expense adjustments: Compliance-related compensation and other expenses - 295 (295 ) N/M 916 1,531 (615 ) (40.2 )% Impairment charges - - - - - 5 (5 ) N/M Segment expense adjustments - 295 (295 ) (100.0 )% 916 1,536 (620 ) (40.4 )% Segment expenses 67,578 63,988 3,590 5.6 % 176,853 175,681 1,172 0.7 % Segment performance $ 43,879 $ 48,667 $ (4,788 ) (9.8 )% $ 91,815 $ 100,553 $ (8,738 ) (8.7 )% Revenue Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Revenue from Comverse VAS customer solutions was $77.3 million for the three months ended October 31, 2012, an increase of $7.5 million, or 10.8%, compared to the three months ended October 31, 2011. The increase in revenue from Comverse VAS customer solutions was primarily attributable to an increase in revenue recognized upon cash collection due to increased collections from certain customers partially offset by a decrease in revenue resulting from customer acceptances in certain large-scale projects in the three months ended October 31, 2011, with no comparable customer acceptances in the three months ended October 31, 2012.

Comverse VAS maintenance revenue was $34.2 million for the three months ended October 31, 2012, a decrease of $8.7 million, or 20.3%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to the timing of entering into renewals of maintenance contracts, termination of maintenance contracts and a decrease in maintenance revenue attributable to maintenance services provided to customers during the initial service period corresponding to a decline in new installed base value.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Revenue from Comverse VAS customer solutions was $170.5 million for the nine months ended October 31, 2012, an increase of $18.0 million, or 11.8%, compared to the nine months ended October 31, 2011. The increase in revenue from Comverse VAS customer solutions was primarily attributable to an increase in revenue recognized upon cash collection due to increased collections from certain customers and timing of completion of project milestones. This increase was partially offset by a decrease in the number of customer acceptances in large-scale deployments of next generation voicemail products (including visual voicemail) during the nine months ended October 31, 2011 with no comparable customer acceptances in the nine months ended October 31, 2012.

Comverse VAS maintenance revenue was $98.2 million for the nine months ended October 31, 2012, a decrease of $25.5 million, or 20.6%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to the timing of entering into renewals of maintenance contracts, termination of maintenance contracts and a decrease in maintenance revenue attributable to maintenance services provided to customers during the initial service period corresponding to a decline in new installed base value.

54-------------------------------------------------------------------------------- Table of Contents Revenue by Geographic Region Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Revenue in the Americas, EMEA and APAC represented approximately 39%, 23% and 38% of Comverse VAS's revenue, respectively, for the three months ended October 31, 2012 compared to approximately 27%, 52% and 21% of Comverse VAS's revenue, respectively, for the three months ended October 31, 2011.

The increase in revenue as a percentage of total revenue for Comverse VAS in the Americas was primarily attributable to significant revenue recognized due to customer acceptances in certain large-scale projects in the three months ended October 31, 2012, with no comparable customer acceptances in the three months ended October 31, 2011. Conversely, the decrease in revenue as a percentage of total revenue for Comverse VAS in Europe was primarily attributable to significant revenue recognized due to customer acceptances in certain large-scale projects in the three months ended October 31, 2011, with no comparable customer acceptances in the three months ended October 31, 2012. The increase in revenue for Comverse VAS in APAC was primarily attributable to revenue recognized upon cash collection due to increased collections from certain customers.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Revenue in the Americas, EMEA and APAC represented approximately 41%, 28% and 31% of Comverse VAS's revenue, respectively, for the nine months ended October 31, 2012 compared to approximately 27%, 47% and 26% of Comverse VAS's revenue, respectively, for the nine months ended October 31, 2011.

The increase in revenue as a percentage of total revenue for Comverse VAS in the Americas was primarily attributable to significant revenue recognized due to customer acceptances in certain large-scale projects in the nine months ended October 31, 2012, with no comparable customer acceptances in the nine months ended October 31, 2011. Conversely, the decrease in revenue as a percentage of total revenue for Comverse VAS in Europe was primarily attributable to significant revenue recognized due to customer acceptances in certain large-scale projects in the nine months ended October 31, 2011, with no comparable customer acceptances in the nine months ended October 31, 2012. The increase in revenue for Comverse VAS in APAC was primarily attributable to revenue recognized upon cash collection due to increased collections from certain customers.

Foreign Currency Impact on Revenue Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Fluctuations in the U.S. dollar relative to foreign currencies in which Comverse VAS conducted business for the three months ended October 31, 2012 compared to the three months ended October 31, 2011 unfavorably impacted revenue by $0.6 million.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Fluctuations in the U.S. dollar relative to foreign currencies in which Comverse VAS conducted business for the nine months ended October 31, 2012 compared to the nine months ended October 31, 2011 unfavorably impacted revenue by $0.3 million.

Cost of Revenue Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Cost of revenue was $57.4 million for the three months ended October 31, 2012, an increase of $1.7 million, or 3.1%, compared to the three months ended October 31, 2011. The increase was primarily attributable to a $7.6 million increase in personnel-related costs principally due to progress of projects related to customer solutions.

This increase was offset by the following: • a $2.9 million decrease in material costs primarily due to lower product costs associated with revenue recognized during the period; • a $1.4 million decrease in allocation of overhead costs relating to cost of revenue; and • a $0.9 million decrease in contractor costs recorded based on progress of projects related to customer solutions.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Cost of revenue was $144.2 million for the nine months ended October 31, 2012, a decrease of $7.1 million, or 4.7%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to: • a $3.1 million decrease in material costs primarily due to lower product costs associated with revenue recognized during the period; and • a $4.8 million decrease in allocation of overhead costs relating to cost of revenue.

55-------------------------------------------------------------------------------- Table of Contents Research and Development, Net Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Research and development expenses, net, were $8.9 million for the three months ended October 31, 2012, an increase of $2.2 million, or 31.7%, compared to the three months ended October 31, 2011. The increase resulted primarily from a $1.7 million increase in personnel-related costs mainly due to increased research and development headcount attributable to the launch of two new services of VAS solution offerings and an increase of $0.7 million in allocated overhead cost relating to research and development, net.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Research and development expenses, net, were $28.4 million for the nine months ended October 31, 2012, an increase of $9.0 million, or 46.1%, compared to the nine months ended October 31, 2011. The increase resulted primarily from an $8.1 million increase in personnel-related costs mainly due to increased research and development headcount attributable to the launch of two new services of VAS solution offerings.

Selling, General and Administrative Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Selling, general and administrative expenses were $1.3 million for the three months ended October 31, 2012, a decrease of $0.6 million, or 32.3%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to a $0.3 million decrease in agent and employee sales commissions expense principally due to the mix of bookings generated from certain projects and in certain geographic locations with respect to which Comverse VAS pays lower sales commission and a $0.3 million decrease in personnel-related costs.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Selling, general and administrative expenses were $5.2 million for the nine months ended October 31, 2012, a decrease of $1.3 million, or 19.6%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to a $1.4 million decrease in agent and employee sales commissions expense principally due to the mix of bookings generated from certain projects and in certain geographic locations with respect to which Comverse VAS pays lower sales commission and a decrease in personnel-related costs of $0.6 million, partially offset by a $0.5 million increase in bad debt expenses.

Segment Performance Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Segment performance was $43.9 million for the three months ended October 31, 2012 based on segment revenue of $111.5 million, representing a segment performance margin of 39.4% as a percentage of segment revenue. Segment performance was $48.7 million for the three months ended October 31, 2011 based on segment revenue of $112.7 million, representing a segment performance margin of 43.2% as a percentage of segment revenue. The decrease in segment performance margin was primarily attributable an increase in segment expenses for the three months ended October 31, 2012 compared to the three months ended October 31, 2011.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Segment performance was $91.8 million for the nine months ended October 31, 2012 based on segment revenue of $268.7 million, representing a segment performance margin of 34.2% as a percentage of segment revenue. Segment performance was $100.6 million for the nine months ended October 31, 2011 based on segment revenue of $276.2 million, representing a segment performance margin of 36.4% as a percentage of segment revenue. The decrease in segment performance margin was primarily attributable to the decrease in segment revenue, for the nine months ended October 31, 2012 compared to the nine months ended October 31, 2011.

56-------------------------------------------------------------------------------- Table of Contents Comverse Other Three Months Ended October 31, Change Nine Months Ended October 31, Change 2012 2011 Amount Percent 2012 2011 Amount Percent (Dollars in thousands) Revenue: Total revenue $ 7,796 $ 13,411 $ (5,615 ) (41.9 )% $ 32,829 $ 34,979 $ (2,150 ) (6.1 )% Costs and expenses: Cost of revenue 14,230 23,513 (9,283 ) (39.5 )% 44,800 59,840 (15,040 ) (25.1 )% Research and development, net 2,944 3,029 (85 ) (2.8 )% 5,363 7,589 (2,226 ) (29.3 )% Selling, general and administrative 34,467 34,330 137 0.4 % 100,546 106,608 (6,062 ) (5.7 )% Other operating expenses 5,582 1,823 3,759 206.2 % 6,689 14,803 (8,114 ) (54.8 )% Total costs and expenses 57,223 62,695 (5,472 ) (8.7 )% 157,398 188,840 (31,442 ) (16.7 )% Loss from operations $ (49,427 ) $ (49,284 ) $ (143 ) 0.3 % $ (124,569 ) $ (153,861 ) $ 29,292 (19.0 )% Computation of segment performance: Total revenue $ 7,796 $ 13,411 $ (5,615 ) (41.9 )% $ 32,829 $ 34,979 $ (2,150 ) (6.1 )% Segment revenue adjustment - - - - - - - - Segment revenue $ 7,796 $ 13,411 $ (5,615 ) (41.9 )% $ 32,829 $ 34,979 $ (2,150 ) (6.1 )% Total costs and expenses $ 57,223 $ 62,695 $ (5,472 ) (8.7 )% $ 157,398 $ 188,840 $ (31,442 ) (16.7 )% Segment expense adjustments: Stock-based compensation expense 1,880 974 906 93.0 % 5,512 2,671 2,841 106.4 % Compliance-related professional fees 176 4,162 (3,986 ) (95.8 )% 189 14,629 (14,440 ) (98.7 )% Compliance-related compensation and other expenses 288 1,281 (993 ) (77.5 )% 247 1,885 (1,638 ) (86.9 )% Impairment of goodwill 5,605 - 5,605 N/M 5,605 - 5,605 N/M Impairment of property and equipment 15 1,118 (1,103 ) (98.7 )% 50 1,270 (1,220 ) (96.1 )% Litigation settlements and related costs 413 - 413 N/M 170 474 (304 ) N/M Restructuring (23 ) 1,838 (1,861 ) (101.3 )% 1,084 14,888 (13,804 ) (92.7 )% Other 1 (8 ) 9 (112.5 )% (207 ) (55 ) (152 ) N/M Segment expense adjustments 8,355 9,365 (1,010 ) (10.8 )% 12,650 35,762 (23,112 ) (64.6 )% Segment expenses 48,868 53,330 (4,462 ) (8.4 )% 144,748 153,078 (8,330 ) (5.4 )% Segment performance $ (41,072 ) $ (39,919 ) $ (1,153 ) 2.9 % $ (111,919 ) $ (118,099 ) $ 6,180 (5.2 )% Revenue Revenue includes revenue generated primarily by Comverse MI and our Netcentrex operations (or Netcentrex).

Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Total revenue was $7.8 million for the three months ended October 31, 2012, a decrease of $5.6 million, or 41.9%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to revenue decreases at Netcentrex of $4.8 million. For the three months ended October 31, 2012 and 2011, Comverse MI's total revenue were $5.5 million and $5.6 million, respectively, and Netcentrex' total revenue were $1.7 million and $6.5 million, respectively.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Total revenue was $32.8 million for the nine months ended October 31, 2012, a decrease of $2.2 million, or 6.1%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to revenue decreases at Netcentrex of $5.8 million, partially offset by a $2.0 million and $1.8 million revenue increases at Comverse MI and other miscellaneous operations, respectively. For the nine months ended October 31, 2012 and 2011, Comverse MI's total revenue was $17.4 million and $15.4 million, respectively, and Netcentrex' total revenue was $11.5 million and $17.3 million, respectively.

Cost of Revenue Cost of revenue is primarily attributable to Comverse MI and Netcentrex. Cost of revenue also includes shared services costs associated with percentage-of-completion projects, including at Comverse BSS and Comverse VAS.

57-------------------------------------------------------------------------------- Table of Contents Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Cost of revenue was $14.2 million for the three months ended October 31, 2012, a decrease of $9.3 million, or 39.5%, compared to the three months ended October 31, 2011. The decrease was primarily attributable to a $14.2 million decrease in personnel-related costs relating to employees, whose personnel-related costs were included in Comverse Other for the three months ended October 31, 2011 and were transferred to specific projects at the Comverse BSS and Comverse VAS segments for the three months ended October 31, 2012.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Cost of revenue was $44.8 million for the nine months ended October 31, 2012, a decrease of $15.0 million, or 25.1%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to: • a $13.5 million decrease in personnel-related costs relating to employees, whose personnel-related costs were included in Comverse Other for the nine months ended October 31, 2011 and were transferred to specific projects at the Comverse BSS and Comverse VAS segments for the nine months ended October 31, 2012; and • a $1.4 million decrease in contractor costs.

Research and Development, Net Research and development expenses, net primarily include expenses incurred by our global corporate functions in connection with shared services provided to our operations, including Comverse BSS and Comverse VAS.

Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Research and development expenses, net, were $2.9 million for the three months ended October 31, 2012, a decrease of $0.1 million, or 2.8%, compared to the three months ended October 31, 2011.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Research and development expenses, net, were $5.4 million for the nine months ended October 31, 2012, a decrease of $2.2 million, or 29.3%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to a decrease in allocated overhead costs relating to research and development.

Selling, General and Administrative Selling, general and administrative expenses consist of expenses incurred by our global corporate functions in connection with shared services provided to our operations, including, Comverse BSS and Comverse VAS.

Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Selling, general and administrative expenses were $34.5 million for the three months ended October 31, 2012, an increase of $0.1 million, or 0.4%, compared to the three months ended October 31, 2011. The increase was primarily attributable to: • a $3.0 million increase as a result of a higher percentage of overhead costs allocated to selling, general and administrative; and • a $1.7 million increase in personnel-related costs primarily due to bonus expenses. Fluctuations in foreign currency exchange rates had a favorable impact on personnel-related costs of approximately $1.0 million for the three months ended October 31, 2012.

These increases were partially offset by a $4.0 million decrease in compliance-related professional fees in connection with CTI's efforts to become current in its periodic reporting obligations under the federal securities laws.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Selling, general and administrative expenses were $100.5 million for the nine months ended October 31, 2012, a decrease of $6.1 million, or 5.7%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to: • a $14.4 million decrease in compliance-related professional fees in connection with CTI's efforts to become current in its periodic reporting obligations under the federal securities laws; and • a $4.9 million decrease in rent and utilities as a result of consolidation of facilities during the current fiscal period.

These decreases were partially offset by: • a $9.5 million increase in overhead allocation relating to selling, general and administrative expenses; and • a $6.4 million increase in agent and employee sales commissions due to the mix of bookings generated from certain projects and in certain geographic locations with respect to which we pay higher commissions.

58 -------------------------------------------------------------------------------- Table of Contents Other Operating Expenses Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Other operating expenses were $5.6 million for the three months ended October 31, 2012, an increase of $3.8 million, or 206.2%, compared to the three months ended October 31, 2011. The increase was primarily attributable a $5.6 million charge for impairment of goodwill related to the Comverse MI reporting unit, partially offset by a $1.9 million decrease in restructuring charges.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Other operating expenses were $6.7 million for the nine months ended October 31, 2012, a decrease of $8.1 million, or 54.8%, compared to the nine months ended October 31, 2011. The decrease was primarily attributable to a $13.8 million decrease in restructuring charges incurred during the nine months ended October 31, 2011, partially offset by a $5.6 million charge for impairment of goodwill related to the Comverse MI reporting unit.

Loss from Operations Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Loss from operations was $49.4 million for the three months ended October 31, 2012, an increase in loss of $0.1 million, or 0.3%, compared to the three months ended October 31, 2011 due primarily to the reasons discussed above. For the three months ended October 31, 2012, Comverse MI had income from operations of $0.7 million compared to a loss from operations of $0.6 million for the three months ended October 31, 2011. The change was primarily attributable to a decrease in cost of revenue and selling, general and administrative expenses.

For the three months ended October 31, 2012 and 2011, Netcentrex had a loss from operations of $1.9 million and $0.1 million, respectively. The increase in loss was primarily attributable to a $4.8 million decrease in total revenue partially offset by a decrease in research and development expenses, net and cost of revenue.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Loss from operations was $124.6 million for the nine months ended October 31, 2012, a decrease in loss of $29.3 million, or 19.0%, compared to the nine months ended October 31, 2011 due primarily to the reasons discussed above. For the nine months ended October 31, 2012, Comverse MI had income from operations of $0.5 million compared to a loss from operations of $2.3 million for the nine months ended October 31, 2011. The change was primarily attributable to a $2.0 million increase in total revenue. For the nine months ended October 31, 2012 and 2011, Netcentrex had a loss from operations of $0.1 million and $3.6 million, respectively. The decrease in loss was primarily attributable to a decrease in research and development expenses, net and cost of revenue partially offset by a $5.8 million decrease in total revenue.

Segment Performance Three Months Ended October 31, 2012 compared to Three Months Ended October 31, 2011. Segment performance was a $41.1 million loss for the three months ended October 31, 2012 an increase in loss of $1.2 million, or 2.9%, compared to the three months ended October 31, 2011. The increase in loss was primarily attributable to the decrease in segment revenue, partially offset by a decrease in segment expenses.

Nine Months Ended October 31, 2012 compared to Nine Months Ended October 31, 2011. Segment performance was a $111.9 million loss for the nine months ended October 31, 2012, a decrease in loss of $6.2 million, or 5.2%, compared to the nine months ended October 31, 2011. The decrease in loss was primarily attributable to a decrease in segment expenses, primarily related to restructuring charges and compliance-related professional fees, partially offset by a decrease in segment revenue.

LIQUIDITY AND CAPITAL RESOURCES Overview Our principal sources of liquidity historically have consisted of cash and cash equivalents, cash flows from operations, including changes in working capital, borrowings from CTI, and the sale of investments and assets. We believe that our future sources of liquidity will include cash and cash equivalents, and may include new borrowings, cash generated from asset divestitures, or proceeds from the issuance of equity or debt securities.

During the nine months ended October 31, 2012 our principal uses of liquidity were to fund operating expenses, make capital expenditures, repay indebtedness, and pay significant professional fees and other expenses in connection with CTI's efforts to become current in, and continue to meet its periodic reporting obligations under, the federal securities laws. In addition, we expended resources and made investments to improve our internal control over financial reporting through the hiring of additional experienced finance and accounting personnel, redesigning of processes, implementing accounting and finance systems and performing additional business analytics. These expenses declined significantly for the nine months ended 59-------------------------------------------------------------------------------- Table of Contents October 31, 2012 compared to the nine months ended October 31, 2011. Following the Share Distribution, we will not incur expenses in connection with CTI's periodic reporting requirements. However, we expect that following the Share Distribution, our accounting, tax and legal fees associated with compliance with our periodic reporting obligations under, federal securities laws and maintenance of internal control over financial reporting will increase.

Financial Condition Cash and Cash Equivalents As of October 31, 2012, we had cash, cash equivalents, bank time deposits and restricted cash of approximately $248.3 million, compared to approximately $153.9 million as of July 31, 2012. In connection with the completion of the Share Distribution, we received from CTI a cash capital contribution of $38.5 million and all indebtedness payable by us to CTI was settled through a capital contribution to our equity by CTI. In addition, we received $37.2 million of cash consideration from the Starhome Disposition including $4.9 million held in escrow pursuant to the terms of the Starhome Share Purchase Agreement to cover potential post-closing indemnification claims. Any cash balance remaining following the escrow period will be released to us.

Restricted Cash Restricted cash aggregated $43.1 million and $37.6 million as of October 31, 2012 and July 31, 2012, respectively. Restricted cash includes compensating cash balances related to existing lines of credit and deposits that are pledged as collateral or restricted for use to settle specified performance guarantees to customers and vendors, letters of credit, foreign currency transactions in the ordinary course of business and pending tax judgments.

Liquidity Forecast We currently forecast that available cash and cash equivalents will be sufficient to meet our liquidity needs, including capital expenditures, for at least the next 12 months.

Management's current forecast is based upon a number of assumptions including, among others: continued implementation of initiatives to reduce operating costs; restricted cash and bank time deposits in amounts consistent with current levels; slight reductions in the unrestricted cash levels required to support the working capital needs of the business; reductions in compliance-related costs and other professional fees; and intra-quarter working capital fluctuations consistent with historical trends. Management believes that the above-noted assumptions are reasonable. However, should one or more of the assumptions prove incorrect, or should one or more of the risks or uncertainties described in Part II, Item 1A, "Risk Factors" of this Quarterly Report materialize, we may experience a shortfall in the cash required to support working capital needs.

Sources of Liquidity The following is a discussion that highlights our primary sources of liquidity, cash and cash equivalents, and changes in those amounts due to operations, financing, and investing activities and the liquidity of our investments.

60-------------------------------------------------------------------------------- Table of Contents Cash Flows Nine Months Ended October 31, 2012 Compared to Nine Months Ended October 31, 2011 Nine Months Ended October 31, 2012 2011 (In thousands)Net cash used in operating activities - continuing operations $ (29,407 ) $ (34,871 ) Net cash used in investing activities - continuing operations (2,933 ) (13,189 ) Net cash provided by (used in) financing activities - continuing operations 47,680 (2,487 ) Net cash (used in) provided by discontinued operations (1,574 ) 8,076 Effects of exchange rates on cash and cash equivalents (1,708 ) 3,608 Net increase (decrease) in cash and cash equivalents 12,058 (38,863 ) Cash and cash equivalents, beginning of period including cash of discontinued operations 193,192 213,038 Cash and cash equivalents, end of period including cash of discontinued operations 205,250 174,175 Less: Cash and cash equivalents of discontinued operations, end of period - (29,285 ) Cash and cash equivalents, end of period $ 205,250 $ 144,890 Operating Cash Flows Our operating cash flows vary significantly from period to period based on timing of collections of accounts receivable, receipts of deposits on work-in-process and achievement of milestones. During the nine months ended October 31, 2012, we used net cash of $29.4 million for operating activities.

Net cash used in operating activities was primarily attributable to a decrease in deferred revenue and an increase in inventory, partially offset by a decrease in accounts receivable, a decrease in prepaid expenses and other current assets and net income from operations for the nine months ended October 31, 2012.

Such cash used in operating activities was partially offset by non-cash charges and a decrease in deferred cost of revenue.

Investing Cash Flows During the nine months ended October 31, 2012, net cash used in investing activities was $2.9 million. Net cash used in investing activities was primarily attributable to a $5.3 million increase in restricted cash in bank time deposits and $3.9 million of cash used for purchases of property and equipment, partially offset by $6.3 million of proceeds from the sale of Starhome.

Financing Cash Flows During the nine months ended October 31, 2012, net cash provided by financing activities was $47.7 million. Net cash provided by financing activities was primarily attributable to a $38.5 million cash capital contribution from CTI and $9.5 million of borrowings under the note payable to CTI.

Effects of Exchange Rates on Cash and Cash Equivalents The majority of our cash and cash equivalents are denominated in U.S. dollars.

However, due to the nature of our global business, we also hold cash denominated in other currencies, primarily the euro, the NIS and the British pound. For the nine months ended October 31, 2012, the fluctuation in foreign currency exchange rates had an unfavorable impact of $1.7 million on cash and cash equivalents.

Sale of Starhome On August 1, 2012, CTI, certain other Starhome shareholders and Starhome entered into a Share Purchase Agreement (the "Starhome Share Purchase Agreement") with Fortissimo Capital Fund II (Israel), L.P., Fortissimo Capital Fund III (Israel), L.P. and Fortissimo Capital Fund III (Cayman), L.P. (collectively, "Fortissimo") pursuant to which Fortissimo agreed to purchase all of the outstanding share capital of Starhome (the "Starhome Disposition"). On September 19, 2012, CTI, in order to ensure it could meet the conditions of the Verint Merger, contributed to us its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement. The Starhome Disposition was completed on October 19, 2012.

61-------------------------------------------------------------------------------- Table of Contents Under the terms of the Starhome Share Purchase Agreement, Starhome's shareholders received aggregate cash proceeds of approximately $81.3 million, subject to adjustment for fees, transaction expenses and certain taxes. Of this amount, $10.5 million is held in escrow to cover potential post-closing indemnification claims, with $5.5 million being released after 18 months and the remainder released after 24 months, in each case, less any claims made on or prior to such dates. We received aggregate net cash consideration (including $4.9 million deposited in escrow at closing) of approximately $37.2 million, after payments that CTI agreed to make to certain other Starhome shareholders of approximately $4.5 million.

Merger of CTI and Verint Under the Verint Merger Agreement, CTI has agreed to place $25.0 million in cash in escrow to support indemnification claims to the extent made against us by CTI and its affiliates (including Verint after the Verint Merger), and any cash balance remaining in such escrow fund 18 months after the closing of the Verint Merger will be released to us. The escrow funds cannot be used for claims related to the Israeli optionholder suit. For more information see Note 21 to our condensed consolidated and combined financial statements included in this Quarterly Report.

Under the Distribution Agreement we and CTI entered into in connection with the Share Distribution, we have agreed to indemnify CTI and its affiliates (including Verint after the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution. Certain of our indemnification obligations are capped at $25.0 million and certain are uncapped. CTI has agreed to place $25.0 million in cash in escrow, upon the closing of the Verint merger, to support indemnification claims to the extent made against us by CTI and its affiliates (including Verint after the Verint Merger). The escrow funds cannot be used for claims related to the Israeli Optionholder suit. We will also assume all pre-Share Distribution tax obligations of each of us and CTI. For more information, see note 3 to our condensed consolidated and combined financial statements included in this Quarterly Report.

Indebtedness Comverse Ltd. Lines of Credit As of October 31, 2012 and January 31, 2012, Comverse Ltd., our wholly-owned Israeli subsidiary, had a $20.0 million line of credit with a bank to be used for various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. This line of credit is not available for borrowings. The line of credit bears no interest and is subject to renewal on an annual basis. Comverse Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts utilized under the line of credit.

As of October 31, 2012 and January 31, 2012, Comverse Ltd. had utilized $16.9 million and $17.8 million, respectively, of capacity under the line of credit for guarantees and foreign currency transactions.

As of October 31, 2012 and January 31, 2012, Comverse Ltd. had an additional line of credit with a bank for $8.0 million, to be used for borrowings, various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. The line of credit bears no interest other than on borrowings thereunder and is subject to renewal on an annual basis. Borrowings under the line of credit bear interest at an annual rate of London Interbank Offered Rate (or LIBOR) plus a variable margin determined based on the bank's underlying cost of capital. Comverse Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts borrowed or utilized under the line of credit. As of October 31, 2012 and January 31, 2012, Comverse Ltd. had no outstanding borrowings under the line of credit. As of October 31, 2012 and January 31, 2012, Comverse Ltd. had utilized $7.4 million and $3.3 million, respectively, of capacity under the line of credit for guarantees and foreign currency transactions.

Other than Comverse Ltd.'s requirement to maintain cash balances with the banks as discussed above, the lines of credit have no financial covenants. These cash balances required to be maintained with the banks were classified as "Restricted cash and bank time deposits" and long-term restricted cash included in "Other assets" within the consolidated and combined balance sheets as of October 31, 2012 and January 31, 2012.

Note Payable to CTI On January 11, 2011, we entered into a promissory note to borrow up to $10.0 million from CTI, with the note scheduled to mature on January 11, 2016.

Borrowings could be prepaid by us without penalty. The contractual interest rate applicable to borrowings under this promissory note was LIBOR plus 4.0%. The interest expense was $0.3 million for the nine months ended October 31, 2012 and $0.4 million for the nine months ended October 31, 2011 and the amount owed to CTI as of October 31, 62-------------------------------------------------------------------------------- Table of Contents 2012 and at January 31, 2012, including accrued interest, was approximately $9.4 million and $8.5 million, respectively. The note payable to CTI was settled through a capital contribution to our equity by CTI concurrently with the Share Distribution.

Loan Agreement with CTI On May 9, 2012, we entered into a revolving loan agreement (referred to as the loan agreement) with CTI, pursuant to which CTI extended us a $25.0 million revolving credit facility. Borrowings under the loan agreement were used to fund our operating expenses and working capital needs. As of October 31, 2012, $9.0 million of borrowings were outstanding under the loan agreement. The borrowings under the loan agreement with CTI were settled through a capital contribution to our equity by CTI concurrently with the Share Distribution. The interest expense was $0.1 million for the nine months ended October 31, 2012.

Borrowings under the loan agreement bore interest at the one-month LIBOR plus 4.00%. The loan agreement provided for the mandatory prepayment of the principal and interest outstanding under the loan agreement with all cash swept from our bank accounts from time to time in accordance with our cash management operations with CTI.

Our obligations under the loan agreement were unsecured. The loan agreement did not contain any restrictive covenants but did contain customary events of default.

Restructuring Initiatives We review our business, manage costs and align resources with market demand. As a result, we have taken several actions to improve our cash position, reduce fixed costs, eliminate redundancies, strengthen operational focus and better position us to respond to market pressures or unfavorable economic conditions.

While such restructuring initiatives are expected to have positive impact on our operating cash flows in the long term, they also have led and will lead to some charges. For more information relating to our restructuring initiatives, including our financial obligations in respect thereof, see note 8 to the condensed consolidated and combined financial statements included in this Quarterly Report.

During the nine months ended October 31, 2012, we recorded and paid severance and facility-related costs attributable to existing restructuring initiatives of $1.4 million and $3.9 million. The remaining costs of $0.9 million relating to existing restructuring initiatives are expected to be substantially paid by July 31, 2013. For additional information relating to our financial obligations in respect of restructuring initiatives, see note 8 to the condensed consolidated and combined financial statements included in this Quarterly Report.

Guarantees and Restrictions on Access to Subsidiary Cash Guarantees We provide certain customers in the ordinary course of business with financial performance guarantees, which in certain cases are backed by standby letters of credit or surety bonds, the majority of which are cash collateralized and accounted for as restricted cash and bank time deposits. We are only liable for the amounts of those guarantees in the event of our nonperformance, which would permit the customer to exercise the guarantee. As of October 31, 2012 and January 31, 2012, we believe that we were in compliance with our performance obligations under all contracts for which there is a financial performance guarantee, and that any liabilities arising in connection with these guarantees will not have a material adverse effect on our condensed consolidated and combined results of operations, financial position or cash flows. We also obtained bank guarantees primarily to provide customer assurance relating to the performance of certain obligations required by customer agreements for the guarantee of certain payment obligations. These guarantees, which aggregated $29.8 million and $27.2 million as of October 31, 2012 and January 31, 2012, respectively, are generally scheduled to be released upon our performance of specified contract milestones, a majority of which are scheduled to be completed at various dates through January 31, 2016.

Dividends from Subsidiaries The ability of our Israeli subsidiaries to pay dividends is governed by Israeli law, which provides that dividends may be paid by an Israeli corporation only out of 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.

63-------------------------------------------------------------------------------- Table of Contents We operate our business internationally. A significant portion of our cash and cash equivalents are held by various foreign subsidiaries. As of October 31, 2012 and January 31, 2012, cash and cash equivalents held by our foreign subsidiaries was $125.2 million and $142.3 million, respectively. If cash and cash equivalents held outside the United States are distributed to the United States resident corporate parents in the form of dividends or otherwise, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. We may incur substantial withholding taxes if we repatriate our cash from certain foreign subsidiaries.

OFF-BALANCE SHEET ARRANGEMENTS As of October 31, 2012, we had no material off-balance sheet arrangements, other than performance guarantees disclosed in "-Liquidity and Capital Resources-Guarantees and Restrictions on Access to Subsidiary Cash-Guarantees." There were no material changes in our off-balance sheet arrangements since January 31, 2012. For a more comprehensive discussion of our off-balance sheet arrangements as of January 31, 2012, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Preliminary Information Statement filed as Exhibit 99.1 to our Registration Statement on Form 10 filed with the SEC on October 10, 2012.

CONTRACTUAL OBLIGATIONS There were no material changes in our contractual obligations as of January 31, 2012. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Preliminary Information Statement filed as Exhibit 99.1 to our Registration Statement on Form 10 filed with the SEC on October 10, 2012.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES We described the significant accounting policies and methods used in the preparation of our consolidated and combined financial statements in note 1 to the consolidated and combined financial statements included in the Preliminary Information Statement filed as Exhibit 99.1 to our Registration Statement on Form 10 filed with the SEC on October 10, 2012. The accounting policies that reflect our more significant estimates, judgments and assumptions in the preparation of our consolidated and combined financial statements are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Preliminary Information Statement filed as Exhibit 99.1 to our Registration Statement on Form 10 filed by us with the SEC on October 10, 2012, and include the following: • revenue recognition; • extended payment terms; • expense allocation; • stock-based compensation; • recoverability of goodwill; • impairment of long-lived and intangible assets; • allowance for doubtful accounts; • income taxes; and • litigation and contingencies.

We do not believe that there were any significant changes in our critical accounting policies during the nine months ended October 31, 2012.

RECENT ACCOUNTING PRONOUNCEMENTS TO BE IMPLEMENTED For information related to recent accounting pronouncements to be implemented, see note 2 to the condensed consolidated and combined financial statements included in this Quarterly Report.

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