BASIS OF PRESENTATION

Company Background

Comverse Technology, Inc. (“CTI” and, together with its subsidiaries, the “Company”) is a holding company organized as a New York corporation in October 1984 that conducts business through its subsidiaries, principally, its wholly-owned subsidiary, Comverse, Inc. (together with its subsidiaries, “Comverse”), and its majority-owned subsidiaries, Verint Systems Inc. (“Verint Systems” and together with its subsidiaries, “Verint”) and Starhome B.V. (together with its subsidiaries, “Starhome”).

Comverse

Overview

Comverse is a leading provider of software-based products, systems and related services that:

•

provide converged, prepaid and postpaid billing and active customer management systems ("Business Support Systems" or "BSS") for wireless, wireline and cable network operators delivering a value proposition designed to ensure timely and efficient service monetization, consistent customer experience, reduced complexity and cost, and enable real-time marketing based on all relevant customer profile information;


•	enable wireless and wireline (including cable) network-based Value-Added Services ("VAS"), comprised of two categories—Voice and Messaging—that include voicemail, visual voicemail, call completion, short messaging service ("SMS") text messaging ("texting"), multimedia picture and video messaging, and Internet Protocol ("IP") communications; and


•	provide wireless users with optimized access to Internet websites, content and applications, manage and enforce policy and generate data usage and revenue for wireless operators.

Comverse's products and services are used by more than 450 wireless, wireline and cable network communication service providers in more than 125 countries, including the majority of the world's 100 largest wireless network operators. Comverse's products and services are designed to generate voice and data network traffic, increase revenue and customer loyalty, monetize services and improve operational efficiency.

Comverse Share Distribution

On January 11, 2012, CTI announced its plan to spin-off Comverse as an independent, publicly-traded company, to be accomplished by means of a pro rata distribution of 100% of Comverse's outstanding common shares to CTI's shareholders (the “share distribution”). Following the share distribution, CTI will no longer hold any of Comverse's outstanding capital stock, and Comverse will be an independent publicly-traded company.

The share distribution is subject to a number of conditions, including receipt of an opinion with respect to the capital adequacy of CTI and Comverse from a nationally recognized provider of such opinions, final approval of the transaction by CTI's Board, the approval of the share distribution by holders of at least two-thirds of the CTI common shares, final approval of certain material agreements by the boards of each of CTI and Comverse and the completion of the review of Comverse's registration statement on Form 10 by the Securities and Exchange Commission (the "SEC").

Immediately prior to the share distribution, CTI will contribute to Comverse Exalink Ltd. (“Exalink”), its wholly-owned subsidiary. Other than holding certain intellectual property rights, Exalink has no operations. Following the share distribution, Comverse and CTI will operate independently, and neither will have any ownership interest in the other. In order to govern certain ongoing relationships between CTI and Comverse after the share distribution and to provide mechanisms for an orderly transition, CTI and Comverse intend to enter into agreements pursuant to which certain services and rights will be provided for following the share distribution, and CTI and Comverse will indemnify each other against certain liabilities arising from their respective businesses and the services that will be provided under such agreements (see Note 22, Subsequent Events).

Verint

Overview

Verint is a global leader in Actionable Intelligence solutions and value-added services. Verint’s solutions enable organizations of all sizes to make more timely and effective decisions to improve enterprise performance and enhance safety. Verint’s customers use Verint’s Actionable Intelligence solutions to capture, distill, and analyze complex and underused information sources, such as voice, video and unstructured text.

In the enterprise intelligence market, Verint's workforce optimization and voice of the customer solutions help organizations enhance the customer service experience, increase customer loyalty, enhance products and services, reduce operating costs, and drive revenue. In the security intelligence market, Verint's communications and cyber intelligence, video and situation intelligence and public safety solutions help government and commercial organizations in their efforts to protect people and property and neutralize terrorism and crime.

Merger of CTI and Verint

As a result of the Company's efforts to evaluate and eliminate CTI's holding company structure, on August 12, 2012, CTI entered into an agreement and plan of merger (the “Verint Merger Agreement”) with Verint pursuant to which CTI will merge with and into a subsidiary of Verint and become a wholly-owned subsidiary of Verint (the “Verint Merger”). Completion of the Verint Merger is contingent upon, among other things, completion by CTI of the disposition of its significant assets and liabilities (including Comverse and Starhome), other than its ownership interest in Verint (see Note 22, Subsequent Events).

Starhome

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

On August 1, 2012, CTI, certain other Starhome shareholders and Starhome entered into a Share Purchase Agreement (the “Starhome Share Purchase Agreement”) with Fortissimo Capital Fund II (Israel), L.P., Fortissimo Capital Fund III (Israel), L.P. and Fortissimo Capital Fund III (Cayman), L.P. (collectively, “Fortissimo”) pursuant to which Fortissimo agreed to purchase all of the outstanding share capital of Starhome (the “Starhome Disposition”). Completion of the Starhome Disposition is subject to customary conditions, including antitrust filings and approvals. The Starhome Disposition is expected to close in October 2012. If the closing of the Starhome Disposition does not occur by October 19, 2012, either the Starhome shareholders or Fortissimo may terminate the Starhome Share Purchase Agreement; provided, that the Starhome Share Purchase Agreement may not be terminated by Fortissimo before December 31, 2012 in the event that a creditor objects to the consummation of the Starhome Disposition and notice has been given that Starhome intends to contest such objection.

It is a condition to the Verint Merger that CTI dispose of its interest in Starhome prior to the consummation of the merger. As a result, if the Starhome Disposition does not close by October 19, 2012, CTI will contribute its interest in Starhome to Comverse prior to the completion of the share distribution in order to ensure it can meet the conditions to the Verint Merger. In addition, CTI is currently evaluating the contribution of its interest in Starhome, including CTI's rights and obligations under the Starhome Share Purchase Agreement, to Comverse prior to the October 19, 2012 termination date.

As a result of the anticipated Starhome Disposition, the results of operations of Starhome are included in discontinued operations, less applicable income taxes, as a separate component of net income (loss) in the Company's condensed consolidated statements of operations for all periods presented. The assets and liabilities of Starhome are included in discontinued operations as separate components to the Company's condensed consolidated balance sheets as of all dates presented (see Note 14, Discontinued Operations).

Condensed Consolidated Financial Statements Preparation

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2012 (the “2011 Form 10-K”). The condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the periods ended July 31, 2012 and 2011, and the condensed consolidated balance sheet as of July 31, 2012 are not audited but in the opinion of management reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results of the periods presented. The condensed consolidated balance sheet as of January 31, 2012 is derived from the audited consolidated financial statements presented in the 2011 Form 10-K. Certain information and disclosures normally included in annual consolidated financial statements have been omitted in this interim period report pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by U.S. GAAP for annual financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in the 2011 Form 10-K. The results for interim periods are not necessarily indicative of a full fiscal year’s results.

For information regarding measurement period adjustments related to certain business combinations that have been applied retrospectively to condensed consolidated balance sheet as of January 31, 2012, refer to Note 5, “Business Combinations.”

Principles of Consolidation

The accompanying condensed consolidated financial statements include CTI and its wholly-owned subsidiaries and its controlled and majority-owned subsidiaries, which include Verint Systems (in which CTI owned 41.0% of the common stock and held 51.8% of the voting power as of July 31, 2012) and Starhome B.V. (66.5% owned as of July 31, 2012). For controlled subsidiaries that are not wholly-owned, the noncontrolling interest is included as a separate component of “Net income (loss)” in the condensed consolidated statements of operations and “Total equity” in the condensed consolidated balance sheets. Verint Systems holds a 50% equity interest in a consolidated variable interest entity in which it is the primary beneficiary. The results of operations of this variable interest entity for the three and six months ended July 31, 2012 and 2011 were not significant to the condensed consolidated statements of operations.

All intercompany balances and transactions have been eliminated.

The Company includes the results of operations of acquired businesses from the dates of acquisition.

Changes in Reportable Segments

The Company changed its reportable segments during the three months ended October 31, 2011. The Company’s reportable segments now consist of Comverse BSS, Comverse VAS, and Verint. The results of operations of all the other operations of the Company, including the Comverse Mobile Internet ("Comverse MI") operating segment, Comverse's Netcentrex operations, Comverse's global corporate functions that support its business units, miscellaneous operations and CTI's holding company operations, are included in the column captioned “All Other” as part of the Company’s business segment presentation. The operating segments included in “All Other” do not meet the quantitative thresholds required for a separate presentation or the aggregation criteria under segment reporting guidance (see Note 19, Business Segment Information). In addition, on August 1, 2012, CTI entered into the Starhome Share Purchase Agreement with unaffiliated purchasers, and accordingly, Starhome's results of operations, which previously were included in “All Other,” are included in discontinued operations for the three and six months ended July 31, 2012. The Company has recast the presentation of its segment information for the three and six months ended July 31, 2011 to reflect these reportable segments and the elimination of Starhome's results of operations (which are included in discontinued operations) from All Other.

Use of Estimates

The preparation of the condensed consolidated financial statements and the accompanying notes in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.

The most significant estimates include:


•	Estimates relating to the recognition of revenue, including the determination of vendor specific objective evidence (“VSOE”) of fair value and the determination of best estimate of selling price for multiple element arrangements;


•	Inventory write-off;


•	Allowance for doubtful accounts;


•	Fair value of stock-based compensation;


•	Valuation of assets acquired and liabilities assumed in business combinations, including contingent consideration;


•	Fair value of reporting units for the purpose of goodwill impairment test;


•	Valuation of other intangible assets;


•	Valuation of investments and financial instruments;


•	Realization of deferred tax assets; and


•	The identification and measurement of uncertain tax positions.

The Company’s actual results may differ from its estimates.

Cash Position

The Company incurred substantial losses and had negative cash flows during the three fiscal years ended January 31, 2012 and the six months ended July 31, 2012, and had a significant accumulated deficit as of July 31, 2012.

The Company forecasts that available cash and cash equivalents will be sufficient to meet the liquidity needs, including capital expenditures, of CTI and Comverse for at least the next 12 months. The Company’s forecast is based upon a number of assumptions, which the Company believes are reasonable. However, should one or more of the assumptions prove incorrect, or should one or more of the risks or uncertainties attendant to the Company and its business materialize, the Company’s business and operations could be materially adversely affected and, in such event, the Company may need to seek new borrowings, asset sales or the issuance of equity or debt securities. Management believes that sources of liquidity could be identified.