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


FORM 10-K

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

For the fiscal year ended January 31, 2003


Commission File Number 0-15502


COMVERSE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)


NEW YORK 13-3238402
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)


170 CROSSWAYS PARK DRIVE
WOODBURY, NEW YORK 11797
(Address of principal executive offices)


Registrant's telephone number, including area code: 516-677-7200

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

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

Not applicable Not applicable


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

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

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

[X] Yes [ ] No


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

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

[X] Yes [ ] No

The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price as of the last
business day of the registrant's most recently completed second fiscal quarter,
July 31, 2002, was approximately $1,486,963,000.

There were 188,190,822 shares of the registrant's common stock
outstanding on April 25, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant hereby incorporates by reference in this report the
information required by Part III appearing in the registrant's proxy statement
or information statement distributed in connection with the 2003 Annual Meeting
of Shareholders of the registrant or in an amendment to this report on Form
10K/A.



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Comverse, Comverse Technology and Comverse's logos are trademarks of the
Company. LORONIX(R) is a registered trademark, and Intelligent Recording,
OpenStorage Portal, RELIANT, STAR-GATE, ULTRA, Universal Database and Verint
Systems are trademarks of Verint Systems Inc., a subsidiary of the Company.
Signalware(R) and Ulticom(R) are registered trademarks of Ulticom, Inc., a
subsidiary of the Company.


- ii -



PART I

ITEM 1. BUSINESS.


THE COMPANY

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

Through its subsidiary Comverse, Inc. ("Comverse"), the Company
provides enhanced services products that enable telecommunications service
providers ("TSPs") to offer a variety of revenue and traffic generating services
accessible to large numbers of simultaneous users. These services include a
broad range of messaging, information distribution and personal communications
services, such as call answering with one-touch call return, voicemail, unified
messaging (voice, fax, text, multimedia content and email in a single mailbox,
media conversion such as email to voice and visual mailbox presentation),
prepaid wireless calling services, wireless data and Internet-based services
such as short messaging services ("SMS"), wireless information and entertainment
services, multimedia messaging services ("MMS"), wireless instant messaging,
interactive voice response ("IVR"), and voice portal services, which are part of
a voice-controlled portfolio of services such as voice dialing, voice-controlled
messaging, and other applications. Comverse's principal market for its systems
consists of organizations that use the systems to provide services to the
public, often on a subscription or pay-per-usage basis, and includes both
wireless and wireline telecommunications network operators and other TSP
organizations. Comverse markets its systems throughout the world, with its own
direct sales force and in cooperation with a number of leading international
vendors of telecommunications infrastructure equipment. More than 400 wireless
and wireline TSPs in more than 100 countries, including the majority of the 20
largest telecom companies in the world, have selected Comverse's products to
provide enhanced telecommunications services to their consumers. Major network
operators and service providers using Comverse's systems include, among others,
AT&T (USA), BellSouth (USA), Deutsche Telekom (Germany and other European
countries), KDDI (Japan), MCI Worldcom (USA), mmO2 (several European countries),
NTT (Japan), Orange (several European countries), SBC Communications (USA), SFR
(France), SingTel (Singapore), Sprint PCS (USA), Telecom Italia (Italy), Telmex
(Mexico), Telstra (Australia), Verizon (USA) and Vodafone (multiple countries).

Through its subsidiary Verint Systems Inc. ("Verint"), the Company
provides analytic software-based solutions for communications interception,
digital video security and surveillance, and enterprise business intelligence.
Verint's software generates actionable intelligence through the collection,
retention and analysis of voice, fax, video, email, Internet and data
transmissions from multiple types of communications networks. The digital
security and surveillance market consists primarily of communications
interception by law enforcement and other government agencies and digital video
security utilized by government agencies and public and private organizations.
The enterprise business intelligence market consists primarily of solutions
targeting enterprises that rely on contact centers for voice, email and Internet


1

interactions with their customers. Additionally, an emerging segment of
enterprise business intelligence utilizes digital video information to allow
enterprises and institutions to enhance their operations, processes and
performance. Verint sells its enterprise business intelligence solutions to
contact center service bureaus, financial institutions, retailers, utilities,
communications service providers, manufacturers and other enterprises. Verint
has established marketing relationships with a variety of global value added
resellers and a network of systems integrators including ADT, Avaya, British
Telecom, Nortel and Siemens. Verint also has technological alliances with
leading software and hardware companies including Genesys, Indentix, and Siebel,
which enables Verint to offer complementary solutions to their products.
Verint's products are used by over 1000 organizations in over 50 countries
worldwide. Customers for digital security and surveillance products include the
Mall of America, the U.S. Capitol, the U.S. Department of Defense, the U.S.
Department of Justice, Vancouver International Airport, Washington Dulles
International Airport, the Toronto Police Service, the Dutch National Police
Agency, and other domestic and foreign law enforcement and intelligence
agencies, as well as communications service and equipment providers, such as
Cingular, Ericsson and Nortel. Customers for enterprise business intelligence
products include Con Edison, FedEx, HSBC, JCPenney, Sprint, Target and Tiffany &
Co. Verint had an initial public offering of its common stock in May, 2002, and
its common stock is listed on the NASDAQ National Market System under the symbol
"VRNT." CTI held approximately 78.6% of Verint's outstanding common stock as of
January 31, 2003.

Through its subsidiary Ulticom, Inc. ("Ulticom"), the Company
provides service enabling signaling software for wireline, wireless and Internet
communications. Ulticom's Signalware call control products interconnect the
complex circuit switching, database and messaging systems and manage vital
number, routing and billing information that form the backbone of today's public
telecommunications networks. Ulticom's products are used by equipment
manufacturers, application developers and communications service providers to
deploy revenue generating infrastructure, enhanced and mandated services such as
global roaming, voice and text messaging, prepaid calling and location-based
services. Signalware products also are embedded in a range of packet
softswitching products to interoperate or converge voice and data networks and
facilitate services such as voice-over-IP ("VoIP") and Internet offload. Ulticom
had an initial public offering of its common stock in April, 2000, and its
common stock is listed on the NASDAQ National Market System under the symbol
"ULCM." CTI held approximately 71.6% of Ulticom's outstanding common stock as of
January 31, 2003.

The Company markets other telecommunications products and services,
including products that are integrated with its systems and products that work
in combination with other systems to provide advanced telecommunications
services, such as automatic call distribution and messaging systems for
telephone answering service bureaus, and intelligent Internet Protocol ("IP")
gateways for wireless roaming. The Company also engages in venture capital
investment and capital market activities for its own account.

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

The Company was incorporated in the State of New York in October
1984. Its headquarters are located at 170 Crossways Park Drive, Woodbury, New
York 11797, where its telephone number is (516) 677-7200.


2

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

THE COMPANY'S PRODUCTS

ENHANCED SERVICES SOLUTIONS (ESS)

Comverse is a leading provider of Enhanced Services Solutions that
enable TSPs to offer a variety of revenue and traffic generating services
accessible to large numbers of simultaneous users. These services include a
broad range of messaging, information distribution and personal communications
services, such as call answering with one-touch call return, voicemail, unified
messaging (voice, fax, text, multimedia content and email in a single mailbox,
media conversion such as email to voice and visual mailbox presentation),
prepaid wireless calling services, wireless data and Internet-based services
such as SMS, wireless information and entertainment services, MMS, wireless
instant messaging, IVR and voice services, which are part of a voice-controlled
portfolio of services such as voice dialing, voice-controlled messaging, and
other applications. Comverse's principal market for its systems consists of
organizations that use the systems to provide services to the public, often on a
subscription or pay-per-usage basis, and includes both wireless and wireline
telecommunications network operators and other TSP organizations. With call
answering and voice messaging, TSPs benefit primarily from traffic revenue
generated by the increase in billable completed calls. In addition, these
services foster customer loyalty that results in an overall reduction in churn.
Wireless TSPs are almost universally adding voicemail and SMS to their service
offerings, and often as part of their basic service package, not only because of
these benefits, but also because wireless voicemail messaging services directly
increase billable airtime by stimulating outbound calls, and wireless SMS
increases billable transactions by stimulating person-to-person messaging and
information retrieval.

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

Comverse's systems also incorporate components that are compatible
with the Intelligent Network ("IN") and Advanced Intelligent Network ("AIN")


3

protocols for Service Control Points and Intelligent Peripherals, permitting
Comverse's network operator customers to develop and deploy services based on
the overall IN architecture.

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

DIGITAL SECURITY AND SURVEILLANCE AND ENTERPRISE BUSINESS INTELLIGENCE

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

The digital security and surveillance market consists primarily of
communications interception by law enforcement and other government agencies and
digital video security utilized by government agencies and public and private
organizations for use in airports, public buildings, correctional facilities and
corporate sites.

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

Verint's RELIANT product line provides intelligent recording and
analysis solutions for communications interception activities to law enforcement
organizations and other government agencies. The RELIANT software equips law
enforcement agencies with an end-to-end solution for live monitoring of
intercepted target communications and evidence collection management, regardless
of the type of communication or network used. Applications can scale from a
small center for a local police force, to a country-wide center for national law
enforcement agencies. RELIANT products are designed to comply with legal
regulations and can be integrated with communications networks in the country
where the system is utilized. RELIANT collects intercepted communications from
multiple channels and stores them for immediate access, further analysis and
later use as evidence.

Verint's LORONIX digital video security product line provides
intelligent recording and analysis of video for security and surveillance
applications to government agencies and public organizations. The LORONIX
software digitizes, compresses, stores and retrieves video imaging. In addition,


4

LORONIX products provide live video streaming and camera control over local and
wide area computer networks and the Internet. The LORONIX product line may be
configured to allow customers to perform complete monitoring for security and
management of local and remote sites from a central investigative unit. The use
of digital storage and compression technology makes the LORONIX product line a
more efficient alternative to traditional analog tape storage. The technology
interfaces with access control, motion detection and analysis, facial
recognition, activity and intrusion detection and other technologies for
enhanced security and surveillance.

The enterprise business intelligence market consists primarily of
solutions targeting enterprises that rely on contact centers for voice, email
and Internet interactions with their customers.

Verint's ULTRA products record and analyze customer interactions to
provide enterprises with business intelligence about their customers and help
monitor and improve the performance of their contact centers. ULTRA products
capture customer interactions from multiple sources, including telephone, email,
Internet or VoIP. Utilizing ULTRA's OpenStorage Portal and Universal Database,
customers can leverage their existing storage infrastructure to store and access
recorded customer interactions using standard file formats. ULTRA products
integrate with leading customer relationship management ("CRM") applications
allowing the delivery of information directly to the user's desktop within
Siebel, PeopleSoft and other CRM solutions. ULTRA also interfaces with popular
desktop software tools, including Microsoft Outlook, Lotus Notes and web
browsers, to enable the user to easily access the data in a familiar computing
environment.

Verint's LORONIX video business intelligence products enable
enterprise customers to monitor and improve their operations through the
analysis of live and recorded digital video. Like the LORONIX digital video
security product, the LORONIX video business intelligence product digitizes,
compresses, stores and retrieves video imaging. While leveraging the technology
of the LORONIX digital security product, the LORONIX enterprise product line
also contains unique software focused on maximizing operational effectiveness
through video analysis. By interfacing with customer databases and software
systems, LORONIX facilitates the user's review of video imaging based on
specific criteria such as employee ID, product barcodes, traffic patterns and
point of sale transaction history.

SERVICE ENABLING SIGNALING SOFTWARE

The Company's Ulticom subsidiary provides service enabling signaling
software for wireline, wireless and Internet communications. Ulticom's
Signalware family of products are used by equipment manufacturers, application
developers and communication service providers to deploy revenue generating
infrastructure, enhanced and mandated services such as mobility, messaging,
payment and location-based services. Signalware products also are embedded in a
range of packet softswitching products to interoperate or converge voice and
data networks and facilitate services such as Internet offload and VoIP.
Signalware provides signaling system #7 ("SS7"), the globally accepted signaling
standard protocol, which interconnects the complex switching, database and
messaging systems, and manages vital number, routing and billing information
that form the backbone of today's telecommunications networks.


5

Signalware supports a range of applications in wireline, wireless and
Internet networks. In circuit networks, Signalware has been deployed as part of
wireline services such as voice messaging, 800 number service and caller ID.
Signalware enables wireless services that include infrastructure applications
such as global roaming, as well as enhanced services such as voice and text
messaging and prepaid calling. Signalware enables deployment of high capacity
wireless data services made possible by the evolution from second generation
("2G") to third generation ("3G") infrastructures, including an intermediate
generation called "2.5G". Signalware is used to deploy mandated, location based
wireless services, such as emergency-911. Signalware also is used to enable
solutions that ease congestion on existing networks by routing Internet dial-up
traffic to more efficient packet infrastructure, and deliver VoIP services for
local and long distance carriers.

Signalware works with multiple SS7 networks, supports a wide variety
of SS7 protocol elements, and enables analog or digital wireline and wireless
transmissions. It provides the functionality needed for call set-up/termination
and call routing/billing. Signalware products also include features that enable
the transition from SS7 signaling to emerging packet signaling standards, such
as SIGTRAN. New features include a SIGTRAN Gateway for circuit-packet network
interoperability, and protocols to transport SS7 traffic over IP networks.
Signalware packages run on a range of hardware platforms and operating systems,
including Sun Solaris, IBM AIX and Red Hat Linux. These packages can be used in
single or multiple computing configurations for fault resiliency and
reliability. Signalware customers include equipment manufacturers, such as
Alcatel, Ericsson and Siemens; application developers, such as Comverse,
LogicaCMG and Sonus; and service providers, such as MCI WorldCom and Telefonica.

OTHER TELECOMMUNICATIONS PRODUCTS AND SERVICES

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

MARKETS, SALES AND MARKETING

Comverse's ESS systems and software are marketed by Comverse
throughout the world, with its own direct sales force as well as local
distributors, and in cooperation with a number of leading international vendors
of telecommunications infrastructure equipment. Comverse is a leader in
providing large capacity enhanced services software and systems for wireless and
wireline telecommunications network operators around the world.

More than 400 wireless and wireline telecommunications network
operators in more than 100 countries, including the majority of the 20 largest
telephone companies in the world, have selected Comverse's platforms to provide
enhanced telecommunications services to their consumers. Major network operators
using Comverse's ESS systems include, among others, AT&T (USA), BellSouth (USA),
Deutsche Telekom (Germany and other European countries), KDDI (Japan), MCI
Worldcom (USA), mmO2 (several European countries), NTT (Japan), Orange (several
European countries), SBC Communications (USA), SFR (France), SingTel
(Singapore), Sprint PCS (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra
(Australia), Verizon (USA) and Vodafone (multiple countries).


6


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

Verint's products are marketed primarily through a combination of its
direct sales force and agents, distributors, value added resellers and systems
integrators. Verint develops strategic marketing alliances with leading
companies in the industry to expand the coverage and support of its direct sales
force. Verint currently has such relationships with ADT, Avaya, British Telecom,
Nortel and Siemens, among others. In addition, Verint established technological
alliances with leading software and hardware companies including Genesys,
Identix and Siebel, which enables Verint to offer complementary solutions to
their products.

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

Customers for digital security and surveillance products include the
Mall of America, the U.S. Capitol, the U.S. Department of Defense, the U.S.
Department of Justice, Vancouver International Airport, Washington Dulles
International Airport, the Toronto Police Service, the Dutch National Police
Agency, and other domestic and foreign law enforcement and intelligence
agencies, as well as communications service and equipment providers, such as
Cingular, Ericsson and Nortel. Customers for enterprise business intelligence
products include Con Edison, FedEx, HSBC, JCPenney, Sprint, Target and Tiffany &
Co.

Ulticom's products are used by over 55 customers and are deployed by
more than 260 service providers in more than 100 countries. Ulticom markets its
products and services primarily through a direct sales organization and through
key relationships with customers. Customers include network equipment
manufacturers, such as Alcatel, Ericsson and Siemens, enhanced services
application enablers such as Comverse and LogicaCMG, softswitching vendors such
as Sonus, and service providers such as MCI Worldcom and Telefonica.

TECHNOLOGIES

The Company's research and development efforts focus particularly on
the design of very large, high throughput systems, digital signal processing
technologies for voice, image, video, and data communications, IP and messaging
protocols, multimodal user interfaces, IN, AIN and signaling, development of
various network and OMAP interfaces, and the development of applications and
analytic solutions. The Company's products use advanced technologies in the
areas of digital signal processing, VoIP, facsimile protocols, networking
interfaces, databases, data networking, multi-processor computer architecture
and real-time software design.

The Company's products are based upon flexible system architectures
specifically designed to handle high capacity multiple session multimodal user


7

experiences, and multimedia communication and processing applications. The
Company's products employ open system, modular architectures, which use
distributed processors, rather than one large central processor, as well as
multiple storage devices and data networking. Product design is intended to be
readily adaptable to the usage and capacity requirements of the individual
end-user. The product architectures are intended to allow the Company to add
enhancements and new technologies to its systems without rendering existing
products obsolete.

The Company has developed or integrated third-party interfaces for
its products to most circuit-switched and IP networks used around the world,
including digital interfaces, such as IP, SIP, SS7, T1, E1 and ISDN and VoIP,
designed to encompass both basic network connectivity and the IN/AIN
capabilities of Intelligent Peripherals and SNs. The Company has also developed
Internet Protocols, including cHTML, HTML, HTTP, IMAP4, LDAP, POP3, VPIM, VXML
and WAP. The Company has implemented interception of communication protocols for
Group 3 facsimile. Certain of its products incorporate LAN and WAN technologies
used for the transfer of digitized voice, fax, video, and modem information, as
well as for the transfer of data among various network elements.

The Company utilizes state-of-the-art mass storage technologies in
many of its products. A variable number of disks may be configured in a disk
array to serve large numbers of users and to provide full or partial disk
redundancy for critical applications. Special algorithms utilized by the Company
to handle optical disks within a number of jukebox devices include automatic
channel-to-disk allocation, automatic retrieval of multimedia information from
any disk located in the jukeboxes and redundant archiving on two or more
cartridges simultaneously.

RESEARCH AND DEVELOPMENT

Because of the continuing technological changes that characterize the
telecommunications and computer industries, the Company's success will depend,
to a considerable extent, upon its ability to continue to develop competitive
products through its research and development efforts. The Company currently
employs more than 1,900 scientists, engineers and technicians in its research
and development efforts, located predominantly in the United States and Israel
with additional offices in France, Germany and Malaysia, with broad experience
in the areas of digital signal processing, computer architecture, telephony, IP,
data networking, multi-processing, databases, real-time software design and
application software design, among others.

A portion of the Company's research and development operations
benefit from financial incentives provided by government agencies to promote
research and development activities performed in Israel. The cost of such
operations is and will continue to be affected by the continued availability of
financial incentives under such programs. During the past fiscal year, the
Company's research and development activities included projects submitted for
partial funding under a program administered by the Office of the Chief
Scientist of the Ministry of Industry and Trade of the State of Israel ("OCS"),
under which reimbursement of a portion of the Company's research and development
expenditures will be made subject to final approval of project budgets. Verint
pays royalties on its sales of certain products developed in part with funding
supplied under such programs. During the year ended January 31, 2002, Comverse
entered into an arrangement with the OCS whereby Comverse agreed to pay a lump
sum royalty amount for all past amounts received from the OCS. In addition,


8

Comverse began to receive lower amounts from the OCS than it had historically
received, but is not required to pay royalty amounts on such future grants.
Permission from the government of Israel is required for the Company to
manufacture outside of Israel products resulting from research and development
activities funded under such programs, or to transfer outside of Israel related
technology rights, and in order to obtain such permission the Company may be
required to increase the royalties to the applicable funding agencies and/or
repay certain amounts received as reimbursement of research and development
costs. See "Licenses and Royalties" and "Operations in Israel" in Item 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7.

PATENTS AND INTELLECTUAL PROPERTY RIGHTS

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

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

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

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

LICENSES AND ROYALTIES

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


9

BACKLOG

At January 31, 2003, the backlog of the Company amounted to
approximately $293.9 million. We believe that substantially all of the backlog
will be delivered within the next 12 months.

SERVICE AND SUPPORT

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

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

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

COMPETITION

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

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

Comverse believes that competition in the sale of ESS systems is
based on a number of factors, the most important of which are product features
and functionality, system capacity and reliability, marketing and distribution


10

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

Verint faces strong competition in the markets for its products, both
in the United States and internationally. Verint expects competition to persist
and intensify in the digital security and surveillance market, primarily due to
increased demand for homeland defense and security solutions following the
September 11, 2001 terrorist attacks. Verint's primary competitors are suppliers
of security and recording systems and software, and indirect competitors that
supply certain components to systems integrators. In the enterprise business
intelligence market, Verint faces competition from organizations emerging from
the traditional call logging or call recording market as well as software
companies that develop and sell products that perform specific functions for
this market. Additionally, many of Verint's competitors specialize in a subset
of Verint's portfolio of products and services. Primary competitors include,
among others, ECtel, e-talk, ETI, JSI Telecom, NICE Systems, Pelco, Raytheon,
Sensormatic, SS8 Networks and Witness Systems. Verint believes it competes
principally on the basis of product performance and functionality, knowledge and
experience in the industry, product quality and reliability, customer service
and support, and price.

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

Competitors of Ulticom include a number of companies ranging from SS7
software solution providers, such as Hughes Software Systems and SS8 Networks,
to vendors of communication and network infrastructure equipment, such as
Continuous Computing (formerly Trillium Digital Systems) and Hewlett Packard.
Ulticom believes it competes principally on the basis of product performance and
functionality, product quality and reliability, customer service and support,
and price.

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

MANUFACTURING AND SOURCES OF SUPPLIES

The Company's manufacturing operations consist primarily of final
assembly and testing, involving the application of extensive testing and quality
control procedures to materials, components, subassemblies and systems. The
Company primarily uses third-parties to perform modules and subsystem assembly,
component testing and sheet metal fabrication. Although the Company generally
uses standard parts and components in its products, certain components and


11

subassemblies are presently available only from a limited number of sources. To
date, the Company has been able to obtain adequate supplies of all components
and subassemblies in a timely manner from existing sources or, when necessary,
from alternative sources or redesign the system to incorporate new modules, when
applicable. However, the inability to obtain sufficient quantities of components
or to locate alternative sources of supply if and as required in the future,
would adversely affect the Company's operations.

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

CAPITAL MARKET ACTIVITIES

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

OPERATIONS IN ISRAEL

A substantial portion of the Company's research and development,
manufacturing and other operations are located in Israel and, accordingly, may
be affected by economic, political and military conditions in that country.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and the
continued state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Since October 2000, there has been a
significant increase in violence, primarily in the West Bank and Gaza Strip, and
more recently Israel has experienced terrorist incidents within its borders.
During this period, peace negotiations between Israel and representatives of the
Palestinian Authority have been sporadic and currently are suspended. The
Company could be adversely affected by hostilities involving Israel, the
interruption or curtailment of trade between Israel and its trading partners, or
a significant downturn in the economic or financial condition of Israel. In
addition, the sale of products manufactured in Israel may be adversely affected
in certain countries by restrictive laws, policies or practices directed toward
Israel or companies having operations in Israel. The continuation or
exacerbation of violence in Israel or the outbreak of violent conflicts
involving Israel may impede the Company's ability to sell its products or
otherwise adversely affect the Company. In addition, many of the Company's
Israeli employees are required to perform annual compulsory military reserve
duty in Israel, and are subject to being called to active duty at any time under
emergency circumstances. The absence of these employees may have an adverse
effect upon the Company's operations.

Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development, and the
International Finance Corporation, and is a signatory to the General Agreement
on Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the


12

Generalized System of Preferences from the United States, Australia, Canada, and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs.

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

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

The Company benefits from various policies of the Government of
Israel, including reduced taxation and special subsidy programs, designed to
stimulate economic activity, particularly high technology industry, in that
country. As a condition of its receipt of funds for various research and
development projects conducted under programs sponsored by the Government of
Israel, the Company has agreed that products resulting from these projects may
not be manufactured, nor may the technology developed in the projects be
transferred, outside of Israel without government consent.

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


13

EMPLOYEES

At January 31, 2003, the Company employed approximately 4,789
individuals, of whom approximately 80% are scientists, engineers and technicians
engaged in research and development, marketing and support activities. The
Company considers its relationship with its employees to be good.

The Company is not a party to any collective bargaining or other
agreement with any labor organization; however, certain provisions of the
collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordinating Bureau of Economic Organizations
(including the Industrialists' Association) are applicable to the Company's
Israeli employees by order of the Israeli Ministry of Labor. Israeli law
generally requires the payment by employers of severance pay upon the death of
an employee, his or her retirement or upon termination of his or her employment,
and the Company provides for such payment obligations through monthly
contributions to an insurance fund. Israeli employees and employers are required
to pay pre-determined sums to the National Insurance Institute, which payment
covers medical and other benefits similar to the benefits provided by the United
States Social Security Administration.

The continuing success of the Company will depend, to a considerable
extent, on the contributions of its senior management and key employees, many of
whom would be difficult to replace, and on the Company's ability to attract and
retain qualified employees in all areas of its business. Competition for such
personnel is intense. In order to attract and retain talented personnel, and to
provide incentives for their performance, the Company has emphasized the award
of stock options as an important element of its compensation program, including
options to purchase shares in certain of the Company's subsidiaries, and
provides cash bonuses based on several parameters, including the profitability
of the recipients' respective business units.







ITEM 2. PROPERTIES.

As of January 31, 2003, the Company leased an aggregate of
approximately 2,478,000 square feet of office space and manufacturing and
related facilities for its operations worldwide, including approximately
1,540,000 square feet in Tel Aviv, Israel, approximately 367,000 square feet in
Wakefield, Massachusetts, approximately 60,000 square feet in Woodbury, New
York, approximately 85,000 square feet in Mt. Laurel, New Jersey, an aggregate
of approximately 186,000 square feet at various other locations in the United
States and an aggregate of approximately 240,000 square feet at various
locations in Europe, Asia-Pacific, South America, Africa and Canada. The
aggregate base monthly rent for the facilities under lease as of January 31,
2003 was approximately $3,070,000, and all of such leases are subject to various
pass-throughs and escalation adjustments.


14

In addition, the Company owns office space and manufacturing and
related facilities of approximately 40,000 square feet in Durango, Colorado,
approximately 27,000 square feet in Bexbach, Germany, and approximately 423,000
square feet of unimproved land in Ra'anana, Israel.

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


ITEM 3. LEGAL PROCEEDINGS.

On or about October 19, 2001, a securities class action complaint
entitled Kevin Beier v. Comverse Technology, Inc., et al., CV 016972, was filed
against CTI and certain of its executive officers in the United States District
Court for the Eastern District of New York ("the Court"). An amended
consolidated complaint was filed on March 4, 2002. The amended consolidated
complaint generally alleged violations of federal securities laws on behalf of
individuals who alleged that they purchased CTI's common stock during a
purported class period between April 30, 2001 and July 10, 2001. The amended
consolidated complaint sought an unspecified amount in damages on behalf of
persons who purchased CTI stock during the purported class period. On April 22,
2002, CTI filed a Motion to Dismiss the amended consolidated complaint in its
entirety. On September 30, 2002, the Court granted CTI's Motion to Dismiss the
amended consolidated complaint. On November 8, 2002, the Court entered a final
judgment dismissing the amended consolidated complaint with prejudice. On
November 26, 2002, plaintiffs agreed to waive their right to appeal the judgment
in exchange for CTI's agreement that each side bear its own costs and legal
fees. Plaintiffs' time to appeal has expired and no appeal was filed, and the
case is now closed.

From time to time, the Company is subject to claims in legal
proceedings arising in the normal course of its business. The Company does not
believe that it is currently party to any pending legal action that could
reasonably be expected to have a material adverse effect on its business,
financial condition and results of operations.


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

At the Company's annual meeting of shareholders held on December 3,
2002, for which proxies were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, the following matters were voted
upon by shareholders:

1. The Company's 2002 Employee Stock Purchase Plan was approved,
under which up to 1,500,000 shares of Common Stock may be made available for
purchase by eligible employees. A total of 168,316,299 votes were cast for
approval, a total of 2,783,133 votes were cast against approval and a total of
963,754 votes were abstentions.

2. Ratification of Deloitte & Touche LLP as independent auditors of
the Company for the year ending January 31, 2003. A total of 168,052,290 votes
were cast for approval, a total of 3,188,405 votes were cast against approval
and a total of 822,491 votes were abstentions.


15

PART II

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


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

YEAR FISCAL QUARTER LOW HIGH

2001 2/1/01 - 4/30/01 $ 45.82 $113.13
5/1/01 - 7/31/01 24.78 74.11
8/1/01 - 10/31/01 15.90 29.87
11/1/01 - 1/31/02 19.14 26.93

2002 2/1/02 - 4/30/02 11.68 20.74
5/1/02 - 7/31/02 7.60 12.93
8/1/02 - 10/31/02 6.82 9.26
11/1/02 - 1/31/03 7.87 12.33

There were 1,803 holders of record of Common Stock at April 25, 2003.
Such record holders include a number of holders who are nominees for an
undetermined number of beneficial owners. The Company believes that the number
of beneficial owners of the shares of Common Stock outstanding at such date was
approximately 30,000.

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



16

ITEM 6. SELECTED FINANCIAL DATA.

The following tables present selected consolidated financial data for
the Company for the years ended January 31, 1999, 2000, 2001, 2002 and 2003.
Such information has been derived from the Company's audited consolidated
financial statements and should be read in conjunction with the Company's
consolidated financial statements and the notes to the consolidated financial
statements included elsewhere in this report. All financial information
presented herein has been retroactively adjusted for the July 2000 acquisition
of Loronix Information Systems, Inc. ("Loronix") to account for the transaction
as a pooling of interests. All per share data has been restated to reflect a
three-for-two stock split effected as a 50% stock dividend to shareholders of
record on March 31, 1999, distributed on April 15, 1999, and a two-for-one stock
split effected as a 100% stock dividend to shareholders of record on March 27,
2000, distributed on April 3, 2000.



YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
1999(1) 2000(1) 2001 2002 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Statement of Operations Data:

Sales $708,805 $909,667 $1,225,058 $1,270,218 $735,889

Cost of Sales 304,665 371,589 482,658 525,480 338,121

Research and development, net 134,201 169,816 232,198 293,296 232,593

Selling, general and administrative 157,106 193,996 259,607 323,036 281,202

Acquisition expenses - 2,016 15,971 - -

Workforce reduction, restructuring and
impairment charges - - - 63,562 66,714
-------- --------- --------- -------- ---------

Income (loss) from operations 112,833 172,250 234,624 64,844 (182,741)

Interest and other income (expense), net 8,315 16,595 33,339 (5,789) 56,557
-------- --------- --------- -------- ---------

Income (loss) before income tax provision 121,148 188,845 267,963 59,055 (126,184)

Income tax provision 11,783 15,698 18,827 4,436 3,294
-------- --------- --------- -------- ---------

Net income (loss) $109,365 $173,147 $249,136 $54,619 $(129,478)
======== ========= ========= ======== =========



Earnings (loss) per share - diluted $0.75 $1.08 $1.39 $0.29 $(0.69)
======== ========= ========= ======== =========

Weighted avg number of common and common
equivalent shares outstanding - diluted 145,439 178,986 189,964 186,434 187,212



JANUARY 31,
--------------------------------------------------------------------------------
1999(2) 2000(2) 2001 2002 2003
(IN THOUSANDS)
Balance Sheet Data:

Working capital $712,165 $858,304 $1,860,379 $2,030,250 $1,766,507

Total assets 1,042,959 1,372,847 2,625,264 2,704,163 2,403,659

Long-term debt, including current portion 416,327 308,082 906,723 648,611 397,628

Stockholders' equity 390,855 724,839 1,236,165 1,616,408 1,549,692




(1) Includes the results of Loronix for its fiscal year ended December 31.

(2) Includes amounts for Loronix as of its fiscal year ended December 31.


17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.


CRITICAL ACCOUNTING POLICIES

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

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

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

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

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

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


18

Accounts receivable are generally diversified due to the large number
of commercial and government entities comprising the Company's customer base and
their dispersion across many geographical regions. At the end of each accounting
period, the Company records a reserve for bad debts included in accounts
receivable based upon its current and historical collection history.

Software development costs are capitalized upon the establishment of
technological feasibility and are amortized over the estimated useful life of
the software, which to date has been four years or less. Amortization begins in
the period in which the related product is available for general release to
customers.

RESULTS OF OPERATIONS

INTRODUCTION

As explained in greater detail in "Certain Trends and Uncertainties",
the Company's two business units serving telecommunications markets are
operating within an industry experiencing a deep capital spending contraction
and, consequently, have experienced year over year revenue declines. In
contrast, Verint, which services the security and enterprise business
intelligence markets, achieved revenue growth based, in part, on heightened
awareness surrounding homeland defense and security related initiatives in the
U.S. and worldwide. Overall, however, with a substantial majority of sales for
the year ended January 31, 2003 generated from activities serving the
telecommunications industry, the Company experienced a year over year sales
decline of approximately 42%, resulting in an operating loss for the period.

YEAR ENDED JANUARY 31, 2003 COMPARED TO YEAR ENDED JANUARY 31, 2002

Sales. Sales for the fiscal year ended January 31, 2003 ("fiscal
2002") decreased by approximately $534.3 million, or 42%, compared to the fiscal
year ended January 31, 2002 ("fiscal 2001"). The decrease in sales is primarily
attributable to a decrease in sales of ESS products of approximately $537.3
million. Such decrease in ESS sales is attributable to all geographic regions,
with sales by region as a percentage of total sales remaining fairly consistent
between periods. In addition, sales of security and business intelligence
recording products and service enabling signaling software products increased
(decreased) by approximately $26.5 million and $(23.3) million, respectively. On
a consolidated basis, sales to international customers represented approximately
65% of sales for fiscal 2002 compared to approximately 70% of sales for fiscal
2001.

Cost of Sales. Cost of sales for fiscal 2002 decreased by
approximately $187.4 million, or 36%, compared to fiscal 2001. The decrease in
cost of sales is primarily attributable to decreased materials and overhead
costs of approximately $146.6 million, due primarily to the decrease in sales,
decreased royalty expense of approximately $20.5 million, decreased
personnel-related costs of approximately $8.0 million and decreased travel costs
of approximately $7.0 million, partially offset by a charge of approximately
$5.9 million pertaining to the write-down of the value of certain inventory and
the write-off of certain prepaid licenses for which there is no estimable future
use. Gross margins decreased from approximately 58.6% in fiscal 2001 to
approximately 54.1% in fiscal 2002.

Research and Development, Net. Net research and development expenses


19

for fiscal 2002 decreased by approximately $60.7 million, or 21%, compared to
fiscal 2001, primarily due to the reductions in workforce and a reduction of
research and development projects.

Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 2002 decreased by approximately $41.8
million, or 13%, compared to fiscal 2001, and as a percentage of sales increased
from approximately 25.4% in fiscal 2001 to approximately 38.2% in fiscal 2002.
The decrease in the dollar amount of the expense was primarily due to the
reductions in workforce.

Workforce Reduction, Restructuring and Impairment Charges. In order
to better align its cost structure with the business environment and improve the
efficiency of its operations, the Company took steps to reduce its workforce,
restructure its operations and write-off impaired assets during fiscal 2001 and
fiscal 2002. In connection with these steps, the Company incurred charges of
approximately $63.6 million and $66.7 million in fiscal 2001 and fiscal 2002,
respectively, primarily pertaining to severance and other related costs, the
elimination of excess facilities and related leasehold improvements and the
write-off of certain property and equipment. The Company expects to pay out
approximately $9.4 million for severance and related obligations during the year
ended January 31, 2004 and approximately $40.5 million for facilities and
related obligations at various dates through January 2011.

Interest and Other Income (Expense), Net. Interest and other income
(expense), net for fiscal 2002 increased by approximately $62.3 million compared
to fiscal 2001. The principal reasons for the increase are (i) decreased
interest expense of approximately $6.8 million due to the redemption of the
Company's $300.0 million 4.5% convertible debentures in June 2001, as well as
the Company's repurchase of approximately $209.2 million face value of its 1.5%
convertible debentures during fiscal 2002; (ii) a gain of approximately $39.4
million recorded as a result of the Company's repurchase of approximately $209.2
million face value of its 1.5% convertible debentures during fiscal 2002; (iii)
change in foreign currency gains/losses of approximately $48.5 million due
primarily to the strengthening of the euro during fiscal 2002; and (iv) other
changes of approximately $1.3 million, net. Such items were offset by (i)
decreased interest and dividend income of approximately $26.0 million due
primarily to the decline in interest rates during fiscal 2002; (ii) an increase
in net losses from the sale and write-down of investments of approximately $4.6
million; (iii) change in the equity of affiliates of approximately $2.2 million;
and (iv) an increase of approximately $0.9 million in the minority interest.

Income Tax Provision. Provision for income taxes decreased from
fiscal 2001 to fiscal 2002 by approximately $1.1 million, or 26%, due primarily
to the overall decrease in pre-tax income coupled with shifts in the underlying
mix by tax jurisdiction. The Company's overall rate of tax is reduced
significantly by the existence of net operating loss carryforwards for Federal
income tax purposes in the United States, as well as the tax benefits associated
with qualified activities of certain of its Israeli subsidiaries, which are
entitled to favorable income tax rates under a program of the Israeli Government
for "Approved Enterprise" investments in that country.

Net Income (Loss). Net income (loss) decreased by approximately
$184.1 million in fiscal 2002 compared to fiscal 2001, while as a percentage of
sales decreased from approximately 4.3% in fiscal 2001 to approximately (17.6)%


20

in fiscal 2002. The decrease resulted primarily from the factors described
above.


YEAR ENDED JANUARY 31, 2002 COMPARED TO YEAR ENDED JANUARY 31, 2001

Sales. Sales for fiscal 2001 increased by approximately $45.2
million, or 4%, compared to the fiscal year ended January 31, 2001 ("fiscal
2000"). This increase is primarily attributable to an increase in sales of ESS
products of approximately $48.7 million. Such increase was principally due to
increased sales to American customers. In addition, sales of security and
business intelligence recording products and service enabling signaling software
products increased (decreased) by approximately $(8.0) million and $9.3 million,
respectively.

Cost of Sales. Cost of sales for fiscal 2001 increased by
approximately $42.8 million, or 9%, compared to fiscal 2000. The increase in
cost of sales is primarily attributable to increased materials and overhead
costs of approximately $21.8 million, due primarily to the increase in sales,
and increased personnel-related costs of approximately $23.2 million, due to the
hiring of additional personnel and increased compensation and benefits for
existing personnel. Gross margins decreased from approximately 60.6% in fiscal
2000 to approximately 58.6% in fiscal 2001.

Research and Development, Net. Net research and development expenses
for fiscal 2001 increased by approximately $61.1 million, or 26%, compared to
fiscal 2000, due to overall growth of research and development operations and
the initiation of significant new research and development projects. The
increase was primarily due to the hiring of additional personnel and increased
compensation and benefits for existing personnel of approximately $32.9 million,
lower reimbursements for research and development projects submitted for funding
to the OCS of approximately $11.5 million, an increase in depreciation and
amortization costs of approximately $6.3 million and an increase in the overhead
allocation of approximately $3.6 million.

Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 2001 increased by approximately $63.4
million, or 24%, compared to fiscal 2000, and as a percentage of sales increased
from approximately 21.2% in fiscal 2000 to approximately 25.4% in fiscal 2001.
The increase was primarily due to the hiring of additional personnel and
increased compensation and benefits for existing personnel to support the
increased level of sales during the first half of fiscal 2001.

Acquisition Expenses. In July 2000, the Company acquired all of the
outstanding stock of Loronix Information Systems, Inc., a company that develops
software-based digital video recording and management systems, and all of the
outstanding stock of Syborg Informationsysteme GmbH, a company that develops
software-based digital voice and Internet recording and workforce management
systems. In August 2000, the Company acquired all of the outstanding stock of
Gaya Software Industries Ltd., a company specializing in software-based
intelligent IP gateways and VoIP technology, and all of the outstanding stock of
Exalink Ltd., a company specializing in protocol gateways and applications
software for the delivery of Internet-based services to all types of wireless
devices. These business combinations were accounted for as pooling of interests.

In connection with the above acquisitions, the Company charged to


21

operations approximately $16.0 million in fiscal 2000 for merger related
charges. Such charges relate to the following:

Asset write-downs and impairments
---------------------------------

In connection with the acquisitions in fiscal 2000, certain assets
became impaired due to the existence of duplicative technology, property and
equipment and inventory of the merged companies. Accordingly, these assets were
written down to their net realizable value at the time of the mergers and a
charge of approximately $7.4 million was charged to operations.

Professional fees and other direct merger expenses
--------------------------------------------------

In connection with the acquisitions in fiscal 2000, the Company
recorded a charge of approximately $8.6 million for professional fees to
lawyers, investment bankers and accountants, as well as other direct merger
costs in connection with the mergers, such as printing costs and filing fees.

Workforce Reduction, Restructuring and Impairment Charges. During
fiscal 2001, the Company took steps to better align its cost structure with the
business environment and to improve the efficiency of its operations. These
steps included a reduction in workforce announced in April 2001 and a
restructuring plan announced in December 2001. In connection with the
implementation of these actions the Company incurred charges of approximately
$63.6 million to cover the costs of severance, elimination of excess facilities
and related leasehold improvements, write-off of certain inventory, property and
equipment and capitalized software and other restructuring related charges, such
as professional fees.

Interest and Other Income (Expense), Net. Interest and other income
(expense), net for fiscal 2001 decreased by approximately $39.1 million compared
to fiscal 2000. The principal reasons for the decrease are increased net
realized losses and write-downs of the Company's investments and decreased
equity in the earnings of affiliates of approximately $22.1 million, increased
interest expense of approximately $0.3 million and a change in foreign currency
gains/losses of approximately $20.1 million. These decreases were partially
offset by increased interest and dividend income of approximately $7.6 million.
The increase in interest and dividend income is primarily a result of the
inclusion of the proceeds for a full year in fiscal 2001 of the Company's $600.0
million 1.5% convertible debentures issued in November and December 2000,
partially offset by the decrease in interest rates during fiscal 2001.

Income Tax Provision. Provision for income taxes decreased from
fiscal 2000 to fiscal 2001 by approximately $14.4 million, or 76%, due primarily
to decreased pre-tax income. The Company's overall effective tax rate increased
from approximately 7.0% during fiscal 2000 to approximately 7.5% in fiscal 2001.
The Company's overall rate of tax is reduced significantly by the tax benefits
associated with qualified activities of certain of its Israeli subsidiaries,
which are entitled to favorable income tax rates under a program of the Israeli
Government for "Approved Enterprise" investments in that country.

Net Income (Loss). Net income decreased by approximately $194.5
million, or 78%, in fiscal 2001 compared to fiscal 2000, while as a percentage
of sales decreased from approximately 20.3% in fiscal 2000 to approximately 4.3%


22

in fiscal 2001. The decrease resulted primarily from the factors described
above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital at January 31, 2003 and 2002 was
approximately $1,766.5 million and $2,030.3 million, respectively. At January
31, 2003 and 2002, the Company had total cash and cash equivalents, bank time
deposits and short-term investments of approximately $1,808.9 million and
$1,892.5 million, respectively.

Operations for fiscal 2002, fiscal 2001 and fiscal 2000, after
adjustment for non-cash items, provided (used) cash of approximately $(35.7)
million, $130.0 million and $309.7 million, respectively. During such years,
other changes in operating assets and liabilities provided (used) cash of
approximately $132.5 million, $12.2 million and $(65.2) million, respectively.
This resulted in net cash provided by operating activities of approximately
$96.8 million, $142.2 million and $244.5 million during fiscal 2002, fiscal 2001
and fiscal 2000, respectively.

Investing activities for fiscal 2002, fiscal 2001 and fiscal 2000
provided (used) cash of approximately $35.9 million, $(122.4) million and
$(207.3) million, respectively. These amounts include (i) net maturities and
sales (purchases) of bank time deposits and investments of approximately $114.5
million, $(44.8) million and $(94.5) million, respectively; (ii) additions to
property and equipment of approximately $(34.1) million, $(54.6) million and
$(97.3) million, respectively; (iii) capitalization of software development
costs of approximately $(13.4) million, $(23.0) million and $(15.5) million,
respectively; and (iv) net assets acquired as a result of acquisitions of
approximately $(31.1) million in fiscal 2002.

Financing activities for fiscal 2002, fiscal 2001 and fiscal 2000
provided (used) cash of approximately $(91.8) million, $67.0 million and $894.1
million, respectively. These amounts include (i) net proceeds from the issuance
of the Company's 1.5% convertible senior debentures due December 2005 (the
"Debentures") in fiscal 2000 of approximately $588.4 million and net repayments
from the repurchase of Debentures in fiscal 2002 of approximately $(169.8)
million; (ii) proceeds from the issuance of common stock in connection with the
exercise of stock options and employee stock purchase plan of approximately
$12.4 million, $28.8 million and $111.4 million, respectively; (iii) net
proceeds from the issuance of common stock of subsidiaries in connection with
public offerings in fiscal 2002 and fiscal 2000 of approximately $68.7 million
and $195.2 million, respectively; and (iv) net proceeds (repayments) of bank
loans and other debt of approximately $(3.1) million, $38.2 million and $(0.9)
million, respectively.

In November and December 2000, the Company issued $600.0 million
aggregate principal amount of the Debentures for net proceeds of approximately
$588.4 million. During fiscal 2002, the Company acquired, in open market
purchases, approximately $209.2 million of face amount of the Debentures for
approximately $169.8 million in cash, resulting in a pre-tax gain of
approximately $39.4 million included in `Interest and other income (expense),
net' in the Consolidated Statements of Operations.

As of January 31, 2003, the Company had outstanding Debentures of
approximately $390.8 million. During March and April 2003, the Company acquired,
in open market purchases, approximately $44.6 million of face amount of the
Debentures for approximately $41.3 million in cash, resulting in a pre-tax gain
of approximately $2.8 million.


23

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

In April and October 2000, Ulticom completed initial and secondary
public offerings of its common stock. Proceeds to Ulticom from the offerings
totaled approximately $195.2 million, net of offering expenses. As of January
31, 2003, the Company's ownership interest in Ulticom was approximately 71.6%.

In May 2002, Verint completed an initial public offering of its
common stock. Proceeds from the offering totaled approximately $65.4 million,
net of offering expenses. As of January 31, 2003, the Company's ownership
interest in Verint was approximately 78.6%.

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

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

The Company has obtained bank guaranties primarily for performance of
certain obligations under contracts with customers. These guaranties, which
aggregated approximately $29.5 million at January 31, 2003, are to be released
by the Company's performance of specified contract milestones, which are
scheduled to be completed primarily during 2003.

In 1997, a subsidiary of CTI and Quantum Industrial Holdings Ltd.
organized two new companies to make investments, including investments in high
technology ventures. Each participant committed a total of $37.5 million to the
capital of the new companies, for use as suitable investment opportunities are
identified. Quantum Industrial Holdings Ltd. is a member of the Quantum Group of
Funds managed by Soros Fund Management LLC and affiliated management companies.
As of January 31, 2003, the Company has invested approximately $25.3 million
related to these ventures. In addition, the Company has committed approximately
$21.6 million to various companies, ventures and funds which may be called at
the option of the investee.

The Company leases office, manufacturing, and warehouse space under
non-cancelable operating leases. As of January 31, 2003, the minimum annual rent
obligations of the Company were approximately $31.6 million, $30.5 million,
$29.3 million, $9.6 million and $29.3 million, respectively, for the twelve
months ended January 31, 2004, 2005, 2006, 2007, and 2008 and thereafter, for a
total obligation of approximately $130.3 million.


24

The ability of CTI's Israeli subsidiaries to pay dividends is
governed by Israeli law, which provides that cash dividends may be paid by an
Israeli corporation only out of retained earnings as determined for statutory
purposes in Israeli currency. In the event of a devaluation of the Israeli
currency against the dollar, the amount in dollars available for payment of cash
dividends out of prior years' earnings will decrease accordingly. Cash dividends
paid by an Israeli corporation to United States residents are subject to
withholding of Israeli income tax at source at a rate of up to 25%, depending on
the particular facilities which have generated the earnings that are the source
of the dividends.

The Company's liquidity and capital resources have not been, and are
not anticipated to be, materially affected by restrictions pertaining to the
ability of its foreign subsidiaries to pay dividends or by withholding taxes
associated with any such dividend payments.

The Company regularly examines opportunities for strategic
acquisitions of other companies or lines of business and anticipates that it may
from time to time issue additional debt and/or equity securities either as
direct consideration for such acquisitions or to raise additional funds to be
used (in whole or in part) in payment for acquired securities or assets. The
issuance of such securities could be expected to have a dilutive impact on the
Company's shareholders, and there can be no assurance as to whether or when any
acquired business would contribute positive operating results commensurate with
the associated investment.

The Company believes that its existing working capital, together with
funds generated from operations, will be sufficient to provide for its planned
operations for the foreseeable future.

CERTAIN TRENDS AND UNCERTAINTIES

The Company derives the majority of its revenue from the
telecommunications industry, which continues to face an unprecedented recession.
This has resulted in a significant reduction of capital expenditures made by
telecommunications service providers ("TSP"). The Company's operating results
and financial condition have been, and will continue to be, adversely affected
by the severe decline in technology purchases and capital expenditures by TSPs
worldwide. Consequently, the Company's operating results have deteriorated
significantly in recent periods and may continue to deteriorate in future
periods if such conditions remain in effect. For these reasons and the risk
factors outlined below, it has been and continues to be very difficult for the
Company to accurately forecast future revenues and operating results.

The Company's business is particularly dependent on the strength of
the telecommunications industry. The telecommunications industry, including the
Company, have been negatively affected by, among other factors, the high costs
and large debt positions incurred by some TSPs to expand capacity and enable the
provision of future services (and the corresponding risks associated with the
development, marketing and adoption of these services as discussed below),
including the cost of acquisitions of licenses to provide broadband services and
reductions in TSPs' actual and projected revenues and deterioration in their
actual and projected operating results. Accordingly, TSPs, including the
Company's customers, have significantly reduced their actual and planned
expenditures to expand or replace equipment and delayed and reduced the
deployment of services. A number of TSPs, including certain customers of the


25

Company, also have indicated the existence of conditions of excess capacity in
certain markets.

In addition, certain TSPs have delayed the planned introduction of
new services, such as broadband mobile telephone services, that would be
supported by certain of the Company's products. Certain of the Company's
customers also have implemented changes in procurement practices and procedures,
including limitations on purchases in anticipation of estimated future capacity
requirements, and in the management and use of their networks, that have reduced
the Company's sales, which also has made it very difficult for the Company to
project future sales. The continuation and/or exacerbation of these negative
trends will have an adverse effect on the Company's future results. In addition
to loss of revenue, weakness in the telecommunications industry has affected and
will continue to affect the Company's business by increasing the risks of credit
or business failures of suppliers, customers or distributors, by customer
requirements for vendor financing and longer payment terms, by delays and
defaults in customer or distributor payments, and by price reductions instituted
by competitors to retain or acquire market share.

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

The Company intends to continue to make significant investments in
its business, and to examine opportunities for growth through acquisitions and
strategic investments. These activities may involve significant expenditures and
obligations that cannot readily be curtailed or reduced if anticipated demand
for the associated products does not materialize or is delayed. The impact of
these decisions on future financial results cannot be predicated with assurance,
and the Company's commitment to growth may increase its vulnerability to
downturns in its markets, technology changes and shifts in competitive
conditions. The Company also may not be able to identify future suitable merger
or acquisition candidates, and even if the Company does identify suitable
candidates, it may not be able to make these transactions on commercially
acceptable terms, or at all. If the Company does make acquisitions, it may not
be able to successfully incorporate the personnel, operations and customers of
these companies into the Company's business. In addition, the Company may fail
to achieve the anticipated synergies from the combined businesses, including
marketing, product integration, distribution, product development and other
synergies. The integration process may further strain the Company's existing
financial and managerial controls and reporting systems and procedures. This may
result in the diversion of management and financial resources from the Company's
core business objectives. In addition, an acquisition or merger may require the
Company to utilize cash reserves, incur debt or issue equity securities, which
may result in a dilution of existing stockholders, and the Company may be
negatively impacted by the assumption of liabilities of the merged or acquired
company. Due to rapidly changing market conditions, the Company may find the
value of its acquired technologies and related intangible assets, such as
goodwill as recorded in the Company's financial statements, to be impaired,
resulting in charges to operations. The Company may also fail to retain the
acquired or merged companies' key employees and customers.

The Company has made, and in the future, may continue to make
strategic investments in other companies. These investments have been made in,


26

and future investments will likely be made in, immature businesses with unproven
track records and technologies. Such investments have a high degree of risk,
with the possibility that the Company may lose the total amount of its
investments. The Company may not be able to identify suitable investment
candidates, and, even if it does, the Company may not be able to make those
investments on acceptable terms, or at all. In addition, even if the Company
makes investments, it may not gain strategic benefits from those investments.

The Company's products involve sophisticated hardware and software
technology that performs critical functions to highly demanding standards. There
can be no assurance that the Company's current or future products will not
develop operational problems, which could have a material adverse effect on the
Company.

The telecommunications industry is subject to rapid technological
change. The introduction of new technologies in the telecommunications market,
including the delay in the adoption of such new technologies, and new
alternatives for the delivery of services are having, and can be expected to
continue to have, a profound effect on competitive conditions in the market and
the success of market participants, including the Company. The Company's
continued success will depend on its ability to correctly anticipate
technological trends in its industries, to react quickly and effectively to such
trends and to enhance its existing products and to introduce new products on a
timely and cost-effective basis. As a result, the life cycle of the Company's
products is difficult to estimate. The Company's new product offerings may not
properly integrate into existing platforms and the failure of new product
offerings to be accepted by the market could have a material adverse effect on
our business, results of operations, and financial condition. In addition,
changing industry and market conditions may dictate strategic decisions to
restructure some business units and discontinue others. Discontinuing a business
unit or product line may result in the Company recording accrued liabilities for
special charges, such as costs associated with a reduction in workforce. These
strategic decisions could result in changes to determinations regarding a
product's useful life and the recoverability of the carrying basis of certain
assets.

The Company relies on a limited number of suppliers and manufacturers
for specific components and may not be able to find alternate manufacturers that
meet its requirements and existing or alternative sources may not be available
on favorable terms and conditions. Thus, if there is a shortage of supply for
these components, the Company may experience an interruption in its product
supply. In addition, loss of third party software licensing could materially and
adversely affect the Company's business, financial condition and results of
operations.

The telecommunications industry continues to undergo significant
change as a result of deregulation and privatization worldwide, reducing
restrictions on competition in the industry. Unforeseen changes in the
regulatory environment also may have an impact on the Company's revenues and/or
costs in any given part of the world. The worldwide ESS system industry is
already highly competitive and the Company expects competition to intensify. The
Company believes that existing competitors will continue to present substantial
competition, and that other companies, many with considerably greater financial,
marketing and sales resources than the Company, may enter the ESS system
markets. Moreover, as the Company enters into new markets as a result of its own
research and development efforts or acquisitions, it is likely to encounter new
competitors.


27

The market for the Company's digital security and surveillance and
enterprise business intelligence products in the past has been affected by
weakness in general economic conditions, delays or reductions in customers'
purchases of capital equipment and uncertainties relating to government
expenditure programs. The Company's business generated from government contracts
may be adversely affected if: (i) the Company's reputation or relationship with
government agencies is impaired, (ii) the Company is suspended or otherwise
prohibited from contracting with a domestic or foreign government or any
significant law enforcement agency, (iii) levels of government expenditures and
authorizations for law enforcement and security related programs decrease,
remain constant or shift to programs in areas where the Company does not provide
products and services, (iv) the Company is prevented from entering into new
government contracts or extending existing government contracts based on
violations or suspected violations of procurement laws or regulations, (v) the
Company is not granted security clearances required to sell products to domestic
or foreign governments or such security clearances are revoked, or (vi) there is
a change in government procurement procedures. Competitive conditions in this
sector also have been affected by the increasing use by certain potential
customers of their own internal development resources rather than outside
vendors to provide certain technical solutions. In addition, a number of
established government contractors, particularly developers and integrators of
technology products, have taken steps to redirect their marketing strategies and
product plans in reaction to cut-backs in their traditional areas of focus,
resulting in an increase in the number of competitors and the range of products
offered in response to particular requests for proposals.

The Company has historically derived a significant portion of its
sales and operating profit from contracts for large system installations with
major customers. The Company continues to emphasize large capacity systems in
its product development and marketing strategies. Contracts for large
installations typically involve a lengthy and complex bidding and selection
process, and the ability of the Company to obtain particular contracts is
inherently difficult to predict. The timing and scope of these opportunities and
the pricing and margins associated with any eventual contract award are
difficult to forecast, and may vary substantially from transaction to
transaction. The Company's future operating results may accordingly exhibit a
higher degree of volatility than the operating results of other companies in its
industries that have adopted different strategies, and also may be more volatile
than the Company has experienced in prior periods. The degree of dependence by
the Company on large system orders, and the investment required to enable the
Company to perform such orders, without assurance of continuing order flow from
the same customers and predictability of gross margins on any future orders,
increase the risk associated with its business. The Company's gross margins also
may be adversely affected by increases in material or labor costs, obsolescence
charges, price competition and changes in channels of distribution or in the mix
of products sold.

Geopolitical, economic and military conditions could directly affect
the Company's operations. The recent outbreak of severe acute respiratory
syndrome ("SARS") has curtailed travel to and from certain countries (primarily
in the Asia-Pacific region). Continued or additional restrictions on travel to
and from these and other regions on account of SARS could have a material
adverse effect on the Company's business, results of operations, and financial
condition. The continued threat of terrorism and heightened security and
military action in response to this threat, or any future acts of terrorism, may
cause disruptions to the Company's business. To the extent that such disruptions
result in delays or cancellations of customer orders, or the manufacture or
shipment of the Company's products, our business, operating results and


28

financial condition could be materially and adversely affected. More recently,
the U.S. military involvement in overseas operations including, for example, the
war with Iraq, could have a material adverse effect on the Company's business,
results of operations, and financial condition.

Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors, and the
continued state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Since October 2000, there has been a
significant increase in violence, primarily in the West Bank and Gaza Strip, and
more recently Israel has experienced terrorist incidents within its borders.
During this period, peace negotiations between Israel and representatives of the
Palestinian Authority have been sporadic and currently are suspended. The
Company could be adversely affected by hostilities involving Israel, the
interruption or curtailment of trade between Israel and its trading partners, or
a significant downturn in the economic or financial condition of Israel. In
addition, the sale of products manufactured in Israel may be adversely affected
in certain countries by restrictive laws, policies or practices directed toward
Israel or companies having operations in Israel. The continuation or
exacerbation of violence in Israel or the outbreak of violent conflicts
involving Israel may impede the Company's ability to sell its products or
otherwise adversely affect the Company. In addition, many of the Company's
Israeli employees in Israel are required to perform annual compulsory military
service in Israel and are subject to being called to active duty at any time
under emergency circumstances. The absence of these employees may have an
adverse effect upon the Company's operations.

The Company's costs of operations have at times been affected by
changes in the cost of its operations in Israel, resulting from changes in the
value of the Israeli shekel relative to the United States dollar, which for
certain periods had a negative impact, and from difficulties in attracting and
retaining qualified scientific, engineering and technical personnel in Israel,
where the availability of such personnel has at times been severely limited.
Changes in these cost factors have from time to time been significant and
difficult to predict, and could in the future have a material adverse effect on
the Company's results of operations.

The Company's historical operating results reflect substantial
benefits received from programs sponsored by the Israeli government for the
support of research and development, as well as tax moratoriums and favorable
tax rates associated with investments in approved projects ("Approved
Enterprises") in Israel. Some of these programs and tax benefits have ceased and
others may not be continued in the future and the availability of such benefits
to the Company may be affected by a number of factors, including budgetary
constraints resulting from adverse economic conditions, government policies and
the Company's ability to satisfy eligibility criteria.

The Israeli government has reduced the benefits available under some
of these programs in recent years, and Israeli government authorities have
indicated that the government may further reduce or eliminate some of these
benefits in the future. The Company has regularly participated in a conditional
grant program administered by the Office of the Chief Scientist of the Ministry
of Industry and Trade of the State of Israel ("OCS") under which it has received
significant benefits through reimbursement of up to 50% of qualified research
and development expenditures. Verint currently pays royalties, of between 3% and
5% (or 6% under certain circumstances) of associated product revenues (including
service and other related revenues) to the Government of Israel for repayment of


29

benefits received under this program. Such royalty payments by Verint are
currently required to be made until the government has been reimbursed the
amounts received by the Company plus, for amounts received under projects
approved by the OCS after January 1, 1999, interest on such amount at a rate
equal to the 12-month LIBOR rate in effect on January 1 of the year in which
approval is obtained. During fiscal 2001, Comverse entered into an arrangement
with the OCS whereby Comverse agreed to pay a lump sum royalty amount for all
past amounts received from the OCS. In addition, Comverse began to receive lower
amounts from the OCS than it had historically received, but will not have to pay
royalty amounts on such grants. The amount of reimbursement received by the
Company under this program has been reduced significantly, and the Company does
not expect to receive significant reimbursement under this program in the
future. In addition, permission from the Government of Israel is required for
the Company to manufacture outside of Israel products resulting from research
and development activities funded under these programs, or to transfer outside
of Israel related technology rights. In order to obtain such permission, the
Company may be required to increase the royalties to the applicable funding
agencies and/or repay certain amounts received as reimbursement of research and
development costs. The continued reduction in the benefits received by the
Company under the program, or the termination of its eligibility to receive
these benefits at all in the future, could adversely affect the Company's
operating results.

The Company's overall effective tax rate benefits from the tax
moratorium provided by the Government of Israel for Approved Enterprises
undertaken in that country. The Company's effective tax rate may increase in the
future due to, among other factors, the increased proportion of its taxable
income associated with activities in higher tax jurisdictions, and by the
relative ages of the Company's eligible investments in Israel. The tax
moratorium on income from the Company's Approved Enterprise investments made
prior to 1997 is four years, whereas subsequent Approved Enterprise projects are
eligible for a moratorium of only two years. Reduced tax rates apply in each
case for certain periods thereafter. To be eligible for these tax benefits, the
Company must continue to meet conditions, including making specified investments
in fixed assets and financing a percentage of investments with share capital. If
the Company fails to meet such conditions in the future, the tax benefits would
be canceled and the Company could be required to refund the tax benefits already
received. Israeli authorities have indicated that additional limitations on the
tax benefits associated with Approved Enterprise projects may be imposed for
certain categories of taxpayers, which would include the Company. If further
changes in the law or government policies regarding those programs were to
result in their termination or adverse modification, or if the Company were to
become unable to participate in, or take advantage of, those programs, the cost
of the Company's operations in Israel would increase and there could be a
material adverse effect on the Company's results of operations and financial
condition.

The Company's success is dependent on recruiting and retaining key
management and highly skilled technical, managerial, sales, and marketing
personnel. The market for highly skilled personnel remains very competitive
despite the current economic conditions. The Company's ability to attract and
retain employees also may be affected by recent cost control actions, including
reductions in the Company's workforce and the associated reorganization of
operations.

The occurrence or perception of security breaches within the Company
could harm the Company's business, financial condition and operating results.


30

While the Company implements sophisticated security measures, third parties may
attempt to breach the Company's security through computer viruses, electronic
break-ins and other disruptions. If successful, confidential information,
including passwords, financial information, or other personal information may be
improperly obtained and the Company may be subject to lawsuits and other
liability. Even if the Company is not held liable, a security breach could harm
the Company's reputation, and even the perception of security risks, whether or
not valid, could inhibit market acceptance of the Company's products.

The Company currently derives a significant portion of its total
sales from customers outside of the United States. International transactions
involve particular risks, including political decisions affecting tariffs and
trade conditions, rapid and unforeseen changes in economic conditions in
individual countries, turbulence in foreign currency and credit markets, and
increased costs resulting from lack of proximity to the customer. The Company is
required to obtain export licenses and other authorizations from applicable
governmental authorities for certain countries within which it conducts
business. The failure to receive any required license or authorization would
hinder the Company's ability to sell its products and could adversely affect the
Company's business, results of operations and financial condition. In addition,
legal uncertainties regarding liability, compliance with local laws and
regulations, labor laws, employee benefits, currency restrictions, difficulty in
accounts receivable collection, longer collection periods and other requirements
may have a negative impact on the Company's operating results.

Volatility in international currency exchange rates may have a
significant impact on the Company's operating results. The Company has, and
anticipates that it will continue to receive, contracts denominated in foreign
currencies, particularly the euro. As a result of the unpredictable timing of
purchase orders and payments under such contracts and other factors, it is often
not practicable for the Company to effectively hedge the risk of significant
changes in currency rates during the contract period. The Company may experience
risk associated with the failure to hedge the exchange rate risks associated
with contracts denominated in foreign currencies and its operating results have
been negatively impacted for certain periods and recently have been positively
impacted and may continue to be affected to a material extent by the impact of
currency fluctuations. Operating results may also be affected by the cost of
such hedging activities that the Company does undertake.

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

If others claim that the Company's products infringe their
intellectual property rights, the Company may be forced to seek expensive
licenses, reengineer its products, engage in expensive and time-consuming


31

litigation or stop marketing its products. The Company attempts to avoid
infringing known proprietary rights of third parties in its product development
efforts. The Company does not regularly conduct comprehensive patent searches to
determine whether the technology used in its products infringes patents held by
third parties, however. There are many issued patents as well as patent
applications in the fields in which the Company is engaged. Because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which relate to the Company's software
and products. If the Company were to discover that its products violated or
potentially violated third-party proprietary rights, it might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can the
Company be certain that any licenses would be available on commercially
reasonable terms.

Substantial litigation regarding intellectual property rights exists
in technology related industries, and the Company expects that its products may
be increasingly subject to third-party infringement claims as the number of
competitors in its industry segments grows and the functionality of software
products in different industry segments overlaps. In addition, the Company has
agreed to indemnify certain customers in certain situations should it be
determined that its products infringe on the proprietary rights of third
parties. Any third-party infringement claims could be time consuming to defend,
result in costly litigation, divert management's attention and resources, cause
product and service delays or require the Company to enter into royalty or
licensing agreements. Any royalty or licensing arrangements, if required, may
not be available on terms acceptable to the Company, if at all. A successful
claim of infringement against the Company and its failure or inability to
license the infringed or similar technology could have a material adverse effect
on its business, financial condition and results of operations.

The Company holds a large proportion of its net assets in cash
equivalents and short-term investments, including a variety of public and
private debt and equity instruments, and has made significant venture capital
investments, both directly and through private investment funds. Such
investments subject the Company to the risks inherent in the capital markets
generally, and to the performance of other businesses over which it has no
direct control. Given the relatively high proportion of the Company's liquid
assets relative to its overall size, the results of its operations are
materially affected by the results of the Company's capital management and
investment activities and the risks associated with those activities. Declines
in the public equity markets have caused, and may be expected to continue to
cause, the Company to experience realized and unrealized investment losses. In
addition, reduction in prevailing interest rates due to economic conditions or
government policies has had and may continue to have an adverse impact on the
Company's results of operations.

The severe decline in the public trading prices of equity securities,
particularly in the technology and telecommunications sectors, and corresponding
decline in values of privately-held companies and venture capital funds in which
the Company has invested, have, and may continue to have, an adverse impact on
the Company's financial results. The Company has in the past benefited from the
long-term rise in the public trading price of its shares in various ways,
including its ability to use equity incentive arrangements as a means of
attracting and retaining the highly qualified employees necessary for the growth
of its business and its ability to raise capital on relatively attractive
conditions. The decline in the price of the Company's shares, and the overall
decline in equity prices generally, and in the shares of technology companies in
particular, can be expected to make it more difficult for the Company to


32

significantly rely on equity incentive arrangements as a means to recruit and
retain talented employees.

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

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill
and some intangible assets are no longer amortized, but rather are reviewed for
impairment on a periodic basis. The provisions of this Statement were required
to be applied starting with fiscal years beginning after December 15, 2001, at
the beginning of the Company's fiscal year, to all goodwill and other intangible
assets in its financial statements at that date. Impairment losses for goodwill
and certain intangible assets arising due to the initial application of this
Statement were to be reported as resulting from a change in accounting
principle. Goodwill and intangible assets acquired after June 30, 2001 were
subject immediately to the provisions of this Statement. The adoption of SFAS
No. 142 did not have a material effect on the Company's consolidated financial
statements.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. SFAS No. 143 applies to legal
obligations associated with the retirement of a tangible long-lived asset that
result from the acquisition, construction, development and/or normal operation
of a long-lived asset. This Statement is effective for fiscal years beginning
after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS
No. 143 is not expected to have a material effect on the Company's consolidated
financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and certain
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 is effective for financial statements issued for fiscal years beginning


33

after December 15, 2001 and interim periods within those fiscal years; however,
early adoption is encouraged. The adoption of SFAS No. 144 did not have a
material effect on the Company's consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, which required all gains and
losses from the extinguishment of debt to be classified as an extraordinary
item. SFAS No. 145 recognizes that the use of debt extinguishment has become
part of the risk management strategy of many companies and therefore may be
considered as part of a company's operating activities. The rescission of SFAS
No. 4 is effective for fiscal years beginning after May 15, 2002 with earlier
application encouraged. The Company adopted SFAS No. 145 in the quarter ended
July 31, 2002. Accordingly, as the Company intends to periodically extinguish
its debt as part of its risk management strategy, the gain of approximately
$39.4 million on the extinguishment of debt relating to the Company's 1.5%
convertible debentures was recorded through continuing operations in the
Consolidated Statements of Operations for the year ended January 31, 2003. In
addition, SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers", and amends SFAS No. 13, "Accounting for Leases", to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The statement is generally effective for
transactions occurring after May 15, 2002 with earlier application encouraged
for these items.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." This statement addresses the recognition, measurement and
reporting of costs that are associated with exit and disposal activities. This
statement includes the restructuring activities that are currently accounted for
pursuant to the guidance set forth in Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)," costs related to terminating a contract that is not a capital
lease and one-time benefit arrangements received by employees who are
involuntarily terminated - nullifying the guidance under EITF Issue No. 94-3.
Under SFAS No. 146 the cost associated with an exit or disposal activity is
recognized in the periods in which it is incurred rather than at the date the
company committed to the exit plan. This statement is effective for exit or
disposal activities initiated after December 31, 2002 with earlier application
encouraged. The adoption of SFAS No. 146 did not have a material effect on the
Company's consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and does not permit the use of the original SFAS No. 123
prospective method of transition in fiscal years beginning after December 15,
2003. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results, regardless of whether,
when, or how an entity adopts the preferable, fair value based method of
accounting. SFAS No. 148 improves the prominence and clarity of the pro forma


34

disclosures required by SFAS No. 123 by prescribing a specific tabular format
and by requiring disclosure in the "Summary of Significant Accounting Policies"
or its equivalent and improves the timeliness of those disclosures by requiring
their inclusion in financial reports for interim periods. The disclosure
requirements of SFAS No. 148 are effective for financial statements for fiscal
years ending after and for interim periods beginning after December 15, 2002.
The adoption of SFAS No. 148 is not expected to have a material effect on the
Company's consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34" ("FIN
45"). FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for
Contingencies", relating to a guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees. Specifically, FIN 45 requires a
guarantor to recognize a liability for the non-contingent component of certain
guarantees, representing the obligation to stand ready to perform in the event
that specified triggering events or conditions occur. The provisions for initial
recognition and measurement are effective on a prospective basis for guarantees
that are issued or modified after December 31, 2002, irrespective of a
guarantor's fiscal year-end. However, the disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 is not expected to have a material
effect on the Company's consolidated financial statements.

FORWARD-LOOKING STATEMENTS

From time to time, the Company makes forward-looking statements.
Forward-looking statements include financial projections, statements of plans
and objectives for future operations, statements of future economic performance,
and statements of assumptions relating thereto.

The Company may include forward-looking statements in its periodic
reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K,
in its annual report to shareholders, in its proxy statements, in its press
releases, in other written materials, and in statements made by employees to
analysts, investors, representatives of the media, and others.

By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors,
including without limitation those discussed under "Certain Trends and
Uncertainties" and elsewhere in this report. Investors and others should
carefully consider these and other uncertainties and events, whether or not the
statements are described as forward-looking.

Forward-looking statements made by the Company are intended to apply
only at the time they are made, unless explicitly stated to the contrary.
Moreover, whether or not stated in connection with a forward-looking statement,
the Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were in any particular instance to update or correct a
forward-looking statement, investors and others should not conclude that the
Company will make additional updates or corrections thereafter.


35

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

The Company may, from time to time, use foreign currency exchange
contracts and other derivative instruments to reduce its exposure to the risk
that the eventual net cash inflows and outflows resulting from the sale of its
products in foreign currency will be adversely affected by changes in exchange
rates. In most instances, the Company elects not to hedge these transactions. As
of January 31, 2003, the Company had no outstanding foreign currency exchange
contracts.

Various financial instruments held by the Company are sensitive to
changes in interest rates. Interest rate changes would result in gains or losses
in the market value of the Company's investments in debt securities due to
differences between the market interest rates and rates at the date of purchase
of these financial instruments. Neither a 100 basis point increase nor decrease
from current interest rates would have a material effect on the Company's
financial position, results of operations or cash flows.

Equity investments held by the Company are subject to equity price
risks. Neither a 10% increase nor decrease in equity prices would have a
material effect on the Company's financial position, results of operations or
cash flows.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

See Part IV, Item 15.


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

Not applicable.



36

PART III

The information required by Part III Items 10-13 are omitted pursuant to
instruction G(3).


ITEM 14. CONTROLS AND PROCEDURES.

(a) The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management, including the
principal executive officer and the principal financial officer, recognizes that
any set of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives.

Within the 90 day period prior to the date of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on such evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective.

(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.



37

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.


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


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

Index to Consolidated Financial Statements F-1

Independent Auditors' Report F-2

Consolidated Balance Sheets as of
January 31, 2002 and 2003 F-3

Consolidated Statements of Operations
for the Years Ended
January 31, 2001, 2002 and 2003 F-4

Consolidated Statements of Stockholders' Equity
for the Years Ended
January 31, 2001, 2002 and 2003 F-5

Consolidated Statements of Cash Flows
for the Years Ended
January 31, 2001, 2002 and 2003 F-6

Notes to Consolidated Financial Statements F-7

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

None

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

The Index of Exhibits commences on the
following page. Exhibits numbered 10.1
through 10.3 and 10.5 through 10.10
comprise material compensatory plans
and arrangements of the registrant.


(b) Reports on Form 8-K

During the fourth quarter of 2002, the Company filed one report
on Form 8-K:


38

Report on Form 8-K dated December 13, 2002.

Item 9. Regulation FD Disclosure:

Certifications of the Principal
Executive Officer and the Principal
Financial Officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.

EXHIBITS
NO. DESCRIPTION
- --- -----------

3 Articles of Incorporation and By-Laws:

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

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

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

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

3.5* Certificate of Amendment of Certificate of Incorporation
dated September 19, 2000.

3.6** By-Laws, as amended.

4 Instruments defining the rights of security holders including indentures:

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

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

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

10 Material contracts:

10.1* Form of Stock Option Agreement pertaining to shares of


39

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

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

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

10.4** Form of Indemnity Agreement between Comverse Technology,
Inc. and its Officers and Directors.

10.5* 1997 Employee Stock Purchase Plan, as amended.
(Incorporated by reference to the Definitive Proxy
Materials for the Registrant's Annual Meeting of
Stockholders held June 15, 2001.)

10.6* 2002 Employee Stock Purchase Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Stockholder held December
3, 2002.)

10.7* 1997 Stock Incentive Compensation Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Stockholders held January
13, 1998.)

10.8* 1999 Stock Incentive Compensation Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Stockholders held October
8, 1999.)

10.9* 2000 Stock Incentive Compensation Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Stockholders held
September 15, 2000.)

10.10* 2001 Stock Incentive Compensation Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Stockholders held June
15, 2001.)

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

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

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

10.14* Third Amendment to Lease dated as of June 7, 1996
between Boston Technology, Inc. and WBAM Limited


40

Partnership. (Incorporated by reference to the Annual
Report of Boston Technology, Inc. on Form 10-K under the
Securities Exchange Act of 1934 for the year ended
January 31, 1997.)

10.15** Fourth Amendment to Lease dated as of December 21, 1998
between Wakefield 100 LLC and Comverse Technology, Inc.

10.16** Fifth Amendment to Lease dated as of September 5, 2002
between SC Wakefield 200, Inc. and Comverse Technology,
Inc.




21.1** Subsidiaries of Registrant.

23.1** Consent of Deloitte & Touche LLP.

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

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

* Incorporated by reference.

** Filed herewith.




41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

COMVERSE TECHNOLOGY, INC.
(Registrant)


April 28, 2003 By: /s/ Kobi Alexander
----------------------------------------
Kobi Alexander, Chief Executive Officer


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

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

/s/ Kobi Alexander April 28, 2003
- ----------------------------------------------------
Kobi Alexander,
Chairman of the Board and
Chief Executive Officer; Director

/s/ David Kreinberg April 28, 2003
- ----------------------------------------------------
David Kreinberg,
Executive Vice President and
Chief Financial Officer

/s/ Itsik Danziger April 28, 2003
- ----------------------------------------------------
Itsik Danziger, Director

/s/ John H. Friedman April 28, 2003
- ----------------------------------------------------
John H. Friedman, Director

/s/ Francis E. Girard April 28, 2003
- ----------------------------------------------------
Francis E. Girard, Director

/s/ Ron Hiram April 28, 2003
- ----------------------------------------------------
Ron Hiram, Director

/s/ Sam Oolie April 28, 2003
- ----------------------------------------------------
Sam Oolie, Director

/s/ William F. Sorin April 28, 2003
- ----------------------------------------------------
William F. Sorin, Director



42

CERTIFICATIONS


I, Kobi Alexander, Chairman of the Board of Directors and Chief Executive
Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Comverse Technology,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: April 28, 2003 /s / Kobi Alexander
------------------------------------------------
Name: Kobi Alexander
Title: Chairman of the Board of Directors and
Chief Executive Officer


43

I, David Kreinberg, the Executive Vice President and Chief Financial Officer of
Comverse Technology, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Comverse Technology,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: April 28, 2003 /s/ David Kreinberg
--------------------------------------
Name: David Kreinberg
Title: Executive Vice President and
Chief Financial Officer




44

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


PAGE

Independent Auditors' Report F-2

Consolidated Balance Sheets as of January 31, 2002 and 2003 F-3

Consolidated Statements of Operations for the
Years Ended January 31, 2001, 2002 and 2003 F-4

Consolidated Statements of Stockholders' Equity for the
Years Ended January 31, 2001, 2002 and 2003 F-5

Consolidated Statements of Cash Flows for the
Years Ended January 31, 2001, 2002 and 2003 F-6

Notes to Consolidated Financial Statements F-7





F-1

INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying consolidated balance sheets of Comverse
Technology, Inc. and subsidiaries (the "Company") as of January 31, 2002 and
2003, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended January
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Comverse Technology, Inc. and
subsidiaries as of January 31, 2002 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2003, in conformity with accounting principles generally accepted in
the United States of America.


/s/ Deloitte & Touche LLP

New York, New York
March 11, 2003 (April 22, 2003 as to Note 24)




F-2



COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2002 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------------------------------------------

ASSETS 2002 2003
- ------ ---- ----

CURRENT ASSETS:

Cash and cash equivalents $ 1,361,862 $ 1,402,783
Bank time deposits 21,431 20,000
Short-term investments 509,191 386,089
Accounts receivable, net 371,928 212,953
Inventories 56,024 40,015
Prepaid expenses and other current assets 76,667 65,018
----------- -----------
TOTAL CURRENT ASSETS 2,397,103 2,126,858
PROPERTY AND EQUIPMENT, net 181,761 146,380
OTHER ASSETS 125,299 130,421
----------- -----------
TOTAL ASSETS $ 2,704,163 $ 2,403,659
=========== ===========

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

LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2003
- ------------------------------------ ---- ----

CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 322,402 $ 260,810
Bank loans 4,696 46,041
Advance payments from customers 39,576 53,496
Other current liabilities 179 4
----------- -----------
TOTAL CURRENT LIABILITIES 366,853 360,351
CONVERTIBLE DEBENTURES 600,000 390,838
LIABILITY FOR SEVERANCE PAY 9,772 9,778
OTHER LIABILITIES 49,827 9,452
----------- -----------
TOTAL LIABILITIES 1,026,452 770,419
----------- -----------

MINORITY INTEREST 61,303 83,548
----------- -----------

COMMITMENTS AND CONTINGENCIES (Note 21)

STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value - authorized, 2,500,000
shares; issued, none
Common stock, $0.10 par value -
authorized, 600,000,000 shares;
issued and outstanding, 186,248,350 and 187,754,407 shares 18,625 18,775
Additional paid-in capital 1,018,232 1,078,720
Retained earnings 574,763 445,285
Accumulated other comprehensive income 4,788 6,912
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,616,408 1,549,692
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,704,163 $ 2,403,659
=========== ===========



See notes to consolidated financial statements.


F-3



COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------------

JANUARY 31, JANUARY 31, JANUARY 31,
2001 2002 2003
---- ---- ----

Sales $ 1,225,058 $ 1,270,218 $ 735,889
Cost of sales 482,658 525,480 338,121
-------------- --------------- --------------
Gross margin 742,400 744,738 397,768

Operating expenses:
Research and development, net 232,198 293,296 232,593
Selling, general and administrative 259,607 323,036 281,202
Acquisition expenses 15,971 - -
Workforce reduction, restructuring
and impairment charges - 63,562 66,714
-------------- ------------- --------------

Income (loss) from operations 234,624 64,844 (182,741)

Interest and other income (expense), net 33,339 (5,789) 56,557
-------------- ------------- --------------

Income (loss) before income tax provision 267,963 59,055 (126,184)
Income tax provision 18,827 4,436 3,294
-------------- ------------- --------------

Net income (loss) $ 249,136 $ 54,619 $ (129,478)
============== ============= ==============

Earnings (loss) per share:
Basic $ 1.54 $ 0.30 $ (0.69)
============== ============= ==============
Diluted $ 1.39 $ 0.29 $ (0.69)
============== ============= ==============





See notes to consolidated financial statements.


F-4



COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------------

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

BALANCE, FEBRUARY 1, 2000 155,776,298 $15,577 $424,075 $282,764 $3,118 $(695) $724,839

Comprehensive income:
Net income 249,136
Unrealized gain on available-for-sale
securities 4,408
Translation adjustment 312
Total comprehensive income 253,856
Change in year-end of pooled company (705) (705)
Common stock issued for acquisitions 5,746,220 575 10,498 11,073
Retained earnings of acquired companies (11,051) (11,051)
Common stock issued for employee
stock purchase plan 131,452 13 9,842 9,855
Exercise of stock options 6,989,653 699 100,840 101,539
Issuance of subsidiary shares 145,958 145,958
Tax benefit of dispositions of stock options 801 801
- ----------------------------------------------------------------------------------------------------------------------------------

BALANCE, JANUARY 31, 2001 168,643,623 16,864 692,014 520,144 7,526 (383) 1,236,165

Comprehensive income:
Net income 54,619
Unrealized loss on available-for-sale
securities (3,227)
Translation adjustment 872
Total comprehensive income 52,264
Warrant exercises 1,792,932 179 (179) -
Common stock issued for employee
stock purchase plan 394,866 39 12,401 12,440
Exercise of stock options 1,463,467 148 16,196 16,344
Conversion of debentures 13,953,462 1,395 294,801 296,196
Tax benefit of dispositions of stock options 2,999 2,999
- ----------------------------------------------------------------------------------------------------------------------------------

BALANCE, JANUARY 31, 2002 186,248,350 18,625 1,018,232 574,763 4,299 489 1,616,408

Comprehensive loss:
Net loss (129,478)
Unrealized gain on available-for-sale
securities 827
Translation adjustment 1,297
Total comprehensive loss (127,354)
Common stock issued for employee
stock purchase plan 975,396 97 8,097 8,194
Exercise of stock options 530,661 53 4,121 4,174
Issuance of subsidiary shares 47,996 47,996
Tax benefit of dispositions of stock options 274 274
- ----------------------------------------------------------------------------------------------------------------------------------

BALANCE, JANUARY 31, 2003 187,754,407 $18,775 $1,078,720 $445,285 $5,126 $1,786 $1,549,692
=========== ======= ========== ======== ====== ====== ==========


See notes to consolidated financial statements.


F-5



COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------
JANUARY 31, JANUARY 31, JANUARY 31,
2001 2002 2003
---- ---- ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 249,136 $ 54,619 $ (129,478)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 53,196 63,824 67,355
Operating asset write-downs and impairments 7,399 11,530 26,445
Changes in assets and liabilities:
Accounts receivable (92,039) (12,611) 161,737
Inventories (16,915) 55,775 13,446
Prepaid expenses and other current assets (22,464) (2,172) 19,728
Accounts payable and accrued expenses 52,165 33,481 (74,856)
Advance payments from customers 26,325 (82,599) 13,822
Liability for severance pay 1,729 1,848 (426)
Other (14,041) 18,490 (927)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 244,491 142,185 96,846
------------- ------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and sales (purchases) of bank time deposits
and investments, net (94,452) (44,762) 114,471
Purchase of property and equipment (97,337) (54,634) (34,092)
Capitalization of software development costs (15,489) (23,027) (13,391)
Net assets acquired - - (31,130)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (207,278) (122,423) 35,858
------------- ------------- -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from issuance (repurchase) of debentures 588,429 - (169,788)
Proceeds from issuance of common stock in connection
with exercise of stock options and
employee stock purchase plan 111,394 28,784 12,368
Net proceeds from issuance of common stock of subsidiaries 195,231 - 68,695
Net proceeds (repayments) of bank loans and other debt (943) 38,211 (3,058)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 894,111 66,995 (91,783)
------------- ------------- -------------

NET INCREASE IN CASH AND CASH EQUIVALENTS 931,324 86,757 40,921
CASH ACQUIRED IN POOLING OF INTERESTS TRANSACTIONS 1,246 - -
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 342,535 1,275,105 1,361,862
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,275,105 $ 1,361,862 $ 1,402,783
============= ============= =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 14,665 $ 16,240 $ 10,458
============= ============= =============
Cash paid during the year for income taxes $ 4,393 $ 8,379 $ 11,682
============= ============= =============



See notes to consolidated financial statements.


F-6

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
- --------------------------------------------------------------------------------

1. ORGANIZATION AND BUSINESS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
expose the Company to concentration of credit risk, consist primarily
of cash investments and accounts receivable. The Company places its
cash investments with high-credit quality financial institutions and
currently invests primarily in money market funds placed with major
banks and financial institutions, bank time deposits, corporate
commercial paper, corporate and municipal short-term notes, corporate
medium-term notes, mortgage and asset backed securities, U.S.
government and U.S. government corporation and agency obligations,
mutual funds investing in the like and common and preferred stock.
Accounts receivable are generally diversified due to the number of
commercial and government entities comprising the Company's customer
base and their dispersion across many geographical regions. As of
January 31, 2002 and 2003, the Company's allowance for doubtful
accounts was approximately $41,955,000 and $56,759,000, respectively.
The Company believes no significant concentration of credit risk exists
with respect to these cash investments and accounts receivable.

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

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


F-7

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

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

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

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

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

SOFTWARE DEVELOPMENT COSTS - Software development costs are capitalized
upon the establishment of technological feasibility and are amortized
over the estimated useful life of the software, which to date has been
four years or less. Amortization begins in the period in which the
related product is available for general release to customers.
Amortization expense amounted to approximately $7,203,000, $9,129,000
and $12,594,000 for the years ended January 31, 2001, 2002 and 2003,
respectively.

FUNCTIONAL CURRENCY AND FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES -
The United States dollar (the "dollar") is the functional currency of
the major portion of the Company's foreign operations. Most of the
Company's sales, and materials purchased for manufacturing, are
denominated in or linked to the dollar. Certain operating costs,
principally salaries, of foreign operations are denominated in local
currencies. In those instances where a foreign subsidiary has a
functional currency other than the dollar, the Company records any
necessary foreign currency translation adjustment, reflected in
stockholders' equity, at the end of each reporting period. As of
January 31, 2002 and 2003, the Company had no outstanding foreign
exchange contracts.

GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill represents the excess
of the purchase price over the fair value of net assets acquired. Other
intangible assets include identifiable acquired software and
technology, trade name and non-compete agreements. In accordance with
the provisions of


F-8

Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", goodwill and certain intangible assets
are no longer amortized, but rather are reviewed for impairment on at
least an annual basis. Other intangible assets with finite lives are
amortized using the straight-line method over their estimated useful
lives, not exceeding six years.

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

LONG-LIVED ASSETS - The Company reviews for the impairment of
long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An
impairment loss would be recognized when estimated future undiscounted
cash flows expected to result from the use of the asset and proceeds
from its eventual disposition are less than its carrying amount.
Impairment is measured at fair value. In connection with its
restructuring plan, during the years ended January 31, 2002 and 2003,
the Company identified certain impairment losses that are included in
`Workforce reduction, restructuring and impairment charges' in the
Consolidated Statements of Operations. Refer to Note 9 for details.

OTHER LIABILITIES - In January 2002, a majority-owned subsidiary of
CTI, Verint Systems Inc. ("Verint") took a bank loan in the amount of
$42,000,000. This loan, which matures in February 2003, bears interest
at LIBOR plus 0.55%. The loan is guaranteed by CTI. Refer to Note 24,
"Subsequent Events."

STOCK-BASED COMPENSATION - At January 31, 2003, the Company had in
place the Comverse Stock Option Plans, as fully described in Note 14.
The Company accounts for its option plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, no stock-based employee compensation cost
is reflected in net income for any periods, as all options granted
under the plan had an exercise price at least equal to the market value
of the underlying common stock on the date of grant.

The Company estimated the fair value of employee stock options
utilizing the Black-Scholes option valuation model, using the
assumptions as described in Note 14, as required under accounting
principles generally accepted in the United States of America. The
Black-Scholes model was developed for use in estimating the fair value
of traded options and does not consider the non-traded nature of
employee stock options, vesting and trading restrictions, lack of
transferability or the ability of employees to forfeit the options
prior to expiry. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of the Company's employee stock options.

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



F-9



YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----

Net income (loss), as reported $ 249,136 $ 54,619 $ (129,478)

Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects (87,112) (181,837) (149,782)
--------- ---------- ----------

Pro forma net income (loss) $ 162,024 $ (127,218) $ (279,260)

Earnings (loss) per share:

Basic - as reported $ 1.54 $ 0.30 $ (0.69)
Basic - pro forma $ 1.00 $ (0.71) $ (1.49)

Diluted - as reported $ 1.39 $ 0.29 $ (0.69)
Diluted - pro forma $ 0.93 $ (0.71) $ (1.49)



PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.

RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform to the manner of presentation in the current year.


3. RESEARCH AND DEVELOPMENT

A significant portion of the Company's research and development
operations are located in Israel where the Company derives benefits
from participation in programs sponsored by the Government of Israel
for the support of research and development activities conducted in
that country. Certain of the Company's research and development
activities include projects partially funded by the Office of the Chief
Scientist of the Ministry of Industry and Trade of the State of Israel
(the "OCS") under which the funding organization reimburses a portion
of the Company's research and development expenditures under approved
project budgets. One of the Company's subsidiaries accrues royalties to
the OCS for the sale of products incorporating technology developed in
these projects. During the year ended January 31, 2002, another of the
Company's subsidiaries entered into an agreement with the OCS whereby
the subsidiary agreed to pay a lump sum royalty amount for all past
amounts received from the OCS. In addition, the subsidiary began to
receive lower amounts from the OCS than it had historically received,
but is not required to pay royalties on such future grants. Under the
terms of the applicable funding agreements, products resulting from
projects funded by the OCS may not be manufactured outside of Israel
without government approval. The amounts reimbursed by the OCS for the
years ended January 31, 2001, 2002 and 2003 were $21,508,000,
$9,980,000 and $10,540,000, respectively.


F-10

4. SHORT-TERM INVESTMENTS

The Company classifies all of its short-term investments as
available-for-sale securities. The following is a summary of
available-for-sale securities as of January 31, 2003:




GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------
(IN THOUSANDS)

Corporate debt securities $ 35,508 $ 1,942 $ - $ 37,450
Mortgage and asset-backed
securities 12,797 - 315 12,482
U.S. Government corporation
and agency bonds 210,308 155 - 210,463
----------- --------- --------- ----------
Total debt securities 258,613 2,097 315 260,395
----------- --------- --------- ----------

Common stock 14,032 3,925 - 17,957
Mutual funds (1) 104,751 173 883 104,041
Preferred stock 3,567 191 62 3,696
----------- --------- --------- ----------
Total equity securities 122,350 4,289 945 125,694
----------- --------- --------- ----------

$ 380,963 $ 6,386 $ 1,260 $ 386,089
=========== ========= ========= ==========



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

The following is a summary of available-for-sale securities as of
January 31, 2002:



GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------
(IN THOUSANDS)

Corporate debt securities $ 120,492 $ 1,481 $ 208 $ 121,765
U.S. Government bonds 86,128 346 - 86,474
U.S. Government corporation
and agency bonds 270,520 1,147 - 271,667
----------- --------- --------- ----------
Total debt securities 477,140 2,974 208 479,906
----------- --------- --------- ----------

Common stock 20,466 3,037 2,180 21,323
Mutual funds (1) 5,763 97 - 5,860
Preferred stock 1,523 579 - 2,102
----------- --------- --------- ----------
Total equity securities 27,752 3,713 2,180 29,285
----------- --------- --------- ----------

$ 504,892 $ 6,687 $ 2,388 $ 509,191
=========== ========= ========= ==========



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

During the year ended January 31, 2003, the gross realized gains on
sales of securities totaled approximately $3,588,000, and the gross
realized losses totaled approximately $13,644,000.


F-11

During the year ended January 31, 2002, the gross realized gains on
sales of securities totaled approximately $25,252,000, and the gross
realized losses totaled approximately $18,855,000. During the year
ended January 31, 2001, the gross realized gains on sales of securities
totaled approximately $9,905,000, and the gross realized losses totaled
approximately $8,394,000. The basis on which cost was determined in
computing realized gain or loss is by the first-in, first-out method.

The amortized cost and estimated fair value of debt securities at
January 31, 2003, by contractual maturity, are as follows:



ESTIMATED
COST FAIR VALUE
---- ----------
(IN THOUSANDS)


Due in one year or less $ 81,095 $ 81,832
Due after one year through three years 161,087 161,950
Due after three years 16,431 16,613
------------ ------------

$ 258,613 $ 260,395
============= =============



5. INVENTORIES

Inventories consist of:



JANUARY 31,
-----------
2002 2003
---- ----
(IN THOUSANDS)

Raw materials $ 30,989 $ 17,111
Work in process 12,049 12,430
Finished goods 12,986 10,474
------------- -------------

$ 56,024 $ 40,015
============= =============


6. PROPERTY AND EQUIPMENT

Property and equipment consist of:



JANUARY 31,
-----------
2002 2003
---- ----
(IN THOUSANDS)

Fixtures and equipment $ 271,935 $ 289,140
Land and buildings 32,952 22,105
Software 30,201 32,042
Transportation vehicles 1,387 1,300
Leasehold improvements 11,817 13,313
------------- -------------
348,292 357,900
Less accumulated depreciation
and amortization (166,531) (211,520)
------------- -------------

$ 181,761 $ 146,380
============= =============



F-12

7. OTHER ASSETS

Other assets consist of:



JANUARY 31,
-----------
2002 2003
---- ----
(IN THOUSANDS)

Software development costs, net of
accumulated amortization
of $28,338 and $37,843 $ 39,313 $ 40,110

Investments 68,518 34,741

Other assets 17,468 55,570
------------- -------------

$ 125,299 $ 130,421
============= =============



8. BUSINESS COMBINATIONS

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

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

These acquisitions were accounted for under the purchase method and,
accordingly, the Consolidated Statements of Operations include the
results of operations from the date of acquisition. Assets acquired and
liabilities assumed were recorded at estimated fair values as determined
by the Company's management based on information currently available and
through the assistance of independent appraisal specialists, where
applicable. After allocating the purchase price, including the direct
costs of the acquisition, to net tangible and identifiable intangible
assets, any excess of cost over fair value of net assets acquired was
recorded as goodwill, included in `Other assets' in the Consolidated
Balance Sheets. A summary of the assets acquired and liabilities assumed
in the acquisitions as well as pro forma results of operations have not
been presented because the effects of these acquisitions are not deemed
material.

In July 2000, the Company acquired all of the outstanding stock of
Loronix Information Systems, Inc. ("Loronix"), a company that develops
software-based digital video recording and management systems for
1,994,806 shares of the Company's common stock and the assumption of
options to purchase 370,101 shares of the Company's common stock. The
combination was accounted for as a pooling of interests. For the six
months ended June 30, 2000, Loronix had sales of approximately $18.1
million and a net loss, including merger related expenses, of
approximately $2.3 million. Loronix's net loss for the period from July
1, 2000 through July 31, 2000 of approximately $705,000 has been
excluded from the Company's Consolidated Statement of Operations for the



F-13

year ended January 31, 2001 as a result of conforming fiscal years and
has been included as an adjustment to retained earnings.

In July 2000, the Company acquired all of the outstanding stock of
Syborg Informationsysteme GmbH, ("Syborg") a company that develops
software-based digital voice and Internet recording systems, for 201,251
shares of the Company's common stock. The combination was accounted for
as a pooling of interests. The Company did not restate prior financial
statements for this acquisition due to immateriality and recorded the
book value of the net assets of Syborg of approximately $(475,000) in
the Consolidated Statements of Stockholders' Equity.

In August 2000, the Company acquired all of the outstanding stock of
Exalink Ltd., ("Exalink") a company specializing in router-based
protocol gateways and applications software for the delivery of
Internet-based services to all types of wireless devices, for 5,261,211
shares of the Company's common stock and the assumption of options and
warrants to purchase 810,377 shares of the Company's common stock. The
combination was accounted for as a pooling of interests. The Company did
not restate prior financial statements for this acquisition due to
immateriality and recorded the book value of the net assets of Exalink
of approximately $(973,000) in the Consolidated Statements of
Stockholders' Equity.

In August 2000, the Company acquired all of the outstanding stock of
Gaya Software Industries Ltd., ("Gaya") a company specializing in
software-based intelligent internet protocol ("IP") gateways and
voice-over-IP technology, for 283,758 shares of the Company's common
stock and the assumption of options and warrants to purchase 10,505
shares of the Company's common stock. The combination was accounted for
as a pooling of interests. The Company did not restate prior financial
statements for this acquisition due to immateriality and recorded the
book value of the net assets of Gaya of approximately $1,470,000 in the
Consolidated Statements of Stockholders' Equity.

In connection with the acquisitions of Loronix, Syborg, Exalink and Gaya
the Company charged approximately $15,971,000 to operations in the year
ended January 31, 2001 for merger related charges. Such charges relate
to the following:


Asset write-downs and impairments
---------------------------------
Year Ended
January 31, 2001
----------------
(In thousands)

Inventory $ 3,685
Property and equipment 1,528
Capitalized software costs 2,186
------------
Total asset write-downs and impairments $ 7,399
============

In connection with these acquisitions in the year ended January 31,
2001, certain assets became impaired due to the existence of duplicative
technology, property and equipment and inventory of the merged
companies. Accordingly, these assets were written down to their net
realizable value at the time of the merger.

Professional fees and other direct merger expenses
--------------------------------------------------

In connection with these acquisitions in the year ended January 31,
2001, the Company recorded a charge of approximately $8,572,000 for
professional fees to lawyers, investment bankers and



F-14

accountants, as well as other direct merger costs in connection with the
mergers, such as printing costs and filing fees.


9. WORKFORCE REDUCTION, RESTRUCTURING AND IMPAIRMENT CHARGES

During the years ended January 31, 2002 and 2003, the Company took steps
to better align its cost structure with the business environment and to
improve the efficiency of its operations. These steps included a
reduction in workforce announced in April 2001 and a restructuring plan,
which included an additional reduction in workforce, announced in
December 2001. During the course of the year ended January 31, 2003, the
Company took additional steps to reduce its workforce, restructure its
operations and write-off impaired assets. In connection with these
actions, the Company charged approximately $63,562,000 and $66,714,000
to operations in the years ended January 31, 2002 and 2003,
respectively, primarily pertaining to severance and other related costs,
the elimination of excess facilities and related leasehold improvements
and the write-off of certain property and equipment.

An analysis of the total charges of approximately $63,562,000 incurred
during the year ended January 31, 2002 as well as a rollforward of the
workforce reduction and restructuring accrual for that period is as
follows:



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

Severance and related $ 27,685 $ 15,823 $ - $ 11,862
Facilities and related 24,347 - - 24,347
Inventory 4,000 - 4,000 -
Property and equipment 4,620 - 4,620 -
Capitalized software 2,910 - 2,910 -
-------- -------- -------- --------
Total $ 63,562 $ 15,823 $ 11,530 $ 36,209
======== ======== ======== ========


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



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

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



F-15

Severance and related costs consist primarily of severance payments to
terminated employees, fringe related costs associated with severance
payments, other termination costs and legal and consulting costs. The
balance of these severance and related costs is expected to be paid by
January 2004.

Facilities and related costs consist primarily of contractually
obligated lease liabilities and operating expenses related to facilities
to be vacated primarily in the United States and Israel as a result of
the restructuring plan. The balance of these facilities and related
costs is expected to be paid at various dates through January 2011.

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

In connection with the restructuring plan, the Company changed its
organizational structure and product offerings. As a result, certain
inventory and capitalized software became impaired and were written-off
during the year ended January 31, 2002.

The Company expects to continue to reduce its workforce during the three
months ending April 30, 2003 and incur additional restructuring related
charges during such period.


10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of:

JANUARY 31,
-----------
2002 2003
---- ----
(IN THOUSANDS)

Accounts payable $ 113,566 $ 88,649
Accrued compensation 48,074 37,054
Accrued vacation 21,092 20,761
Accrued royalties 41,105 6,596
Accrued workforce reduction
and restructuring 36,209 49,821
Accrued warranty 9,742 12,269
Other accrued expenses 52,614 45,660
------------- -------------

$ 322,402 $ 260,810
============= =============




F-16

11. CONVERTIBLE DEBENTURES

In November 2000, the Company issued $500,000,000 aggregate principal
amount of its 1.50% convertible senior debentures due December 2005
(the "Debentures"). In December 2000, the Company issued an additional
$100,000,000 of the Debentures as a result of the initial purchaser
exercising in full their over-allotment option. The Debentures are
unsecured senior obligations of the Company ranking equally with all
of the Company's existing and future unsecured senior indebtedness and
are senior in right of payment to any of the Company's existing and
future subordinated indebtedness. The Debentures are convertible, at
the option of the holders, into shares of the Company's common stock
at a conversion price of $116.325 per share, subject to adjustment in
certain events; and are subject to redemption at any time on or after
December 1, 2003, in whole or in part, at the option of the Company,
at redemption prices (expressed as percentages of the principal
amount) of 100.375% if redeemed during the twelve-month period
beginning December 1, 2003, and 100% of the principal amount if
redeemed thereafter. The Debenture holders may require the Company to
repurchase the Debentures at par in the event that the common stock
ceases to be publicly traded and, in certain instances, upon a change
in control of the Company. Upon the occurrence of a change in control,
instead of paying the repurchase price in cash, the Company may pay
the repurchase price in common stock.

During the year ended January 31, 2003, the Company acquired, in open
market purchases, $209,162,000 of face amount of the Debentures,
resulting in a pre-tax gain, net of debt issuance costs, of
approximately $39,374,000 included in `Interest and other income
(expense), net' in the Consolidated Statements of Operations. Refer to
Note 24, "Subsequent Events."

In June 1998, the Company issued $300,000,000 of convertible
subordinated debentures bearing interest at 4.50% per annum, payable
semi-annually. In June 2001, the Company called these debentures for
redemption. The debentures were converted into 13,953,462 shares of
common stock.


12. LIABILITY FOR SEVERANCE PAY

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

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

The Company is obligated under an agreement with its chief executive
officer to provide a severance payment upon the termination of his
employment with the Company. Approximately $2,631,000 and $3,013,000
has been accrued as of January 31, 2002 and 2003, respectively,
relating to this liability.


F-17

13. COMMON STOCK

STOCK SPLITS - On April 15, 1999, the Company effected a three-for-two
stock split by paying a 50% stock dividend to stockholders of record
on March 31, 1999. On April 3, 2000, the Company effected a
two-for-one stock split by paying a 100% stock dividend to
shareholders of record on March 27, 2000. All share and per share
information has been retroactively restated in the consolidated
financial statements to reflect these splits.

INCREASE IN AUTHORIZED COMMON SHARES - At the Annual Meeting of
Shareholders held on September 15, 2000, the Company's shareholders
approved an amendment to the Company's Certificate of Incorporation to
increase from 300,000,000 to 600,000,000 the aggregate number of
authorized common shares of the Company.

ISSUANCE OF SUBSIDIARY STOCK - In April 2000, a majority-owned
subsidiary of the Company, Ulticom, Inc. ("Ulticom"), issued 4,887,500
shares of its common stock in an initial public offering. Proceeds
from the offering, based on the offering price of $13.00 per share,
totaled approximately $58,062,000, net of offering expenses. In
October 2000, Ulticom issued an additional 2,843,375 shares of its
common stock in a public offering. Proceeds to Ulticom from the
offering, based on the offering price of $50.00 per share, totaled
approximately $137,169,000, net of offering expenses. The Company
recorded a gain of approximately $145,854,000 during the year ended
January 31, 2001, which was recorded as an increase in stockholders'
equity as a result of these issuances. As of January 31, 2003, the
Company's ownership interest in Ulticom was approximately 71.6%.

In May 2002, Verint issued 4,500,000 shares of its common stock in an
initial public offering. Proceeds from the offering, based on the
offering price of $16.00 per share, totaled approximately $65.4
million, net of offering expenses. The Company recorded a gain of
approximately $48.1 million during the year ended January 31, 2003,
which was recorded as an increase in stockholders' equity as a result
of the issuance. As of January 31, 2003, the Company's ownership
interest in Verint was approximately 78.6%.


14. STOCK OPTIONS

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

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


F-18

EMPLOYEE STOCK OPTIONS - At January 31, 2003, 25,079,827 shares of
common stock were reserved for issuance upon the exercise of stock
options then outstanding and 9,235,083 shares were available for future
grant under Comverse's Stock Option Plans, under which options may be
granted to key employees, directors, and other persons rendering
services to the Company. Options which are designated as "incentive
stock options" under the option plans may be granted with an exercise
price not less than the fair market value of the underlying shares at
the date of grant and are subject to certain quantity and other
limitations specified in Section 422 of the Internal Revenue Code.
Options which are not intended to qualify as incentive stock options may
be granted at any price, but not less than the par value of the
underlying shares, and without restriction as to amount. The options and
the underlying shares are subject to adjustment in accordance with the
terms of the plans in the event of stock dividends, recapitalizations
and similar transactions. The right to exercise the options generally
vests in increments over periods of up to four years from the date of
grant or the date of commencement of the grantee's employment with the
Company, up to a maximum term of ten years for all options granted.

The changes in the number of options were as follows:



YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----

Outstanding at beginning of period 23,810,758 26,163,560 33,089,823
Options from pooling
of interests transactions 820,882 - -
Granted during the period 9,306,315 9,945,007 15,851,028
Exercised during the period (6,989,653) (1,463,467) (530,661)
Canceled, terminated and expired (784,742) (1,555,277) (23,330,363)
-------------- -------------- ---------------

Outstanding at end of period 26,163,560 33,089,823 25,079,827
============== ============== ===============


At January 31, 2003, options to purchase an aggregate of 8,003,012
shares were vested and currently exercisable under the option plans and
options to purchase an additional 17,076,815 shares vest at various
dates extending through the year 2006.

Weighted average option exercise price information was as follows:



YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----

Outstanding at beginning of period $ 22.14 $ 45.66 $ 38.24
Assumed from pooling of interests 3.21 - -
Granted during the period 84.83 18.03 10.30
Exercised during the period 14.45 11.43 7.87
Canceled, terminated and expired 31.01 56.73 47.42
Outstanding at end of period 45.66 38.24 12.73
Exercisable at end of period 14.73 31.23 15.24



Significant option groups outstanding at January 31, 2003 and related
weighted average price and life information were as follows:



F-19



Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- -------------- ----------- --------------

$ 0.01 - 10.42 7,116,561 5.48 $ 8.85 5,971,851 $ 9.26
$10.52 14,319,295 7.76 10.52 11,325 10.52
$10.71 - 46.50 2,991,013 7.10 17.12 1,545,946 17.53
$49.28 - 119.69 652,958 5.94 83.35 473,890 83.32
---------- ---- ------ --------- ------
25,079,827 6.99 $12.73 8,003,012 $15.24
========== ==== ====== ========= ======



The weighted average fair value of the options granted for the years
ended January 31, 2001, 2002 and 2003, respectively, is estimated at
$50.38, $10.85 and $4.66 on the date of grant (using the Black-Scholes
option pricing model) with the following weighted average assumptions
for the years ended January 31, 2001, 2002 and 2003, respectively:
volatility of 65%, 76% and 75%; risk-free interest rate of 5.5%, 4.0%
and 1.8%; and an expected life of 4.9, 4.3 and 2.6 years.

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


15. WARRANTS

In November 1995, the Company entered into an agreement to supply its
products to a customer. Pursuant to this agreement, the Company issued
warrants to purchase shares of its common stock at an exercise price of
$7.18 per share. As of January 31, 2002, all such warrants were
exercised.


16. EMPLOYEE STOCK PURCHASE PLANS

Under Comverse's Employee Stock Purchase Plans, all employees who have
completed three months of employment are entitled, through payroll
deductions of amounts up to 10% of their base salary, to purchase shares
of the Company's common stock at 85% of the lesser of the market price
at the offering commencement date or the offering termination date. The
number of shares available under the 1997 Employee Stock Purchase Plan
is 2,500,000, of which approximately 2,021,000 had been issued as of
January 31, 2003. In December 2002 the Company adopted the 2002 Employee
Stock Purchase Plan, under which 1,500,000 additional shares are
available, none of which have been issued as of January 31, 2003.



F-20


17. EARNINGS PER SHARE ("EPS")

Basic earnings (loss) per share is determined by using the weighted
average number of shares of common stock outstanding during each
period. Diluted earnings (loss) per share further assumes the issuance
of common shares for all dilutive potential common shares outstanding.
The calculation for earnings (loss) per share for the years ended
January 31, 2001, 2002 and 2003 was as follows:



JANUARY 31, 2001 JANUARY 31, 2002 JANUARY 31, 2003
-------------------------------- --------------------------------- --------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Loss Shares Amount
(In thousands, except per share data)

BASIC EPS
---------
Net Income (loss) $ 249,136 161,496 $ 1.54 $ 54,619 179,311 $ 0.30 $(129,478) 187,212 $(0.69)
====== ====== ======

EFFECT OF DILUTIVE
SECURITIES
------------------
Options and warrants 14,514 7,123
Convertible debentures 14,552 13,954
--------- ------- ------ -------- ------- ------ --------- ------- ------
DILUTED EPS $ 263,688 189,964 $ 1.39 $ 54,619 186,434 $ 0.29 $(129,478) 187,212 $(0.69)
========= ======= ====== ======== ======= ====== ========= ======= ======


The diluted earnings (loss) per share computation for the year ended
January 31, 2003 excludes incremental shares of approximately 632,000
related to employee stock options. These shares are excluded due to
their antidilutive effect as a result of the Company's loss during the
period. In addition, the Company's Debentures were not included in the
computation of diluted earnings (loss) per share for the years ended
January 31, 2002 and 2003 because the effect of including them would be
antidilutive.


18. INTEREST AND OTHER INCOME (EXPENSE), NET

Interest and other income (expense), net, consists of the following:



YEAR ENDED JANUARY 31,
2001 2002 2003
---- ---- ----
(IN THOUSANDS)

Interest and dividend income $ 63,607 $ 71,210 $ 45,171
Interest expense (18,031) (18,344) (11,552)
Investment gains (losses), net 1,511 (37,079) (41,666)
Foreign currency gains (losses), net (646) (20,788) 27,752
Gain on repurchase of convertible debentures - - 39,374
Other, net (13,102) (788) (2,522)
------------ ------------ -------------
$ 33,339 $ (5,789) $ 56,557
============ ============ =============



F-21


19. INCOME TAXES

The provision for income taxes consists of the following:



YEAR ENDED JANUARY 31,
2001 2002 2003
---- ---- ----
(IN THOUSANDS)

Current provision:
Federal $ 1,507 $ 6,288 $ -
State 844 779 886
Foreign 16,698 6,631 2,257
----------- ------------ ------------

19,049 13,698 3,143
----------- ------------ ------------

Deferred provision (benefit):
Federal (37) (9,077) (956)
State (88) (162) (20)
Foreign (97) (23) 1,127
----------- ------------ ------------

(222) (9,262) 151
----------- ------------ ------------

$ 18,827 $ 4,436 $ 3,294
=========== ============ ============


The reconciliation of the U.S. Federal statutory tax rate to the
Company's effective tax rate is as follows:



YEAR ENDED JANUARY 31,
2001 2002 2003
---- ---- ----

U.S. Federal statutory rate 35% 35% 35%
Consolidated worldwide income
in excess of U.S. income (38) (47) (38)
Foreign income taxes 6 11 2
Other 4 9 (2)
--------- -------- ---------
Company's effective tax rate 7% 8% (3)%
========= ======== =========


Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes and (b) operating loss carryforwards. The tax effects of
significant items comprising the Company's deferred tax asset and
liability at January 31, 2002 and 2003 is as follows:



F-22

JANUARY 31,
-----------
2002 2003
---- ----
(IN THOUSANDS)

Deferred tax liability:
Expenses deductible for tax purposes and
not for financial reporting purposes $ 1,080 $ 2,666
=========== ============

Deferred tax asset:
Reserves not currently deductible $ 43,532 $ 65,194
Tax loss carryforwards 253,703 278,364
Inventory capitalization 118 51
----------- ------------
297,353 343,609
Less: valuation allowance (285,801) (331,090)
----------- ------------

Total deferred tax asset $ 11,552 $ 12,519
=========== ============


At January 31, 2003, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $711.6 million, of
which approximately $24.9 million will expire in 2004 and the balance
will begin to expire in 2019.

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


20. BUSINESS SEGMENT INFORMATION

The Company's reporting segments are as follows:

Enhanced Services Solutions Products - Enable telecommunications
service providers to offer a variety of revenue and traffic generating
services accessible to large numbers of simultaneous users. These
services include a broad range of messaging, information distribution
and personal communications services, such as call answering with
one-touch call return, voicemail, unified messaging (voice, fax, text,
multimedia content and email in a single mailbox, media conversion such
as email to voice and visual mailbox presentation), value-added
services for roamers, prepaid wireless calling services, wireless data
and Internet-based services such as short messaging services, wireless
information and entertainment services, multimedia messaging services,
wireless instant messaging, interactive voice response, and voice
portal services, which are part of a voice-controlled portfolio of
services such as voice dialing, voice-controlled messaging, and other
applications.

Service Enabling Signaling Software Products - Interconnect the complex
circuit switching, database and messaging systems and manage vital
number, routing and billing information that form the backbone of
today's public telecommunications networks. These products also are
embedded in a range of packet softswitching products to interoperate or
converge voice and data networks and facilitate services such as voice
over the Internet and Internet offload. This segment represents the
Company's Ulticom subsidiary.

Security and Business Intelligence Recording Products - Provides
analytic solutions for communications interception, digital video
security and surveillance, and enterprise business intelligence. The
software generates actionable intelligence through the collection,


F-23

retention and analysis of voice, fax, video, email, Internet and data
transmissions from multiple types of communications networks. This
segment represents the Company's Verint subsidiary.

All Other - Includes other miscellaneous operations.

The table below presents information about sales, operating income
(loss) and total assets as of and for the years ended January 31, 2001,
2002 and 2003:



Service Security and
Enhanced Enabling Business
Services Signaling Intelligence
Solutions Software Recording All Reconciling Consolidated
Products Products Products Other Items Totals
------------------------------------------------------------------------------------------------------
(In thousands)

YEAR ENDED
JANUARY 31, 2001
----------------

Sales $ 1,032,860 $ 47,441 $ 139,252 $ 15,233 $ (9,728) $ 1,225,058

Operating Income
(Loss) $ 251,748 $ 8,356 $ (5,963) $ (1,955) $ (17,562) $ 234,624

Total Assets $ 1,041,622 $ 232,187 $ 118,484 $ 80,571 $ 1,152,400 $ 2,625,264

YEAR ENDED
JANUARY 31, 2002
----------------

Sales $ 1,080,694 $ 58,156 $ 131,235 $ 9,966 $ (9,833) $ 1,270,218

Operating Income
(Loss) $ 66,105 $ 8,523 $ (2,533) $ (984) $ (6,267) $ 64,844

Total Assets $ 1,168,075 $ 240,675 $ 116,726 $ 56,930 $ 1,121,757 $ 2,704,163

YEAR ENDED
JANUARY 31, 2003
----------------

Sales $ 542,984 $ 29,231 $ 157,775 $ 9,602 $ (3,703) $ 735,889

Operating Income
(Loss) $ (179,492) $ (8,632) $ 10,051 $ (615) $ (4,323) $ (182,741)

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


Reconciling items consist of the following:

Sales - elimination of intersegment revenues.

Operating Income (Loss) - elimination of intersegment operating income
and corporate operations.

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


F-24

Sales by country, based on end-user location, as a percentage of total
sales, for the years ended January 31, 2001, 2002 and 2003 were as
follows:

JANUARY 31,
-----------
2001 2002 2003
---- ---- ----

United States 25% 30% 35%
Germany 11 12 5
Other foreign 64 58 60
------ ----- -----
Total 100% 100% 100%
====== ===== =====


No customer accounted for 10% or more of sales for the years ended
January 31, 2001, January 31, 2002 or January 31, 2003.

Long-lived assets by country of domicile consist of:

JANUARY 31,
-----------
2002 2003
---- ----
(IN THOUSANDS)

United States $ 128,681 $ 79,113
Israel 158,726 134,514
Other 10,850 12,899
----------- -----------

$ 298,257 $ 226,526
=========== ===========


21. COMMITMENTS AND CONTINGENCIES

LEASES - The Company leases office, manufacturing, and warehouse space
under non-cancelable operating leases. Rent expense for all leased
premises approximated $28,304,000, $36,461,000 and $36,032,000 in the
years ended January 31, 2001, 2002 and 2003, respectively.

As of January 31, 2003, the minimum annual rent obligations of the
Company were approximately as follows:


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

2004 $ 31,632
2005 30,437
2006 29,332
2007 9,584
2008 and thereafter 29,330
-------------

$ 130,315
=============


F-25

EMPLOYMENT AGREEMENTS - The Company is obligated under employment
contracts with Kobi Alexander, its Chairman and Chief Executive
Officer, to provide compensation, insurance and fringe benefits through
January 31, 2004. Minimum salary payments under the contracts currently
amount to $672,000 per year. Following termination or expiration of the
term of employment, the executive is entitled to receive a severance
payment equal to $136,411 times the number of years from the beginning
of his employment with the Company, the amount of which payment
increases at the rate of 10% per annum compounded for each year of
employment following December 31, 2002, plus continued fringe benefits
for three years and insurance coverage for up to 10 years. If the
executive's employment is terminated by the Company without "cause", or
by the executive for "good reason" (as those terms are defined in the
agreement), the executive is entitled to additional payments
attributable to the compensation and the monetary equivalence of other
benefits which he otherwise would have expected to receive for a period
of three years. If such termination occurs following a change in
control of the Company, the required additional payment is three times
the executive's annual salary and bonus, and the executive is
additionally entitled to the accelerated vesting of all retirement
benefits and stock options, and payments sufficient to reimburse any
associated excise tax liability and income tax resulting from such
reimbursement. Stock options granted the executive become fully vested,
exercisable and nonforfeitable in the event of a change in control of
the Company, the termination of the executive's employment by the
Company without cause or by the executive for good reason, or the
executive's death or disability. Insurance benefits include life
insurance providing cumulative death benefits of approximately
$40,000,000, including amounts provided under a split dollar
arrangement through which the Company is to be reimbursed premiums from
the benefit payments or cash surrender value.

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

LICENSES AND ROYALTIES - The Company licenses certain technology,
"know-how" and related rights for use in the manufacture and marketing
of its products, and pays royalties to third parties under such
licenses and under other agreements entered into in connection with
research and development financing. The Company currently pays
royalties on certain of its product sales in varying amounts based upon
the revenues attributed to the various components of such products.
Royalties typically range up to 6% of net sales of the related products
and, in the case of royalties due to government funding sources in
respect of research and development projects, are required to be paid
until the funding organization has received total royalties up to the
amounts received by the Company under the approved project budgets.

DIVIDEND RESTRICTIONS - The ability of Comverse's Israeli subsidiaries
to pay dividends is governed by Israeli law, which provides that cash
dividends may be paid by an Israeli corporation only out of retained
earnings as determined for statutory purposes in Israeli currency. In
the event of a devaluation of the Israeli currency against the dollar,
the amount in dollars available for payment of cash dividends out of
prior years' earnings will decrease accordingly. Cash dividends paid by




F-26

an Israeli corporation to United States residents are subject to
withholding of Israeli income tax at source at a rate of up to 25%,
depending on the particular facilities which have generated the
earnings that are the source of the dividends.

INVESTMENTS - In 1997, a subsidiary of CTI and Quantum Industrial
Holdings Ltd. organized two new companies to make investments,
including investments in high technology ventures. Each participant
committed a total of $37,500,000 to the capital of the new companies,
for use as suitable investment opportunities are identified. Quantum
Industrial Holdings Ltd. is a member of the Quantum Group of Funds
managed by Soros Fund Management LLC and affiliated management
companies. As of January 31, 2002 and 2003, the Company has invested
approximately $25,026,000 and $25,259,000 respectively, related to
these ventures, included in `Other assets' in the Consolidated Balance
Sheets. In addition, the Company has committed $21,609,000 to various
companies, ventures and funds which may be called at the option of the
investee.

GUARANTIES - The Company has obtained bank guaranties primarily for
performance of certain obligations under contracts with customers.
These guaranties, which aggregated approximately $29,463,000 at
January 31, 2003, are to be released by the Company's performance of
specified contract milestones, which are scheduled to be completed
primarily during 2003.

LITIGATION - On or about October 19, 2001, a securities class action
complaint entitled Kevin Beier v. Comverse Technology, Inc., et al.,
CV 016972, was filed against CTI and certain of its executive officers
in the United States District Court for the Eastern District of New
York ("the Court"). An amended consolidated complaint was filed on
March 4, 2002. The amended consolidated complaint generally alleged
violations of federal securities laws on behalf of individuals who
alleged that they purchased CTI's common stock during a purported
class period between April 30, 2001 and July 10, 2001. The amended
consolidated complaint sought an unspecified amount in damages on
behalf of persons who purchased CTI stock during the purported class
period. On April 22, 2002, CTI filed a Motion to Dismiss the amended
consolidated complaint in its entirety. On September 30, 2002, the
Court granted CTI's Motion to Dismiss the amended consolidated
complaint. On November 8, 2002, the Court entered a final judgment
dismissing the amended consolidated complaint with prejudice. On
November 26, 2002, plaintiffs agreed to waive their right to appeal
the judgment in exchange for CTI's agreement that each side bear its
own costs and legal fees. Plaintiffs' time to appeal has expired and
no appeal was filed, and the case is now closed.

From time to time, the Company is subject to claims in legal
proceedings arising in the normal course of its business. The Company
does not believe that it is currently party to any pending legal
action that could reasonably be expected to have a material adverse
effect on its business, financial condition and results of operations.


22. FAIR VALUE OF FINANCIAL INSTRUMENTS

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



F-27



JANUARY 31,
------------------------------------------------------------------------
2002 2003
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(IN THOUSANDS)

Liabilities:
Convertible debentures $ 600,000 $ 471,000 $ 390,838 $ 340,029



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

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

The fair value estimates presented herein are based on pertinent
information available to management as of January 31, 2003. Such
amounts have not been comprehensively revalued for purposes of these
financial statements since January 31, 2003, and current estimates of
fair value may differ significantly from the amounts presented herein.


23. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Under SFAS
No. 142, goodwill and some intangible assets are no longer amortized,
but rather are reviewed for impairment on a periodic basis. The
provisions of this Statement were required to be applied starting with
fiscal years beginning after December 15, 2001, at the beginning of the
Company's fiscal year, to all goodwill and other intangible assets in
its financial statements at that date. Impairment losses for goodwill
and certain intangible assets arising due to the initial application of
this Statement were to be reported as resulting from a change in
accounting principle. Goodwill and intangible assets acquired after
June 30, 2001 were subject immediately to the provisions of this
Statement. The adoption of SFAS No. 142 did not have a material effect
on the Company's consolidated financial statements.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting standards
for recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement cost. SFAS No. 143
applies to legal obligations associated with the retirement of a
tangible long-lived asset that result from the acquisition,
construction, development and/or normal operation of a long-lived
asset. This Statement is effective for fiscal years beginning after
June 15, 2002; however, early adoption is encouraged. The adoption of
SFAS No. 143 is not expected to have a material effect on the Company's
consolidated financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supercedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and certain provisions of Accounting Principles Board


F-28

Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No.
144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and interim periods within those
fiscal years; however, early adoption is encouraged. The adoption of
SFAS No. 144 did not have a material effect on the Company's
consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be
classified as an extraordinary item. SFAS No. 145 recognizes that the
use of debt extinguishment has become part of the risk management
strategy of many companies and therefore may be considered as part of a
company's operating activities. The rescission of SFAS No. 4 is
effective for fiscal years beginning after May 15, 2002 with earlier
application encouraged. The Company adopted SFAS No. 145 in the quarter
ended July 31, 2002. Accordingly, as the Company intends to
periodically extinguish its debt as part of its risk management
strategy, the gain of approximately $39.4 million on the extinguishment
of debt relating to the Company's 1.50% convertible debentures was
recorded through continuing operations in the Consolidated Statements
of Operations for the year ended January 31, 2003. In addition, SFAS
No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers", and amends SFAS No. 13, "Accounting for Leases", to
require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. The statement is generally
effective for transactions occurring after May 15, 2002 with earlier
application encouraged for these items.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." This statement addresses the recognition,
measurement and reporting of costs that are associated with exit and
disposal activities. This statement includes the restructuring
activities that are currently accounted for pursuant to the guidance
set forth in Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)," costs related to terminating a contract that is not a
capital lease and one-time benefit arrangements received by employees
who are involuntarily terminated - nullifying the guidance under EITF
Issue No. 94-3. Under SFAS No. 146 the cost associated with an exit or
disposal activity is recognized in the periods in which it is incurred
rather than at the date the company committed to the exit plan. This
statement is effective for exit or disposal activities initiated after
December 31, 2002 with earlier application encouraged. The adoption of
SFAS No. 146 did not have a material effect on the Company's
consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of
FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting
for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and does not permit
the use of the original SFAS No. 123 prospective method of transition
in fiscal years beginning after December 15, 2003. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results, regardless of
whether, when, or how an entity adopts the preferable, fair value based
method of accounting. SFAS No. 148 improves the prominence and clarity
of the pro forma disclosures required by SFAS No. 123 by prescribing a
specific tabular format and by requiring disclosure in the "Summary of
Significant Accounting Policies" or its equivalent and improves the
timeliness of those disclosures by requiring their inclusion in
financial reports for interim periods.


F-29

The disclosure requirements of SFAS No. 148 are effective for financial
statements for fiscal years ending after and for interim periods
beginning after December 15, 2002. The adoption of SFAS No. 148 is not
expected to have a material effect on the Company's consolidated
financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57 and 107 and rescission of
FASB Interpretation No. 34" ("FIN 45"). FIN 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies", relating
to a guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. Specifically, FIN 45 requires a guarantor
to recognize a liability for the non-contingent component of certain
guarantees, representing the obligation to stand ready to perform in
the event that specified triggering events or conditions occur. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after
December 31, 2002, irrespective of a guarantor's fiscal year-end.
However, the disclosure provisions of FIN 45 are effective for
financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 is not expected to have a
material effect on the Company's consolidated financial statements.

24. SUBSEQUENT EVENTS

During February 2003, Verint repaid its bank loan in the amount of
$42,000,000.

During March and April 2003, the Company acquired, in open market
purchases, approximately $44,550,000 of face amount of the Debentures,
resulting in a pre-tax gain, net of debt issuance costs, of
approximately $2,809,000.



F-30

25. QUARTERLY INFORMATION (UNAUDITED)

The following table shows selected results of operations for each of
the quarters during the years ended January 31, 2002 and 2003:



FISCAL QUARTER ENDED
--------------------------------------------------------------------------------------------------------
APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31,
2001 2001 2001 2002 2002 2002 2002 2003
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


Sales $365,037 $345,090 $295,032 $265,059 $211,194 $181,210 $167,469 $176,016
Gross margin 222,415 198,439 169,822 154,062 119,417 101,865 82,957 93,529
Net income (loss) 78,956 27,984 1,695 (54,016) (23,576) 3,923 (79,683) (30,142)

Diluted earnings (loss)
per share $ 0.43 $ 0.15 $ 0.01 $ (0.29) $ (0.13) $ 0.02 $ (0.43) $ (0.16)
======== ======== ======== ======== ======== ======== ======== ========
















F-31