UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2010

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File No. 0-49790

Verint Systems Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware		11-3200514
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
330 South Service Road, Melville, New York		11747
(Address of Principal Executive Offices)		(Zip Code)

(631) 962-9600

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.40S of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filer o		Small Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 32,794,402 shares of the registrant’s common stock outstanding on May 31, 2010.

 

 

Cautionary Note on Forward-Looking Statements		ii
PART I. FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations			2
Condensed Consolidated Statements of Stockholders’ Deficit			3
Condensed Consolidated Statements of Cash Flows			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			45
PART II. OTHER INFORMATION			46
Item 1. Legal Proceedings			46
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3. Defaults upon Senior Securities			50
Item 4. Removed and Reserved			50
Item 5. Other Information			50
Item 6. Exhibits			50
SIGNATURES			52
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Cautionary Note on Forward-Looking Statements

Certain statements discussed in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (which Sections were adopted as part of the Private Securities Litigation Reform Act of 1995). Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements are often identified by future or conditional words such as “will”, “plans”, “expects”, “intends”, “believes”, “seeks”, “estimates”, or “anticipates”, or by variations of such words or by similar expressions. There can be no assurances that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:

•

risks relating to the filing of our Securities and Exchange Commission (“SEC”) reports, including the occurrence of known contingencies or unforeseen events that could delay our plan for completion of our outstanding or future filings, management distractions, and significant expense;

•

risk associated with the SEC’s initiation of an administrative proceeding on March 3, 2010 to suspend or revoke the registration of our common stock under the Exchange Act due to our previous failure to file an annual report on either Form 10-K or Form 10-KSB since April 25, 2005 or quarterly reports on either Form 10-Q or Form 10-QSB since December 12, 2005;

•

risk that our credit rating could be downgraded or placed on a credit watch based on, among other things, our financial results, delays in the filing of our periodic reports, or the results of the SEC’s administrative proceeding;

•

risks associated with being a consolidated, controlled subsidiary of Comverse Technology, Inc. (“Comverse”) and formerly part of Comverse’s consolidated tax group, including risk of any future impact on us resulting from Comverse’s special committee investigation and restatement or related effects, and risks related to our dependence on Comverse to provide us with accurate financial information, including with respect to stock-based compensation expense and net operating loss carryforwards (“NOLs”), for our financial statements;

•

uncertainty regarding the impact of general economic conditions, particularly in information technology spending, on our business;

•

risk that our financial results will cause us not to be compliant with the leverage ratio covenant under our credit facility or that any delays in the filing of future SEC reports could cause us not to be compliant with the financial statement delivery covenant under our credit facility;

•

risk that customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise;

•

risk that we will experience liquidity or working capital issues and related risk that financing sources will be unavailable to us on reasonable terms or at all;

•

uncertainty regarding the future impact on our business of our internal investigation, restatement, extended filing delay, and the SEC’s administrative proceeding, including customer, partner, employee, and investor concern, and potential customer and partner transaction deferrals or losses;

•

risks relating to the remediation or inability to adequately remediate material weaknesses in our internal controls over financial reporting and relating to the proper application of highly complex accounting rules and pronouncements in order to produce accurate SEC reports on a timely basis;

•

risks relating to our implementation and maintenance of adequate systems and internal controls for our current and future operations and reporting needs;

•

risk of possible future restatements if the processes used to produce the financial statements contained in this report or in future SEC reports are inadequate;

•

risk associated with current or future regulatory actions or private litigations relating to our internal investigation, restatement, or delays in filing required SEC reports;

•

risk that we will be unable to re-list our common stock on NASDAQ or another national securities exchange and maintain such listing;

•

risks associated with Comverse controlling our board of directors and a majority of our common stock (and therefore the results of any significant stockholder vote);

•

risks associated with significant leverage resulting from our current debt position;

•

risks due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient levels of investment in the business and with respect to introducing quality products which achieve market acceptance;

•

risks created by continued consolidation of competitors or introduction of large competitors in our markets with greater resources than us;

•

risks associated with significant foreign and international operations, including exposure to fluctuations in exchange rates;

•

risks associated with complex and changing local and foreign regulatory environments;

•

risks associated with our ability to recruit and retain qualified personnel in all geographies in which we operate;

•

challenges in accurately forecasting revenue and expenses;

•

risks associated with acquisitions and related system integrations;

•

risks relating to our ability to improve our infrastructure to support growth;

•

risks that our intellectual property rights may not be adequate to protect our business or that others may make claims on our intellectual property or claim infringement on their intellectual property rights;

•

risks associated with a significant amount of our business coming from domestic and foreign government customers;

•

risk that we improperly handle sensitive or confidential information or perception of such mishandling;

•

risks associated with dependence on a limited number of suppliers for certain components of our products;

•

risk that we are unable to maintain and enhance relationships with key resellers, partners, and systems integrators; and

•

risk that use of our NOLs or other tax benefits may be restricted or eliminated in the future.

These risks and uncertainties, as well as other factors, are discussed in greater detail in “Risk Factors” under Item 1A of our Annual Report on Form 10-K for the year ended January 31, 2010. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the filing date of this report. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

VERINT SYSTEMS INC. AND SUBSIDIARIES

		April 30,				January 31,
(in thousands, except share and per share data)		2010				2010
Assets
Current Assets:
Cash and cash equivalents		$	149,403			$	184,335
Restricted cash and bank time deposits			4,972				5,206
Accounts receivable, net			140,649				127,826
Inventories			14,654				14,373
Deferred cost of revenue			8,576				11,232
Prepaid expenses and other current assets			59,997				64,554
Total current assets			378,251				407,526
Property and equipment, net			23,396				24,453
Goodwill			730,053				724,670
Intangible assets, net			171,541				173,833
Capitalized software development costs, net			7,812				8,530
Deferred cost of revenue			28,847				33,019
Other assets			25,712				24,306
Total assets		$	1,365,612			$	1,396,337
Liabilities, Preferred Stock, and Stockholders’ Deficit
Current Liabilities:
Accounts payable		$	44,464			$	46,570
Accrued expenses and other liabilities			171,197				155,422
Current maturities of long-term debt			22,098				22,678
Deferred revenue			165,696				183,719
Liabilities to affiliates			1,793				1,709
Total current liabilities			405,248				410,098
Long-term debt			598,234				598,234
Deferred revenue			47,991				51,412
Other liabilities			62,778				65,618
Total liabilities			1,114,251				1,125,362
Preferred Stock — $0.001 par value; authorized 2,500,000 shares. Series A convertible preferred stock; 293,000 shares issued and outstanding; aggregate liquidation preference and redemption value of $328,983 at April 30, 2010			285,542				285,542
Commitments and Contingencies
Stockholders’ Deficit:
Common stock — $0.001 par value; authorized 120,000,000 shares. Issued 33,029,000 and 32,687,000 shares; outstanding 32,803,000 and 32,584,000 shares, as of April 30, 2010 and January 31, 2010, respectively			33				33
Additional paid-in capital			458,665				451,166
Treasury stock, at cost — 226,000 and 103,000 shares as of April 30, 2010 and January 31, 2010, respectively			(5,805	)			(2,493	)
Accumulated deficit			(436,546	)			(420,338	)
Accumulated other comprehensive loss			(51,314	)			(43,134	)
Total Verint Systems Inc. stockholders’ deficit			(34,967	)			(14,766	)
Noncontrolling interest			786				199
Total stockholders’ deficit			(34,181	)			(14,567	)
Total liabilities, preferred stock, and stockholders’ deficit		$	1,365,612			$	1,396,337

See notes to condensed consolidated financial statements.

VERINT SYSTEMS INC. AND SUBSIDIARIES

		Three Months Ended April 30,
(in thousands, except per share data)		2010				2009
Revenue:
Product		$	92,070			$	97,071
Service and support			80,543				78,077
Total revenue			172,613				175,148
Cost of revenue:
Product			28,346				32,057
Service and support			27,228				22,913
Amortization of acquired technology and backlog			2,233				2,099
Total cost of revenue			57,807				57,069
Gross profit			114,806				118,079
Operating expenses:
Research and development, net			26,432				18,901
Selling, general and administrative			87,017				57,226
Amortization of other acquired intangible assets			5,339				5,930
Restructuring			—				13
Total operating expenses			118,788				82,070
Operating income (loss)			(3,982	)			36,009
Other income (expense), net:
Interest income			83				147
Interest expense			(5,948	)			(6,353	)
Other expense, net			(3,698	)			(4,963	)
Total other expense, net			(9,563	)			(11,169	)
Income (loss) before provision for income taxes			(13,545	)			24,840
Provision for income taxes			2,071				4,268
Net income (loss)			(15,616	)			20,572
Net income attributable to noncontrolling interest			592				938
Net income (loss) attributable to Verint Systems Inc.			(16,208	)			19,634
Dividends on preferred stock			(3,403	)			(3,262	)
Net income (loss) attributable to Verint Systems Inc. common shares		$	(19,611	)		$	16,372
Net income (loss) per share attributable to Verint Systems Inc.
Basic		$	(0.60	)		$	0.50
Diluted		$	(0.60	)		$	0.47
Weighted-average common shares outstanding
Basic			32,663				32,459
Diluted			32,663				42,151

See notes to condensed consolidated financial statements.

VERINT SYSTEMS INC. AND SUBSIDIARIES

		Verint Systems Inc. Stockholders’ Deficit
																						Accumulated				Total Verint
		Common Stock								Additional												Other				Systems Inc.								Total
						Par				Paid-in				Treasury				Accumulated				Comprehensive				Stockholders’				Noncontrolling				Stockholders’
(in thousands)		Shares				Value				Capital				Stock				Deficit				Loss				Deficit				Interest				Deficit
Balances as of January 31, 2009			32,535			$	32			$	419,937			$	(2,353	)		$	(435,955	)		$	(58,404	)		$	(76,743	)		$	673			$	(76,070	)
Comprehensive income:
Net income			—				—				—				—				19,634				—				19,634				938				20,572
Unrealized gains on derivative financial instruments, net			—				—				—				—				—				73				73				—				73
Unrealized gains on available for sale securities, net			—				—				—				—				—				4				4				—				4
Currency translation adjustments			—				—				—				—				—				2,818				2,818				(267	)			2,551
Total comprehensive income			—				—				—				—				19,634				2,895				22,529				671				23,200
Stock-based compensation expense			—				—				6,257				—				—				—				6,257				—				6,257
Common stock issued for stock awards			20				—				—				—				—				—				—				—				—
Forfeitures of restricted stock awards			(3	)			—				22				(22	)			—				—				—				—				—
Balances as of April 30, 2009			32,552			$	32			$	426,216			$	(2,375	)		$	(416,321	)		$	(55,509	)		$	(47,957	)		$	1,344			$	(46,613	)
Balances as of January 31, 2010			32,584			$	33			$	451,166			$	(2,493	)		$	(420,338	)		$	(43,134	)		$	(14,766	)		$	199			$	(14,567	)
Comprehensive income (loss):
Net income (loss)			—				—				—				—				(16,208	)			—				(16,208	)			592				(15,616	)
Unrealized gains on derivative financial instruments, net			—				—				—				—				—				81				81				—				81
Currency translation adjustments			—				—				—				—				—				(8,261	)			(8,261	)			(5	)			(8,266	)
Total comprehensive income (loss)			—				—				—				—				(16,208	)			(8,180	)			(24,388	)			587				(23,801	)
Stock-based compensation expense			—				—				7,546				—				—				—				7,546				—				7,546
Common stock issued for stock awards			342				—				—				—				—				—				—				—				—
Purchases of treasury stock			(123	)			—				—				(3,312	)			—				—				(3,312	)			—				(3,312	)
Tax effects from stock award plans			—				—				(47	)			—				—				—				(47	)			—				(47	)
Balances as of April 30, 2010			32,803			$	33			$	458,665			$	(5,805	)		$	(436,546	)		$	(51,314	)		$	(34,967	)		$	786			$	(34,181	)

See notes to condensed consolidated financial statements.

VERINT SYSTEMS INC. AND SUBSIDIARIES

		Three Months Ended April 30,
(in thousands)		2010				2009
Cash flows from operating activities:
Net income (loss)		$	(15,616	)		$	20,572
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			11,898				13,073
Stock-based compensation			7,546				6,257
Non-cash losses on derivative financial instruments, net			1,703				3,539
Other non-cash items, net			1,189				1,685
Changes in operating assets and liabilities, net of effects of business combination:
Accounts receivable			(13,787	)			(5,365	)
Inventories			(488	)			938
Deferred cost of revenue			6,161				7,041
Accounts payable and accrued expenses			14,959				(15,012	)
Deferred revenue			(18,476	)			3,255
Prepaid expenses and other assets			1,501				(6,667	)
Other, net			(1,110	)			(1,874	)
Net cash provided by (used in) operating activities			(4,520	)			27,442
Cash flows from investing activities:
Cash paid for business combination, net of cash acquired, and payments of contingent consideration associated with business combinations in prior periods			(15,292	)			(7	)
Purchases of property and equipment			(1,878	)			(738	)
Settlements of derivative financial instruments not designated as hedges			(6,333	)			(3,850	)
Cash paid for capitalized software development costs			(462	)			(509	)
Other investing activities			205				805
Net cash used in investing activities			(23,760	)			(4,299	)
Cash flows from financing activities:
Repayments of borrowings and other financing obligations			(580	)			(1,562	)
Dividends paid to noncontrolling interest			—				(2,142	)
Purchases of treasury stock			(3,312	)			—
Other financing activities			(897	)			—
Net cash used in financing activities			(4,789	)			(3,704	)
Effect of exchange rate changes on cash and cash equivalents			(1,863	)			805
Net increase (decrease) in cash and cash equivalents			(34,932	)			20,244
Cash and cash equivalents, beginning of period			184,335				115,928
Cash and cash equivalents, end of period		$	149,403			$	136,172
Supplemental disclosures of cash flow information:
Cash paid for interest		$	3,538			$	7,310
Cash paid for income taxes		$	1,525			$	3,050
Non-cash investing and financing transactions:
Accrued but unpaid purchases of property and equipment		$	495			$	216
Inventory transfers to property and equipment		$	77			$	195

See notes to condensed consolidated financial statements.

VERINT SYSTEMS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

Condensed Consolidated Financial Statements Preparation

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC for the year ended January 31, 2010. The condensed consolidated statements of operations, stockholders’ deficit and cash flows for the periods ended April 30, 2010 and 2009, and the condensed consolidated balance sheet as of April 30, 2010, are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results of the periods shown. The condensed consolidated balance sheet as of January 31, 2010 is derived from the audited consolidated balance sheet presented in our Annual Report on Form 10-K for the year ended January 31, 2010. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K filed with the SEC for the year ended January 31, 2010. The results for interim periods are not necessarily indicative of a full year’s results.

Unless the context otherwise requires, the terms “Verint”, “we”, “our”, and “us” and words of similar import as used in these notes to the condensed consolidated financial statements include Verint Systems Inc. and its consolidated subsidiaries.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned subsidiaries, and a joint venture in which we hold a 50% equity interest. This joint venture functions as a systems integrator for Asian markets and is a variable interest entity in which we are the primary beneficiary. Investments in companies in which we have less than a 20% ownership interest and do not exercise significant influence are accounted for at cost. We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

Standards Implemented:

In May 2009, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In February 2010, the FASB issued an amendment to this guidance that removed the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. The adoption of this standard, as amended, did not have a material impact on our condensed consolidated financial statements.

In June 2009, the FASB issued a new accounting standard related to the consolidation of variable interest entities, requiring a company to perform an analysis to determine whether its variable interests give it a controlling financial interest in a variable interest entity. This analysis requires a company to assess whether it has the power to direct the activities of the variable interest entity and if it has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the variable interest entity. This standard requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity, eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, and significantly enhances disclosures. The standard may be applied retrospectively to previously issued financial statements with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. This standard is effective for us for the fiscal year beginning on February 1, 2010. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

In January 2010, the FASB issued amended standards that require additional fair value disclosures. These disclosure requirements are effective in two phases. The initial phase, effective for us as of February 1, 2010, requires enhanced disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers. The adoption of this standard did not have a material impact on our condensed consolidated financial statements. The second phase, effective for us as of February 1, 2011, is further discussed below.

New Standards to be Implemented:

In October 2009, the FASB issued guidance that applies to multiple-deliverable revenue arrangements. This guidance also provides principles and application guidance on whether a revenue arrangement contains multiple deliverables, how the arrangement should be separated, and how the arrangement consideration should be allocated. The guidance requires an entity to allocate revenue in a multiple-deliverable arrangement using estimated selling prices of the deliverables if a vendor does not have vendor specific objective evidence of fair value (“VSOE”) or third-party evidence of selling price. It eliminates the use of the residual method and, instead, requires an entity to allocate revenue using the relative selling price method. It also expands disclosure requirements with respect to multiple-deliverable revenue arrangements.

Also in October 2009, the FASB issued guidance related to multiple-deliverable revenue arrangements that contain both software and hardware elements, focusing on determining which revenue arrangements are within the scope of existing software revenue guidance. This additional guidance removes tangible products from the scope of the software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance. The above guidance related to revenue recognition should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. It will be effective for us in our fiscal year beginning February 1, 2011, although early adoption is permitted. Alternatively, an entity can elect to adopt the provisions of these issues on a retrospective basis. We are assessing the impact that the application of this new guidance, and the guidance discussed in the preceding paragraph, may have on our consolidated financial statements.

In January 2010, the FASB issued amended standards that require additional fair value disclosures. These disclosure requirements are effective in two phases. The initial phase, as previously discussed, was effective for us in our fiscal year beginning February 1, 2010. The second phase, effective for us as of February 1, 2011, will require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3). We are assessing the impact that the application of this new guidance may have on our consolidated financial statements.

2. Net Income (Loss) Per Share Attributable to Verint Systems Inc.

The following table summarizes the calculation of basic and diluted net income (loss) per share attributable to Verint Systems Inc. for the three months ended April 30, 2010 and 2009:

		Three Months Ended April 30,
(in thousands, except per share amounts)		2010				2009
Net income (loss)		$	(15,616	)		$	20,572
Net income attributable to noncontrolling interest			592				938
Net income (loss) attributable to Verint Systems Inc.			(16,208	)			19,634
Dividends on preferred stock			(3,403	)			(3,262	)
Net income (loss) attributable to Verint Systems Inc. for basic net income (loss) per share			(19,611	)			16,372
Dilutive effect of dividends on preferred stock			—				3,262
Net income (loss) attributable to Verint Systems Inc. for diluted net income (loss) per share		$	(19,611	)		$	19,634
Weighted-average shares outstanding:
Basic			32,663				32,459
Dilutive effect of employee equity award plans			—				—
Dilutive effect of assumed conversion of preferred stock			—				9,692
Diluted			32,663				42,151
Net income (loss) per share attributable to Verint Systems Inc.
Basic		$	(0.60	)		$	0.50
Diluted		$	(0.60	)		$	0.47

Due to the net loss applicable to Verint Systems Inc. common shares reported for the three months ended April 30, 2010, the assumed exercise of stock options and assumed settlement of unvested restricted stock awards and restricted stock units had an antidilutive effect and was therefore excluded from the computation of weighted-average diluted shares outstanding for the period. The options, restricted stock awards and restricted stock units excluded from the computation of weighted-average diluted shares outstanding totaled 8.7 million as of April 30, 2010. Weighted-average diluted shares outstanding for the three months ended April 30, 2009 excludes shares underlying approximately 4.7 million stock options, representing all of our outstanding options during this period, since such options have exercise prices in excess of the average market value of our common stock during the period and are therefore antidilutive.

Also excluded from the calculation of diluted net loss per share attributable to Verint Systems Inc. for the three months ended April 30, 2010 were 10.1 million common shares issuable from the assumed conversion of our preferred stock, because such assumed conversion would have an antidilutive effect.

3. Inventories

Inventories consist of the following as of April 30, 2010 and January 31, 2010:

		April 30,				January 31,
(in thousands)		2010				2010
Raw materials		$	7,126			$	5,987
Work-in-process			3,987				4,649
Finished goods			3,541				3,737
Total inventories		$	14,654			$	14,373

4. Business Combination

On February 4, 2010, our wholly owned subsidiary, Verint Americas Inc., acquired all of the outstanding shares of Iontas Limited (“Iontas”), a privately held provider of desktop analytics solutions. Prior to this acquisition, we licensed certain technology from Iontas, whose solutions measure application usage and analyze workflows to help improve staff performance in contact center, branch, and back-office operations environments. We acquired Iontas, among other objectives, to expand the desktop analytical capabilities of our workforce optimization solutions. We have included the financial results of Iontas in our condensed consolidated financial statements since February 4, 2010.

We acquired Iontas for total consideration valued at $21.9 million, including cash consideration of $17.9 million, and additional milestone-based contingent payments of up to $3.8 million, tied to certain performance targets being achieved over the next two years.

We have recorded the acquisition-date estimated fair value of the contingent consideration of $3.2 million as a component of the purchase price of Iontas. The acquisition-date fair value of the contingent consideration was measured based on the probability-adjusted present value of the contingent consideration expected to be earned and transferred. The fair value of the contingent consideration was remeasured as of April 30, 2010 at $3.3 million, and the change in the fair value of the contingent consideration between the acquisition date and April 30, 2010 is recorded within selling, general and administrative expenses in our condensed consolidated statements of operations.

Our purchase price to acquire Iontas also includes $1.5 million of prepayments for product licenses and support services procured from Iontas prior to the acquisition date, partially offset by $0.7 million of trade accounts payable to Iontas as of the acquisition date.

The following table sets forth the components and the preliminary allocation of the purchase price of Iontas:

						Estimated
(in thousands)		Amount				Useful Lives
Components of Purchase Price:
Cash		$	17,861
Fair value of contingent consideration			3,224
Prepaid product licenses and support services			1,493
Trade accounts payable			(712	)
Total purchase price		$	21,866
Allocation of Purchase Price:
Net tangible assets:
Cash		$	2,569
Other current assets			286
Other assets			89
Current liabilities			(211	)
Deferred income taxes — current and long-term			(993	)
Net tangible assets			1,740
Identifiable intangible assets:
Developed technology			6,949			6 years
Non-competition agreements			278			3 years
Total identifiable intangible assets (1)			7,227
Goodwill			12,899
Total purchase price		$	21,866

Among the factors that contributed to the recognition of goodwill in this transaction were the expansion of our desktop analytical capabilities, the expansion of our suite of products and services, and the addition of an assembled workforce. This goodwill has been assigned to our Workforce Optimization segment, and is not deductible for income tax purposes.

Transaction costs, primarily professional fees, directly related to the acquisition of Iontas, totaled $1.2 million, including $0.5 million incurred during the three months ended April 30, 2010, and were expensed as incurred.

The pro forma impact of the Iontas acquisition is not material to our historical consolidated operating results and is therefore not presented. Revenues from Iontas for the three months ended April 30, 2010 were also not material.

5. Intangible Assets and Goodwill

Acquisition-related intangible assets consist of the following as of April 30, 2010 and January 31, 2010:

		April 30, 2010
						Accumulated
(in thousands)		Cost				Amortization				Net
Customer relationships		$	196,121			$	(59,128	)		$	136,993
Acquired technology			60,868				(30,456	)			30,412
Trade names			9,453				(8,201	)			1,252
Non-competition agreements			3,694				(2,325	)			1,369
Distribution network			2,440				(925	)			1,515
Total		$	272,576			$	(101,035	)		$	171,541

		January 31, 2010
						Accumulated
(in thousands)		Cost				Amortization				Net
Customer relationships		$	198,084			$	(54,825	)		$	143,259
Acquired technology			54,629				(28,419	)			26,210
Trade names			9,551				(7,989	)			1,562
Non-competition agreements			3,429				(2,203	)			1,226
Distribution network			2,440				(864	)			1,576
Total		$	268,133			$	(94,300	)		$	173,833

Total amortization expense recorded for acquisition-related intangible assets was $7.6 million and $8.0 million for the three months ended April 30, 2010 and 2009, respectively.

Estimated future finite-lived acquisition-related intangible asset amortization expense is as follows:

(in thousands)
Years Ended January 31,		Amount
2011 (Remainder of year)		$	22,683
2012			29,325
2013			28,546
2014			23,558
2015			20,986
2016 and thereafter			46,443
Total		$	171,541

Goodwill activity for the three months ended April 30, 2010, in total and by reportable segment, was as follows:

						Reportable Segment
						Workforce				Video				Communications
(in thousands)		Total				Optimization				Intelligence				Intelligence
Goodwill, gross, at January 31, 2010		$	791,535			$	694,465			$	66,998			$	30,072
Accumulated impairment losses through January 31, 2010			(66,865	)			(30,791	)			(36,074	)			—
Goodwill, net, at January 31, 2010			724,670				663,674				30,924				30,072
Acquisition of Iontas Limited			12,899				12,899				—				—
Foreign currency translation			(7,516	)			(6,850	)			(666	)			—
Goodwill, net, at April 30, 2010		$	730,053			$	669,723			$	30,258			$	30,072
Balance at April 30, 2010
Goodwill, gross, at April 30, 2010		$	796,918			$	700,514			$	66,332			$	30,072
Accumulated impairment losses through April 30, 2010			(66,865	)			(30,791	)			(36,074	)			—
Goodwill, net, at April 30, 2010		$	730,053			$	669,723			$	30,258			$	30,072

We test our goodwill for impairment at least annually as of November 1, or more frequently if an event occurs indicating the potential for impairment. No events or circumstances indicating the potential for goodwill impairment were identified during either the three months ended April 30, 2010 or the three months ended April 30, 2009.

6. Long-term Debt

On May 25, 2007, to partially finance the acquisition of Witness Systems Inc. (“Witness”), we entered into a $675.0 million secured credit facility comprised of a $650.0 million seven-year term loan facility and a $25.0 million six-year revolving credit facility.

The following is a summary of our outstanding financing arrangements as of April 30, 2010 and January 31, 2010:

		April 30,				January 31,
(in thousands)		2010				2010
Term loan facility		$	605,332			$	605,912
Revolving credit facility			15,000				15,000
Total debt			620,332				620,912
Less: current portion			22,098				22,678
Long-term debt		$	598,234			$	598,234

The interest rates on the term loan were 3.54% and 3.49% as of April 30, 2010 and January 31, 2010, respectively.

Our $25.0 million revolving line of credit facility was reduced to $15.0 million during the quarter ended October 31, 2008 as a result of the bankruptcy of Lehman Brothers. During the quarter ended January 31, 2009, we borrowed the full $15.0 million available under the revolving credit facility. Repayment of these borrowings is required upon expiration of the facility in May 2013. The interest rates on the revolving line of credit borrowings were 3.54% and 3.49% as of April 30, 2010 and January 31, 2010, respectively.

On May 25, 2007, concurrently with entry into our credit facility, we entered into a receive-variable/pay-fixed interest rate swap agreement with a multinational financial institution on a notional amount of $450.0 million to mitigate a portion of the risk associated with variable interest rates on the term loan. This interest rate swap agreement terminates in May 2011. See Note 11, “Fair Value Measurements and Derivative Financial Instruments” for further details regarding the interest rate swap agreement.

During the three months ended April 30, 2010 and 2009, we incurred $5.4 million and $5.8 million of interest expense, respectively, on borrowings under our credit facilities. We also recorded $0.5 million and $0.4 million during three month periods ended April 30, 2010 and 2009, respectively, for amortization of our deferred debt issuance costs, which is reported within interest expense.

In May 2010, we made a $22.1 million mandatory “excess cash flow” prepayment of the term loan, based upon our operating results for the year ended January 31, 2010, $12.4 million of which will be applied to the eight immediately following principal payments and $9.7 million of which will be applied pro rata to the remaining principal payments.

The credit agreement also includes a requirement that we submit audited consolidated financial statements to the lenders within 90 days of the end of each fiscal year, beginning with the financial statements for the year ended January 31, 2010. Should we fail to deliver such audited consolidated financial statements as required, the agreement provides a thirty day period to cure such default, or an event of default occurs.

On April 27, 2010, we entered into an amendment to our credit agreement to extend the due date for delivery of audited consolidated financial statements and related documentation for the year ended January 31, 2010 from May 1, 2010 to June 1, 2010. In consideration for this amendment, we paid $0.9 million to our lenders. This payment will be amortized as additional interest expense over the remaining term of the credit agreement using the effective interest method. Legal fees and other out-of-pocket costs directly relating to the amendment, which were expensed as incurred, were not significant.

7. Convertible Preferred Stock

On May 25, 2007, in connection with our acquisition of Witness, we entered into a Securities Purchase Agreement with Comverse, whereby Comverse purchased, for cash, an aggregate of 293,000 shares of our Series A Convertible Preferred Stock, for an aggregate purchase price of $293.0 million. Proceeds from the issuance of the preferred stock were used to partially finance the acquisition.

The terms of the preferred stock provide that upon a fundamental change, as defined, the holders of the preferred stock would have the right to require us to repurchase the preferred stock for 100% of the liquidation preference then in effect. Therefore, the preferred stock has been classified as mezzanine equity on our condensed consolidated balance sheets as of April 30, 2010 and January 31, 2010, separate from permanent equity, because the occurrence of these fundamental changes, and thus potential redemption of the preferred stock, however remote in likelihood, is not solely under our control. Fundamental change events include the sale of substantially all of our assets and certain changes in beneficial ownership, board of directors’ representation, and business reorganizations.

We concluded that, as of April 30, 2010 and January 31, 2010, there were no indications that the occurrence of a fundamental change and the associated redemption of the preferred stock were probable. We therefore have not adjusted the initial carrying amount of the preferred stock to its redemption amount, which is its liquidation preference. Through April 30, 2010, cumulative, undeclared dividends on the preferred stock were $36.0 million and as a result, the liquidation preference of the preferred stock was $329.0 million at that date. If it were convertible at April 30, 2010, the preferred stock could be converted into approximately 10.1 million shares of our common stock.

8. Stockholders’ Deficit

Treasury Stock

From time to time, our board of directors approves repurchases of our common stock from executive officers upon vesting of restricted stock grants during our extended filing delay period, in order to provide funds to the recipient for the payment of associated income taxes.

During the three months ended April 30, 2010, we acquired 123,000 shares of treasury stock from certain executive officers at a cost of $3.3 million. Treasury stock activity for the three months ended April 30, 2009 was not significant.

Accumulated Other Comprehensive Loss

The following table summarizes, as of each balance sheet date, the components of our accumulated other comprehensive loss. Income tax effects on unrealized gains and losses on available-for-sale marketable securities and derivative financial instruments were not significant.

		April 30,				January 31,
(in thousands)		2010				2010
Foreign currency translation losses, net		$	(51,506	)		$	(43,245	)
Unrealized gains on derivative financial instruments			187				106
Unrealized gains on available-for-sale marketable securities			5				5
Total accumulated other comprehensive loss		$	(51,314	)		$	(43,134	)

Foreign currency translation losses, net, primarily reflect the strengthening of the U.S. dollar against the British pound sterling since our acquisition of Witness in May 2007, which has resulted in lower U.S. dollar translated balances of British pound sterling denominated goodwill and intangible assets associated with the acquisition of Witness.

9. Restructuring

We continually review our business model and carefully manage our cost structure. When considered necessary, we have periodically implemented restructuring plans to reduce costs and better align our resources with market demand. Activities under all historical restructuring plans were complete at January 31, 2010, with the exception of the restructuring plan related to the May 2007 acquisition of Witness.

Following the acquisition of Witness in May 2007, we implemented a plan to integrate the Witness business with our existing Workforce Optimization segment, which included actions to reduce fixed costs and eliminate redundancies. The following table summarizes the activity during the three months ended April 30, 2010 in accrued expenses related to the Witness restructuring plan.

(in thousands)		Total
Accrued restructuring costs — January 31, 2010		$	116
Payments and settlements			(116	)
Accrued restructuring costs — April 30, 2010		$	—

10. Income Taxes

Our quarterly provision for (benefit from) income taxes is measured using an estimated annual effective tax rate for the period, adjusted for discrete items that occurred within the periods presented. For the three months ended April 30, 2010, we recorded an income tax provision for continuing operations of $2.1 million, which represents an effective tax rate of (15.3%). The effective tax rate is negative due to the fact that we reported income tax expense on a consolidated pre-tax loss. We did not record either a significant federal income tax expense or income tax benefit because we maintain a valuation allowance against our U.S. deferred tax assets, but recorded an income tax provision on income from certain foreign subsidiaries taxed at rates lower than the U.S. federal statutory rate. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by taxing jurisdiction, foreign income tax rate differentials, relative impact of permanent book to tax differences, and the effects of valuation allowances.

For the three months ended April 30, 2009, we recorded an income tax provision for continuing operations of $4.3 million, which represents an effective tax rate of 17.2%. The tax rate for the three months ended April 30, 2009 is lower than the U.S. federal statutory rate of 35% primarily because we maintain valuation allowances against our U.S. deferred tax assets and therefore did not record significant income tax expense or income tax benefit in the U.S., but recorded an income tax provision on income from our foreign subsidiaries taxed at rates lower than the U.S. federal statutory rate.

As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more-likely-than-not realizable, we establish a valuation allowance. We determined there is sufficient negative evidence to maintain the valuation allowances against our federal and certain state and foreign deferred tax assets as a result of historical losses in the most recent three-year period in the U.S. and certain foreign jurisdictions. We intend to maintain a valuation allowance against these assets until sufficient positive evidence exists to support its reversal.

We had unrecognized tax benefits of $38.3 million and $37.5 million (excluding interest and penalties) as of April 30, 2010 and January 31, 2010, respectively. The accrued liability for interest and penalties was $7.4 million and $7.2 million at April 30, 2010 and January 31, 2010, respectively. Interest and penalties are recorded as a component of the provision for income taxes in the statement of operations. As of April 30, 2010 and January 31, 2010 the total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately $33.3 million and $32.6 million, respectively. We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of expiration. We believe that it is reasonably possible that the total amount of unrecognized tax benefits at April 30, 2010 could decrease by approximately $2 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional taxes, the adjustment of certain deferred taxes including the need for additional valuation allowances, and the recognition of tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur which would require increases or decreases to the balance of reserves for unrecognized tax benefits; however, an estimate of such changes cannot reasonably be made.

11. Fair Value Measurements and Derivative Financial Instruments

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This fair value hierarchy consists of three levels of inputs that may be used to measure fair value:

Level 1: quoted prices in active markets for identical assets or liabilities;

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

Level 3: unobservable inputs that are supported by little or no market activity.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification of our applicable assets and liabilities on a quarterly basis. Changes in the observability of valuation inputs may result in transfers within the fair value measurement hierarchy. We did not identify any transfers between levels of the fair value measurement hierarchy during the three months ended April 30, 2010.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of April 30, 2010 and January 31, 2010:

		April 30, 2010
		Fair Value Hierarchy Category
(in thousands)		Level 1				Level 2				Level 3
Assets:
Money market funds		$	50,095			$	—			$	—
Foreign currency forward contracts			—				277				—
Total assets		$	50,095			$	277			$	—
Liabilities:
Interest rate swap agreement		$	—			$	25,840			$	—
Contingent consideration — business combination			—				—				3,264
Total liabilities		$	—			$	25,840			$	3,264

		January 31, 2010
		Fair Value Hierarchy Category
(in thousands)		Level 1				Level 2				Level 3
Assets:
Money market funds		$	82,593			$	—			$	—
Foreign currency forward contracts			—				140				—
Total assets		$	82,593			$	140			$	—
Liabilities:
Foreign currency forward contracts		$	—			$	636			$	—
Interest rate swap agreement			—				29,812				—
Total liabilities		$	—			$	30,448			$	—

The following table presents the change in the estimated fair value for our liability for contingent consideration measured using significant unobservable inputs (Level 3) for the three-month period ended April 30, 2010:

(in thousands)		Amount
Fair value measurement at January 31, 2010		$	—
Contingent consideration liability recorded for business combination			3,224
Change in fair value recorded in operating expenses			40
Fair value measurement at April 30, 2010		$	3,264

Our liability for contingent consideration relates to the February 4, 2010 acquisition of Iontas. Between February 4, 2010 and April 30, 2010, there were no changes in the estimated fair value of the contingent consideration liability other than accretion related solely to the passage of time. The $40 thousand change in fair value for the three months ended April 30, 2010 is recorded in the condensed consolidated statement of operations within selling, general and administrative expenses.

Fair Value Measurements

Money Market Funds — We value our money market funds using quoted market prices for such funds.

Foreign Currency Forward Contracts — The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparty. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market exchange rates using readily observable market prices for similar contracts.

Interest Rate Swap Agreement — The fair value of our interest rate swap agreement is based in part on data received from a third party financial institution. These fair values represent the estimated amount we would receive or pay to settle the swap agreement, taking into consideration current and projected interest rates using readily observable market prices for similar contracts as well as the creditworthiness of the parties.

Contingent Consideration — Business Combination — The fair value of the contingent consideration related to our acquisition of Iontas is estimated using a probability-adjusted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market. The key assumptions used in this model are the discount rate and the probability assigned to the milestone being achieved. We remeasure the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in the probability of achieving the performance target, are recorded in earnings.

Derivative Financial Instruments

Interest Rate Swap Agreement

The interest rates applicable to borrowings under our credit facilities are variable, and we are exposed to risk from changes in the underlying index interest rates, which affect our cost of borrowing. To partially mitigate this risk, and in part because we were required to do so by the lenders, when we entered into our credit facilities in May 2007, we executed a pay-fixed, receive-variable interest rate swap with a high credit-quality multinational financial institution under which we pay fixed interest at 5.18% and receive variable interest of the three-month London Interbank Offering Rate (“LIBOR”) on a notional amount of $450.0 million. This instrument is settled with the counterparty on a quarterly basis, and matures on May 1, 2011. As of April 30, 2010, of the $620.3 million of borrowings which were outstanding under the term loan facility, the interest rate on $450.0 million of such borrowings was substantially fixed by utilization of this interest rate swap. Interest on the remaining $170.3 million of borrowings was variable.

The interest rate swap is not designated as a hedging instrument under derivative accounting guidance, and gains and losses from changes in its fair value are therefore reported in other income (expense), net.

Foreign Currency Forward Contracts

Under our risk management strategy, we periodically use derivative instruments to manage our short-term exposures to fluctuations in foreign currency exchange rates. We utilize foreign currency forward contracts to hedge certain operational cash flow exposures resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, primarily the Israeli shekel and the Canadian dollar. Our joint venture, which has a Singapore dollar functional currency, also utilizes foreign currency forward contracts to manage its exposure to exchange rate fluctuations related to settlement of liabilities denominated in U.S. dollars. These foreign currency forward contracts are reported at fair value on our consolidated balance sheets and have maturities of no longer than twelve months. We enter into these foreign currency forward contracts in the normal course of business to mitigate risks and not for speculative purposes.

The counterparties to our derivative financial instruments consist of several major international financial institutions. We regularly monitor the financial strength of these institutions. While the counterparties to these contracts expose us to credit-related losses in the event of a counterparty’s non-performance, the risk would be limited to the unrealized gains on such affected contracts. We do not anticipate any such losses.

Certain of these foreign currency forward contracts are not designated as hedging instruments under derivative accounting guidance, and gains and losses from changes in their fair values are therefore reported in other income (expense), net. Changes in the fair value of foreign currency forward contracts that are designated and effective as cash flow hedges are recorded net of related tax effects in accumulated other comprehensive loss, and are reclassified to the statement of operations when the effects of the item being hedged are recognized in the statement of operations.

The total notional amounts for outstanding derivatives as of April 30, 2010 and January 31, 2010 were as follows:

		April 30,				January 31,
(in thousands)		2010				2010
Foreign currency forward contracts		$	50,085			$	50,437
Interest rate swap agreement			450,000				450,000
		$	500,085			$	500,437

Fair Values of Derivative Financial Instruments

The fair values of our derivative financial instruments as of April 30, 2010 and January 31, 2010 were as follows:

		April 30, 2010
		Assets						Liabilities
		Balance Sheet						Balance Sheet
(in thousands)		Classification		Fair Value				Classification		Fair Value
Derivative financial instruments designated as hedging instruments:
Foreign currency forward contracts		Prepaid expenses and other current assets		$	216			—		$	—
Total derivative financial instruments designated as hedging instruments				$	216					$	—
Derivative financial instruments not designated as hedging instruments:
Foreign currency forward contracts		Prepaid expenses and other current assets		$	61			—		$	—
Interest rate swap — current portion		—			—			Accrued expenses and other liabilities			21,204
Interest rate swap — long-term portion		—			—			Other liabilities			4,636
Total derivative financial instruments not designated as hedging instruments				$	61					$	25,840

		January 31, 2010
		Assets						Liabilities
		Balance Sheet						Balance Sheet
(in thousands)		Classification		Fair Value				Classification		Fair Value
Derivative financial instruments designated as hedging instruments:
Foreign currency forward contracts		Prepaid expenses and other current assets		$	140			Accrued expenses and other liabilities		$	38
Total derivative financial instruments designated as hedging instruments				$	140					$	38
Derivative financial instruments not designated as hedging instruments:
Foreign currency forward contracts		—		$	—			Accrued expenses and other liabilities		$	598
Interest rate swap — current portion		—			—			Accrued expenses and other liabilities			20,988
Interest rate swap — long-term portion		—			—			Other liabilities			8,824
Total derivative financial instruments not designated as hedging instruments				$	—					$	30,410

The effects of derivative financial instruments in cash flow hedging relationships as of April 30, 2010 and January 31, 2010, and for the three months ended April 30, 2010 and 2009 were as follows:

										Classification of Gains
										Reclassified from
										Other Comprehensive
		Gains Recognized in								Loss into the				Gains Reclassified from Other
		Accumulated Other								Condensed Statements				Comprehensive Loss into the Condensed
		Comprehensive Loss								of Operations				Statements of Operations
		April 30,				January 31,								Three Months Ended April 30,
(in thousands)		2010				2010								2010				2009
Foreign currency forward contracts		$	187			$	106			Operating Expenses				$	151			$	60

There were no gains or losses from ineffectiveness of these financial instruments recorded for the three month periods ended April 30, 2010 and 2009.

Gains (losses) recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the three months ended April 30, 2010 and 2009 were as follows:

		Classification in
		Condensed
		Statements of				Three Months Ended April 30,
(in thousands)		Operations				2010				2009
Interest rate swap agreement		Other income (expense), net				$	(1,601	)		$	(3,685	)
Foreign currency forward contracts		Other income (expense), net					(102	)			146
Total						$	(1,703	)		$	(3,539	)

Other Financial Instruments

The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities.

As of April 30, 2010, the estimated fair values of our outstanding term loan facility and revolving credit facility were $583.4 million and $15.0 million, respectively. As of January 31, 2010, the estimated fair values of our outstanding term loan and revolving credit borrowings were $572.6 million and $15.0 million, respectively. The estimated fair values of the term loan facility are based upon the estimated bid and ask prices for portions of our term loan facility in a relatively inactive market as determined by the agent responsible for the syndication of our term loan facility. The fair value of the revolving credit facility is estimated to equal the principal amount outstanding at April 30, 2010 and January 31, 2010.

Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.

12. Stock -Based Compensation

We recognized stock-based compensation expense in the following line items on the condensed consolidated statements of operations for the three months ended April 30, 2010 and 2009:

		Three Months Ended
		April 30,
(in thousands)		2010				2009
Cost of revenue — product		$	631			$	118
Cost of revenue — service and support			1,778				799
Research and development, net			3,485				1,075
Selling, general, and administrative			12,076				4,566
Total stock-based compensation expense		$	17,970			$	6,558