11. FAIR VALUE MEASUREMENTS

Under the FASB's guidance, fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., "the exit price").

The FASB's guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy consists of three levels based on the reliability of inputs as follows:

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Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access.

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Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

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Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in transfers within fair value measurement hierarchy. The Company did not have any transfers between levels of the fair value measurement hierarchy during the three and nine months ended October 31, 2010.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial instruments is estimated by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is 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 market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Money Market Funds and U.S. Government Agency Debt Securities. The Company values these assets using quoted market prices for such funds.

Commercial Paper. The Company uses quoted prices for similar assets and liabilities.

ARS. The Company determines the fair value of ARS on a quarterly basis by utilizing a discounted cash flow model, which considers, among other factors, assumptions about the (i) underlying collateral, (ii) credit risk associated with the issuer, and (iii) contractual maturity. The discounted cash flow model considers contractual future cash flows, representing both interest and principal payments. Future interest payments were projected using U.S. Treasury and swap curves over the remaining term of the ARS in accordance with the terms of each specific security and principal payments were assumed to be made at an estimated contractual maturity date taking into account applicable prepayments. Yields used to discount these payments were determined based on the specific characteristics of each security. Key considerations in the determination of the appropriate discount rate include the securities' remaining term to maturity, capital structure subordination, quality and level of collateralization, complexity of payout structure, credit rating of the issuer, and the presence or absence of additional insurance enhancement from monoline insurers.

Contingent Consideration. The Company values contingent consideration using an estimated probability-adjusted discounted cash flow model. The fair value measurement is based on significant inputs not observable in the market. The fair value of contingent consideration is re-measured at each reporting period, and any changes in fair value are recorded in earnings.

Derivative Assets and Liabilities. The fair value of derivative instruments is based on quotes or data received from counterparties and third party financial institutions. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and markets rates for similar contracts using readily observable market prices thereof.

The following tables present financial instruments according to the fair value hierarchy as defined by the FASB's guidance as of October 31, 2010 and January 31, 2010:


	October 31, 2010
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
			(In thousands)
Financial Assets:
Commercial paper ⁽¹⁾	$	—	$	9,370	$	—	$	9,370
Money market funds ⁽¹⁾		116,970		—		—		116,970
Auction rate securities		—		—		69,566		69,566
Derivative assets		—		3,652		—		3,652

	$	116,970	$	13,022	$	69,566	$	199,558


Financial Liabilities:
Derivative liabilities	$	—	$	2,041	$	—	$	2,041
Contingent consideration - business combination		—		—		3,447		3,447

	$	—	$	2,041	$	3,447	$	5,488


	January 31, 2010
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
			(In thousands)
Financial Assets:
Commercial paper ⁽¹⁾	$	—	$	122,219	$	—	$	122,219
Money market funds ⁽¹⁾		114,387		—		—		114,387
Auction rate securities		—		—		114,650		114,650
Derivative assets		—		1,622		—		1,622

	$	114,387	$	123,841	$	114,650	$	352,878


Financial Liabilities:
Derivative liabilities	$	—	$	30,448	$	—	$	30,448

	$	—	$	30,448	$	—	$	30,448

(1)

As of October 31, 2010, $93.6 million of commercial paper and money market funds were classified in "Cash and cash equivalents" and $32.8 million of commercial paper and money market funds were classified in "Restricted cash and bank time deposits." As of January 31, 2010, $210.5 million of commercial paper and money market funds were classified in "Cash and cash equivalents," $9.0 million of money market funds were classified in "Restricted cash and bank time deposits" and $17.1 million of money market funds were classified in "Other assets" as long-term restricted cash.

The following table is a summary of changes in the fair value of the level 3 financial assets and liabilities, during the three and nine months ended October 31, 2010 and 2009:


	Level Three Financial Assets and Liabilities
	Three Months Ended October 31,										Nine Months Ended October 31,
	2010					2009					2010					2009
	Asset			Liability		Asset			Liability		Asset			Liability		Asset			Liability
	(In thousands)										(In thousands)
Beginning balance	$	69,349		$	3,306	$	121,521		$	—	$	114,650		$	—	$	120,265		$	—
Transfers to Level 3		—			—		—			—		—			—		—			—
Sales and redemptions		(2,522	)		—		(100	)		—		(57,018	)		—		(400	)		—
Change in realized and unrealized gains included in other income (expense), net		1,625			—		48			—		23,715			—		191			—
Change in unrealized gains (losses) included in other comprehensive income		1,143			—		9,290			—		(11,374	)		—		17,256			—
Impairment charges		(29	)		—		(248	)		—		(407	)		—		(6,801	)		—
Contingent consideration liability recorded for business combination		—					—			—		—			3,224		—			—
Change in fair value recorded in operating expenses		—			141		—			—		—			223		—			—

Ending balance	$	69,566		$	3,447	$	130,511		$	—	$	69,566		$	3,447	$	130,511		$	—

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

In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. The Company measures non-financial assets, including goodwill, intangible assets and property, plant and equipment, at fair value when there is an indication of impairment. The Company also elected not to apply the fair value option for non-financial assets and non-financial liabilities.

UBS Put

In November 2008, CTI accepted an offer from UBS AG ("UBS"), providing rights related to $51.6 million in aggregate principal amount of ARS that were held in an account with UBS (the "UBS Put"). Under the terms of the UBS Put, CTI had the right, but not the obligation, to sell its eligible ARS at par value to UBS at any time during the period of June 30, 2010 through July 2, 2012. Additionally, UBS had the right, at its discretion and at any time until July 2, 2012, to purchase the ARS from CTI at par value, which is defined as the price equal to the principal amount of the ARS plus accrued but unpaid dividends or interest, if any. Under the terms of the settlement agreement of the consolidated shareholder class action, CTI was required to exercise the UBS Put on June 30, 2010, and apply the proceeds from such exercise toward amounts payable under such settlement. UBS purchased from CTI, pursuant to its purchase right and upon the exercise of the UBS Put by CTI effective June 30, 2010, approximately $42.6 million and $9.0 million aggregate principal amount of ARS during the nine months ended October 31, 2010 and the fiscal year ended January 31, 2010, respectively.

The Company had no recorded amounts in connection with the UBS Put subsequent to its exercise on June 30, 2010.

The UBS Put was carried at historical cost and assessed for impairment. The Company evaluated the UBS Put for impairment based on redemptions and changes in fair value of the related ARS subject to the UBS Put. During the nine months ended October 31, 2010, the Company recorded $6.7 million of impairment charges related to the UBS Put which are classified in "Other income (expense), net." During the three and nine months ended October 31, 2009, the Company recorded $2.1 million and $4.1 million, respectively, of impairment charges related to the UBS Put.

The UBS Put fair value was determined using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality and risk profile which are considered significant unobservable inputs. In determining the market interest yield curve, the Company considered the credit rating of UBS. As such the UBS Put has a fair value based on inputs consistent with an asset included in Level 3 of the fair value hierarchy.

Verint's Prior Facility

As of October 31, 2010 and January 31, 2010, the carrying amounts reported in the condensed consolidated balance sheets for Verint's term loan were $583.2 million and $605.9 million, respectively. The estimated fair values of the outstanding term loan as of October 31, 2010 and January 31, 2010 were $577.4 million and $572.6 million, respectively, based upon the estimated bid and ask prices as determined by the agent responsible for the syndication of Verint's term loan. The fair value of the revolving credit facility was estimated to equal the principal amount outstanding as of October 31, 2010 and January 31, 2010.