<PAGE>
 
=============================================================================== 

                       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 December 31, 1995

                         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.

                               Yes: [X]           No: [_]

===============================================================================
<PAGE>
 
    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.


                                      [X]



    The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 15, 1996 was approximately $491,000 ,000.  The closing price
of the registrant's common stock on the NASDAQ National Market System on March
15, 1996 was $23.125 per share.

   There were 21,417,653 shares of the registrant's common stock outstanding on
March 15,  1996.


                      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 1996 Annual Meeting
of Shareholders of the registrant or in an amendment to this report on Form
10K/A.



                          ____________________________



    TRILOGUE is a registered trademark and TRILOGUE INfinity and AUDIODISK are
trademarks of the Company.

                                      -ii-

<PAGE>
 
                                     PART I

ITEM 1.  BUSINESS.


INTRODUCTION

          Comverse Technology, Inc., a New York corporation ("Comverse" and,
together with its subsidiaries, the "Company"), designs, develops, manufactures,
markets and supports computer and telecommunications systems and software for
multimedia communications and information processing applications.  The
Company's systems are used in a broad range of applications by fixed and
wireless telephone network operators, government agencies, financial
institutions and other public and commercial organizations worldwide.

          The Company has developed two main product lines -- the TRILOGUE
family of telephone-accessed, multimedia messaging and information processing
systems, and the AUDIODISK family of multiple channel, multimedia digital
recording systems -- both of which incorporate advanced technologies in the
areas of digital signal processing, facsimile protocols, telephony interfaces,
mass storage, digital networking, multi-processor computer architecture and
real-time software design.

          The Company's TRILOGUE systems enable many simultaneous users to
access from any telephone or fax machine a broad range of integrated messaging
and information services, such as call answering, voice mail, fax mail and
audiotext.  TRILOGUE's principal market consists of subscriber service provider
("SSP") organizations that use the systems to provide services to the public,
usually on a subscription basis, and includes both fixed and wireless telephone
network operators and other telecommunications services organizations.  The
Company's Network Systems Division markets TRILOGUE systems throughout the
world, with its own direct sales force and subsidiaries located in seven
countries, and in cooperation with a number of leading international vendors of
telecommunications infrastructure equipment.  The Company is a market-share
leader in providing large capacity messaging systems for international telephone
network operators.  More than 90 fixed and wireless telephone network operators
in more than 40 countries have selected TRILOGUE as their platform for messaging
services.  Current Network Systems Division customers include a number of large
providers of public telecommunications services, such as AIS in Thailand,
BellSouth, Deutsche Telekom in Germany, Hongkong Telecom, Pacific Bell, Telstra
in Australia, Telecom Italia, Telefonos de Mexico, Singapore Telecom and several
regional telephone companies in India and the People's Republic of China.  The
objectives of the Network Systems Division include maintaining the Company's
international market share leadership and increasing the Company's presence in
the United States SSP markets as existing messaging system users expand and
upgrade their equipment and new providers of fixed and mobile network services
enter the market.

          The Company's AUDIODISK systems enable many simultaneous users to
monitor and process voice, image (facsimile) and data communications from
multiple channels in a variety of analog and digital formats, provide facilities
for archiving large volumes of recorded
<PAGE>
 
information and allow the use of computer database processing techniques for
analysis, management and retrieval operations.  The systems have been sold
primarily to law enforcement, military and intelligence agencies that monitor
and record communication channels for a variety of purposes, such as
surveillance in support of police actions and the collection and processing of
information for intelligence analysis.  Various other government and commercial
organizations, such as "911" emergency service providers, correctional
facilities, public health and safety organizations and financial institutions,
also use AUDIODISK and its derivative product line, to record and process large
volumes of audio, image and data communications.

          Traditionally, analog tape recorders, alone or coupled with a variety
of special purpose devices, have been utilized for these applications.  The
worldwide growth in telecommunications traffic in general and digital
communications in particular, and the increasing use of a variety of digital
transmission formats in telecommunications networks, have created a need for
user organizations to modernize their monitoring, recording and processing
capabilities.  AUDIODISK provides a number of advantages over analog, tape
recorder-based systems, including improvements in capacity, reliability,
accuracy, processing efficiency and archiving and retrieval capabilities.
AUDIODISK systems interface with a variety of analog and digital communications
protocols and automatically recognize and adapt to voice, fax or modem content
on each recorded channel.  Most importantly, AUDIODISK systems enable users to
adapt efficiently to the emergence of new telecommunications technologies, such
as digital transmission, ISDN and enhanced signaling systems, for which analog,
tape recorder-based equipment was not designed.  To date, AUDIODISK and its
derivative systems have been sold to end-users in more than 25 countries.

          The Company has designed its products with an open system, modular
architecture to accommodate user requirements for flexibility of product
configuration and capacity, and to enable the integration of advanced
technologies, including intelligent network capabilities.  This architecture
permits scalability across the full range of product configurations.  Current
TRILOGUE single-system configurations may include up to 1,000,000 mailboxes,
with 6,000 ports and storage capacity for 45,000 hours of voice or 6,750,000 fax
pages.  AUDIODISK configurations support multiple user workstations for
monitoring up to 350 channels simultaneously, with storage capacities of up to
30,000 hours of audio or 4,500,000 pages of fax, using both magnetic disk and
optical media.

          Through subsidiaries, the Company is also involved in the provision of
computer design and consulting services, primarily for government customers in
Canada, the design and development of software for Intelligent Network ("IN")
and Advanced Intelligent Network ("AIN") architecture and services, the design
and development of systems for telephone answering service bureaus, the
operation of a telemessaging service bureau primarily in Israel and capital
market activities for its own account.

          During 1995, the Company derived revenues of approximately $90,247,000
(66% of total sales) from the TRILOGUE product line (and related products and
services), an increase of approximately $17,817,000 (25%) over the prior year,
and approximately $46,902,000 (34% of total sales) from the AUDIODISK product
line (and related products and services), an increase of 

                                      -2-
<PAGE>
 
approximately $11,182,000 (31%) over the prior year. At December 31, 1995, the
Company had a backlog of approximately $50,200,000, of which approximately
$38,000,000 was scheduled for delivery during 1996.

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


THE COMPANY'S PRODUCTS

TRILOGUE PRODUCT FAMILY

OVERVIEW

          The market for telephone-accessed, multimedia messaging and
information processing systems has grown rapidly over the past several years.
The Company believes that a number of factors have contributed to this growth,
including the increasing public awareness and acceptance of multimedia messaging
services resulting from the growing installed base of systems in the business
community, the expanding availability from the major telephone companies of call
answering services, the growing use of wireless telephone services, which almost
universally offer a mailbox-based call answering service, and the popularity of
pay-per-call audiotext services.

          The Company's primary focus has been on supplying large-capacity
messaging systems to SSP organizations, including fixed and wireless telephone
network operators and other telecommunications services organizations worldwide.
SSP organizations benefit from the ability to offer their customers a variety of
services provided by the TRILOGUE system, such as automated call answering,
voice and fax messaging, audiotext and "virtual telephone" service, usually on a
subscription basis.  With call answering and voice and fax messaging, telephone
operating companies benefit not only from service subscription fees, but also
from traffic revenue generated by the increase in billable completed calls.  In
addition, these services improve overall network efficiency by reducing
congestion from repeated unbillable busy/no-answer calls.  Wireless telephone
service operators are almost universally adding voice mailboxes to their service
offerings, not only because of these benefits, but also because their services
are increasingly used as personal communication systems in which call answering
is an important element.  Voice and fax information services increase the range
of revenue producing value-added services the organizations can provide to their
business customers and also serve as a direct source of pay-per-call revenue to
the service providers.  "Virtual telephone" service offers an effective means
for telephone companies to provide telecommunications services in developing
areas at a fraction of the time and cost per subscriber required to create the
infrastructure for traditional telephone service.

                                      -3-
<PAGE>
 
PRODUCT DESCRIPTION AND CONFIGURATIONS

          TRILOGUE systems are available in four models, each designed to
address a range of capacities in a modular and scalable manner:

<TABLE>
<CAPTION>
                            PORTS  VOICE HOURS    MAXIMUM
                            -----  ------------
MODEL                 FROM   TO    FROM    TO    MAILBOXES
--------------------  ----  -----  ----  ------  ---------
<S>                   <C>   <C>    <C>   <C>     <C>
          2500           4     16    12      58     32,000
          4500           4     16    12   1,000     32,000
          6500          16     64    45   1,000     32,000
          INfinity      24  6,000    50  45,000  1,000,000
</TABLE>

          Through its universal port capability, all the ports on any TRILOGUE
model can be configured to support voice storage and retrieval only, or to
support both voice and fax storage and retrieval.  Storage capacity, shown above
in voice hours, can be dynamically allocated to voice or fax on a demand basis,
with a fax capacity of approximately 150 pages per voice hour.  The systems are
configured in different sizes designed for various market segments and
applications.

       TRILOGUE 2500 is an ultra-compact model designed for small to medium-
       sized organizations with messaging needs that are not likely to grow much
       beyond 1,000 users, or whose information distribution volume is not
       likely to exceed 600 one minute calls per hour.

       TRILOGUE 4500 is designed to support the same number of users and
       information traffic as the TRILOGUE 2500, but its larger package provides
       greater storage capacity.  The system is also field-upgradeable to the
       much greater port capacity of the TRILOGUE 6500 with no loss of
       investment by the customer.

       TRILOGUE 6500 is a compact model for medium-sized service providers.  It
       can typically support between 5,000 and 10,000 messaging users, or as
       many as 3,000 one minute calls per hour.

       TRILOGUE INFINITY is designed and packaged to meet the capacity,
       reliability, maintainability and physical requirements of large telephone
       network operators.  In 1995, the Company announced a new INfinity system
       architecture (see "New Product Architecture") that provides expanded
       capacity of up to 6,000 ports, 45,000 voice storage hours and 1,000,000
       mailboxes, permitting access to any mailbox from any port.  The system
       also provides redundancy of all critical components, so that no single
       failure will interrupt the service.  TRILOGUE INfinity is available in
       both centralized and widely distributed configurations, and maintains its
       integrity as a single system in distributed configurations.

     All TRILOGUE models incorporate much of the same proprietary software, and
much of the same industry standard and proprietary hardware.  Most of the
software is written in the C 

                                      -4-
<PAGE>
 
language using object oriented design techniques and providing a high degree of
portability and hardware independence. TRILOGUE's current hardware is based on
Industry Standard Architecture ("ISA"), which facilitates the integration of
commercially available ISA technologies with the Company's core technologies.

     TRILOGUE supports a wide variety of analog and digital telephony interfaces
and signaling systems, which makes the system adaptable to a variety of
different telephony environments and IN applications.  TRILOGUE also provides a
"universal port" -- a single port that supports any combination of voice and fax
services at any time during a single call.

TRILOGUE APPLICATIONS

     TRILOGUE systems support a variety of software options and applications.
Included among the available TRILOGUE applications are the following:

  .       TELEPHONE ANSWERING
 
       If the telephone to which a call is placed is not answered or is busy,
  the call is diverted to the TRILOGUE system, where the caller is greeted with
  the subscriber's personal greeting and is instructed to leave a message.  The
  subscriber can then retrieve the message from any telephone.

  .       VOICE MESSAGING

       Voice messaging enables any TRILOGUE user to send a message to any other
  TRILOGUE user 24 hours a day without calling the recipient directly.  The
  recipient can retrieve the message from any telephone and reply to the sender
  with a single keystroke.  TRILOGUE permits delivery of recorded messages to
  lists of recipients, transferring of messages from one person to another with
  attached comments, editing of messages and delivery of messages at any future
  time designated by the sender.

  .       VIRTUAL TELEPHONE SERVICE

       The virtual telephone subscriber receives a published personal telephone
  number.  However, no telephone or line is installed on the subscriber's
  premises.  Instead, the subscriber receives a voice mailbox set up in a
  TRILOGUE system connected to a public switch. Anyone who dials that number
  reaches the subscriber's mailbox directly, hears the subscriber's voice
  greeting and records a message.  The subscriber may retrieve and respond to
  the messages from any telephone.  This service concept is especially targeted
  at developing countries, where conventional telephone infrastructure and
  service are not readily available or affordable.
 
  .       VIRTUAL REPLACEMENT TELEPHONE SERVICE
 
       Calls to a subscriber whose line is out of service are re-routed to a
  voice mailbox.  Each caller is informed that the call is being answered by a
  special service of the telephone company 

                                      -5-
<PAGE>
 
and is invited to leave a message. The subscriber may retrieve the messages from
any operational telephone.
 
  .       MESSAGE DELIVERY
 
       A caller dials a telephone number that is busy or does not answer. The
  caller may then access TRILOGUE to record a message to be delivered later.
  The system attempts to deliver the message by repeatedly calling the intended
  recipient at designated intervals.
 
  .       FAX ANSWERING (NEVER BUSY FAX)
 
       A fax call finds the destination fax machine busy or non-operational.
  The call is forwarded to TRILOGUE, which answers the call and receives the fax
  in a manner indistinguishable from a fax machine.  TRILOGUE delivers the fax
  when the destination fax machine is no longer busy.

  .       VIRTUAL FAX (FAX MAILBOX)
 
       Like a user of virtual telephone, a user of virtual fax has a published
  personal fax number.  TRILOGUE answers calls to this number in the same manner
  as they would be answered by a fax machine, receives a fax from the caller and
  stores the fax in the subscriber's mailbox.  The subscriber is then notified
  that a fax message is waiting and can retrieve it either by calling from a fax
  machine and requesting immediate delivery or by entering the phone number of a
  fax machine, which the system then calls to deliver the fax.
 
  .       FAX MESSAGING

       Fax messaging is the fax equivalent of voice messaging.  Subscribers can
  send faxes via TRILOGUE to mailboxes or to telephone numbers, using the future
  delivery and the mailing list features of the mailbox.  Fax messages received
  in a mailbox can be transferred to other mailboxes or to any fax machine for
  printing.
 
  .       INTEGRATED VOICE AND FAX MAIL
 
       TRILOGUE can provide a single mailbox that supports the storage and
  retrieval of voice, fax and combined voice/fax messages using a common set of
  commands.  This capability is one of the most distinctive features of the
  TRILOGUE system.
 
  .       NETWORK MESSAGING
 
       TRILOGUE supports networking for voice and fax mailbox-to-mailbox
  communication among a large community of subscribers whose mailboxes may
  reside on many different systems throughout the world.  TRILOGUE's network
  messaging not only supports voice messaging between TRILOGUE systems, but also
  provides networking between TRILOGUE 

                                      -6-
<PAGE>
 
  and other vendors' systems, because it is compatible with AMIS, an accepted
  standard for inter-vendor voice mail networking.
 
  .       AUDIOTEXT
 
       Audiotext is an application that provides automated access to recorded
  information via the telephone.  This application provides information
  services, such as public service announcements or product descriptions, at a
  lower cost than using live operators, and permits service to be extended to 24
  hours a day at virtually no incremental cost to the information provider.
  TRILOGUE's GenLogue software package, available as an option on all TRILOGUE
  models, is an easy-to-use, menu-driven dialogue generator specifically
  designed for the creation of audiotext programs.
 
  .       VOICE FORMS
 
       A voice form is a question and answer dialogue with a caller.  The system
  prompts the caller for a series of information items, records the answer to
  each question and, at the end, sends all the answers as one message to a voice
  mailbox for later retrieval and transcription.
 
  .       FAX-ON-DEMAND AND VOICE/FAX INFORMATION-ON-DEMAND

       Fax-on-demand is the fax equivalent of audiotext, providing automated
  access to printed information via fax.  Prompts and menus can be provided in
  voice form, and voice information can be mixed with fax.  If the caller is
  calling from a fax machine, faxes can be delivered in the same call.  If the
  caller is calling from an ordinary telephone, information can be delivered to
  any fax machine specified by the caller.
 
  .       CALLING CARD GATEWAY

       TRILOGUE INfinity systems provide calling card access to the public
  telephone network in countries such as the People's Republic of China which
  have not offered this service until recently. TRILOGUE supports a complete
  debit card application including maintaining the calling card database and the
  account balance of each subscriber, validating the card number and PIN of
  callers, placing the validated calls, and monitoring the duration of calls to
  calculate the account balance in real time and prevent balance overruns.
 
  .       PAGING GATEWAY
 
       A caller can activate and transmit a specific text or voice message to a
  pager via TRILOGUE.  The call is answered by TRILOGUE with the subscriber's
  personal greeting and voice prompts, rather than with cryptic tones.  The
  paging gateway application works with tone-only pagers, numeric pagers,
  alphanumeric pagers and voice pagers.

                                      -7-
<PAGE>
 
  .       SHORT MESSAGE SERVICE CENTER (SMSC)
 
          For advanced digital wireless networks, TRILOGUE allows alphanumeric
  messages to be received through the system and displayed on a subscriber's
  handset.

  .       LIVE ANSWERING INTEGRATION
 
       TRILOGUE integrates with a number of computer-based live answering
  systems, including systems manufactured by the Company as well as those of
  other vendors.  A live attendant answers the telephone with a client-specific
  greeting and provides live answers to questions. The attendant may route the
  caller to a TRILOGUE mailbox or take a message in person and then read it into
  the client's mailbox. Clients retrieve the messages from TRILOGUE in the same
  manner as with other voice messaging applications.
 
  .       ELECTRONIC MAIL INTEGRATION
 
       A data link between TRILOGUE and an electronic mail system updates the E-
  Mail status of TRILOGUE subscribers.  TRILOGUE notifies subscribers whenever
  they receive E-Mail communications and informs them of the number of E-Mail
  messages waiting for them as well as the number of voice and fax messages in
  their TRILOGUE mailboxes.
 

MULTI-APPLICATION ENHANCED SERVICES PLATFORM

     SSP organizations increasingly require an integrated multi-application
enhanced services platform ("ESP"), both because multi-application ESPs reduce
costs and because they provide greater flexibility for service offerings.  By
combining many different applications and service capabilities in a single
system, ESPs offer savings in comparison to the cost of the many separate
systems that would otherwise be required to provide the same services.  In
addition, having a single platform reduces the cost of staffing and training
personnel for operations, administration and maintenance ("OA&M"), simplifies
the integration of the ESP OA&M with the customer's existing OA&M systems and
procedures and saves money on spare parts.

     TRILOGUE was conceived and designed specifically as an ESP.  TRILOGUE
provides seamless integration of call answering, audiotext, fax-on-demand and
voice and fax messaging applications to provide users with the benefits of all
these services in a single telephone call.  All the applications listed above
can be offered on any TRILOGUE port, and all the software to provide these
applications can run concurrently.  There is no limitation on the number of
transitions between different media and applications that a caller can make in a
single call.

NEW PRODUCT ARCHITECTURE

     The demand from SSP customers for high capacity and high reliability in ESP
platforms is increasing as enhanced services grow in popularity, and as
telephone network operators gain experience with the equipment they have
initially deployed.  In 1995, the Company announced the 

                                      -8-
<PAGE>
 
general availability of a new INfinity system architecture designed to meet the
capacity and reliability requirements of large telephone network operators, and
to work with the AIN environment of the future. The system is designed to
support an expanded capacity of up to 6,000 ports, 45,000 voice storage hours
and 1,000,000 mailboxes, permitting access to any mailbox from any port. The
system is also designed to provide redundancy of all critical components, so
that no single failure will interrupt the service.

     The new INfinity architecture, which is available as a field upgrade for
existing INfinity systems, consists of up to 100 rack-mounted Message Management
Units ("MMU"s) and up to 50 Message Storage Units ("MSU"s), all linked by a High
Speed Backbone Network to each other and to the TRILOGUE Manager, a general
purpose computer serving as an administration processor, and to the TRILOGUE
Alarm Processor, an on-line testing and alarm notification device.  TRILOGUE
INfinity is available in both centralized and widely distributed configurations,
and maintains its integrity as a single system in distributed configurations.

     The new INfinity architecture also incorporates components that are
compatible with the IN and AIN protocols for Service Nodes and Intelligent
Peripherals, permitting the Company's SSP customers to design and develop their
own TRILOGUE-based services without relying solely on the development resources
of the Company.

MARKETS, SALES AND MARKETING

     The Company's Network Systems Division markets TRILOGUE systems throughout
the world, with its own direct sales force and subsidiaries located in seven
countries, and in cooperation with a number of leading international vendors of
telecommunications infrastructure equipment.  The Company is a market-share
leader in providing large capacity messaging systems for international telephone
network operators, and has incorporated into TRILOGUE various capabilities that
were specifically developed for the international markets.

     More than 90 fixed and wireless telephone network operators in more than 40
countries have selected TRILOGUE as their platform for messaging services.
Major TRILOGUE installations include, among others, Deutsche Telekom in Germany,
where a TRILOGUE INfinity system is installed with a current capacity of 250,000
subscribers.  The Company believes that this installation, with over 1,200
voice/fax ports, is one of the largest single site voice and fax messaging
systems in the world.  The Company's SSP customers include, among others, Optus
Vision and Telstra in Australia; CTC in Chile; Helsinki Telephone Company and
Telecom Finland in Finland; Hongkong Telecom in Hong Kong; Bezek and Pelephone
in Israel; Omnitel and Telecom Italia in Italy; Telmex and Telnor in Mexico;
BellSouth NZ in New Zealand; Netcom and Telenor in Norway; Singapore Telecom in
Singapore; Comvik and Europolitan in Sweden; AIS in Thailand; Energis in the
United Kingdom; American Personal Communications, BellSouth and Pacific Bell in
the United States; and several telephone companies in India and the People's
Republic of China.  The objectives of the Network Systems Division include
maintaining the Company's international market share leadership and increasing
the Company's presence in the United States SSP markets as existing users expand
and upgrade their equipment and new providers of fixed and mobile network
services enter the market.

                                      -9-
<PAGE>
 
     The Company provides its customers with marketing consultation, seminars
and materials designed to assist them in marketing TRILOGUE-based services, and
also undertakes to play an ongoing supporting role in their business and market
planning processes.


AUDIODISK PRODUCT FAMILY

OVERVIEW

     The AUDIODISK family of products consists of multiple channel, multimedia
digital recording systems, which enable many users simultaneously to monitor and
process audio, image (facsimile) and data communications over many channels in a
variety of analog and digital formats and provide facilities for archiving large
volumes of recorded information.  The systems automatically decode and record a
variety of signals without operator intervention and store the recorded
information on magnetic and optical disks to permit quick and easy random access
and the use of computer database techniques for analysis, archival and retrieval
operations.  AUDIODISK also enables a number of users to access the same
recorded information simultaneously for processing and analysis.

     Traditionally, analog tape recorders, alone or coupled with a variety of
other special purpose devices, have been utilized for communications monitoring
and related applications.  The limited capacity and processing capability
inherent in these systems have imposed constraints on organizations that process
large amounts of multimedia information from multiple channels and that need to
store the processed information for long periods while keeping it available for
rapid retrieval.  AUDIODISK systems provide a transition from multiple
individual analog tape recorders to a multiple channel, optical disk-based
digital recording system, similar to the transition from analog cassette tapes
to digital compact disks in the consumer electronics market, affording the user
access to the capacity and processing capabilities available only with digital
technology.  Digital processing capabilities provided by AUDIODISK include
immediate random access to large volumes of recorded information and the ability
concurrently to record and playback recorded information, access information
over a network and process information in various types of media through
multiple user workstations.

     Organizations that have sought a comprehensive solution for multimedia,
multiple channel recording and processing applications historically have been
required to acquire, integrate and support many different systems, including
recording devices for audio transmissions, monitoring devices for fax and modem
communications, monitoring devices for telephony signaling, high-quality voice
recording and cellular recording systems, transcription systems, various
database management systems and various devices to decode and record different
kinds of telecommunication signals.  AUDIODISK provides a fully integrated,
single-system solution for these applications.  Multiple channels can be
processed on AUDIODISK by many users simultaneously in a computerized
environment analogous to a mainframe or mini-computer database application,
utilizing audio, image and modem signals rather than alphanumeric data as the
processed media.

                                      -10-
<PAGE>
 
     AUDIODISK provides a number of advantages over analog, tape recorder-based
systems, including improvements in capacity, reliability, accuracy, processing
efficiency and archiving and retrieval capabilities.  AUDIODISK systems
interface with a variety of analog and digital communications protocols and
automatically recognize and adapt to voice, fax or modem content on each
recorded channel. Most importantly, AUDIODISK also enables users to adapt
efficiently to the emergence of new telecommunications technologies, such as
digital transmission, ISDN and enhanced signaling systems, for which analog,
tape recorder-based equipment was not designed.

PRODUCT DESCRIPTION

     The AUDIODISK product design is based on open system architecture and
client/server concepts.  AUDIODISK operators utilize computer workstations to
access various servers across local and wide area networks.  These servers
include a multimedia server, which interfaces with incoming channels and records
information from each channel in digital format, a computer database server,
which enables automated searches and retrieval of stored information, and other
servers, which provide printing, electronic mail, file storage, mainframe
applications and operator support services.

     AUDIODISK is designed to support a broad range of multimedia monitoring
capabilities, including the recording, processing and retrieval of:
 

       .  Analog audio signals, including telephone and radio channels

       .  Analog facsimile and modem communications

       .  Digital audio and data signals, including ISDN, T1, E1 and X.25

       .  Telephony signaling, including Pulse Dialing, DTMF, Calling Line
          Identification and Call Progress Tones (such as busy, no answer and
          ringback)

 
       AUDIODISK systems simultaneously process incoming signals over multiple
channels, apply digital signal processing technologies and utilize magnetic and
optical disks for temporary and long-term digital storage.  Digital signal
processing technologies that are employed by AUDIODISK to enhance monitoring
applications include, among others, signal compression, automatic signal
identification, automatic signal interpretation and noise cancellation.
Magnetic and optical disks permit virtually instantaneous retrieval and sharing
of stored information among many users.

       AUDIODISK systems also enable users to transmit multimedia information
among multiple sites over communication links.  AUDIODISK is designed to support
various communications links, including T1, E1, ISDN, Dial-up telephone lines
(over secure modems), satellite links, TCP/IP over Ethernet (with routers) and
X.25.

                                      -11-
<PAGE>
 
       AUDIODISK systems provide a facility for archiving large volumes of
recorded information on rewritable optical disks.  This archive function allows
a single recording session, groups of sessions, a single recording channel,
selected channels or all channels to be stored on the same disk.  The archive
disk records all the signals on a particular channel and automatically
associates the signal-related information ("SRI") as well as the date and time
with the recorded information.  For larger AUDIODISK systems, automatic disk
library systems, referred to as "jukeboxes", provide very large amounts of on-
line storage.

       AUDIODISK employs a database management system to provide a central
facility for access to all stored information.  This feature allows any operator
to use computer database query techniques to retrieve the audio and SRI data
quickly and efficiently.

PRODUCT CONFIGURATIONS

       The Company offers AUDIODISK systems in a range of configurations, which
share substantially the same hardware, software and user interface.  The
AUDIODISK systems' multimedia server currently can be configured in six models:
Model 100, with 2 channels; Model 1000, with up to 16 channels; Model 4000, with
up to 32 channels; Model 5000, with up to 64 channels; Model 6000, with up to
160 channels; and Model 7000, with up to 350 channels.  Moreover, several
AUDIODISK multimedia servers may be networked for increased capacity or to
satisfy redundancy requirements.

       Storage configurations include magnetic disks, optical drives and optical
jukebox devices.  Up to 50 four-gigabyte magnetic disks can be configured in a
disk array to provide a recording buffer.  Removable optical cartridges are used
for archiving, with each cartridge capable of storing up to 180 compressed audio
hours. Multiple jukebox configurations provide automated management of optical
media, storing up to 30,000 hours of audio or 4,500,000 pages of fax for rapid
automated retrieval.

       The AUDIODISK product family is available in a variety of packaging
options to support a range of applications in addition to large, fixed-site
audio monitoring operations.  The AUDIODISK Observer is a transportable system
designed for field operations.  A hand-carried AUDIODISK Court Playback Unit is
designed for the playback of recordings as trial evidence.  Also available are a
TEMPEST model for electromagnetic radiation sensitive applications and a
ruggedized model for military applications.  The Ultra and Spectrum systems are
derivatives of AUDIODISK, specifically tailored for multiple channel voice
logging applications that require archiving of large amounts of audio
information with relatively infrequent retrieval, such as financial transactions
and requests for emergency services.

MARKETS, SALES AND MARKETING

       The Company markets AUDIODISK systems worldwide through its direct sales
force and, where appropriate, through agents, distributors and system
integrators.  The Company sells AUDIODISK directly to the law enforcement,
military and intelligence markets through offices located in North America,
Western Europe, Israel and the Far East.

                                      -12-
<PAGE>
 
       The Company has dedicated substantial scientific and engineering
resources to the target markets for AUDIODISK, permitting the Company to respond
quickly and effectively to customer requests for proposals, to provide cost-
effective product customization and, in many instances, to anticipate the
requirements of its potential customers for product design and special features.

       Comverse's current target markets for AUDIODISK include law enforcement
and security and intelligence agencies, public safety and emergency services
organizations and financial institutions.

       LAW ENFORCEMENT.  Law enforcement agencies conduct large-scale
communication monitoring operations relating to criminal investigations and
prosecutions.  AUDIODISK improves monitoring capabilities in a number of ways,
including its ability to interface with and capture a variety of telephony
signals and to facilitate the use of digital signal processing technologies for
analyzing and interpreting those signals.  Several versions of the AUDIODISK
product family are currently being marketed to law enforcement agencies,
including large AUDIODISK systems (16-350 lines) for agencies with central
monitoring facilities, portable Observer systems (1-16 lines) for field
surveillance operations and hand-carried Court Playback systems designed to
facilitate optical disk playback in court.

       INTELLIGENCE.  Security and intelligence agencies collect information in
various media on a large scale for analysis and evaluation. However, only a
small portion of that information is valuable, and intelligence agencies devote
significant resources to processing the information to extract and evaluate the
useful elements.  The AUDIODISK system automates the process of retrieval,
analysis and dissemination of relevant information within a networked computer
environment.  AUDIODISK provides users with a facility for archiving large
volumes of recorded information and applying sophisticated database management
and query techniques to automate retrieval and analysis operations.  Comverse
currently offers its large AUDIODISK systems (16-350 lines) for fixed site
intelligence processing facilities, the AUDIODISK ruggedized version for
military and highly portable applications and the AUDIODISK TEMPEST
configuration for radiation sensitive environments.  AUDIODISK's open system
architecture enables the Company to develop special purpose interfaces and other
custom features to address the highly specialized needs of individual customers
in this market.

       PUBLIC SAFETY AND EMERGENCY SERVICES.  Organizations that provide public
safety and emergency services are required to log requests for services and
related communications, and to preserve the resulting records for evidentiary
purposes.  Organizations in this market include, among others, providers of
"911" emergency services and municipal agencies responsible for health and
public safety.  The introduction of digital, computer-based systems for logging
applications enables the integration of logging activities with other computer
systems for improvements in response time and quality of service.  Comverse
designed the Ultra and Spectrum systems, both AUDIODISK derivatives,
specifically for these and other voice logging applications.

                                      -13-
<PAGE>
 
       FINANCIAL SERVICES.  Financial institutions worldwide, including banks,
mutual fund management firms and brokerage houses, conduct substantial portions
of their business over the telephone.  A growing number of these institutions
record voice communications related to financial transactions for archival and
evidentiary purposes.  Digital logging systems enable these users to archive
large volumes of recorded information and to accommodate the increasing use of
fax and modem communications to effect transactions. The products marketed to
financial services organizations provide, in addition to the optical disk
medium, 8mm digital tape with a storage capacity of over 1,000 compressed voice
hours per cassette.  The low cost, high capacity digital tape medium represents
an efficient archiving method for these organizations, many of which are
required to keep records for long periods.

       ADDITIONAL MARKETS.  Additional markets for AUDIODISK and its derivative
products include, among others, the military, courts and legislative bodies,
correctional institutions, call centers, hospitals and broadcast services, all
of which share the need to record and process large amounts of voice, fax and
computer modem communications and to maintain archived records of the recorded
information.

TECHNOLOGIES

       The Company's research and development efforts focus particularly on the
design of very large, high throughput systems and digital signal processing
technologies for voice, image and data communications.  The Company's products
utilize advanced technologies in the areas of digital signal processing,
facsimile protocols, telephony interfaces, mass storage, digital networking,
multi-processor computer architecture and real-time software design.  The
Company's research and development organization consists of a TRILOGUE
applications group, an AUDIODISK applications group and a core technologies
group that serves the two applications groups.  Through its recent acquisition
of Dale, Gesek, McWilliams & Sheridan, Inc. ("DGM&S"), the Company also
possesses considerable technology and expertise in the development of software
products, solutions and applications within the IN and AIN environment.

       Comverse has developed a flexible system architecture specifically
designed to handle multiple channel, multimedia communication and processing
applications. Multimedia processing computers require a much higher throughput
than conventional data processing systems, especially when a large number of
channels have to be processed simultaneously.  The Company's products employ an
open system, modular architecture, which uses distributed processors, rather
than one large central processor, as well as multiple storage devices and
digital networking.  The product design is intended to be readily adaptable to
the usage and capacity requirements of the individual end-user.  The product
architecture also allows the Company to add enhancements and new technologies to
its systems without rendering existing products obsolete.

       A primary focus of the Company's research and development efforts has
been digital signal processing technologies required for voice, image and data
communications.  Computer systems designed for signal processing applications,
such as processing of voice and image communications, handle information
differently from conventional data processing systems and 

                                      -14-
<PAGE>
 
require greater processing and storage resources. For example, a digitized voice
message, even when subjected to data compression techniques, may require as much
as 150 times the storage capacity as the same message processed in textual form.
The computer must be designed to function at a fast and efficient rate to
produce a form of speech acceptable to the human ear. The Company has developed
a number of speech compression algorithms, which provide the Company's products
with optimal compression taking into account the level of speech quality
required for each application. The Company also has developed a special signal
detector, which identifies signals as voice, fax or modem. Voice processing
algorithms currently available with the Company's products include speech
enhancement (noise reduction) and variable playback speed with pitch
compensation. Fax and modem processing algorithms offered by the Company enable
communication and interception of a large number of standard and non-standard
communications protocols.

       The Company has developed interfaces for its products to most telephony
environments used around the world, including digital interfaces, such as T1, E1
and ISDN, and Signaling System #7 interfaces designed to encompass both basic
network connectivity and the AIN capabilities of Intelligent Peripherals and
Service Nodes.  The Company has implemented facsimile communication and
intercept protocols for Group 3 facsimile.  Certain of the Company's products
incorporate local area network and wide area network technologies used for the
transfer of digitized voice, fax 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, including two gigabyte hard disks, erasable optical disks and
an optical disk jukebox device.  Proprietary algorithms developed by the Company
are utilized for storage of multimedia information to facilitate real-time
processing of large amounts of information and optimal use of media.  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
industries in which the Company competes, 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 is engaged in ongoing research and development efforts
intended to expand and enhance the technical capabilities, features and range of
uses of its products, and to design and develop new generations of its product
offerings.  The Company currently employs in its research and development
operations, more than 500 scientists and engineers with broad experience in the
areas of digital signal processing, computer architecture, facsimile protocols,
telephony, digital networking, multi-processing, mass storage, and real-time
software design.  A 

                                      -15-
<PAGE>
 
substantial portion of the Company's research and development operations benefit
from financial incentives provided by government instrumentalities to promote
research and development activities, including, in the case of the Company, its
research and development activities situated in Israel and Canada. The cost of
such efforts is affected to a considerable extent by the continued availability
of funding under such programs. Gross expenditures on research and development
for 1993, 1994 and 1995 were approximately $12,187,000, $18,117,000 and
$27,161,000, respectively, of which approximately $4,026,000, $5,477,000 and
$7,735,000, respectively, were reimbursed under government funding programs. The
percentage of the Company's total research and development expenditures
reimbursed under these programs has declined over the three-year period, and is
anticipated to continue to decline with the growth in the Company's overall
operations and the increasing amount of research and development conducted by
the Company at locations other than those in which reimbursement programs are
available to it. The Company pays royalties on its sales of certain products
developed in part with funding supplied under such programs. See "Business--
Licenses and Royalties."

PATENTS AND INTELLECTUAL PROPERTY RIGHTS

       The Company currently holds three United States patents, two of which
apply to the integration of voice and image (facsimile) technologies utilized by
the Company in certain of its products.  The third patent, issued in 1995,
applies to certain potential applications of the Company's products for the
emergency notification and mobilization of many people.  The Company files
patent applications periodically; however, 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 certain 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.

                                      -16-
<PAGE>
 
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 (including the Israeli Government) under such licenses and under
other agreements entered into in connection with research and development
financing.  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.  The Company currently pays
royalties on substantially all sales of TRILOGUE systems and on certain sales of
AUDIODISK and derivative products.  The royalties vary in amount based upon the
revenues attributable to the various components of such products.  During 1993,
1994 and 1995, aggregate royalty payments amounted to approximately $1,911,000,
$2,186,000 and $2,419,000, respectively.  A portion of the 1993 and 1994
royalties included amounts relating to marketing subsidies received under an
Israeli Government program, which has been discontinued.

INTERNATIONAL SALES

       The Company's sales outside of North America have increased from
approximately $50,432,000 in 1993 to approximately $66,861,000 in 1994 and
$92,046,000 in 1995.  International sales and marketing efforts may be adversely
affected by a number of factors, including the need for system customization and
special integrations, government approvals and export licenses, instability in
international trading relations, currency fluctuations and additional costs of
marketing, service and support due to lack of proximity with the end-users.
International sales of certain systems manufactured by the Company also are
subject to a variety of legal restrictions governing the export of such
products.

       For additional financial information regarding foreign operations, see
Notes 13 and 15 of Notes to Consolidated Financial Statements appearing
elsewhere in this report.

MAJOR CUSTOMERS AND BACKLOG

       At December 31, 1995, the Company had a backlog of approximately
$50,200,000, compared with a backlog of approximately $44,600,000 at December
31, 1994, an increase of approximately $5,600,000.  Approximately $38,000,000 of
the backlog at December 31, 1995 was scheduled for delivery during 1996.  During
1995, no customer accounted for more than 5% of the Company's total sales.

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 telephone network operators 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.

                                      -17-
<PAGE>
 
       The Company's general warranty policy is to replace or repair any
component that fails during a specified warranty period, which is usually within
one year after shipment.  Longer warranty periods are applicable to sales in
certain international and government markets.  Broader warranty and service
coverage is provided in certain instances, and is usually made available to
customers on a contractual basis for an additional charge.

COMPETITION

       The voice processing and message management industry is highly
competitive, and includes numerous products offering a broad range of features
and capacities.  The Company currently competes primarily for large system sales
to telephone network operators around the world, where its main competitors are
manufacturers of stand-alone voice mail systems, including, among others, Octel
Communications Corporation, Boston Technology, Inc., Unisys Corporation,
Tecnomen and Centigram Communications Corporation, and manufacturers of central
office telecommunications equipment, including Northern Telecom Limited and
Ericsson.  Competitors of the Company that manufacture other telecommunications
equipment may derive a competitive advantage in selling voice processing and
message management systems to customers that are purchasing or have previously
purchased other compatible equipment from such manufacturers.

       Indirect competition is provided by voice and fax messaging products,
including stand-alone systems and PBX systems that incorporate messaging
capabilities, employed at end-user sites as an alternative to the use of
services available through telephone network operators.  This "customer premises
equipment" includes a broad range of products, such as stand-alone voice mail
systems, products offering "call processing" services that are supplied with
voice mail features or integrated with other voice mail systems, as well as
personal computer modems and add-on cards and software designed to furnish voice
processing and message management features.

       The Company believes that competition in the sale of voice processing and
message management systems is based on a number of factors, the most important
of which are product features and functionality, marketing and distribution
capability and price.  Other important competitive factors include system
performance and reliability, service and support and the capability to integrate
systems with a variety of central office and cellular switches and other
communications systems.  The Company believes that the range of features
provided by, and the ease of use of, the TRILOGUE system are competitive with
other voice processing and message management systems currently being marketed,
and that the TRILOGUE system is one of the leading systems designed specifically
for telephone network operators.

       Neither the Company nor any of the Company's competitors is a dominant
vendor of voice processing and message management systems in any market segment
or product line.  The Company anticipates that a number of its direct and
indirect competitors will be introducing new or enhanced voice and image
processing and message management products during the next several years.

                                      -18-
<PAGE>
 
       The Company is aware of a relatively small number of manufacturers of
products that compete with the AUDIODISK product line at the present time.
Manufacturers of products that have been offered in competition with the
AUDIODISK system include E-Systems, Inc., Loral Corporation, Applied Signal
Technology, Inc., GTE Government Systems Division and Harris Corporation.
Competition also has been provided by manufacturers and integrators of custom
designed computer and telecommunications systems in response to particular
government procurements in specific markets where they have entrenched customer
relationships.  The Company believes that it derives a competitive advantage
over many potential competitors of its AUDIODISK product line by reason of its
ability to offer prospective customers a family of products that can provide a
solution to most customer requirements without extensive special development
effort.  The government market in general is highly competitive and difficult to
penetrate, and the Company may be at a competitive disadvantage in respect of
certain customers and market segments as a result of its small size in relation
to other potential vendors and the existence of entrenched customer
relationships with other vendors.  The voice logging market, where the company
sells its Ultra product family, is highly competitive.  Primary competitors
include Dictaphone Corporation, Racal Recorders Ltd., TEAC America, Inc. Nice
Systems, Ltd. and Atis Assmann GmbH.

       Many of the Company's present and potential competitors for both its
AUDIODISK and TRILOGUE product lines 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 presently uses third parties to perform printed circuit board assembly
and sheet metal fabrication.  Although the Company generally uses standard parts
and components in its products, certain components are presently available only
from a limited number of sources.  To date, the Company has been able to obtain
adequate supplies of all components in a timely manner from existing sources or,
when necessary, from alternative sources.  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.  The Company's primary
manufacturing and research and development facilities have received
certification to Quality Standard ISO 9001 each year since 1991.

                                      -19-
<PAGE>
 
ACQUISITIONS, CAPITAL MARKET ACTIVITIES AND OTHER SUBSIDIARY OPERATIONS

       The Company regularly examines opportunities for acquisitions and
strategic investment transactions as a means of expanding its business.

       In August of 1995, the Company acquired DGM&S, a privately-held Mt.
Laurel, New Jersey-based provider of telecommunications software products and
solutions, especially those oriented to IN and AIN architecture design and
network elements, Signaling System #7, and ISDN.  The transaction accounted for
as a pooling of interests, with 1,078,944 shares of Comverse common stock issued
to the prior shareholders of DGM&S.

       As a recognized leader in the IN/AIN field, DGM&S works closely with
several major United States telephone companies and telecommunications equipment
suppliers to design and develop IN/AIN-based products and services.  DGM&S's
telecommunications network operator customers include, among others, Ameritech,
BellSouth, GTE, and MCI.

       Comverse believes that DGM&S's IN/AIN expertise will facilitate the
Company's efforts to evolve its TRILOGUE product line to support an expanding
range of IN/AIN-based services, such as single number services, voice activated
dialing, call screening, and single-key return-a-call.  The Company believes
that successful product evolution into the IN/AIN services area would improve
the value and applicability of the TRILOGUE product line, and further the
Company's ongoing efforts to differentiate TRILOGUE from competitive offerings.

       The Company has organized a wholly-owned subsidiary, CTI Capital Corp.,
in support of its exploration of strategic acquisition and investment
opportunities.  The subsidiary, directly and through a wholly-owned subsidiary
in Israel, Comverse Investments Ltd., seeks to identify and implement suitable
strategic investments for the Company, and engages in portfolio investment,
financial services and capital market activities, primarily in Israel.  Such
activities include, in addition to direct investment in public and private
companies, the provision of advisory and valuation services, investment and
merchant banking activities and short-term trading of debt and equity
securities.  In 1995, CTI Capital Corp. acquired approximately 22.6% of DCL
Technologies Ltd., a developer of advanced software-based products and
solutions, with specialized expertise in communications processing.


OPERATIONS IN ISRAEL

       A substantial portion of the Company's research and development and
manufacturing operations are conducted at its wholly-owned subsidiary, Efrat
Future Technology Ltd. ("Efrat"), which is located in Israel and, accordingly,
may be affected by economic, political and military conditions in that country.
The Company's business is also dependent on trading relationships between Israel
and other countries.  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 major hostilities involving Israel should occur
or if trade between Israel and its current trading 

                                      -20-
<PAGE>
 
partners were interrupted or curtailed. 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.

       Since the establishment of Israel in 1948, a state of hostility has
existed, varying in degree and intensity, between Israel and the Arab countries,
and Israel and countries doing business with Israel have been the subject of an
economic boycott by the Arab countries.  Following the Six-Day War in 1967,
Israel commenced administering the territories of the West Bank and the Gaza
Strip and, since December 1987, increased civil unrest has existed in these
territories and resulted in acts of violence in other parts of Israel.  Although
Israel has entered into various agreements with Arab countries and the Palestine
Liberation Organization ("PLO"), and various declarations have been signed in
connection with efforts to resolve some of the regional problems, no prediction
can be made as to whether a full resolution of these problems can be achieved or
as to the nature of any such resolution.  To date, these problems have not had a
material adverse impact on the financial condition or operations of the Company,
although there can be no assurance that continuation of these problems will not
have such an impact in the future.

       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
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 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 ("FTA") which is intended ultimately to eliminate
all tariff and certain non-tariff barriers on most trade between the two
countries.  Under the FTA agreement, most products received immediate duty-free
status in 1985, and all tariffs have since been eliminated.  In 1993, Israel
entered into an agreement with the European Free Trade Association ("EFTA"),
which includes Austria, Norway, Finland, Switzerland, Iceland and Liechtenstein,
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 is the only country which
has free-trade area agreements with the United States as well as with the
European Union and EFTA states.  The end of the Cold War has also enabled Israel
to establish commercial and trade relations with a number of nations, including
Russia, China and the nations of Eastern Europe, with whom Israel has not
previously had such relations.

                                      -21-
<PAGE>
 
       Israel's economy has from time to time been subject to various
destabilizing factors, including a period of rampant inflation in the early to
mid-1980s, low foreign exchange reserves, fluctuations in world commodity
prices, military conflicts and civil unrest.  For these and other reasons, the
Israeli Government has intervened in all sectors of the economy, employing,
among other means, fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and exchange rates.  The Israeli
Government has frequently changed its policies in all these areas.  For the
calendar years 1991 through 1995, the annual rates of inflation were
approximately 18%, 9%, 11%, 14% and 8% respectively.  This inflation, and the
associated increases in salaries that are linked by Israeli law to increases in
the consumer price index, have increased the cost of the Company's operations in
Israel, and salary costs have further increased as a result of the growing
competition for qualified scientific, engineering and technical personnel in
Israel.  The increase in costs in recent periods has not been offset by
proportional devaluation of the Israeli shekel against the U.S. dollar, which
during the period 1991 through 1995 occurred at the annual rates of
approximately 12%, 21%, 8%, 1% and 4%, and accordingly have had a negative
impact on the Company's overall results of operations.

       The results of operations of the Company have been favorably affected by
Efrat's participation in Israeli Government programs related to research and
development, as well as its 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 as its internal
financial and operational resources increase relative to other applicants.  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 Efrat's ability to participate in these programs were to be
reduced significantly.

EMPLOYEES

       At December 31, 1995, the Company employed 1,008 individuals,
approximately 71% of whom are scientists, engineers and technicians engaged in
research and development, marketing and support activities.

       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 retirement or upon termination of his 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.

                                      -22-
<PAGE>
 
       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, particularly in the computer and telecommunications
industries.  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, in the
case of certain key management level personnel, options to purchase shares in
certain of the Company's subsidiaries, and cash bonuses based on the
profitability of their respective business units.


ITEM 2.  PROPERTIES.

       As of December 31, 1995, the Company leased an aggregate of approximately
268,000 square feet of space for its operations worldwide, including
approximately 29,000 square feet in Woodbury, New York, approximately 161,000
square feet in Tel Aviv, Israel,  approximately 31,000 square feet in Mt.
Laurel, New Jersey, approximately 21,000 square feet in Irvine, California, and
an aggregate of approximately 26,000 square feet at various other locations in
the United States, Canada, Israel, Western Europe and the Far East.  The
aggregate base monthly rent for the facilities under lease at December 31, 1995
was approximately $248,000, and all of such leases are subject to various pass-
throughs and escalation adjustments.  In June 1995, Efrat entered into a lease
for approximately 148,000 square feet in Tel Aviv, Israel to increase the
capacity of, as well as to consolidate, its Israeli operations.  The new lease
will have a term of seven and one-half years, with an option to extend for an
additional two and one-half years, and the right to cancel after five years with
the payment of $250,000, which sum decreases over time.  The annual base rent
for the new premises starts at approximately $1,600,000.  Occupancy is scheduled
to begin in the first quarter of 1997, at which time the Company anticipates
terminating some of its other Israeli leases.

       The Company believes that its facilities are adequate for its current and
immediately foreseeable operations and that additional facilities are available
on competitive market terms to provide for such future expansion of the
Company's operations as may be warranted.


ITEM 3.  LEGAL PROCEEDINGS.

       The Company is not a party to any legal proceedings the outcome of which
is believed by management to have a reasonable likelihood of having a material
adverse effect upon its business or financial condition.


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

       At the Company's 1995 Annual Meeting of Shareholders, held on November
17, 1995, the shareholders of the Company reelected the incumbent Board of
Directors and approved 

                                      -23-
<PAGE>
 
proposals to (i) approve the adoption of the Company's 1995 Stock Option Plan
and to reserve an aggregate of 1,000,000 shares of common stock for future
issuance thereunder, and (ii) ratify the appointment of Deloitte & Touche as the
auditors for the Company's 1995 fiscal year. The proposals were approved by the
following vote:

<TABLE>
<CAPTION>
 
 
                             NUMBER OF SHARES VOTED                BROKER
PROPOSAL                      IN FAVOR     AGAINST   ABSTENTIONS  NON-VOTES
<S>                              <C>          <C>        <C>          <C>
 
1995 Stock Option Plan       13,797,073  3,750,604            -    123,010
Ratification of Auditors     17,539,530     58,925            -     72,232
 
</TABLE>

                                      -24-
<PAGE>
 
                                    PART II


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

  Comverse's common stock has been traded in the over-the-counter market under
the NASDAQ symbol CMVT since the Company's initial public offering in December
1986.  On January 19, 1993, the common stock commenced trading on the NASDAQ
National Market System ("NMS").  The following table sets forth the range of
trading prices of the common stock as reported on NASDAQ (including the high and
low bid prices quoted from January 1 to January 18, 1993 and the high and low
closing prices thereafter) through March 15, 1996.  Prices for the period prior
to the listing of the common stock on NASDAQ NMS represent quotations between
dealers without adjustments for retail markups, markdowns or commissions, and
may not represent actual transactions.  Prices are adjusted to give effect to
the 1-for-10 combination, or "reverse split", of the common stock on February
26, 1993.

 
 
YEAR               CALENDAR QUARTER         LOW         HIGH
 
       1993    First Quarter              $      15   $  21-3/4
               Second Quarter             $  15-3/4   $  20-1/4
               Third Quarter              $      11   $  17-3/8
               Fourth Quarter             $  10-3/8   $  16-3/4
 
       1994    First Quarter              $       8   $  15-5/8
               Second Quarter             $   8-1/4   $  10-1/2
               Third Quarter              $   8-3/4   $  11-1/8
               Fourth Quarter             $   9-7/8   $  14-1/4
 
       1995    First Quarter              $      11   $  14-5/8
               Second Quarter             $  13-1/4   $  18-1/4
               Third Quarter              $ 17-9/64   $  23-3/8
               Fourth Quarter             $19-15/16   $25-11/16
 
       1996    First Quarter
               (through March 15, 1996)   $  16-5/8   $  25-1/8

          There were 2,186 holders of record of common stock at March 15, 1996.
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 28,000.

                                      -25-
<PAGE>
 
          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 foreseeable
future, but rather intends to retain its earnings to finance the development and
growth 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."

                                      -26-
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA.


          The following tables present selected consolidated financial data for
the Company for each of the years in the five years ended December 31, 1995.
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 for periods prior to the 1995 acquisition of DGM&S have been
retroactively adjusted to account for that transaction as a pooling of
interests.

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                     --------------------------------------------------------
                                                     1991(1)    1992(1)      1993(1)       1994(1)     1995
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>       <C>        <C>             <C>        <C>
Statement of Operations Data:
 Revenues:
  Sales                                              $35,110    $50,956        $ 81,388   $108,150   $137,149
  Interest and other income                              876        948           3,203      6,162      8,747
                                                     -------    -------        --------   --------   --------
      Total revenues                                  35,986     51,904          84,591    114,312    145,896
 
Costs and Expenses:
 Research and development                              4,708      7,265          12,187     18,117     27,161
 Less reimbursements                                   2,476      3,030           4,026      5,477      7,735
                                                     -------    -------        --------   --------   --------
 
 Net research and development                          2,232      4,235           8,161     12,640     19,426
 Cost of sales                                        18,438     23,950          35,125     47,715     59,297
 Selling, general and administrative                  11,418     15,497          23,468     33,681     41,388
 Interest expense and other                              627        474           1,057      3,947      4,406
 Royalties and license fees                              509        774           1,911      2,186      2,419
      Total costs and expenses                        33,211     45,045          70,105    100,431    126,789
 
Income before income tax provision and
 extraordinary item                                    2,775      6,859          14,486     13,881     19,107
Income tax provision                                     392      1,787           1,021      1,783      2,057
Extraordinary item - utilization of net operating
 loss carryforward                                        24        788               -      -              -
                                                     -------    -------        --------   --------   --------
      Net income                                     $ 2,407    $ 5,860        $ 13,465   $ 12,098   $ 17,050
                                                     =======    =======        ========   ========   ========
 
Primary earnings per common and
       common equivalent share                         $0.16      $0.36           $0.65      $0.55      $0.75
                                                     =======    =======        ========   ========   ========
 
Primary weighted average number of common and
 common equivalent shares outstanding                 15,372     16,449          20,756     21,868     22,602

<CAPTION> 
                                                                                DECEMBER 31,
                                                      -------------------------------------------------------
                                                      1991(2)    1992(2)         1993(2)      1994       1995
                                                                               (IN THOUSANDS)
Balance Sheet Data:
<S>                                                 <C>         <C>            <C>       <C>         <C> 
 Working capital                                     $14,317    $24,354        $138,149   $141,344   $155,064
 Total assets                                         26,853     55,245         174,468    192,502    221,454
 Long-term debt, including current portion             4,880      3,905          63,232     62,810     61,086
 Stockholders' equity                                 15,813     32,576          91,608    101,613    121,766
</TABLE>

(1)  Includes results for DGM&S for their fiscal year ended September 30.
(2)  Includes amounts for DGM&S as of their fiscal year ended September 30.

                                      -27-
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
       FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

       The Company has benefited from strong operating cash flow and the growth
in its capital base over the past three years to make significant new investment
in its operations and infrastructure intended to enhance its opportunities for
future growth and profitability.

       The Company's results of operations reflect the significant increase in
its investment in operations over the past three years.  The Company has
increased gross expenditures for research and development from $12,187,000 in
1993 to $27,161,000 in 1995, adding new features and capabilities to its
existing product lines and supporting the planned introduction of its next
generation of products.  At the same time, the Company has significantly
expanded its sales and marketing activities, both internationally and in the
United States.  Regional offices for sales, marketing and support services have
been opened in the United Kingdom, Germany, Canada, Finland, Australia and Hong
Kong, and the Company has increased its direct sales activities throughout
Europe, North America and the Far East.  Total revenues increased throughout the
period, from $84,591,000 in 1993 to $145,896,000 in 1995, and the Company's
backlog at December 31, 1995 stood at a record $50,200,000. In 1995, the Company
increased its customer base with no single customer constituting more than 5% of
sales.

       The Company intends to continue during 1996 to make significant
investments in the growth of its business, and to examine opportunities for
additional growth through acquisitions and strategic investments.  The impact of
these decisions on future profitability cannot be predicted with assurance, and
the Company's commitment to growth may increase its vulnerability to unforeseen
downturns in its markets, technology changes and shifts in competitive
conditions.  However, the Company believes that significant opportunities exist
in the markets for both of its main product lines, and that continued strong
investment in its technical, product development, marketing and sales
capabilities will enhance its opportunities for long term growth and
profitability.

RESULTS OF OPERATIONS

COMPARISON OF 1994 AND 1995 OPERATIONS

       Total Revenues.  Total revenues increased from 1994 to 1995 by
approximately $31,584,000 (28%), reflecting an increase in TRILOGUE sales of
$17,817,000 (25%), an increase in AUDIODISK sales of $11,182,000 (31%) and an
increase in interest and other income of $2,585,000 (42%).  TRILOGUE sales
increased in Europe, the Far East, Australia, and North America.  AUDIODISK
sales increased in Europe, the Far East, North America and Israel.  The increase
in interest and other income resulted primarily from increased interest and
dividend income and realized gains on sales of short-term investments.

                                      -28-
<PAGE>
 
       Cost of Sales.  Cost of sales increased by approximately $11,582,000
(24%) from 1994 to 1995 primarily as a result of the increase in sales.  Gross
margins increased from approximately 55.9% in 1994 to approximately 56.8% in
1995.

       Research and Development Expenses.  Gross research and development
expenses during 1995 increased by approximately $9,044,000 (50%) over 1994 due
to overall growth of research and development operations, the initiation of
significant new research and development projects for both product lines and
increases in salaries and other costs associated with research and development
operations in Israel.  Net research and development expenses, after
reimbursement of approved expenditures under government funding programs,
increased by approximately $6,786,000 (54%).  The higher rate of growth of net
research and development expense in comparison with gross research and
development expense is primarily a result of an increase in the portion of
research and development activities not benefiting from reimbursement
arrangements and a lower rate of reimbursement associated with certain projects
conducted under government funding programs.

       Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased from 1994 to 1995 by approximately $7,707,000
(23%) and as a percentage of total revenues decreased from approximately 29% in
1994 to approximately 28% in 1995.  The increased amount was a result of
increased sales, marketing and administrative activities associated with the
overall growth of the Company's operations, and particularly with the expansion
of direct sales and marketing activities internationally and in the United
States.

       Royalties and License Fees.  Royalties and license fees increased from
1994 to 1995 by approximately $233,000 (11%) due to growth in sales of royalty-
bearing products.  Royalties and license fees as a percentage of total sales
decreased from approximately 2.0% in 1994 to approximately 1.8% in 1995,
reflecting an increase in the proportion of total sales comprised of products
bearing lower rates of royalty or for which no royalties are due.

       Income Tax Provision.  Provision for income taxes increased from 1994 to
1995 by approximately $274,000 (15%), while the Company's overall effective tax
rate decreased from approximately 12.8% during 1994 to approximately 10.8% in
1995. The Company's overall rate of tax is reduced significantly by the tax
benefits associated with qualified activities of Efrat, which is entitled to
favorable income tax rates under a program of the Israeli Government for
"Approved Enterprise" investments in that country.

       Net Income.  Net income after taxes increased from approximately
$12,098,000 in 1994 to approximately $17,050,000 in 1995, an increase of
approximately $4,952,000 (41%), while net income after taxes as a percentage of
total revenues increased from approximately 10.6% in 1994 to approximately 11.7%
in 1995.  The increases resulted primarily from the factors described above.

                                      -29-
<PAGE>
 
COMPARISON OF 1993 AND 1994 OPERATIONS

       Total Revenues.  Total revenues increased from 1993 to 1994 by
approximately $29,721,000 (35%), reflecting an increase in TRILOGUE sales of
$22,300,000 (44%), an increase in AUDIODISK sales of $4,462,000 (14%), and an
increase in interest and other income of $2,959,000 (92%).  TRILOGUE sales
increased in all geographical regions, with the largest increases occurring in
Europe, the Far East, and Australia.  AUDIODISK sales increased primarily as a
result of the consolidation of DVL system operations previously conducted
through a 50%-owned joint venture.  The increase in interest and other income
resulted primarily from the full-year investment of funds generated from
operations and through the issuance of securities during 1993, as well as an
increase in interest rates during 1994.

       Cost of Sales.  Cost of sales increased by approximately $12,590,000
(36%) from 1993 to 1994 as a result of the increase in sales.  Gross margins
decreased from approximately 56.8% in 1993 to approximately 55.9% in 1994,
resulting primarily from lower gross margins associated with the newly-
consolidated DVL system operations.

       Research and Development Expenses.  Gross research and development
expenses during 1994 increased by $5,930,000 (49%) over 1993 due to overall
growth of research and development operations, the initiation of significant new
research and development projects for both product lines and increases in
salaries and other costs associated with research and development operations in
Israel.  Net research and development expenses, after reimbursement of approved
expenditures under government funding programs, increased by approximately
$4,479,000 (55%).  The higher rate of growth of net research and development
expense in comparison with gross research and development expense is primarily a
result of a lower rate of reimbursement associated with certain projects
conducted under government funding programs and an increase in the portion of
research and development activities not benefiting from reimbursement
arrangements.

       Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased from 1993 to 1994 by approximately $10,213,000
(44%) and as a percentage of total revenues increased from appropriately 28% in
1993 to 29% in 1994.  Such increases were a result of increased sales,
marketing, and administrative activities associated with the overall growth of
the Company's operations, and particularly with the expansion of direct sales
and marketing activities internationally and in the United States.

       Royalties and License Fees.  Royalties and license fees increased from
1993 to 1994 by approximately $275,000 (14%) due to growth in sales of royalty-
bearing products.  Royalties and license fees as a percentage of total sales
decreased from approximately 2.3% in 1993 to approximately 2.0% in 1994.  The
decline resulted primarily from a significant reduction in royalty payments made
to the Government of Israel in respect of marketing subsidies under a program
discontinued during 1993.

                                      -30-
<PAGE>
 
       Income Tax Provision.  Provision for income taxes increased from 1993 to
1994 by approximately $762,000 (75%), reflecting an increase in the Company's
overall tax rate from approximately 7.0% during 1993 to approximately 12.8% in
1994.  The increase resulted primarily from an increase in the tax on income
from the Company's United States operations, due in part to the substantial
utilization of net operating loss carryforwards that reduced the 1993 income tax
provision.  The Company's overall rate of tax is reduced significantly by the
tax benefits associated with qualified activities of Efrat, which is entitled to
favorable income tax rates under a program of the Israeli government for
"Approved Enterprise" investments in that country.

       Net Income.  Net income after taxes decreased from approximately
$13,465,000 in 1993 to approximately $12,098,000 in 1994, a decrease of
approximately $1,367,000 (10%), while net income after taxes as a percentage of
total revenues decreased from approximately 15.9% in 1993 to approximately 10.6%
in 1994.  The decreases resulted primarily from the significant growth in the
amounts invested in the Company's operations during 1994, including substantial
increases in research and development and marketing and sales activities
undertaken in support of the Company's strategic growth plan.

LIQUIDITY AND CAPITAL RESOURCES

       At December 31, 1995, the Company had cash and cash equivalents of
approximately $99,862,000, short-term investments of approximately $23,070,000
and working capital of approximately $155,064,000.  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.

       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 can 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 acquisition cost.

       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 subsidiaries in Israel to pay dividends or by withholding taxes
associated with any such dividend payments.  Cash dividends paid by an Israeli
corporation to foreign residents are subject to withholding of Israeli income
tax at source at rates of up to 15%, depending on the particular facilities that
have generated the earnings that are the source of the dividends.

                                      -31-
<PAGE>
 
CERTAIN TRENDS AND UNCERTAINTIES

       The industries in which the Company is principally involved are highly
competitive and characterized by frequent technological and market changes.

       The voice processing and message management industry has undergone
consolidation in recent periods, as a result of corporate acquisitions and
attrition.  In addition, the industry has experienced a continuing evolution of
product offerings and alternatives for delivery of services.  These trends have
affected and may be expected to have a significant continuing influence on
conditions in the industry, although the impact on the industry generally and on
the Company's position in the industry cannot be predicted with assurance.
Significant changes in the industry make planning decisions more difficult and
increase the risk inherent in the planning process.

       The market for telecommunications monitoring systems is also in a period
of significant transition.  Budgetary constraints, uncertainties resulting from
the introduction of new technologies in the telecommunications environment and
shifts in the pattern of government expenditures resulting from geopolitical
events have increased uncertainties in the market, resulting in certain
instances in the attenuation of government procurement programs beyond their
originally expected performance periods and an increased incidence of delay,
cancellation or reduction of planned projects.  Competitive conditions in this
sector have also been affected by the efforts of government contractors,
particularly developers and integrators of technology products, 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 lack of predictability in the timing and scope of government
procurements have similarly made planning decisions more difficult and have
increased the associated risks.

       The Company has historically derived a significant portion of its revenue
and operating profit from a relatively small number of contracts for large
system installations with customers in both the commercial and government
sectors.  While the growth of the Company's business has reduced its dependence
on any specific customers, it 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 Company believes that opportunities for
large installations will continue to grow in both its commercial and government
markets, and intends to continue to expand its research and development,
manufacturing, sales and marketing and product support capabilities in
anticipation of such growth.  However, 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 than the Company has
experienced in prior periods.  Although the Company is actively pursuing a
number of significant procurement opportunities in the United States and
internationally, both the timing of any eventual procurements and the
probability of the Company's receipt of significant contract awards are
uncertain.  The degree of 

                                      -32-
<PAGE>
 
dependence by the Company on large 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 has significantly increased its expenditures in all areas of
its operations during recent periods, including the areas of research and
development and marketing and sales, and the Company plans to further increase
these expenditures during 1996.  The increase in research and development
expenditures reflects the Company's concentration on enhancing the range of
features and capabilities of its existing product lines and developing new
generations of its products.  The Company believes that these efforts are
essential for the long- and short- term competitiveness of its product offerings
and for positioning itself to participate in future growth opportunities in both
the commercial and government sectors.  The increase in sales and marketing
expenditures primarily results from the Company's decision to expand its
activities and direct presence in a number of world markets.  The Company's
costs of operations have also been affected by increases in the cost of its
operations in Israel, resulting both from general inflation and increases in the
cost of attracting and retaining qualified scientific, engineering and technical
personnel in Israel, where the demand for such personnel is growing rapidly with
the expansion of technology-based industries in that country.  The increase in
these costs in recent periods has not been offset by proportional devaluation of
the Israeli shekel against the U.S. dollar, and accordingly has had a negative
impact on the Company's overall results of operations.

       The Company currently derives a majority of its total revenues from sales
to 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.  Volatility in
international currency exchange rates may have a significant impact on the
Company's operating results to the extent that it is unable to completely hedge
the exchange rate risk of long term contracts denominated in foreign currencies,
or by the cost of such hedging.

       The trading price of the Company's shares may be affected by the factors
noted above as well as prevailing economic and financial trends and conditions
in the public securities markets.  During recent periods, share prices of
companies in technology and government contracting businesses, and particularly
smaller and medium-sized publicly traded companies such as the Company, have
exhibited a high degree of volatility.  Shortfalls in revenues or earnings from
the levels anticipated by the public markets could have an immediate and
significant 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, which 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 voice processing industry, which may not have any
direct relationship with the Company's business or prospects.

                                      -33-
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

         See Part IV, Item 14.


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

         Not applicable.



                                    PART III

The information required by Part III is omitted pursuant to instruction G(3).

                                      -34-
<PAGE>
 
                                    PART IV

ITEM 14.  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 -
                  December 31, 1994 and 1995                      F-3
 
             Consolidated Statements of Income -
                  Years ended December 31,
                    1993, 1994 and 1995                           F-5
 
             Consolidated Statements of Stockholders' Equity -
                  Years ended December 31,
                   1993, 1994 and 1995                            F-6
 
             Consolidated Statements of Cash Flows -
                  Years ended December 31,
                   1993, 1994 and 1995                            F-7
 
             Notes to Consolidated Financial Statements           F-9

         (2) Financial Statement Schedules.
             ----------------------------- 
             None

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

     The Index of Exhibits commences on the following page.  Exhibits
     numbered 10(16), 10(18), 10(19), 10(K), 10(L), 10(ddd), 10(EEE)
     and 10(lll) comprise material compensatory plans and arrangements
     of the registrant.

                                      -35-
<PAGE>
 
          Exhibit
          Number  Description
          ------  -----------

           1    Not applicable.

           2    Not applicable.

          3     Articles of incorporation and By-Laws:

            3(A)     Certificate of Incorporation.*

            3(A)(1)  Certificate of Amendment of Certificate of Incorporation
                     effective February 26, 1993.**

            3(A)(2)  Certificate of Amendment of Certificate of Incorporation
                     effective January 12, 1995.****

            3(B)     By-Laws, as amended.*

           4    Instruments defining the rights of security
                holders, including indentures:

            4(A)     Excerpts from Certificate of Incorporation.***

            4(A)(1)  Excerpt from Certificate of Amendment
                     of Certificate of Incorporation effective
                     February 26, 1993.**

            4(A)(2)  Excerpt from Certificate of Amendment
                     of Certificate of Incorporation effective
                     January 12, 1995.****

            4(B)     Excerpts from By-Laws, as amended.**

            4(C)(1)  Specimen stock certificate.**

__________________

*    Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1987.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.

**   Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1992.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.

***  Incorporated by reference to Exhibits filed with Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No. 33-9147.  Exhibit
number shown is the Exhibit number of the document as filed with such
Registration Statement.

**** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1994.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.

                                      -36-
<PAGE>
 
          Exhibit
          Number   Description
          ------   -----------

            4(D)         Indenture dated as of November 30, 1993 from Comverse
                         Technology, Inc. to The Chase Manhattan Bank, N.A.,
                         Trustee.*

            4(E)         Specimen 5-1/4% Convertible Subordinated Debenture due
                         2003.*

           5             Not applicable.

           6             Not applicable.

           7             Not applicable.

           8             Not applicable.

           9             Not applicable.

          10             Material contracts:

            10(7)             Proxy Agreement dated as of September 5, 1991 by
                              and among Comverse Government Systems Corporation,
                              James R. Allen, Robert W. Bazley, Robert T. Marsh
                              and Comverse Technology, Inc.**

            10(8)             Visitation Approval Procedure Agreement dated as
                              of September 5, 1991 by and among Comverse
                              Government Systems Corporation, James R. Allen,
                              Robert W. Bazley, Robert T. Marsh and Comverse
                              Technology, Inc.**

            10(16)            Form of Stock Option Agreement pertaining to
                              shares of certain subsidiaries of Comverse
                              Technology, Inc.*

            10(17)            Form of Asset Purchase Agreement dated as of March
                              1, 1994 by and among Comverse Technology, Inc.,
                              Magnasync/Moviola Corporation, Interactive
                              Information Systems Corporation and Magnasync
                              Comverse Corporation.*

            10(18)            Employment Agreement effective as of July 1, 1994
                              by and between Comverse Technology, Inc. and Kobi
                              Alexander.****
______________

*    Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1993.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.

**   Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1991.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.

**** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1994.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.

                                      -37-
<PAGE>
 
          Exhibit
          Number         Description
          -------        -----------

            10(19)            1994 Stock Option Plan.****

            10(20)            1994 Stock Option Plan.

            10(Aa)            Agreement among Efrat Future Technology, Ltd.,
                              Tadiran Israel Electronics Industries Ltd., Boaz
                              Misholi, Kobi Alexander and Yechiam Yemini.*

            10(K)             1984 Incentive Stock Option Plan.*

            10(L)             Form of Incentive Stock Option Agreement.*

            10(GGg)           Deed of Guarantee from Comverse Technology, Inc.
                              to Bank Hapoalim B.M. dated July 30, 1986.*

            10(GGgg)          Continuing Guarantee from Comverse Technology,
                              Inc. to Bank Leumi le-Israel B.M.*

            10(XX)            Patent License Agreement by and between Efrat
                              Future Technology Ltd. and VMX, Inc.*

            10(CCC)           Form of Indemnity Agreement between Comverse
                              Technology, Inc. and its Officers and Directors.**

            10(ddd)           1987 Stock Option Plan, as amended.***

            10(EEE)           Form of Stock Option Agreement for options other
                              than Incentive Stock Options.**

            10(JJJ)           Agreement of Lease dated September 21, 1989
                              between Industrial & Research Associates Co. and
                              Comverse Technology, Inc.*
________________

*    Incorporated by reference to Exhibits filed with Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No. 33-9147. Exhibit
number shown is the Exhibit number of the document as filed with such
Registration Statement.

**   Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1987.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.

***  Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1992.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.

**** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1994.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.

                                      -38-
<PAGE>
 
           Exhibit                                                         
           Number    Description                                           
           -------   -----------                                           
                                                                           
           12.    Not applicable.                                          
                                                                           
           13.    Not applicable.                                          
                                                                           
           14.    Not applicable.                                          
                                                                           
           15.    Not applicable.                                          
                                                                           
           16.    Not applicable.                                          
                                                                           
           17.    Not applicable.                                          
                                                                           
           18.    Not applicable.                                          
                                                                           
           19.    Not applicable.                                          
                                                                           
           20.    Not applicable.                                          
                                                                           
           21.    Subsidiaries of the Registrant.                          
                                                                           
           22.    Not applicable.                                          
                                                                           
           23.    Not applicable.                                          
                                                                           
           24.    Not applicable.                                          
                                                                           
           25.    Not applicable.                                          
                                                                           
           26.    Not applicable.                                          
                                                                           
           27.    Financial Data Schedule.                                 
                                                                           
           28.    Not applicable.                                          
                                                                           
           99.    Not applicable.                                          
                                                                           
                                                                           
                                                                           
   (b)     Reports on Form 8-K.                                      
           -------------------                                             
                                                                           
           None.                                                            

                                      -39-
<PAGE>
 
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
 
 
                                                                        PAGE
 
Independent Auditors' Report                                             F-2
 
Consolidated Balance Sheets as of December 31, 1994 and 1995             F-3
 
Consolidated Statements of Income for the Years Ended December 31,
  1993, 1994 and 1995                                                    F-5
  
Consolidated Statements of Stockholders' Equity for the Years
  Ended December 31, 1993, 1994 and 1995                                 F-6
 
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1993, 1994 and 1995                                       F-7
 
Notes to Consolidated Financial Statements                               F-9


                                      F-1
<PAGE>
 
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 December 31, 1994 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. 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 generally accepted auditing
standards. 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 December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.

Deloitte & Touche LLP

New York, New York
March 1, 1996

                                      F-2
<PAGE>
 
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>


ASSETS                                                                              1994       1995
                                                                                  ---------  --------
<S>                                                                            <C>        <C>

CURRENT ASSETS:
Cash and cash equivalents                                                         $ 39,225  $ 99,862
Bank time deposits                                                                  15,707         -
Short-term investments (Note 4)                                                     73,661    23,070
Accounts receivable, net of allowance for doubtful accounts of
$2,678 and $2,621                                                                   24,181    43,009
Inventories (Note 5)                                                                12,427    15,773
Prepaid expenses and other current assets                                            4,004     7,815
Deferred income tax benefits (Note 14)                                                 587       721
                                                                                  --------   -------

TOTAL CURRENT ASSETS                                                               169,792   190,250
                                                                                  --------  --------

LONG-TERM RECEIVABLES - Net of allowance for
doubtful accounts of $151 and $272                                                   1,093     2,105
                                                                                  --------   -------

PROPERTY AND EQUIPMENT:
Fixtures and equipment                                                              15,588    20,251
Transportation vehicles                                                              1,334     2,211
Leasehold improvements                                                                 240       256
                                                                                  --------  --------
                                                                                    17,162    22,718

Less accumulated depreciation and amortization                                      (8,119)  (10,887)
                                                                                  --------   -------
                                                                                     9,043    11,831
                                                                                  --------   -------

INVESTMENTS                                                                            616     3,880

GOODWILL - Net of accumulated amortization of $561 and $758                          1,384     1,106


SOFTWARE DEVELOPMENT COSTS - Net of accumulated amortization of
$3,571 and $6,024                                                                    6,512     8,756

OTHER INTANGIBLE ASSETS - Net of accumulated amortization of
$421 and $685 (Note 6)                                                               1,827     1,597

DEFERRED COSTS AND OTHER ASSETS - Net of
accumulated amortization of $206 and $398                                            2,235     1,929
                                                                                  --------   -------

                                                                                    12,574    17,268
                                                                                  --------   -------
TOTAL ASSETS                                                                      $192,502  $221,454
                                                                                  ========  ========
</TABLE>
                         See notes to consolidated financial statements.

                                      F-3
<PAGE>
 
<TABLE>
<CAPTION>

--------------
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY                    1994     1995
------------------------------------                    ----     ----  
<S>                                                    <C>      <C>
 
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 7)         $19,192  $27,230
Advance payments from customers                          5,387    4,988
Due to related parties (Note 10)                           278      364
Other current liabilities                                3,591    2,604
                                                       -------  -------
 
TOTAL CURRENT LIABILITIES                               28,448   35,186
 
 
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES (Note 8)     60,000   60,000
 
LIABILITY FOR SEVERANCE PAY (Note 9)                     1,352    2,299
 
OTHER LIABILITIES (Note 14)                                676    1,939
 
MINORITY INTEREST                                          413      264
                                                       -------  -------
 
TOTAL LIABILITIES                                       90,889   99,688
                                                       -------  -------

COMMITMENTS AND CONTINGENCIES (Note 16)
</TABLE> 


<TABLE> 
 
<S>                                                           <C>            <C>   
STOCKHOLDERS' EQUITY (Notes 11, 12 and 16):
Preferred stock, $0.01 par value--authorized, 
  2,500,000 shares; issued, none                                         -         -
Common stock, $0.10 par value -- authorized, 
  100,000,000 shares; issued and outstanding, 
  20,981,456 and 21,362,598 shares                                    2,098     2,136
Additional paid-in capital                                           73,300    75,752
Cumulative translation adjustment                                      (118)     (136)
Unrealized gain on available-for-sale securities, net of tax             15       646
Retained earnings                                                    26,318    43,368
                                                                    -------   -------
 
TOTAL STOCKHOLDERS' EQUITY                                          101,613   121,766
                                                                    -------   -------
 


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $192,502 $221,454
                                                                    ========  =======
</TABLE> 


                         See notes to consolidated financial statements.

                                      F-4
<PAGE>
 
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 
 
                                                                   1993        1994         1995
                                                                 ---------  ----------  -------------
<S>                                                            <C>         <C>           <C> 
REVENUES:
 Sales                                                           $ 81,388    $108,150        $137,149
 Interest and other income                                          3,203       6,162           8,747
                                                                 --------    --------   -------------
 
TOTAL REVENUES                                                     84,591     114,312         145,896
                                                                  -------    --------    ------------
 
COSTS AND EXPENSES:
 Research and development (Note 3)                                 12,187      18,117          27,161
 Less reimbursements (Note 3)                                       4,026       5,477           7,735
                                                                 --------    --------   -------------
 
 Net research and development                                       8,161      12,640          19,426
 
 Cost of sales                                                     35,125      47,715          59,297
 Selling, general and administrative                               23,468      33,681          41,388
  Interest expense and other                                        1,057       3,947           4,406
 Royalties and license fees (Notes 3 and 16)                        1,911       2,186           2,419
  Minority interest in income (loss) of consolidated
subsidiaries                                                            8         (52)           (207)
 Equity in loss of affiliates                                         375         314              60
                                                                 --------    --------   -------------
 
TOTAL COSTS AND EXPENSES                                           70,105     100,431         126,789     
                                                                  -------    --------        --------     
                                                                                                          
INCOME BEFORE INCOME TAX                                           14,486      13,881          19,107     
                                                                                                          
INCOME TAX PROVISION (Note 14)                                      1,021       1,783           2,057     
                                                                  -------    --------        --------     
                                                                                                          
NET INCOME                                                        $13,465    $ 12,098        $ 17,050     
                                                                  =======    ========        ========     
                                                                                                          
EARNINGS PER COMMON AND                                                                                   
 COMMON EQUIVALENT SHARE:                                                                                 
   Primary                                                          $0.65       $0.55           $0.75      
   Fully diluted                                                  =======    ========        ========     
                                                                    $0.65       $0.55           $0.75      
                                                                  =======    ========        ========     
                                                                                                          
WEIGHTED AVERAGE NUMBER OF                                                                                
 COMMON AND COMMON EQUIVALENT                                                                             
 SHARES OUTSTANDING:                                                                                      
   Primary                                                         20,756      21,868          22,602      
                                                                  =======    ========        ========     
   Fully diluted                                                   20,756      21,868          22,709      
                                                                  =======    ========        ========      
</TABLE>

See notes to consolidated financial statements.

                                      F-5
<PAGE>
 
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
-------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 



                                                      COMMON STOCK     ADDITIONAL   CUMULATIVE    UNREALIZED   RETAINED
                                                   ----------------
                                                   NUMBER OF    PAR       PAID-IN   TRANSLATION     GAINS      EARNINGS
                                                   SHARES       VALUE   CAPITAL     ADJUSTMENT     (LOSSES)    (DEFICIT)   TOTAL
                                                   ----------  ------  ----------   -----------   ----------   --------   --------
<S>                                                <C>         <C>      <C>          <C>           <C>         <C>        <C> 
BALANCE, JANUARY 1, 1993, as previously reported   16,474,191  $1,647     $27,779         $ (60)           -    $ 2,810   $ 32,176
Pooling of Interests  (Note 6)                      1,078,944     108         (98)            -            -        390        400
                                                   ----------  ------     -------   -----------                 -------   --------
BALANCE, as restated                               17,553,135   1,755      27,681           (60)           -      3,200     32,576
Common stock issued in connection with public
 offering                                           3,105,000     311      44,551             -            -          -     44,862
Common stock issued in connection with
 exercise of stock options and warrants (Note 12)     235,270      23         717             -            -          -        740
Translation adjustment                                      -       -           -           (35)           -          -        (35)
Net income, year ended December 31, 1993                    -       -           -             -            -     13,465     13,465
                                                   ----------  ------     -------   -----------   ----------    -------   --------
 
BALANCE, DECEMBER 31, 1993                         20,893,405   2,089      72,949           (95)           -     16,665     91,608
Adjustment to beginning balance for unrealized
 gain on available-for-sale securities, net of
  tax                                                       -       -           -             -          353          -        353
Unrealized loss on available-for-sale securities,
 net of tax (Note 4)                                        -       -           -             -         (338)         -       (338)
Common stock issued in connection with
 exercise of stock options and warrants (Note 12)      88,051       9         351             -            -          -        360
Translation adjustment                                      -       -           -           (23)           -          -        (23)
Adjustment to conform fiscal year of
 pooled company (Note 6)                                    -       -           -             -            -     (2,445)    (2,445)
Net income, year ended December 31, 1994                    -       -           -             -            -     12,098     12,098
                                                   ----------  ------     -------   -----------   ----------    -------   --------
 
BALANCE, DECEMBER 31, 1994                         20,981,456   2,098      73,300          (118)          15     26,318    101,613
Unrealized gain  on available-for-sale
 securities,
 net of tax (Note 4)                                        -       -           -             -          631          -        631
Common stock issued in connection with
 exercise of stock options (Note 12)                  370,446      37       2,040             -            -          -      2,077
Common stock issued in connection with
 acquisition
 of additional interest in majority-owned
  subsidiary                                           10,696       1         154             -            -          -        155
Tax benefit of disqualifying dispositions of
 incentive stock options (Note 14)                          -       -         258             -            -          -        258
Translation adjustment                                      -       -           -           (18)           -          -        (18)
Net income, year ended December 31, 1995                    -       -           -             -            -     17,050     17,050
                                                   ----------  ------     -------   -----------   ----------    -------   --------
 
BALANCE, DECEMBER 31, 1995                         21,362,598  $2,136     $75,752         $(136)       $ 646    $43,368   $121,766
                                                   ==========  ======     =======   ===========   ==========    =======   ========
</TABLE>
See notes to consolidated financial statements.

                                      F-6
<PAGE>
 
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 
 
                                                                   1993       1994       1995
                                                                 --------  ----------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                              <C>       <C>         <C>
Net income                                                       $13,465   $  12,098   $ 17,050
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization                                      3,126       4,846      5,874
Equity in loss of affiliate                                          375         314         60
Minority interest in income (loss) of consolidated subsidiary          8         (52)      (207)
Changes in assets and liabilities:
Accounts receivable                                               (1,468)     (8,360)   (18,828)
Inventories                                                       (4,627)     (2,038)    (3,346)
Prepaid expenses and other current assets                         (2,366)       (675)    (3,811)
Long-term receivables                                                (11)     (1,192)    (1,012)
Accounts payable and accrued expenses                              1,150       5,020      8,038
Advance payments from customers                                     (691)       (500)      (399)
Liability for severance pay                                          374         434        947
Due to related parties                                              (369)        151         86
Other                                                               (801)      1,476      2,248
                                                                 -------   ---------   --------
 
NET CASH PROVIDED BY OPERATING ACTIVITIES                          8,165      11,522      6,700
                                                                 -------   ---------   --------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of bank time deposits and investments                    (5,007)   (113,923)   (18,848)
Purchase of property and equipment                                (3,598)     (4,840)    (5,556)
Capitalization of software development costs                      (3,064)     (3,592)    (4,697)
Proceeds from maturities and sales of bank time deposits
and short-term investments                                           549      30,805     82,454
Other                                                                513        (267)         -
                                                                 -------   ---------   --------

NET CASH (USED IN) PROVIDED BY
     INVESTING ACTIVITIES                                        (10,607)    (91,817)    53,353
                                                                 --------    --------    ------
</TABLE> 
                                      F-7
<PAGE>
 
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
--------------
<TABLE>
<CAPTION>
 
 
                                                               1993       1994       1995
                                                             ---------  ---------  --------
<S>                                                          <C>        <C>        <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debentures                     $ 58,102   $      -   $     -
Proceeds from issuance of common stock in connection with
  public offering                                              44,862          -         -
Proceeds from issuance of common stock in connection with
  exercise of stock options and warrants                          740        360     2,077
Other                                                            (652)      (278)   (1,493)
                                                             --------   --------   -------
 
NET CASH PROVIDED BY FINANCING ACTIVITIES                     103,052         82       584
                                                             --------   --------   -------
 
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                            100,610    (80,213)   60,637
 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                   18,828    119,438    39,225
                                                             --------   --------   -------
 
CASH AND CASH EQUIVALENTS, END OF YEAR                       $119,438   $ 39,225   $99,862
                                                             ========   ========   =======
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
  Cash paid during the year for interest                     $    206   $  3,417   $ 3,492
                                                             ========   ========   =======
 
  Cash paid during the year for income taxes                 $  1,460   $  1,190   $   850
                                                             ========   ========   =======
</TABLE>


See notes to consolidated financial statements.

                                      F-8
<PAGE>
 
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
--------------------------------------------



1. ORGANIZATION AND BUSINESS

   Comverse Technology, Inc. ("Comverse" 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 telecommunica-tions 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 Comverse 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, on a net-of-tax basis.

   CONCENTRATION OF CREDIT RISK - Financial instruments which potentially expose
   the Company to concentration of credit risk, as defined by Statement of
   Financial Accounting Standards No. 105, 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 institutional banks and financial
   institutions, time deposits, and U.S. government obligations that have
   maturities of one year or less.  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.  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 over periods ranging from
   three to seven years.  The cost of maintenance and repairs is charged to
   operations as incurred.  Significant renewals and betterments are
   capitalized.

   INCOME TAXES - The Company accounts for its income taxes in accordance with
   Statement of Financial Accounting Standards No. 109, which requires the asset
   and liability method.  Under this method, 

                                      F-9
<PAGE>
 
   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 will be in effect when the
   differences are expected to reverse.

   REVENUE AND EXPENSE RECOGNITION - Revenues from product sales are generally
   recognized upon shipment.  Products shipped for customer trials are carried
   in finished goods inventory until customer acceptance is obtained, at which
   time revenue is recognized.

   Revenues from certain contracts are recognized under the percentage-of-
   completion method on the basis of physical completion to date.  This method
   is used because management considers physical completion to be the best
   available measure of the progress on these contracts.  Revenues from a
   subsidiary engaged in software development are recognized under the
   percentage of completion method using actual costs incurred to total expected
   costs under the contract.  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 income.

   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 totaling $3,064,000,
   $3,592,000 and $4,697,000 were capitalized in 1993, 1994 and 1995,
   respectively, in accordance with Statement of Financial Accounting Standards
   No. 86. Capitalized software development costs 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 expenses amounted
   to $1,066,000, $2,041,000 and $2,453,000 in 1993, 1994 and 1995,
   respectively.

   DEFERRED COSTS - Deferred costs include debt issue costs which are being
   amortized over the ten-year term of the related debt, on a straight-line
   basis.

   MINORITY INTEREST - Minority interest relates to Comverse's majority-owned
   consolidated subsidiaries, Telemesser Ltd. ("Telemesser"), an Israeli
   corporation which operates a telemessaging service bureau, and Applied
   Silicon, Inc. Canada ("ASIC"), an Ontario corporation which provides computer
   consulting and development services primarily to government agencies in
   Canada.  Comverse owns approximately 75% of the outstanding shares of
   Telemesser.   In 1995, Comverse increased its ownership of the outstanding
   shares of ASIC from 51% to 55%.

   EQUITY IN AFFILIATES- Investments in affiliates are accounted for under the
   equity method.

   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.

 

                                      F-10
<PAGE>
 
   Net losses from foreign currency transactions, included in the consolidated
   statements of income, approximated $198,000, $3,000 and $249,000 in 1993,
   1994 and 1995, respectively.

   The Company occasionally enters into foreign exchange forward contracts and
   options on foreign currencies.  The purpose of the Company's foreign currency
   hedging activities is to protect the Company from the risk that the eventual
   dollar cash flows resulting from the sale of products to international
   customers will be adversely affected by changes in exchange rates.  These
   transactions are accounted for in accordance with Statement of Financial
   Accounting Standards No. 52.   In accordance with this Statement, any gain or
   loss on a foreign exchange contract which hedges a firm commitment is
   deferred until the underlying transaction is realized, at which time it is
   included in the consolidated statement of  income.  At December 31, 1995,
   there were outstanding forward contracts to purchase approximately $3,100,000
   in Western European currencies.  Deferred gains and losses from hedging these
   commitments were not significant at December 31, 1995.

   OTHER INTANGIBLE 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 five years.
   Goodwill and other intangible assets associated with acquired subsidiaries
   are amortized over five to twelve years.

   LONG-LIVED ASSETS - In March 1995, the Financial Accounting Standards Board
   issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
   and for Long-Lived Assets to Be Disposed Of". This statement is effective for
   fiscal years beginning after December 15, 1995. The Company does not expect
   the effect on its consolidated financial statements from the adoption of this
   statement to be material.

   PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
   conformity with generally accepted accounting principles 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.

   EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - Primary and fully diluted
   earnings per common and common equivalent share are determined by using the
   weighted average number of shares of common stock and common stock
   equivalents outstanding (using the treasury stock method) during each period.

   RESTATEMENT FOR POOLING OF INTERESTS TRANSACTION - The consolidated financial
   statements have been retroactively restated to include the financial
   statements of Dale, Gesek, McWilliams & Sheridan, Inc. ("DGM&S") for all
   periods prior to the consummation of the acquisition discussed in Note 6.

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

                                      F-11
<PAGE>
 
3. RESEARCH AND DEVELOPMENT

   A significant portion of the Company's research and development operations
   are located in Israel where the Company derives substantial benefits from
   participation in programs sponsored by the Government of Israel for the
   support of research and development activities conducted in that country.
   For the years 1993, 1994 and 1995, the Company's research and development
   activities included projects partially funded by the Office of the Chief
   Scientist of the Ministry of Industry and Trade of the State of Israel (the
   "OCS") and in 1993 and 1994 included projects partially funded by the Israel-
   United States Binational Industrial Research and Development Foundation
   ("BIRD-F") under which these funding organizations reimbursed a portion of
   the Company's research and development expenditures under approved project
   budgets. The Company's research and development activities also included
   projects partially funded by a Canadian government agency, which reimbursed a
   portion of the Company's research and development expenditures under approved
   project budgets.  The Company is currently involved in several ongoing
   research and development projects supported by the OCS and by the Canadian
   government agency.

   The Company is required to pay royalties to the respective funding
   organizations based on the sale of products incorporating technology
   developed in these projects (Note 16).  In addition, 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 and
   the governments of the United States and Israel have certain nonexclusive,
   irrevocable, royalty-free licenses to use for all governmental purposes any
   inventions developed in the projects funded by BIRD-F.


4. SHORT-TERM INVESTMENTS

   The Company classifies all of its short-term investments (including U.S.
treasury bills) as available-for-sale securities.  The following is a summary of
available-for-sale securities as of December 31, 1995:

<TABLE>
<CAPTION>
                                                                GROSS                GROSS      ESTIMATED
                                                             UNREALIZED             UNREALIZED    FAIR
                                              COST              GAINS                  LOSSES     VALUE
                                            --------------------------------------------------------------
                                                                           (IN THOUSANDS)
<S>                                     <C>                      <C>             <C>            <C>  
 
  U.S. Treasury bills                           $ 4,990/(1)/         $     3      $       -     $  4,993
  U.S. Treasury notes                               345                   14              -          359
  U.S. corporate bonds                              100                    -              3           97
                                                -------               ------           ----      -------
    Total debt securities                       $ 5,435               $   17      $       3      $ 5,449
                                                -------               ------           ----      -------
 
  Common stock                                    9,175                1,129            318        9,986
  Mutual funds investing in
    U.S. government and
    agencies obligations                          2,015                    -              -        2,015
 Preferred stock                                  5,397                  230              7        5,620
                                                -------              -------         -------    --------
   Total equity securities                       16,587                1,359            325       17,621
                                                -------               ------           ----      -------
                                                $22,022               $ 1,376      $    328      $23,070
                                                =======               =======      ========      =======
</TABLE>

/(1)/  Amount includes $4,691,000 of cost plus $299,000 accretion of discount 
included in interest and other income.



                                      F-12
<PAGE>
 
The following is a summary of available-for-sale securities as of December
   31, 1994:

<TABLE>
<CAPTION>
 
                                                                   GROSS        GROSS   ESTIMATED
                                                                UNREALIZED    UNREALIZED   FAIR
                                                       COST        GAINS        LOSSES     VALUE
                                                       -------------------------------------------
                                                                      (IN THOUSANDS)
<S>                                                <C>          <C>            <C>        <C>      
 
 U.S. Treasury bills                                 $59,712/(2)/  $    -       $   327    $59,385
 U.S. Treasury notes                                     339            -             2        337
 U.S. corporate bonds                                    100            -            10         90
                                                     -------       ----------    ------     ------  
   Total debt securities                             $60,151        $   -        $  339    $59,812
                                                     -------        ------       ------    -------
 Common stock                                          6,481        1,553           556      7,478
 Mutual funds investing in
   U.S. government and
   agencies obligations                                2,085            -           213      1,872
Preferred stock                                        4,919           25           445      4,499
                                                     -------       ------       -------  ---------
  Total equity securities                             13,485        1,578         1,214     13,849
                                                     -------       ------        ------  ---------
                                                     $73,636      $ 1,578        $1,553    $73,661
</TABLE> 
 
 /(2)/  Amount includes $58,649,000 of cost plus $1,063,000 accretion of
   discount included in interest and other income.


During 1995, the gross realized gains on sales of securities totaled
approximately $2,788,000 and the gross realized losses totaled approximately
$467,000.

The amortized cost and estimated fair value of debt securities at December 31,
1995, by contractual maturity, are as follows:


<TABLE>
<CAPTION>
 
                                                  ESTIMATED
                                           COST   FAIR VALUE
                                          ------  ----------
                                            (IN THOUSANDS)
<S>                                       <C>     <C>
 
Due in one year or less                   $4,990      $4,993
Due after one year through three years       100         102
Due after three years                        345         354
                                          ------      ------
 
                                          $5,435      $5,449
                                         =======      =======
</TABLE>

                                      F-13
<PAGE>
 
5. INVENTORIES
 
Inventories consist of:
                                                DECEMBER 31,
                                           --------------------
                                           1994            1995
                                           ----            ----
                                               (IN THOUSANDS)
 
       Raw materials                     $ 7,196          $10,364
       Work in process                     2,342            2,638
       Finished goods                      2,889            2,771
                                         -------          -------
                                         $12,427          $15,773


6. BUSINESS ACQUISITIONS

   On August 30, 1995, the Company acquired DGM&S, a corporation that develops
   and markets telecommunications software products.  To effect the acquisition,
   the Company issued 1,078,944 shares of common stock for all of the
   outstanding common stock of DGM&S.  The acquisition has been accounted for as
   a pooling of interests; therefore, prior financial statements and information
   have been restated to include DGM&S, as if the companies had been combined
   for all periods presented.

   Prior to the acquisition, DGM&S prepared its financial statements with a
   fiscal year ending September 30.  In 1995, the combined companies reported on
   the basis of Comverse's fiscal year, which ends on December 31.  Accordingly,
   the restated Statements of Income for 1993 and 1994 include the results of
   DGM&S for the years ended September 30, 1993 and 1994, respectively.  As a
   result, DGM&S's operations for the three month period ended December 31, 1994
   are not reflected in the Consolidated Statements of Income or Cash Flows.
   DGM&S's operating results for the three month period ended December 31, 1994,
   comprising total revenues and a net loss of approximately $2,122,000 and
   $2,445,000, respectively, are reflected as an adjustment to retained
   earnings.

   The table below sets forth the unaudited separate and combined results of
   Comverse and DGM&S for 1993 and 1994 and for the three month periods ended
   March 31, 1995, June 30, 1995 and September 30, 1995:

<TABLE>
<CAPTION>
 
                                                           THREE MONTHS ENDED
                                                MARCH 31,       JUNE 30,       SEPTEMBER 30,
                          1993      1994          1995            1995              1995
                        --------  ---------    -----------     ---------       -------------
                                              (IN THOUSANDS)
                                               (UNAUDITED)
                                              
Total Revenues                                
----------------------                        
<S>                     <C>       <C>          <C>             <C>            <C> 
 Comverse               $ 70,438    $98,843       $28,744       $31,918          $34,044
 DGM&S                    14,153     15,469         2,778         3,894            4,550
 Less:  Intercompany                          
  eliminations                 -          -             -            -              (269)
                        --------    -------       -------       -------          -------
                       $  84,591   $114,312      $ 31,522      $ 35,812          $38,325
                       ========    ========       =======      ========          ======= 
</TABLE> 
 

                                      F-14
<PAGE>
 
<TABLE> 
<CAPTION> 
 
                                                                THREE MONTHS ENDED
                                                         MARCH 31,  JUNE 30,  SEPTEMBER 30,
                          1993      1994                 1995            1995     1995
                          ----      ----                 ----            ----     ----
                                                                  (IN THOUSANDS)
                                                                    (UNAUDITED)
Net Income
----------
<S>                     <C>         <C>              <C>              <C>       <C>   
 Comverse               $ 12,707    $11,770             $ 3,517         $ 4,071  $ 4,418
 DGM&S                       758        328                (628)            205      310
 Less:  Intercompany
  eliminations                 -          -                   -               -      (21)
                        --------    -------             -------         -------  -------
                         $13,465   $ 12,098             $ 2,889         $ 4,276  $ 4,707
                        ========   ========             =======         =======  =======
</TABLE>

     In April 1994, the Company acquired the business and assets of
   Magnasync/Comverse Corporation (the "Joint Venture"), a previously 50% owned
   corporation, in return for the Company's agreement to assume certain of the
   Joint Venture's liabilities.  The acquisition has been accounted for by the
   purchase method of accounting and, accordingly, the purchase price has been
   allocated to the assets acquired and the liabilities assumed based on the
   estimated fair values at the date of acquisition.  The liabilities assumed
   exceeded the assets acquired by approximately $605,000 which has been
   assigned to other intangible assets to be amortized over five years.  The
   operating results of the acquired business are included in the Company's
   consolidated results of operations from April 1, 1994.


7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

    Accounts payable and accrued expenses consist of:

<TABLE>
<CAPTION>
                                           DECEMBER 31,
                                       -----------------
                                       1994         1995
                                       ----         ----
<S>                                   <C>      <C>      
                                         (IN THOUSANDS)
 
            Accounts payable          $10,488  $13,252
            Accrued salaries            2,397    3,706
            Accrued vacation            1,360    2,109
            Accrued royalties           1,405    1,954
            Other accrued expenses      3,542    6,209  
                                      -------  -------
                                      $19,192  $27,230
</TABLE>

8. 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES

   On November 30, 1993, the Company issued $60 million of convertible
   subordinated debentures bearing interest at 5 1/4% per annum, payable semi-
   annually.  The debentures mature on December 1, 2003.  The debentures are
   convertible into shares of the Company's common stock at a conversion price
   of $19.375 per share, subject to adjustment in certain events.  The
   debentures are subordinated in right of payment to all existing and future
   senior indebtedness of the Company.  The debentures are redeemable at the
   option of the Company, in whole or in part, at prices decreasing from 102% of
   the face amount on December 1, 1996 to par on December 1, 1998.  However, the
   Company's ability to redeem the debentures prior to December 1, 1998 is
   subject to certain restrictions related to the market price of the Company's
   common stock.  The debenture holders may require the Company to repurchase
   

                                      F-15
<PAGE>
 
   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.


9. LIABILITY FOR SEVERANCE PAY

   Liability for severance pay consists 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.

   The Company's statutory obligation for severance pay to employees of its
   Israeli subsidiaries is determined on the basis of each individual's current
   salary and length of employment.  Funding is currently provided primarily by
   premiums paid by the Company to insurance providers.

   The Company is obligated under an agreement, which was amended during 1995,
   with its chief executive officer to provide a severance payment upon the
   termination of his employment with the Company.  The severance payment will
   be $77,000 per year of employment, which amount is increased by 10% per
   annum, compounded for each year of employment commencing with December 1996.
   Approximately $720,000 and $1,001,000 has been accrued as of December 31,
   1994 and 1995, respectively, relating to this liability.


10. RELATED PARTIES

   The Company paid or accrued legal fees to one of its directors in the amounts
   of $329,000,  $309,000 and $298,000 in 1993, 1994 and 1995, respectively.

 
11. CAPITAL STOCK

   In December 1994, the authorized shares of common stock of Comverse were
   increased from 25,000,000 to 100,000,000.

   At December 31, 1995, there were 3,096,774 shares of common stock reserved
   for conversion of the 5 1/4% convertible subordinated debentures and
   2,677,333 shares of common stock reserved for exercise of outstanding stock
   options.

   Comverse has granted to certain holders of its equity securities the right to
   cause the Company to register such securities under applicable Federal and
   state securities laws to permit the public sale of such securities upon the
   request of such holders.

12. STOCK OPTIONS AND WARRANTS

   EMPLOYEE STOCK OPTIONS - At December 31, 1995, 2,677,333 shares of common
   stock were reserved for issuance upon the exercise of options then
   outstanding and 1,020,444 shares of common stock 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
                                      F-16
<PAGE>
 
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 annual 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.

The changes in the number of options were as follows:

<TABLE>
<CAPTION>
 
                        YEAR ENDED DECEMBER 31,
                        ----------------------
                                                   1993              1994                  1995
                                                   ----              ----                  ----
<S>                                            <C>               <C>                        <C>
 
  Outstanding at beginning of year                 1,462,656         1,746,072                 2,455,755
  Granted during the year                            432,500         1,176,000                   650,200
  Exercised during the year                         (115,748)          (85,649)                 (370,442)
  Canceled, terminated and expired                   (33,336)         (380,668)                  (58,180)
                                                 -----------       -----------               -----------
 
  Outstanding at end of year                       1,746,072         2,455,755                 2,677,333
                                                 ===========       ===========               ===========
 
  Aggregate exercise price                       $10,220,000       $16,626,477               $22,721,516
                                                 ===========       ===========               ===========
 
  At an exercise price range per share of    $0.94 to $18.50   $0.94 to $18.50          $0.94 to $19.625
                                             ===============   ===============          ================
</TABLE>

At December 31, 1995, options to purchase an aggregate of 1,283,258 shares
were vested and currently exercisable under the option plans and options to
purchase an additional 1,394,075 shares vest at various dates extending
through the year 2000.

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting for
stock options and other equity instruments used for compensation purposes, and
requires companies electing to report in accordance with the standard to
recognize or disclose such compensation in its financial statements for fiscal
years beginning after December 15, 1995. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The Company is also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but will be required to disclose in a note to the
financial statements pro forma net income and earnings per share as if the
Company had adopted the new fair value method of accounting. The Company has not
yet determined the effect that the adoption of the new standard would have on
its net income and earnings per share.


OPTIONS ON SUBSIDIARY SHARES - Comverse has granted to certain key executives
the Company options to acquire shares of certain subsidiaries, other than Efrat
Future Technology, Ltd. ("Efrat"), as a means of providing incentives directly
tied to the performance of those subsidiaries for which different executives
have direct responsibility. Such options, which upon exercise would represent
9.1% to 19.5% of the outstanding shares of each subsidiary, have terms of ten
years and become exercisable and vest in equal ratable annual increments over
periods ranging from three to five years from the first


                                      F-17
<PAGE>
 
vest in equal ratable annual increments over periods ranging from three to five
years from the first anniversary of 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 the
Board of Directors. The aggregate exercise price of these options at December
31, 1995 was approximately $5,214,000. Upon the exercise, in whole or in part,
of any option, Comverse will receive an irrevocable proxy to vote the underlying
shares and a right of first refusal to purchase the shares upon any proposed
sale, transfer or other disposition, until such time as the shares shall have
been sold in a bona fide open market transaction.


13.    FOREIGN OPERATIONS

   Condensed net assets, exclusive of intercompany balances, applicable to all
   foreign operations, principally located in Israel, included in the
   consolidated balance sheets, are summarized as follows:

<TABLE>
<CAPTION>
 
                                       DECEMBER 31,
                                     -----------------
                                       1994      1995
                                       ----      ----
<S>                                  <C>      <C>
                                       (IN THOUSANDS)
 
Current assets                       $32,207   $56,526
 Property and equipment, net           6,251     8,396
  Software development costs, net      5,863     7,599
  Other assets                           276       271
                                     -------   -------
 
Total assets                          44,597    72,792
                                     -------   -------
 
 Current liabilities                  12,638    22,378
                                    --------   -------
 Other liabilities                     1,307     2,428
                                     -------   -------

Total liabilities                     13,945    24,806
                                     -------   -------
 
Net assets                           $30,652   $47,986
                                     =======   =======
</TABLE>

Condensed operating information, exclusive of intercompany transactions,
applicable to all foreign operations, principally located in Israel, included
in the consolidated statements of income, is summarized as follows:

<TABLE>
<CAPTION>
 
                                     YEAR ENDED DECEMBER 31,
                                    --------------------------
                                      1993     1994     1995
                                      ----     ----     ----  
                                          (IN THOUSANDS)
<S>                                 <C>       <C>      <C>
 
         Total revenues             $25,670   $42,661  $72,843
         Costs and expenses          26,194    40,546   71,430
                                    -------   -------  -------
         Operating (loss) income    $  (524)  $ 2,115  $ 1,413
                                    =======   =======  =======
 
</TABLE>

The operating results shown above reflect the inclusion in costs and expenses of
fixed charges incurred by Comverse's foreign subsidiaries necessary to support a
level of activity which is greater than that

                                      F-18
<PAGE>
 
shown in the table due to the exclusion of intercompany revenue. Foreign
operations in 1993 were profitable when intercompany transactions are included.


14. INCOME TAXES

    The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
 
                                         YEAR ENDED DECEMBER 31,
                                        --------------------------
                                          1993     1994     1995
                                          ----     ----     -----   
                                                (IN THOUSANDS)
<S>                                     <C>       <C>     <C>
Current:
    Federal                              $  682   $  667  $   529
    State                                   176      340      272
    Foreign                                 821      720    1,022
                                         ------   ------  -------
 
                                          1,679    1,727    1,823
                                         ------   ------  -------
 
Deferred (benefit):
    Federal                                 (31)       -       25
    State                                    (4)      12      (12)
    Foreign                                 (31)      44      221
                                         ------   ------  -------
 
                                            (66)      56      234
                                         ------   ------  -------
 
                                          1,613    1,783   2 ,057
 Less credit from utilization of net
  operating loss carryforward               592        -        -
                                         ------   ------  -------
 
                                         $1,021   $1,783  $ 2,057
                                         ======   ======  =======
</TABLE>

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

<TABLE>
<CAPTION>
 
                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------
                                                             1993     1994     1995
                                                           --------  -------  -------
<S>                                                        <C>       <C>      <C>
 
         U.S. Federal statutory rate                            35%      35%      35%
         Consolidated worldwide income
            in excess of U.S. income                           (28)     (36)     (31)
         Foreign income taxes                                    5        6        7
         Utilization of net operating loss carryforward         (4)       -        -
         Other                                                  (1)       8        -
                                                              ----     ----     ----
         Company's effective tax rate                            7%      13%      11%
                                                              ====     ====     ====
</TABLE>

                                      F-19
<PAGE>
 
    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 December 31,
    1994 and 1995 are as follows:

<TABLE>
<CAPTION>
 
 
                                                       1994      1995
                                                     --------  --------
<S>                                                  <C>       <C>
                                                       (IN THOUSANDS)
     Deferred tax liability:
Expenses deductible for tax purposes and
  not for financial reporting purposes               $   515   $   904
 Unrealized gain on available-for-sale securities          -       384
                                                     -------   -------
                                                     $   515   $ 1,288
 
Deferred tax asset:
   Reserves not currently deductible                 $ 1,763   $ 2,494
   Tax loss carryforwards                              2,261     2,217
    Inventory capitalization                             589       138
 Other                                                   283       337
                                                     -------   -------
                                                       4,896    5,186

  Less: valuation allowance                           (4,309)   (4,465)
                                                     -------   -------
 
Total deferred tax asset                             $   587   $   721
                                                     =======   =======
</TABLE>

At December 31, 1995, the Company had net operating loss carryforwards for U.S.
income tax purposes resulting from employees' exercise of stock options of
approximately $4,300,000 expiring in various periods through 2010. Utilization
of such net operating loss carryforwards will increase Additional Paid-in
Capital.

At December 31, 1995, Startel Corporation ("Startel"), a wholly-owned subsidiary
of Comverse, had net operating loss carryforwards of approximately $1,680,000
for U.S. income tax reporting purposes expiring in various periods through 2005
which may be used to reduce future U.S. taxable income of Startel. The Company
is limited to utilizing approximately $188,000 per year of Startel's net
operating loss carryforwards by Section 382 of the Internal Revenue Code. The
Company utilized approximately $564,000 of such accumulated net operating loss
carryforwards in 1995, which reduced goodwill by approximately $197,000.

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.


15. BUSINESS SEGMENT INFORMATION

The Company is engaged in one business segment: the design, development,
manufacture, marketing and support of special purpose computer and
telecommunications systems and software for multimedia communications and
information processing applications.

                                      F-20
<PAGE>
 
   In 1993, sales to a government agency constituted 17% of sales, and sales to
   a Western European customer constituted 12% of sales.  In 1994 and 1995, no
   customer constituted more than 10% of sales.

   Sales by geographic regions, as a percentage of total sales, for the years
   ended December 31, 1993, 1994 and 1995 were as follows:

<TABLE>
<CAPTION>
 
 
                                                  1993   1994   1995  
                                                  -----  -----  ----- 
                            <S>                   <C>    <C>    <C>   
                                                                      
                            United States           28%    27%    29% 
                            Canada                  10%    11%     4% 
                            Europe                  37%    26%    31% 
                            Far East/Australia      16%    21%    24% 
                            Latin America            3%     8%     2% 
                            Israel                   6%     5%     9% 
                            Africa                   -      2%     1% 
                                                  ----   ----   ----  
                                                                      
                            Total                  100%   100%   100% 
                                                  ====   ====   ====   
 
</TABLE>

16. COMMITMENTS AND CONTINGENCIES

   LEASES - The Company leases office, manufacturing, and warehouse space under
   non-cancelable operating leases.  Rent expense for all leased premises
   approximated $1,899,000, $2,562,000 and $3,014,000 in 1993, 1994, and 1995,
   respectively.

   As of December 31, 1995, the annual minimum rent obligations of the Company
   were approximately as follows:

<TABLE>
<CAPTION>
 
                        AMOUNT
                        ------
                     (IN THOUSANDS)
<S>                     <C> 
 
1996                    $2,759
1997                     3,642
1998                     3,293
1999                     2,339
2000                     1,977
2001 and thereafter      2,068
                        ------
 
                       $16,078
                       =======
</TABLE>

     EMPLOYMENT AGREEMENTS - The Company is obligated under employment contracts
with its chief executive officer to provide salary, bonuses, and fringe benefits
through June 30, 2000. Minimum salary payments under the contracts currently
amount to $350,000 per year and aggregate $1,450,000 through June 30, 2000. The
executive is entitled to annual bonuses equal to at least 3% of the Company's
consolidated after-tax net income during each year. Upon termination or
expiration of the term of employment, the executive is entitled to receive a
severance payment equal to $77,000 for each year of his previous and current
employment with the Company, which is increased by the rate of 10%

                                      F-21
<PAGE>
 
   per annum compounded for each year of employment commencing with
   December 1996 (See Note 9), plus continued employment-related benefits for
   the period of 36 months thereafter.  If the termination of employment results
   from a unilateral termination or fundamental breach of the agreement by the
   Company, or the resignation of the executive within six months following a
   change in control of the Company not approved by the executive in his
   capacity as a director of Comverse, the executive is entitled to an
   additional payment equal to 299% of the average annual cash compensation,
   including salary and any bonus payments, received by the executive from the
   Company during the three immediately preceding fiscal years, plus an amount
   equal to the income tax resulting from such payment.

     Most other employment agreements of the Company are terminable with or
   without cause with prior notice of 60 days or less.

     LICENSES AND ROYALTIES - The Company licenses certain technology, "know-
   how," software 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 product
   development activities.  The Company currently pays royalties on the sale of
   substantially all of its TRILOGUE and AUDIODISK product lines in varying
   amounts based upon the revenues attributed to the various components of such
   products. Royalties typically range from approximately 1.5% to 5% 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
   ranging from 100% to 150% of 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
   further 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
   foreign residents are subject to withholding of Israeli income tax at source
   at a rate of up to 15%, depending on the particular facilities which have
   generated the earnings that are the source of the dividends.

     GUARANTIES - The Company has obtained bank guaranties primarily for
   performance of certain obligations under contracts with customers.  These
   guaranties, which aggregated approximately $9,522,000 at December 31, 1995,
   are to be released by the Company's performance of specified contract
   milestones, which are scheduled to be completed primarily during 1996.

     LITIGATION - The Company is subject to certain legal actions arising in the
   normal course of business.  After taking into consideration legal counsel's
   evaluation of such actions, management is of the opinion that their final
   resolution will not have any significant adverse effect upon the Company's
   business or its consolidated financial statements.


17. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following disclosure of the estimated fair value of financial
   instruments is made in accordance with the requirements of Statement of
   Financial Accounting Standards No. 107.  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 

                                      F-22
<PAGE>
 
   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.

                                                 DECEMBER 31, 1995
                                                 -----------------
                                                CARRYING  ESTIMATED
                                                AMOUNT    FAIR VALUE
                                                ------    ----------
                                                    (IN THOUSANDS)

   Liabilities:
       5 1/4% convertible subordinated
           debentures                             $60,000    $69,000

     Off-balance sheet financial instruments:
     Foreign exchange forward contracts
       used for hedging purposes                  $   -      $   (66)

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

   CONVERTIBLE SUBORDINATED DEBENTURES AND FOREIGN EXCHANGE FORWARD CONTRACTS -
   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 December 31, 1995.  Although management is not
   aware of any factors that would significantly affect the estimated fair value
   amounts, such amounts have not been comprehensively revalued for purposes of
   these financial statements since that date, and current estimates of fair
   value may differ significantly from the amounts presented herein.

                                      F-23
<PAGE>
 
  18. QUARTERLY INFORMATION (UNAUDITED)

   The following table shows selected results of operations for each of the
      quarters during 1994 and 1995.
<TABLE>
<CAPTION>
 
 
                                                          FISCAL QUARTER ENDED
                               MARCH 31  JUNE 30  SEPT. 30  DEC. 31  MARCH 31  JUNE 30  SEPT. 30  DEC. 31
                                 1994     1994      1994     1994      1995     1995      1995      1995
                               --------  -------  --------  -------  --------  -------  --------  --------
                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                            <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>
 
  Sales                         $23,887  $26,038   $28,893  $29,332   $29,383  $33,627   $36,116   $38,023
  Interest and Other Income       1,102    1,363     1,452    2,245     2,139    2,185     2,209     2,214
                                -------  -------   -------  -------   -------  -------   -------   -------
     Total Revenues             $24,989  $27,401   $30,345  $31,577   $31,522  $35,812   $38,325   $40,237
                                =======  =======   =======  =======   =======  =======   =======   =======
 
  Gross profit                  $13,187  $14,398   $16,324  $16,526   $16,462  $19,334   $20,451   $21,605
  Net income                    $ 2,495  $ 2,393   $ 3,472  $ 3,738   $ 2,889  $ 4,276   $ 4,707   $ 5,178
                                =======  =======   =======  =======   =======  =======   =======   =======
 
  Earnings per common and
   common equivalent share        $0.11    $0.11     $0.16    $0.17     $0.13    $0.19     $0.21   $  0.23
                                =======  =======   =======  =======   =======  =======   =======   =======
</TABLE>

  The difference between income per share for 1995 and the sum of the income per
  share for the quarters comprising the year is due to differences in the
  calculation of the weighted average number of shares outstanding over the
  respective periods and rounding adjustments.

                                      F-24
<PAGE>
 
                                   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)


                             By: S / Kobi Alexander
                                 ------------------
                                 Kobi Alexander, President

Date:  March 15, 1996

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                              March 15, 1996
------------------                      
Kobi Alexander, President,
Chairman of the Board and
Chief Executive Officer; Director


/s/ Igal Nissim                                 March 25, 1996
---------------                      
Igal Nissim, Vice President,
Finance and Chief Financial Officer


/s/ Zvi Alexander                               March 17, 1996
-----------------                      
Zvi Alexander, Director


/s/ Sam Oolie                                   March 20, 1996
-------------                      
Sam Oolie, Director


/s/ John H. Friedman                            March 18, 1996
--------------------                      
John H. Friedman, Director


/s/ William F. Sorin                            March 15, 1996
--------------------                      
William F. Sorin, Director


/s/ Yechiam Yemini                              March 25, 1996
------------------                      
Yechiam Yemini, Director

                                      F-25