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                       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, 1997


                         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: [_]

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<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 24 , 1998 was approximately $1,975,000,000.  The closing
price of the  registrant's  common stock on the NASDAQ National Market System on
March 24, 1998 was $47.25 per share.

       There were 43,461,824 shares of the registrant's common stock outstanding
on March 24, 1998.


                       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 1998 Annual Meeting
of  Shareholders  of the  registrant  or in an  amendment to this report on Form
10K/A.








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



              TRILOGUE and Access NP are registered trademarks and
            TRILOGUE INfinity, AUDIODISK, ULTRA, and SignalWare 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
products  are  used in a broad  range of  applications  by  fixed  and  wireless
telephone  network  operators,  government  agencies,  call  centers,  financial
institutions and other public and commercial organizations worldwide.

             The Company's line of enhanced  services  platform  products enable
telecommunications  network  operators to offer a variety of  revenue-generating
services that are accessible to large numbers of simultaneous users, including a
broad range of  integrated  messaging,  information  distribution  and  personal
assistant  services,  such as call  answering,  voice  mail,  fax mail,  unified
messaging,  pre-paid services, short text messaging and audiotext. The Company's
Comverse  Network  Systems  ("CNS")  Division's  principal  market  consists  of
organizations that use the systems to provide services to the public, usually on
a  subscription  or  pay-per-usage  basis,  and includes both fixed and wireless
telephone network operators and other telecommunications services organizations.

         In January  1998,  Boston  Technology,  Inc.,  a  Delaware  corporation
("Boston"),  merged with and into  Comverse  in a  transaction  in which  former
shareholders of Boston received an aggregate of 18,141,185, shares of Comverse's
Common  Stock,  par value $0.10 per share  ("Common  Stock").  Boston,  like the
Company's CNS Division,  manufactures multimedia enhanced services platforms for
service  provider  organizations,  including  both fixed and wireless  telephone
network operators.  Boston's enhanced services platforms are similar in features
to those of the Company,  but have  traditionally  been sold to different market
segments,  which include,  among others,  several of the Regional Bell Operating
Companies  in the  United  States  and NTT in Japan.  Prior to its  merger  with
Boston,  Comverse's  marketing  efforts were focused  primarily on international
network operators, as well as wireless personal communications network operators
in the United States.  The business and assets of Boston have been combined with
the CNS Division  following the merger of Boston with  Comverse (the  "Merger").
Except for financial  information and as otherwise indicated,  discussion of the
business of the Company in this report includes the business of Boston.

     The Company markets its enhanced services  platforms  throughout the world,
with its own  direct  sales  force and in  cooperation  with a number of leading
international  vendors  of  telecommunications   infrastructure  equipment.  The
Company is the market-share leader in providing large capacity enhanced services
platforms for wireless and wireline  telecommunications  network operators. More
than  250  fixed  and  wireless  telephone  network  operators  in more  than 65
countries, including 13 of the 20 largest telephone companies in the world, have
selected the Company's platforms to provide enhanced telecommunications services


                                     - 1 -
<PAGE>

to their public customers. CNS customers include, among others, AT&T (USA), Bell
Atlantic (USA),  BellSouth (USA),  Deutsche Telekom (Germany),  Hongkong Telecom
(Hong Kong), NTT (Japan),  SBC  Communications  (USA), SFR (France),  Sprint PCS
(USA),  Telebras (Brazil),  Telecom Italia (Italy),  Telmex (Mexico) and Telstra
(Australia).

         The   Company's   Comverse   Information   Systems   ("CIS")   Division
manufactures  multiple channel,  multimedia  digital monitoring  systems,  which
support the monitoring,  recording,  surveillance, and information gathering and
analysis  activities of law enforcement and intelligence  agencies,  and digital
recording  systems which support the voice,  fax and data recording and analysis
activities  of a variety  of  governmental  and  commercial  organizations.  The
Company's  monitoring systems enable many simultaneous users to monitor,  record
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  information  and allow the use of computer
database   processing   techniques   for  analysis,   management  and  retrieval
operations.  The  systems  have  been  sold  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.  Customers
such as inbound and outbound call centers,  commercial organizations,  emergency
service (e.g.,  "911")  providers,  correctional  facilities,  public health and
safety  organizations  and  financial  institutions,   use  the  Company's  call
recording  systems 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 used 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.  The Company's systems provide a number of advantages over analog,
tape recorder-based equipment, including improvements in capacity,  reliability,
accuracy,  processing efficiency and archiving and retrieval capabilities.  Most
importantly,  the systems enable users to adapt  efficiently to the emergence of
new telecommunications  technologies,  such as digital transmission,  Integrated
Services  Digital Network  ("ISDN") and enhanced  signaling  systems,  for which
analog,  tape recorder-based  equipment was not designed.  CIS Division products
have been sold to end-users in more than 30 countries.

         The  Company's  DGM&S Telecom  ("DGM&S")  Division  provides  Signaling
System Number Seven ("SS7")  telecommunications  software and hardware.  DGM&S's
products provide  Intelligent  Network ("IN") and Advanced  Intelligent  Network
("AIN") applications for voice, data and mobility  communications  services such
as 800 number translation,  voice mail, Internet routing,  short text messaging,
local number portability, cellular roaming and emergency "911" services. DGM&S's
products are marketed to wireline and wireless  equipment  providers and network
operators   to   enable   global   connectivity,   inter-platform   portability,
client/server  flexibility and clustering reliability.  The products provide the
global  standards  and  national  variants  needed to  communicate  between  the
disparate  signaling protocols  worldwide,  and enable operators to use either a
UNIX or Windows NT platform.  The products,  which offer


                                     - 2 -
<PAGE>

mediated  access  to the  telecommunications  signaling  network,  operate  in a
client/server configuration.

         DGM&S's  customers   include,   among  others,   Amdahl,   Compaq,  DSC
Communications,  Ericsson,  MCI,  Nokia,  PTT Telecom  (Netherlands),  Qualcomm,
Siemens, Sprint and Sun Microsystems.

         Through  subsidiaries  and affiliates,  the Company is also involved in
the development of technologies and products incorporating video compression and
networking,  the  design and  development  of systems  for  telephone  answering
service  bureaus,  the operation of  telemessaging  service  bureaus and capital
market activities for its own account.

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

         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

Comverse Network Systems Division: Enhanced Services Platform Product Family

         The market for  network-based  enhanced  services  platforms  has grown
rapidly  over the past  several  years.  The Company  believes  that a number of
factors have contributed to this growth, including the heightened emphasis among
wireless  and  wireline  telecommunications  network  operators  on offering new
services for revenue-generation and competitive differentiation,  the increasing
public awareness and acceptance of multimedia  messaging services resulting from
the growing installed base of messaging systems in the business  community,  the
expanding  availability  from the major  telephone  companies of call  answering
services,  and the growing  use of wireless  telephone  services,  which  almost
universally offer a mailbox-based call answering service.

         The CNS Division's  primary focus has been on supplying  large-capacity
enhanced  services  platforms,  which are marketed under the names Access NP and
TRILOGUE INfinity, to fixed and wireless  telecommunications  network operators.
These organizations  benefit from the ability to offer their customers a variety
of  revenue-generating  services  provided  by the  Company's  systems,  such as
automated call answering, voice and fax messaging,  unified messaging,  pre-paid
services,  short  text  messaging,  audiotext,  voice  activated  dialing,  call
screening,  one-touch call return,  automated  personal  assistant  services and
"virtual  telephone"  service,  usually on a subscription or pay-per-call basis.
With call answering and voice and fax


                                     - 3 -
<PAGE>

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,  and often as part of their basic service
package, not only because of these benefits, but also because wireless messaging
services directly increase billable airtime by stimulating outbound calls.

         The  Company's  enhanced  services  platforms  have been  designed  and
packaged to meet the capacity,  reliability,  scalability,  maintainability  and
physical  requirements of large  telephone  network  operators.  The systems are
offered in a variety of sizes and configurations,  extending to a capacity of up
to 6,000 ports, 45,000 voice storage hours and 1,000,000 mailboxes.  The systems
also offer  redundancy of critical  components,  so that no single  failure will
interrupt the service. The Company's platforms are available in both centralized
and widely distributed configurations,  and maintain their integrity as a single
system in distributed configurations.

         The Company's  systems also incorporate  components that are compatible
with the IN and AIN protocols for Intelligent Peripherals ("IP"), permitting the
Company's network operator customers to develop and deploy services based on the
overall  IN/AIN  architecture.  In addition,  when the system is configured as a
Service Node ("SN"), it enables customers to offer next-generation  IN/AIN-based
services such as personal number, call screening/caller introduction,  one-touch
call return and pre-paid.  The incorporation of IN and AIN-related software also
allows  a  customer,   which  has  not  yet  implemented   intelligent   network
infrastructure,  to purchase an enhanced services platform from the Company with
the confidence that it contains a built-in  migration path to IN/AIN  standards,
should the network  operator decide to implement  IN/AIN  infrastructure  in the
future.

             The Company's  platforms  incorporate  proprietary  and third-party
software,  and industry  standard and  proprietary  hardware,  in an open system
architecture.  Most hardware is based on Industry Standard Architecture ("ISA"),
which  facilitates the integration of  commercially  available ISA  technologies
with the  Company's  core  technologies.  The systems  support a wide variety of
analog and digital telephony interfaces and signaling systems,  enabling them to
adapt to a variety of different telephony  environments and IN/AIN applications,
and provide a "universal port" -- a single port that supports any combination of
voice and fax  services at any time during a single  call.  The Company has also
introduced Internet messaging  capabilities,  enabling end-users to access their
voice,  fax and e-mail text  messages  from  anywhere in the world via the World
Wide Web.


Comverse Information Systems Division: Monitoring and Recording Systems

         Comverse's  Information  Systems  Division  develops,  manufactures and
markets   monitoring  and  recording  systems  primarily  for  law  enforcement,
intelligence agencies, call centers and financial institutions.


                                     - 4 -
<PAGE>

         The  Company's  AUDIODISK  systems  are  multiple  channel,  multimedia
digital monitoring  systems,  sold primarily to law enforcement and intelligence
agencies,  which enable  multiple users  simultaneously  to monitor,  record and
process audio, image (facsimile) and data  communications over multiple 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  multiple users to access the same recorded
information simultaneously for processing and analysis.

         The  Company's  ULTRA  line of  multiple  channel,  multimedia  digital
recording   systems  are   marketed   primarily  to  call   centers,   financial
institutions,  emergency "911" service providers, correctional institutions, and
other  organizations  that record large volumes of  communications,  and require
fast and easy retrieval of recorded information.

         Traditionally,  analog tape recorders,  alone or coupled with a variety
of  other  special  purpose  devices,  have  been  utilized  for  communications
monitoring,  recording  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. The Company's 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,  they also enable users to adapt efficiently to the emergence
of  new  telecommunications  technologies,  such  as  digital  transmission  and
enhanced signaling systems, for which analog, tape recorder-based  equipment was
not  designed.  The systems  provide a number of  advantages  over analog,  tape
recorder-based  systems,   including  improvements  in  capacity,   reliability,
accuracy, processing efficiency and archiving and retrieval capabilities.

         The AUDIODISK  product design is based on open system  architecture and
client/server  concepts,  and  supports a broad range of  multimedia  monitoring
capabilities,  such as the  recording,  processing and retrieval of analog audio
signals,  such as  telephone  and radio  channels;  analog  facsimile  and modem
communications; digital audio and data signals, including ISDN, T1, E1 and X.25;
and  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 use 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.  The  systems  also  enable  users to  transmit
multimedia information among multiple sites over


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<PAGE>

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. AUDIODISK systems
also 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. The product 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.

         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 can be configured in a variety of models to
support a range of applications,  including  large,  fixed-site audio monitoring
platforms  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.

         ULTRA systems provide  Computer-Telephony  Integration  ("CTI") enabled
recording,  including  integration with major PBX/ACDs,  Predictive  Dialers and
middleware  products.  The CTI  connection  allows the customer to easily search
calls through database  queries.  In addition,  selective  recording is possible
through  time-driven  schedules or event  triggers.  ULTRA systems  support high
volume of simultaneous  playbacks over the telephone or through LANs,  WANs, and
the  Internet.  Immediate  access to  recordings  is possible  through  advanced
optical disk technology and jukeboxes.  The ULTRA Series comprises six products,
tailored to  customer-specific  requirements  for capacity,  storage and special
features.


DGM&S Telecom Division: Telecommunications Signaling Products

         The DGM&S Telecom Division provides SS7 telecommunications software and
hardware,  marketed  under  the name  SignalWare.  DGM&S's  SignalWare  products
provide IN/AIN applications for voice, data and mobility communications services
such as 800  number  translation,  voice  mail,  Internet  routing,  short  text
messaging,  local  number  portability,  cellular  roaming and  emergency  "911"
services.  DGM&S's  products are  marketed to wireline  and  wireless  equipment
providers and network  operators to enable global  connectivity,  inter-platform
portability,  client/server flexibility and clustering reliability. The products
provide the global


                                     - 6 -
<PAGE>

standards  and national  variants  needed to  communicate  between the disparate
signaling  protocols  worldwide,  and enable  operators  to use either a UNIX or
Windows NT platform.  SignalWare  products,  which offers mediated access to the
telecommunications signaling network, operates in a client/server configuration.

         DGM&S's  customers   include,   among  others,   Amdahl,   Compaq,  DSC
Communications,  Ericsson,  MCI,  Nokia,  PTT Telecom  (Netherlands),  Qualcomm,
Siemens, Sprint and Sun Microsystems.

MARKETS, SALES AND MARKETING

         The  Company's  CNS  Division  markets  enhanced   services   platforms
throughout the world,  with its own direct sales force 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 telephone network operators around the world.

         More than 250 fixed and wireless  telephone  network  operators in more
than 65  countries,  including 13 of the 20 largest  telephone  companies in the
world,  have selected the Company's  platforms for messaging and other  enhanced
services.  The Company's network operator customers include,  among others, AT&T
(USA),  Bell  Atlantic  (USA),  BellSouth  (USA),  Deutsche  Telekom  (Germany),
Hongkong  Telecom  (Hong Kong),  NTT (Japan),  SBC  Commmunications  (USA),  SFR
(France),  Sprint PCS (USA), Telebras (Brazil),  Telecom Italia (Italy),  Telmex
(Mexico) and Telstra (Australia).

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

             The  Company's  CIS Division  markets  AUDIODISK  and ULTRA 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.  Primary target markets for
the ULTRA Series  include call centers,  public  safety and  emergency  services
organizations and financial institutions.


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
use 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


                                     - 7 -
<PAGE>

also  possesses  considerable  technology  and expertise in the  development  of
software products, solutions and applications within the IN and AIN environment.

         The  Company's  products are based upon flexible  system  architectures
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 open system,  modular  architectures,  which use 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
architectures also allow 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  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  SS7  interfaces   designed  to  encompass  both  basic  network
connectivity and the IN/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.  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.


                                     - 8 -
<PAGE>

RESEARCH AND DEVELOPMENT

         Because of the continuing  technological  changes that characterize the
telecommunications  and computer industries,  the Company's success will depend,
to a considerable  extent,  upon its ability to continue to develop  competitive
products through its research and development efforts.

         The  Company 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 more than 1,200 scientists,  engineers
and technicians 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  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 its
research and development activities situated in Israel. The cost of such efforts
is affected by the continued  availability  of funding under such programs.  The
percentage  of  the  Company's  total  research  and  development   expenditures
reimbursed  under these programs has declined in recent years, and will 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.  Permission  from the government of
Israel is required  for the Company to  manufacture  outside of Israel  products
resulting from research and development  activities  funded under such programs,
or to transfer  outside of Israel  related  technology  rights,  and in order to
obtain such  permission the Company may be required to increase the royalties to
the  applicable  funding  agencies  and/or  repay  certain  amounts  received as
reimbursement  of research and development  costs.  The Company expects to incur
additional  royalty  expenses  and/or  repayment  obligations as a result of the
Merger and the location of certain  manufacturing  and research and  development
operations pertaining to its TRILOGUE product line at its Boston facilities. See
"Business--Licenses  and  Royalties,"  "Management's  Discussion and Analysis of
Financial  Condition  and  Results of  Operations"  and Note 3 to the  financial
statements.


PATENTS AND INTELLECTUAL PROPERTY RIGHTS

         The Company  currently  holds a total of 17 United States patents and a
number  of  foreign  patents.   While  the  Company  files  patent  applications
periodically, no assurance can be given that patents will be issued on the basis
of such applications or that, if patents are issued,  the claims allowed will be
sufficiently  broad  to  protect  the  Company's  technology.  In  addition,  no
assurance  can be given  that any  patents  issued  to the  Company  will not be
challenged,  invalidated  or  circumvented  or that the rights granted under the
patents will provide significant benefits to the Company.


                                       9
<PAGE>

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

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


LICENSES AND ROYALTIES

         The Company  licenses certain  technology,  know-how and related rights
for use in the manufacture and marketing of its products,  and pays royalties to
third  parties under such  licenses and under other  agreements  entered into in
connection with research and development  financing.  The Company  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 enhanced  services  platforms  and on certain  sales of  AUDIODISK,
ULTRA and  derivative  products.  The  royalties  vary in amount  based upon the
revenues  attributable to the various components of such products.  During 1995,
1996 and 1997, aggregate license and royalty payments by the Company amounted to
approximately $2,419,000, $4,365,000 and $6,865,000, respectively.


INTERNATIONAL SALES

         Sales of the Company's products outside of North America have increased
from approximately $92,046,000 in 1995 to approximately $136,236,000 in 1996 and
$205,988,000 in 1997. 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.  In
certain cases, the Company's contracts are denominated in local currencies,  and
as  such,  the  Company  may be  adversely  affected  by  fluctuations  in those
currencies.  International sales of certain systems  manufactured by the Company
also are subject to a variety of legal restrictions governing the export of such
products.


                                       10
<PAGE>

         While the Company believes that prevailing  economic  conditions in the
Far East and  Southeast  Asia have reduced the demand for its systems in certain
countries,  overall sales in the region have  increased over the past 12 months.
The Company cannot currently  predict the effect on its business should regional
economic conditions fail to improve.

         For additional  information regarding foreign operations,  see Notes 16
and  18  of  Notes  to  Consolidated   Financial  Statements  and  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Certain Trends and Uncertainties" appearing elsewhere in this report.


BACKLOG

         At  December  31,  1997,  the  backlog  of  the  Company   amounted  to
approximately  $87,644,000,  compared with approximately $70,339,000 at December
31, 1996, an increase of  approximately  $17,305,000.  Substantially  all of the
current backlog is expected to be delivered within the next 12 months.


SERVICE AND SUPPORT

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

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

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


COMPETITION

         The enhanced  services  platform  industry is highly  competitive,  and
includes  numerous  products  offering a broad range of features and capacities.
The  primary  direct  competitors  of the  CNS  Division  are  manufacturers  of
stand-alone voice mail systems,  including,  among others,  Brite Voice Systems,
Inc., Centigram Communications  Corporation,  Glenayre Electronics,  Inc., Octel
Communications  Corporation  (acquired  in 1997 by Lucent  Technologies,  Inc.),
Tecnomen  Oy,  Unisys   Corporation,   and   manufacturers   of  central  office
telecommunications   equipment,   including   Northern   Telecom   Limited   and
Telefonaktiebolaget  LM 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.


                                       11
<PAGE>

         Indirect  competition  is provided by voice and fax messaging  products
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 enhanced  services
platforms  is based on a number  of  factors,  the most  important  of which are
product  features  and   functionality,   system  performance  and  reliability,
marketing and  distribution  capability and price.  Other important  competitive
factors include 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, its  enhanced  services  platforms  are  competitive  with other
platforms currently being marketed,  and that its products are among the leading
systems designed specifically for telephone network operators.

         Neither the Company nor any of the Company's  competitors is a dominant
vendor of enhanced services platforms in any market segment or product line. The
Company anticipates that a number of its direct and indirect competitors will be
introducing new or improved enhanced services  platforms during the next several
years.

         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 Applied Signal Technology, Inc., the E-Systems division
of Raytheon  Corporation,  GTE Government Systems Division,  Harris Corporation,
JSI Corporation  and Nice Systems,  Ltd.  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 market in which ULTRA
products are sold is also highly  competitive.  Primary competitors include Atis
Assmann GmbH, Dictaphone  Corporation,  Kreutler GmbH, Nice Systems, Ltd., Racal
Recorders Ltd.,  Seltronics  Corp.,  TEAC America,  Inc.,  Teknekron  Infoswitch
Corporation and Witness Systems, Inc.


                                       12
<PAGE>

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


MANUFACTURING AND SOURCES OF SUPPLIES

         The  Company's  manufacturing  operations  consist  primarily  of final
assembly and testing, involving the application of extensive testing and quality
control  procedures to materials,  components,  subassemblies  and systems.  The
Company 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.


CAPITAL MARKET ACTIVITIES

             The Company has organized a  wholly-owned  subsidiary,  CTI Capital
Corp.  ("CTI Capital"),  in support of its exploration of strategic  acquisition
and investment  opportunities.  CTI Capital, 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 and capital market activities,  primarily in Israel.  Such activities
include,  in addition  to direct  investment  in public and  private  companies,
investment and merchant  banking  activities and short-term  trading of debt and
equity securities. Through ComSor Investment Fund N.V., formed by CTI Capital in
partnership  with a subsidiary of Soros Fund Management  LLC., the Company seeks
to invest venture capital in high technology  firms,  primarily those located in
Israel,  and engages in other investment  activities.  The ComSor fund has a $25
million  dollar  capital  commitment  each from CTI Capital and a subsidiary  of
Soros Fund  Management.  Comverse  also engages in direct  strategic and capital
management investment activities for its own account.


                                       13
<PAGE>

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 to some extent on trading relationships
between  Israel  and  other  countries.   Certain  of  the  Company's   products
incorporate  components  imported  into Israel from the United  States and other
countries  and most of the  Company's  products  are  sold  outside  of  Israel.
Accordingly,  the  Company's  operations  would be  adversely  affected if major
hostilities  involving  Israel should occur or if trade  between  Israel and its
current trading  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


                                       14
<PAGE>

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 had not
previously had such relations.

         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  1993  through  1997,   the  annual  rates  of  inflation  were
approximately 11%, 14%, 8%, 11% and 7%,  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,  and
accordingly  has 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,  1997,  the  Company   employed  2,827   individuals,
approximately 76% of whom are scientists,  engineers and technicians  engaged in
research and development, marketing and support activities.


                                       15

<PAGE>

         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.

         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  several
parameters, including the profitability of their respective business units.


ITEM 2.  PROPERTIES.

         As of December  31,  1997,  the Company,  excluding  Boston,  leased an
aggregate  of  approximately  548,000  square  feet of space for its  operations
worldwide,  including  approximately  414,000  square feet in Tel Aviv,  Israel,
approximately  46,000 square feet in Woodbury,  New York,  approximately  31,000
square feet in Mt.  Laurel,  New  Jersey,  approximately  22,000  square feet in
Irvine,  California,  and an aggregate of  approximately  35,000  square feet at
various other locations in the United States,  Israel,  Western Europe,  the Far
East and Australia.  The aggregate  base monthly rent for the  facilities  under
lease at December 31, 1997 was  approximately  $604,000,  and all of such leases
are subject to various pass-throughs and escalation adjustments.

         In March  1998,  the  Company  entered  into a lease for  approximately
93,500  square feet in Tel Aviv,  Israel to increase the capacity of its Israeli
operations.  The monthly base rent for the new premises starts at  approximately
$103,000.

             The Company believes that its facilities  currently under lease are
adequate  for  its  current  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.


                                       16
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.

         On November 16, 1995, a purported  class action was filed in the United
States District Court for the Eastern  District of  Pennsylvania  against Boston
and certain of its officers.  Two similar  complaints were filed on November 20,
1995 and November 21, 1995. The plaintiffs  alleged violations of the Securities
Exchange Act of 1934.  On February 15, 1996,  the Court  consolidated  the three
cases into one captioned In re Boston Technology,  Inc., Securities  Litigation.
On November 13, 1996, Boston was allowed to transfer the consolidated  action to
the United States District Court for the District of Massachusetts.  On February
5, 1998,  the Court issued an order granting the  defendants'  motion to dismiss
the Amended  Complaint.  No final  judgment  has been  entered in the case.  The
Company has received no information  regarding any plans the plaintiffs may have
to ask the Court to reconsider its order,  attempt to re-plead their claims,  or
appeal from any judgment that might be entered. However, if any of these actions
are taken by the  plaintiffs,  the  Company and the other  defendants  intend to
contest these actions vigorously.

         On or about March 11,  1997,  a complaint  was filed in the  Fourteenth
Judicial  District  Court of Dallas  County,  Case No.  9702187,  by  Syntellect
Technology  Corporation  ("Syntellect").  The  complaint  alleges,  among  other
things,  breach of  contract  by Boston in failing or  refusing  to pay  certain
royalties  allegedly due under the Patent License  Agreement  between Boston and
Syntellect's   predecessor,   Dytel   Corporation  (the  "License   Agreement").
Syntellect claims that the License Agreement required Boston to pay royalties on
sales of its  software and hardware  products.  On February 10, 1998,  the Court
granted the Company partial summary judgment, holding that the License Agreement
requires  payment of royalties on software  products  only,  and not on hardware
sales. Discovery on the remaining claims continues, and a trial is scheduled for
the summer of 1998.  The  Company is  currently  engaged  in  negotiations  with
Syntellect  for the  settlement of the litigation and the license by the Company
of a number of patents for which Syntellect holds licensing rights.  Should such
negotiations not result in the settlement of the action,  the Company intends to
contest Syntellect's claims vigorously.

         On February 2, 1998,  Computel  Computadores e  Telecommunicacoes  S.A.
("Computel")  filed a Request for Arbitration with the International  Chamber of
Commerce  ("ICC")  in  Paris,  France,  claiming  breaches  by  Boston  and  its
wholly-owned  subsidiary,  Boston  Technology  Investments,  Inc., in respect of
agreements  with Computel and its  affiliates for the  distribution  of Boston's
systems in Brazil. Computel claims, among other things, that the defendants have
breached  their  obligations  to  Computel by engaging in the Merger and thereby
competing with the joint venture  established by the parties in connection  with
such distribution  activities,  by delivering  equipment that did not conform to
specification,  by  failing  to  support  this  equipment  and by  "fraudulently
inducing" Computel to terminate the agreement that established the joint venture
without advising it of the possibility of the Merger.  In its prayer for relief,
Computel  alleges  damages  in  excess  of US $50  million  as a result  of lost
business opportunities, injury to its business reputation, investment losses and
losses due to currency devaluation.  On March 10, 1998, the Company commenced an
action  against  Computel and an affiliate in the  Middlesex  Superior  Court of
Massachusetts (Civil Action No. 98-1155) seeking declaratory judgments as to


                                       17
<PAGE>

arbitrability  and the  continuing  validity of the Purchase and Sale  Agreement
between the parties,  Computel's  specific  performance  of such  agreement  and
injunctions to prevent  Computel from proceeding with the ICC  arbitration.  The
Company also seeks  damages in excess of  $3,767,500  as a result of  Computel's
failure to pay monies owed under the  Purchase  and Sale  Agreement,  as well as
costs and attorneys'  fees. The Company has also filed a Demand for  Arbitration
with the American  Arbitration  Association  in Boston,  Massachusetts,  against
Computel  and  certain  of its  affiliates  claiming  breach  of a  Distribution
Agreement  between the parties and unfair and  deceptive  trade  practices.  The
Company seeks to recover  damages in excess of $12,000,000,  plus interest,  for
systems  shipped  to  respondents,   and  additional  damages  for  respondents'
repudiation and  anticipatory  breach of contract and unfair and deceptive trade
practices.  The Company  intends to  vigorously  contest  Computel's  claims and
assert its claims against Computel and its affiliates.

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

At the 1997 Annual  Meeting of  Shareholders  of  Comverse,  held on January 13,
1998,  the  following  matters,  in addition to the  reelection of the incumbent
Board of Directors, were approved by the shareholders with the votes indicated:

<TABLE>
<CAPTION>
                                                                           Number of Shares
                                                                                                   Abstentions and
                                                               Voted For      Voted Against        Broker Non-Votes
<S>                                                             <C>                <C>                 <C>
1.    Adoption of the Agreement and Plan
      of Merger providing for the Merger
      and related actions.                                      19,518,465         55,052              4,023,159

2.    Ratification of the appointment of
      Deloitte & Touche LLP as Comverse's
      independent auditors for the fiscal year
      ending December 31, 1997.                                 23,419,355         17,998                 75,567

3.    Approval of Comverse's 1997 Stock
      Incentive Compensation Plan under
      which up to 2.5 million shares of
      Common Stock may be issued as
      equity-based compensation to Company
      employees and directors.                                  11,585,060      7,902,484              4,025,376

4.    Approval of Comverse's 1997 Employee
      Stock Purchase Plan under which up to
      250,000 shares of Common Stock may be
      issued for purchase by employees of the
      Company.                                                  19,391,347        175,745              3,945,828
</TABLE>





                                       18
<PAGE>

                                     PART II


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

             The Common Stock trades on the NASDAQ  National Market System under
the symbol CMVT.  The following  table sets forth the range of closing prices of
the Common Stock as reported on NASDAQ for the past three calendar years and for
the first calendar quarter of 1998, through March 24, 1998.

             YEAR     CALENDAR QUARTER               LOW             HIGH

             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                $ 16-5/8         $ 25-1/8
                      Second Quarter               $ 23-3/8         $ 30-1/2
                      Third Quarter                $ 23-3/4         $ 41-3/8
                      Fourth Quarter               $ 32-9/16        $ 38-1/8

             1997     First Quarter                $ 36-7/8         $ 46-3/8
                      Second Quarter               $ 36-1/2         $ 52
                      Third Quarter                $ 45-15/16       $ 53-1/16
                      Fourth Quarter               $ 32-5/16        $ 54-3/16

             1998     First Quarter
                      (through March 24, 1998)     $ 30-5/8         $ 47-3/4

         There were 3,005  holders of record of Common  Stock at March 24, 1998.
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 40,000.

         The Company has not  declared or paid any cash  dividends on its equity
securities  and does not  expect to pay any cash  dividends  in the  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."



                                       19
<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,  1997.
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 has been
retroactively  adjusted  to  account  for  that  transaction  as  a  pooling  of
interests.

<TABLE>
<CAPTION>


                                                                                  Year Ended December 31,
                                                           ----------------------------------------------------------------
                                                              1993(1)      1994(1)        1995          1996         1997

                                                                          (In thousands, except per share data)
   Statement of Operations Data:
   Revenues:
<S>                                                        <C>           <C>          <C>          <C>            <C>
       Sales                                               $   81,388    $  108,150   $  137,149   $  197,181     $ 280,281
       Interest and other income                                3,203         6,162        8,747       10,130        16,209
                                                           ----------    ----------   ----------   ----------     ---------
           Total revenues                                      84,591       114,312      145,896      207,311       296,490

   Costs and Expenses:
       Cost of sales                                           35,125        47,715       59,297       84,319       118,857
       Selling, general and administrative                     23,468        33,681       41,388       53,347        74,064
       Research and development, net                            8,161        12,640       19,426       27,441        38,659
       Interest expense and other                               1,057         3,947        4,406        7,063         9,769
       Royalties and license fees                               1,911         2,186        2,419        4,365         6,865
           Total costs and expenses                            70,105       100,431      126,789      176,500       248,175


Income before income tax provision and
   extraordinary item                                          14,486        13,881       19,107       31,346        48,315
Income tax provision                                            1,021         1,783        2,057        3,358         4,815
                                                           ----------    ----------   ----------   ----------     ---------
           Net income                                      $   13,465    $   12,098   $   17,050   $   27,988     $  43,500
                                                           ==========    ==========   ==========   ==========     =========

Earnings per share -diluted                                $     0.65    $     0.55   $     0.75   $     1.16     $    1.61
                                                           ==========    ==========   ==========   ==========     =========

Weighted average number of common
   and common equivalent shares outstanding                    20,756        21,868       22,602       26,447        27,099

                                                                                       December 31,
                                                           ----------------------------------------------------------------
                                                               1993(2)       1994       1995              1996       1997

                                                                                     (In thousands)
Balance Sheet Data:
   Working capital                                         $  138,149    $  141,344   $  155,064   $  292,249   $   330,303
   Total assets                                               174,468       192,502      221,454      390,901       457,563
   Long-term debt, including current portion                   63,232        62,810       61,086      115,605       115,630
   Stockholders' equity                                        91,608       101,613      121,766      212,058       261,482
</TABLE>

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


                                       20
<PAGE>

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


FORWARD-LOOKING STATEMENTS

             This report  contains  forward-looking  statements  that  involve a
number of risks and  uncertainties,  including  without  limitation  information
regarding  competition  and future trends in the industries in which the Company
competes,  the Company's future revenues and expenses,  and the Company's plans,
strategies and expectations for its business. There are a number of factors that
could cause the Company's actual results and business plans to differ materially
from those  forecasted or projected in such  forward-looking  statements.  These
factors  include,  without  limitation,  those set forth below under the caption
"Certain  Trends and  Uncertainties".  Readers are  cautioned not to place undue
reliance on these  forward-looking  statements,  which speak only as of the date
hereof.  The Company undertakes no obligations to publicly release any revisions
to these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.


RESULTS OF OPERATIONS

             The following  discussion and analysis of the Company's  results of
operations  covers  the  operating  results  of  Comverse  and its  consolidated
subsidiaries for the fiscal years included in the foregoing  selected  financial
data. The operating  results of Boston are not included.  In connection with the
Merger,  the fiscal year of the Company has been changed from the calendar  year
to the fiscal year ending January 31, corresponding to Boston's fiscal year. The
Company  is  recognizing  substantial  charges  relating  to the  Merger and the
resulting  combination of the two companies,  effective upon the consummation of
the Merger in January  1998.  Sales in the January,  1998  one-month  transition
period (including  Boston) were  approximately  $14,401,000,  with a net loss of
approximately $115,207,000.

Comparison of 1996 and 1997 Operations

         Total  Revenues.   Total  revenues  increased  from  1996  to  1997  by
approximately  $89,179,000  (43%).  The increase is attributable  primarily to a
higher volume of sales of systems and parts.  Sales  increased from 1996 to 1997
by approximately  $83,100,000 (42%), primarily resulting from increased sales in
the TRILOGUE product line. Interest and other income increased from 1996 to 1997
by approximately  $6,079,000 (60%),  resulting primarily from increased interest
and dividend income,  the investment of funds generated  through the issuance of
convertible subordinated debentures in October 1996, and realized gains on sales
of investments.

         Cost of Sales.  Cost of sales  increased by  approximately  $34,538,000
(41%) from 1996 to 1997  primarily as a result of the  increase in sales.  Gross
margins  increased from  approximately  57.2% in 1996 to approximately  57.6% in
1997.


                                       21
<PAGE>

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative expenses increased from 1996 to 1997 by approximately $20,717,000
(39%) and as a percentage of total revenues  decreased from approximately 26% in
1996 to  approximately  25% in  1997.  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.

         Research  and  Development  Expenses.   Net  research  and  development
expenses during 1997 increased by approximately  $11,218,000 (41%) over 1996 due
to overall  growth of research and  development  operations,  the  initiation of
significant new research and development  projects and increases in salaries and
other costs associated with research and development operations in Israel.

         Royalties and License Fees.  Royalties and license fees  increased from
1996 to 1997 by approximately  $2,500,000 (57%) due primarily to growth in sales
of royalty-bearing products. Royalties and license fees as a percentage of total
sales increased from  approximately  2.2% in 1996 to approximately 2.4% in 1997,
reflecting  an  increase in the royalty  rate  payable to a funding  agency that
became effective in 1996.

         Income Tax Provision. Provision for income taxes increased from 1996 to
1997 by approximately  $1,457,000  (43%),  while the Company's overall effective
tax rate decreased from approximately  10.7% during 1996 to approximately  10.0%
in 1997. The Company's  overall rate of tax is reduced  significantly by the tax
benefits   associated   with   qualified   activities  of  one  of  its  Israeli
subsidiaries, 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
$27,988,000  in 1996 to  approximately  $43,500,000  in  1997,  an  increase  of
approximately $15,512,000 (55%), while net income after taxes as a percentage of
total revenues increased from approximately 13.5% in 1996 to approximately 14.7%
in 1997. The increases resulted primarily from the factors described above.

Comparison of 1995 and 1996 Operations

         Total  Revenues.   Total  revenues  increased  from  1995  to  1996  by
approximately  $61,415,000  (42%).  The increase is attributable  primarily to a
higher volume of sales of systems and parts.  Sales  increased from 1995 to 1996
by approximately  $60,032,000 (44%), primarily resulting from increased sales in
the TRILOGUE product line. Interest and other income increased from 1995 to 1996
by approximately  $1,383,000 (16%),  resulting primarily from increased interest
and dividend income,  the investment of funds generated  through the issuance of
convertible subordinated debentures in October 1996, and realized gains on sales
of short-term investments.


                                       22
<PAGE>

         Cost of Sales.  Cost of sales  increased by  approximately  $25,022,000
(42%) from 1995 to 1996  primarily as a result of the  increase in sales.  Gross
margins  increased from  approximately  56.8% in 1995 to approximately  57.2% in
1996.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative expenses increased from 1995 to 1996 by approximately $11,959,000
(29%) and as a percentage of total revenues  decreased from approximately 28% in
1995 to  approximately  26% in  1996.  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.

         Research  and  Development  Expenses.   Net  research  and  development
expenses during 1996 increased by  approximately  $8,015,000 (41%) over 1995 due
to overall  growth of research and  development  operations,  the  initiation of
significant new research and development  projects and increases in salaries and
other costs associated with research and development operations in Israel.

         Royalties and License Fees.  Royalties and license fees  increased from
1995 to 1996 by approximately  $1,946,000 (80%) due primarily to growth in sales
of royalty-bearing products. Royalties and license fees as a percentage of total
sales increased from  approximately  1.8% in 1995 to approximately 2.2% in 1996,
reflecting  an  increase in the royalty  rate  payable to a funding  agency that
became effective in 1996.

         Income Tax Provision. Provision for income taxes increased from 1995 to
1996 by approximately  $1,301,000  (63%),  while the Company's overall effective
tax rate decreased from approximately  10.8% during 1995 to approximately  10.7%
in 1996. The Company's  overall rate of tax is reduced  significantly by the tax
benefits   associated   with   qualified   activities  of  one  of  its  Israeli
subsidiaries, 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
$17,050,000  in 1995 to  approximately  $27,988,000  in  1996,  an  increase  of
approximately $10,938,000 (64%), while net income after taxes as a percentage of
total revenues increased from approximately 11.7% in 1995 to approximately 13.5%
in 1996. The increases resulted primarily from the factors described above.


LIQUIDITY AND CAPITAL RESOURCES

             At December 31, 1997, the Company had cash and cash  equivalents of
approximately  $173,531,000,  bank time deposits of  approximately  $40,700,000,
short-term  investments  of  approximately  $60,787,000  and working  capital of
approximately  $330,303,000.  The Company  believes  that its  existing  working
capital,  together with funds generated from  operations,  will be sufficient to
provide for its planned operations at least through December 31, 1998.


                                       23
<PAGE>

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


YEAR 2000

         The Company has taken  actions to  understand  the nature and extent of
the work  required to make its systems,  products and  infrastructure  Year 2000
compliant  and has  begun  work  to  prepare  its  products  and its  financial,
information  and  other  computer-based  systems  for the Year  2000,  including
replacing  and/or updating  existing legacy  systems.  The Company  continues to
evaluate the estimated costs associated with these efforts.  While these efforts
will  involve  additional  costs,  the  Company  believes,  based  on  available
information,  that it will be able to  manage  its total  Year  2000  transition
without any  material  adverse  effect on its business  operations,  products or
financial prospects.


CERTAIN TRENDS AND UNCERTAINTIES

         The Company has  benefited  from the growth in its business and 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 intends to continue during 1998 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
each 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.


                                       24
<PAGE>

         The  Merger  involves  the  integration  of  two  companies  that  have
previously   operated   independently.    The   combination   of   two   sizable
technology-based  companies involves significant complexities,  and no assurance
can be given that the combined  Company will be able to integrate the operations
of Boston into the Company without encountering difficulties or experiencing the
loss of key Comverse or Boston personnel or that the benefits expected from such
integration   will  be  realized.   The  integration  of  two  companies  across
geographically  dispersed  operations  can  create  the  risk of  disruption  in
operations  of the  combined  company,  and  neither  company's  management  has
substantial  experience in managing  such  integration  or the  operations of an
entity the size of the combined Company.  The Company does not expect to realize
cost savings in the near future as a result of the Merger,  and no assurance can
be given that any savings can be achieved in future periods. Furthermore,  there
can be no certainty that the Merger will not adversely affect the  relationships
with key  customers  or key  vendors  of  either  company.  As a  result  of its
significantly greater concentration on a small number of large telephone company
customers,  Boston's  business has historically  been considerably more volatile
than that of Comverse,  and the operations of the combined Company are likely to
be less  predictable  and subject to greater  risks from  actions of  individual
customers than the operations of Comverse in recent years.

         The  telecommunications  industry  is  subject  to rapid  technological
change.  The Company's  revenue stream will depend on its ability to enhance its
existing  products and to introduce new products on a timely and  cost-effective
basis.  This  includes  any  customer-requested   custom  software  enhancements
required in the normal course of product  delivery and customer  demands for the
technological  convergence  of the Company's  products.  The Company's  products
involve  sophisticated  hardware and software  technology that performs critical
functions to highly demanding standards. There can be no assurance the Company's
current or future products will not develop  operational  problems,  which could
have a material adverse effect on the Company. In addition,  if the Company were
to delay the introduction of new products,  or to delay the delivery of specific
custom software enhancements, the Company's operating results could be adversely
affected.  The Company  sells a majority of its  products  to  companies  in the
telecommunications industry. This industry is undergoing significant change as a
result of deregulation and  privatization  worldwide,  reducing  restrictions on
competition in the industry.  Unforeseen  changes in the regulatory  environment
may have an impact on the Company's  revenues  and/or costs in any given part of
the world.  The worldwide  enhanced  services systems industry is already highly
competitive  and the  Company  expects  competition  to  intensify.  The Company
believes  that  existing   competitors  will  continue  to  present  substantial
competition, and that other companies, many with considerably greater financial,
marketing and sales resources than the Company,  may enter the enhanced services
systems markets.  The 1997 acquisition of Octel  Communications  Corporation,  a
significant  competitor  of  the  Company,  by  Lucent  Technologies,  Inc.  may
intensify  the  competitive  environment  in the  industry,  and there can be no
assurance that similar business combinations or industry  consolidation will not
occur in the future.


                                       25
<PAGE>

         The enhanced services  platforms  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.  The  continuing  delay  and
uncertainties  surrounding the Communications Assistance for Law Enforcement Act
("CALEA") have had a significant  impact on acquisition plans of law enforcement
agencies in North America  engaged in monitoring  activities,  and no assurances
can be given as to the timing or ultimate  content of the proposed  legislation.
Competitive  conditions in this sector have also been affected by the increasing
use by certain potential  government customers of their own internal development
resources rather than outside vendors to provide certain technical solutions. In
addition,  a  number  of  established   government   contractors,   particularly
developers and integrators of technology products,  have taken steps to redirect
their  marketing  strategies and product plans in reaction to cut-backs in their
traditional  areas  of  focus,  resulting  in  an  increase  in  the  number  of
competitors and the range of products offered in response to particular requests
for proposals.  The 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 sales
and  operating  profit from a relatively  small  number of  contracts  for large
system  installations  with major  customers.  Boston's  operating  results,  in
particular,   have  often  been   characterized   by  volatility   and  lack  of
predictability,  reflecting its traditional  customer  concentration among major
telecommunications  services  providers  such  as the  Regional  Bell  Operating
Companies.  The Company  continues to emphasize  large  capacity  systems in its
product development and marketing strategies.  Contracts for large installations
typically involve a lengthy and complex bidding and selection  process,  and the
ability of the Company to obtain particular contracts is inherently difficult to
predict.  The 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  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.


                                       26
<PAGE>

         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  in the  foreseeable  future.  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 continuing  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  growing  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  United  States  dollar,  and
accordingly  has had a  negative  impact on the  Company's  overall  results  of
operations.  Continuation  of such trends may have a material  adverse effect on
the Company's future results of operations.

         A significant  portion of the Company's  research and  development  and
manufacturing   operations  are  located  in  Israel  and  may  be  affected  by
regulatory,  political,  military and economic  conditions in that country.  The
Company's   historical  operating  results  reflect  substantial  benefits  from
programs  sponsored  by the Israeli  government  for the support of research and
development,  as well as favorable tax rates available to "Approved Enterprises"
in Israel.  The Israeli  government  has  indicated  its  intention to reexamine
certain of its  policies  in these  areas.  Recently,  the  government  acted to
increase, from between 2% and 3% of associated product sales to 3% of associated
product revenues (including service and other related revenues), the annual rate
of royalties to be applied to repayment of benefits under the conditional  grant
program  administered  by the Office of the Chief  Scientist  of the Ministry of
Industry and Trade,  a program in which the Company has  regularly  participated
and  under  which  it  continues  to  receive   significant   benefits   through
reimbursement of qualified research and development expenditures.  The Company's
repayment  of amounts  received  under the program will be  accelerated  through
these higher royalty rates until repayment is completed. In addition, permission
from the government of Israel is required for the Company to manufacture outside
of Israel  products  resulting from research and development  activities  funded
under such programs, or to transfer outside of Israel related technology rights,
and in order to obtain such  permission  the Company may be required to increase
the royalties to the applicable  funding  agencies


                                       27
<PAGE>

         and/or repay certain amounts  received as reimbursement of research and
development  costs.  The Company expects to incur  additional  royalty  expenses
and/or  repayment  obligations  as a result of the  Merger and the  location  of
certain manufacturing and research and development  operations pertaining to its
TRILOGUE  product line at its Boston  facilities.  The Israeli  authorities have
also indicated that this funding  program will be further reduced in the future,
particularly for larger entities such as the Company. The Israeli government has
also  shortened  the  period  of the  tax  moratorium  applicable  to  "Approved
Enterprises" from four years to two years. Although this change has not affected
the tax status of most of the Company's current  projects,  it will apply to any
future "Approved  Enterprises" of the Company.  If further changes in the law or
government policies regarding those programs were to result in their termination
or adverse modification,  or if the Company were to become unable to participate
in or  take  advantage  of  those  programs,  the  cost  to the  Company  of its
operations  in Israel  would  materially  increase and there would be an adverse
effect on the results of the Company's  operations as a whole. To the extent the
Company  increases its  activities  outside  Israel,  which will result from the
Merger and possible future  acquisitions,  such increased activities will not be
eligible  for  programs   sponsored  by  Israel.   The  Company's  research  and
development and manufacturing  operations attributable to Boston are expected to
continue to be located in the United  States and thus will not be  eligible  for
the benefits of those programs.  Accordingly,  the effective cost to the Company
of its  future  research  and  development  activities  in  particular,  and its
operations  in  general,  could  significantly  increase  relative  to  that  of
Comverse, historically.

         The Company currently derives a significant  portion of its total sales
from customers outside of the United States.  International transactions involve
particular  risks,  including  political  decisions  affecting tariffs and trade
conditions,  rapid and unforeseen  changes in economic  conditions in individual
countries,  turbulence  in foreign  currency and credit  markets,  and increased
costs  resulting  from  lack  of  proximity  to  the  customer.   Volatility  in
international  currency  exchange  rates  may have a  significant  impact on the
Company's  operating  results.  The Company  has, and  anticipates  that it will
continue to receive,  significant  contracts  denominated  in foreign (primarily
Western  European and  Japanese)  currencies.  As a result of the  unpredictable
timing of purchase  orders and payments  under such contracts and other factors,
it is often not  practicable  for the Company to  effectively  hedge the risk of
significant  changes in currency  rates  during the contract  period.  Since the
Company will hedge the exchange rate risks  associated with long-term  contracts
denominated in foreign  currencies only to a limited extent,  operating  results
can be affected by the impact of  currency  fluctuations  as well as the cost of
such hedging.

             While the Company believes that prevailing  economic  conditions in
the Far East and  Southeast  Asia have  reduced  the demand  for its  systems in
certain  countries,  overall sales in the region have increased over the past 12
months.  The Company cannot currently  predict the effect on its business should
regional economic conditions fail to improve.

             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.  Share  prices of  companies  in
technology and government contracting  businesses,  and particularly smaller and
medium-sized  publicly traded  companies such as the Company,  tend to


                                       28
<PAGE>

exhibit a high degree of volatility.  The Company's revenues and earnings may be
more  volatile  than that of  Comverse  historically  as a result of the greater
concentration  of  Boston's  business  on a limited  number of large  customers.
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.  These factors 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.



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).


                                       29
<PAGE>


                                     PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                  AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>

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

<S>                        <C>                                                                     <C>
                           (1)      Financial Statements.
                           ---      ---------------------

                                    Index to Consolidated Financial Statements                     F-1

                                    Independent Auditors' Report                                   F-2

                                    Consolidated Balance Sheets -

                                            December 31, 1996 and 1997                             F-3

                                    Consolidated Statements of Income -

                                            Years ended December 31,
                                               1995, 1996 and 1997                                 F-4

                                    Consolidated Statements of Stockholders' Equity -

                                            Years ended December 31,
                                               1995, 1996 and 1997                                 F-5

                                    Consolidated Statements of Cash Flows -

                                            Years ended December 31,
                                               1994, 1995 and 1996                                 F-7

                                    Notes to Consolidated Financial Statements                     F-8


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

                                    None

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

                           The  Index of  Exhibits  commences  on the  following
                           page.  Exhibits  numbered  10.3 through  10.8,  10.13
                           through  10.16  and  10.24  through  10.30   comprise
                           material  compensatory  plans and arrangements of the
                           registrant.

</TABLE>


                                     - 30 -
<PAGE>

                                    EXHIBITS
No.      Description

2.1*     Agreement  and Plan of Merger  dated as of  August  20,  1997,  between
         Registrant and Boston  Technology,  Inc.  (Incorporated by reference to
         the Definitive Proxy Materials for the  Registrant's  Annual Meeting of
         Stockholders held January 13, 1998.)

3        Articles of Incorporation and By-Laws:

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

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

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

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

4 Instruments defining the rights of security holders including indentures:

         4.1*       Excerpts from Certificate of Incorporation. (Incorporated by
                    reference to the Registrant's Registration Statement on Form
                    S-1 under the Securities Exchange Act of 1933,  Registration
                    No. 33-9147.)

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

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

         4.4*       Excerpts  from  By-Laws,   as  amended.   (Incorporated   by
                    reference  to the  Registrant's  Annual  Report on Form 10-K
                    under the Securities Exchange Act of 1934 for the year ended
                    December 31, 1992.)

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


                                     - 31 -
<PAGE>

         4.6*       Indenture   dated  as  of  October  4,  1996  from  Comverse
                    Technology, Inc. to The Chase Manhattan Bank, N.A., Trustee.
                    (Incorporated  by  reference  to  the  Registrant's  Current
                    Report on Form 8-K under the Securities Exchange Act of 1934
                    filed October 10, 1996.)

         4.7*       Specimen 5 3/4% Convertible Subordinated Debenture due 2006.
                    (Incorporated  by  reference  to  the  Registrant's  Current
                    Report on Form 8-K under the Securities Exchange Act of 1934
                    filed October 10, 1996.)

10       Material contracts:

         10.1*      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.  (Incorporated by reference to the Registrant's  Annual
                    Report on Form 10-K  under the  Securities  Exchange  Act of
                    1934 for the year ended December 31, 1991.)

         10.2*      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.   (Incorporated  by
                    reference  to the  Registrant's  Annual  Report on Form 10-K
                    under the Securities Exchange Act of 1934 for the year ended
                    December 31, 1991.)

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

         10.4*      Employment  Agreement  effective  as of July 1,  1994 by and
                    between  Comverse  Technology,   Inc.  and  Kobi  Alexander.
                    (Incorporated by reference to the Registrant's Annual Report
                    on Form 10-K under the  Securities  Exchange Act of 1934 for
                    the year ended December 31, 1994.)

         10.5*      1994 Stock  Option Plan.  (Incorporated  by reference to the
                    Registrant's Annual Report on Form 10-K under the Securities
                    Exchange Act of 1934 for the year ended December 31, 1994.)

         10.6*      1995 Stock  Option Plan.  (Incorporated  by reference to the
                    Registrant's Annual Report on Form 10-K under the Securities
                    Exchange Act of 1934 for the year ended December 31, 1995.)


                                     - 32 -
<PAGE>

         10.7*      1996 Stock  Option Plan.  (Incorporated  by reference to the
                    Registrant's Annual Report on Form 10-K under the Securities
                    Exchange Act of 1934 for the year ended December 31, 1996.)

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

         10.9*      Deed of Guarantee  from  Comverse  Technology,  Inc. to Bank
                    Hapoalim  B.M.  dated  July  30,  1986.   (Incorporated   by
                    reference to the Registrant's Registration Statement on Form
                    S-1  under  the  Securities  Act of 1933,  Registration  No.
                    33-9147.)

         10.10*     Continuing Guarantee from Comverse Technology,  Inc. to Bank
                    Leumi  le-Israel  B.M.  (Incorporated  by  reference  to the
                    Registrant's  Registration  Statement  on Form S-1 under the
                    Securities Act of 1933, Registration No. 33-9147.)

         10.11*     Patent  License   Agreement  by  and  between  Efrat  Future
                    Technology Ltd. and VMX, Inc.  (Incorporated by reference to
                    the  Registrant's  Registration  Statement on Form S-1 under
                    the Securities Act of 1933, Registration No. 33-9147.)

         10.12*     Form of Indemnity  Agreement  between  Comverse  Technology,
                    Inc.  and  its  Officers  and  Directors.  (Incorporated  by
                    reference  to the  Registrant's  Annual  Report on Form 10-K
                    under the Securities Exchange Act of 1934 for the year ended
                    December 31, 1987.)

         10.13*     1987  Stock  Option  Plan,  as  amended.   (Incorporated  by
                    reference  to the  Registrant's  Annual  Report on Form 10-K
                    under the Securities Exchange Act of 1934 for the year ended
                    December 31, 1987.)

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

         10.15*     1997  Employee  Stock  Purchase   Plan.   (Incorporated   by
                    reference  to  the  Definitive   Proxy   Materials  for  the
                    Registrant's Annual Meeting of Stockholders held January 13,
                    1998.)

         10.16*     1997 Stock Incentive  Compensation  Plan.  (Incorporated  by
                    reference  to  the  Definitive   Proxy   Materials  for  the
                    Registrant's Annual Meeting of Stockholders held January 13,
                    1998.)

         10.17*     Memorandum  of  Agreement  dated  November  22, 1995 between
                    Boston Technology, Inc. and AT&T. (Incorporated by reference
                    to the Annual Report of Boston Technology, Inc. on Form 10-K
                    under the Securities Exchange Act of 1934 for the year ended
                    January 31,  1996,  confidential  treatment  requested as to
                    certain portions.)


                                     - 33 -
<PAGE>

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

         10.19*     First  Amendment  dated as of March 31,  1993 to Lease dated
                    November  5,  1990  between  Boston  Technology,   Inc.  and
                    Wakefield  Park  Limited   Partnership.   (Incorporated   by
                    reference to the Quarterly Report of Boston Technology, Inc.
                    on Form 10-Q under the  Securities  Exchange Act of 1934 for
                    the quarter ended October 31, 1993.)

         10.20*     Second  Amendment dated as of August 31, 1994 to Lease dated
                    November  5,  1990  between  Boston  Technology,   Inc.  and
                    Wakefield  Park  Limited   Partnership.   (Incorporated   by
                    reference to the Annual Report of Boston Technology, Inc. on
                    Form 10-K under the Securities  Exchange Act of 1934 for the
                    year ended January 31, 1995.)

         10.21*     License  Agreement  dated  November 15, 1988 between  Boston
                    Technology, Inc. and VMX, Inc. (Incorporated by reference to
                    the  Registration  Statement of Boston  Technology,  Inc. on
                    Form S-1 under the Securities Act of 1933,  Registration No.
                    33-32134.)

         10.22*     License  Agreement  dated  January 22, 1990  between  Boston
                    Technology,  Inc. and Dytel  Corporation.  (Incorporated  by
                    reference to the Annual Report of Boston Technology, Inc. on
                    Form 10-K under the Securities  Exchange Act of 1934 for the
                    year ended January 31, 1990.)

         10.23*     Settlement  Agreement  dated  December  28, 1993 between the
                    Boston Technology,  Inc. and Theis Research,  Inc. and Peter
                    F. Theis. (Incorporated by reference to the Annual Report of
                    Boston  Technology,  Inc. on Form 10-K under the  Securities
                    Exchange Act of 1934 for the year ended January 31, 1994.)

         10.24*     Boston  Technology,  Inc. 1995  Director  Stock Option Plan.
                    (Incorporated by reference to the Quarterly Report of Boston
                    Technology,  Inc. on Form 10-Q under the Securities Exchange
                    Act of 1934 for the quarter ended July 31, 1995.)

         10.25*     Boston  Technology,  Inc. 1992 Directors' Stock Option Plan,
                    as amended.  (Incorporated by reference to the Annual Report
                    of Boston Technology, Inc. on Form 10-K under the Securities
                    Exchange Act of 1934 for the year ended January 31, 1994.)

         10.26*     Boston   Technology,   Inc.  1994  Stock   Incentive   Plan.
                    (Incorporated  by reference  to the Annual  Report of Boston
                    Technology,  Inc. on Form 10-K under the Securities Exchange
                    Act of 1934 for the year ended January 31, 1994.)


                                     - 34 -
<PAGE>

         10.27*     Boston Technology, Inc. 1989 Incentive Stock Option Plan, as
                    amended.  (Incorporated by reference to the Definitive Proxy
                    Materials for Boston  Technology,  Inc.'s Annual  Meeting of
                    Stockholders held July 14, 1992.)

         10.28*     Boston Technology,  Inc. Employee Savings and Profit Sharing
                    Plan.  (Incorporated by reference to Registration  Statement
                    of Boston Technology,  Inc. on Form S-1 under the Securities
                    Act of 1933, Registration No. 33-32134.)

         10.29*     Boston  Technology,  Inc.  Employee  Severance Benefit Plan.
                    (Incorporated  by reference to the Current  Report of Boston
                    Technology,  Inc. on Form 8-K under the Securities  Exchange
                    Act of 1934 dated May 9, 1991.)

         10.30*     Boston   Technology,   Inc.  1996  Stock   Incentive   Plan.
                    (Incorporated by reference to the Definitive Proxy Materials
                    for Boston Technology, Inc.'s Annual Meeting of Stockholders
                    held June 25, 1996.)

         10.31*     Lease dated June 7, 1996 between Boston Technology, Inc. and
                    WBAM Limited Partnership.  (Incorporated by reference to the
                    Annual Report of Boston Technology,  Inc. on Form 10-K under
                    the  Securities  Exchange  Act of 1934  for the  year  ended
                    January 31, 1997.)

21       Subsidiaries of Registrant.

27       Financial Data Schedule

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

* Incorporated by reference.


                                     - 35 -

<PAGE>

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

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

                                                                        Page

Independent Auditors' Report                                             F-2

Consolidated Balance Sheets as of December 31, 1996 and 1997             F-3

Consolidated Statements of Income for the Years Ended December 31,
   1995, 1996 and 1997                                                   F-4

Consolidated Statements of Stockholders' Equity for the Years
   Ended December 31, 1995, 1996 and 1997                                F-5

Consolidated Statements of Cash Flows for the Years Ended
   December 31, 1995, 1996 and 1997                                      F-7

Notes to Consolidated Financial Statements                               F-8


                                       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, 1996 and
1997, and the related  consolidated  statements of income,  stockholders' equity
and cash flows for each of the three  years in the  period  ended  December  31,
1997.  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,  1996  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.


Deloitte & Touche LLP

New York, New York
February 12, 1998


                                       F-2
<PAGE>

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(In thousands, except share data)

<TABLE>
<CAPTION>

ASSETS                                                                                            1996          1997
------                                                                                            ----          ----

CURRENT ASSETS:
<S>                                                                                            <C>          <C>
   Cash and cash equivalents                                                                   $  196,724   $  173,531
   Bank time deposits                                                                              10,000       40,700
   Short-term investments                                                                          39,464       60,787
   Accounts receivable, net of allowance for doubtful accounts
     of $3,984 and $3,524                                                                          63,540       79,783
   Inventories                                                                                     31,494       35,220
   Prepaid expenses and other current assets                                                        9,034       13,315
   Deferred income tax benefits                                                                       721        2,163
                                                                                               ----------   ----------
TOTAL CURRENT ASSETS                                                                              350,977      405,499
                                                                                               ----------   ----------
PROPERTY AND EQUIPMENT, net                                                                        18,041       25,105
INVESTMENTS                                                                                         5,788        6,859
OTHER ASSETS                                                                                       16,095       20,100
                                                                                               ----------   ----------

TOTAL ASSETS                                                                                   $  390,901   $  457,563
                                                                                               ==========   ==========




LIABILITIES AND STOCKHOLDERS' EQUITY                                                             1996           1997
------------------------------------                                                             ----           ----

CURRENT LIABILITIES:
   Accounts payable and accrued expenses                                                     $   40,531     $   48,732
   Bank loans                                                                                    11,195         16,970
   Advance payments from customers                                                                6,400          9,292
   Other current liabilities                                                                        602            202
                                                                                             ----------     ----------
TOTAL CURRENT LIABILITIES                                                                        58,728         75,196
                                                                                             ----------     ----------
CONVERTIBLE SUBORDINATED DEBENTURES                                                             115,000        115,000
LIABILITY FOR SEVERANCE PAY                                                                       2,708          3,515
OTHER LIABILITIES                                                                                 2,407          2,370
                                                                                             ----------     ----------
TOTAL LIABILITIES                                                                               178,843        196,081
                                                                                             ----------     ----------

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
   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, 24,741,228 and 25,199,176 shares                                     2,474          2,519
   Additional paid-in capital                                                                   136,737        142,998
   Cumulative translation adjustment                                                                (56)            (8)
   Unrealized gain on available-for-sale securities, net of tax                                   1,547          1,117
   Retained earnings                                                                             71,356        114,856
                                                                                             ----------     ----------
TOTAL STOCKHOLDERS' EQUITY                                                                      212,058        261,482
                                                                                             ----------     ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                   $  390,901     $  457,563
                                                                                             ==========     ==========
</TABLE>


See notes to consolidated financial statements.


                                       F-3
<PAGE>

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>


                                                                           1995              1996             1997
                                                                           ----              ----             ----
REVENUES:
<S>                                                                    <C>              <C>               <C>
   Sales                                                               $   137,149      $   197,181       $   280,281
   Interest and other income                                                 8,747           10,130            16,209
                                                                       -----------      -----------       -----------

TOTAL REVENUES                                                             145,896          207,311           296,490
                                                                       -----------      -----------       -----------

COSTS AND EXPENSES:
   Cost of sales                                                            59,297           84,319           118,857
   Selling, general and administrative                                      41,388           53,347            74,064
   Research and development, net                                            19,426           27,441            38,659
   Interest expense and other                                                4,406            7,063             9,769
   Royalties and license fees                                                2,419            4,365             6,865
   Minority interest                                                         (207)            (260)                29
   Equity in loss (gain) of affiliates                                          60              225              (68)
                                                                       -----------      -----------       -----------

TOTAL COSTS AND EXPENSES                                                   126,789          176,500           248,175
                                                                       -----------      -----------       -----------

INCOME BEFORE GAIN ON ISSUANCE OF
  SUBSIDIARY SHARES AND INCOME TAX PROVISION                                19,107           30,811            48,315

GAIN ON ISSUANCE OF SUBSIDIARY SHARES                                        -                  535                 -
                                                                       -----------      -----------       -----------

INCOME BEFORE INCOME TAX                                                    19,107           31,346            48,315

INCOME TAX PROVISION                                                         2,057            3,358             4,815
                                                                       -----------      -----------       -----------

NET INCOME                                                             $    17,050      $    27,988       $    43,500
                                                                       ===========      ===========       ============

EARNINGS PER SHARE:
     Basic                                                             $      0.81      $      1.28       $      1.74
                                                                       ===========      ===========       ===========
     Diluted                                                           $      0.75      $      1.16       $      1.61
                                                                       ===========      ===========       ===========

</TABLE>

See notes to consolidated financial statements.


                                      F-4
<PAGE>

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands, except share data)
<TABLE>
<CAPTION>

                                                          Common Stock             Additional        Cumulative       Unrealized
                                                     -----------------------
                                                     Number of          Par         Paid-in          Translation        Gains
                                                       Shares          Value        Capital          Adjustment        (Losses)
                                                       ------          -----        -------          ----------        --------
<S>                                               <C>             <C>            <C>                <C>              <C>
BALANCE, JANUARY 1, 1995                          $  20,981,456   $    2,098     $    73,300        $    (118)       $       15
Unrealized gain  on available-for-sale
   securities, net of tax                                     -            -               -                 -              631
Common stock issued in connection with
   exercise of stock options                            370,446           37           2,040                 -                -
Common stock issued in connection with acquisition
   of additional interest in majority-owned subsidiary   10,696            1             154                 -                -

Tax benefit of disqualifying dispositions of
   incentive stock options                                    -            -             258                 -                -
Translation adjustment                                        -            -               -               (18)               -
Net income, year ended December 31, 1995                      -                            -                 -                -
                                                   ------------    ---------     -----------        ----------       ----------
BALANCE, DECEMBER 31, 1995                           21,362,598        2,136          75,752              (136)             646
Unrealized gain  on available-for-sale securities,
   net of tax                                                 -            -               -                 -              901
Common stock issued in connection with
   exercise of stock options                            276,362           27           1,490                 -                -
Conversion of convertible subordinated
   debentures                                         3,096,768          310          58,335                 -                -
Common stock issued in connection with acquisition
   of additional interest in majority-owned subsidiary    5,500            1             148                 -                -

Tax benefit of disqualifying dispositions of
   incentive stock options                                    -            -           1,012                 -                -
Translation adjustment                                        -            -               -                80                -
Net income, year ended December 31, 1996                      -            -               -                 -                -
                                                   ------------    ---------     -----------        ----------       ----------
BALANCE, DECEMBER 31, 1996                           24,741,228        2,474         136,737               (56)            1,547
Unrealized gain  on available-for-sale securities,
   net of tax                                                -             -               -                 -              (430)
Common stock issued in connection with
   exercise of stock options                            457,948           45           3,331                 -                 -
Tax benefit of disqualifying dispositions of
   incentive stock options                                   -             -           2,930                 -                 -
Translation adjustment                                       -             -               -                48                 -
Net income, year ended December 31, 1997                     -             -               -                 -                 -
                                                   ------------    ---------     -----------        ----------       ----------

BALANCE, DECEMBER 31, 1997                           25,199,176    $   2,519     $   142,998        $       (8)      $    1,117
                                                   ============    =========     ===========        ===========      ==========

                                                  See notes to consolidated financial statements.
</TABLE>


                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                                                             Retained
                                                             Earnings        Total
                                                             --------        -----
<S>                                                       <C>             <C>
BALANCE, JANUARY 1, 1995                                  $    26,318     $  101,613
Unrealized gain  on available-for-sale
   securities, net of tax                                           -            631
Common stock issued in connection with
   exercise of stock options                                        -          2,077
Common stock issued in connection with acquisition
   of additional interest in majority-owned subsidiary              -            155
Tax benefit of disqualifying dispositions of
   incentive stock options                                          -            258
Translation adjustment                                              -            (18)
Net income, year ended December 31, 1995                       17,050         17,050
                                                          -----------     ----------
BALANCE, DECEMBER 31, 1995                                     43,368        121,766
Unrealized gain  on available-for-sale securities,
   net of tax                                                       -            901
Common stock issued in connection with
   exercise of stock options                                        -          1,517
Conversion of convertible subordinated
   debentures                                                       -         58,645
Common stock issued in connection with acquisition
   of additional interest in majority-owned subsidiary              -            149

Tax benefit of disqualifying dispositions of
   incentive stock options                                          -          1,012
Translation adjustment                                              -             80
Net income, year ended December 31, 1996                       27,988         27,988
                                                          -----------     ----------
BALANCE, DECEMBER 31, 1996                                     71,356        212,058
Unrealized gain  on available-for-sale securities,
   net of tax                                                       -          (430)
Common stock issued in connection with
   exercise of stock options                                        -          3,376
Tax benefit of disqualifying dispositions of
   incentive stock options                                          -          2,930
Translation adjustment                                              -             48
Net income, year ended December 31, 1997                       43,500         43,500
                                                          -----------     ----------

BALANCE, DECEMBER 31, 1997                                $   114,856     $  261.482
                                                          ===========     ==========
</TABLE>


                                      F-6
<PAGE>

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands)
<TABLE>
<CAPTION>

                                                                                1995           1996             1997
                                                                                ----           ----             ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                        <C>             <C>             <C>
   Net income                                                              $    17,050     $    27,988     $    43,500
   Adjustments to reconcile net income to net cash provided
       by operating activities:
     Depreciation and amortization                                               5,874           7,132           9,700
     Equity in loss (gain) of affiliates                                            60             225             (68)
     Minority interest                                                            (207)           (260)             29
     Changes in assets and liabilities:
       Accounts receivable                                                     (18,828)        (20,531)        (16,243)
       Inventories                                                              (3,346)        (15,721)         (3,726)
       Prepaid expenses and other current assets                                (3,811)           (862)         (4,337)
       Accounts payable and accrued expenses                                     8,038          13,287           8,201
       Advance payments from customers                                            (399)          1,412           2,892
       Liability for severance pay                                                 947             409             807
       Other                                                                     1,322            (563)         (1,009)
                                                                           -----------     ------------    ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                        6,700          12,516          39,746
                                                                           -----------     -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Maturities and sales (purchases) of bank time deposits
     and investments, net                                                       63,606         (25,792)       (53,524)
   Purchase of property and equipment                                           (5,556)         (9,745)       (12,580)
   Capitalization of software development costs                                 (4,697)         (4,466)        (6,008)
                                                                           ------------    ------------    -----------

NET CASH PROVIDED BY (USED IN)
    INVESTING ACTIVITIES                                                        53,353         (40,003)       (72,112)
                                                                           -----------     ------------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from issuance of debentures                                $         -      $  111,899     $         -
   Proceeds from issuance of common stock in connection with
     exercise of stock options and warrants                                      2,077           1,665           3,376
   Net proceeds from bank loans and other debt                                       -          10,785           5,797
   Other                                                                        (1,493)              -               -
                                                                           ------------     ----------      ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                          584         124,349           9,173
                                                                           -----------      ----------      ----------

NET INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS                                                             60,637          96,862         (23,193)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                    39,225          99,862         196,724
                                                                           -----------      ----------      ----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                     $    99,862      $  196,724      $  173,531
                                                                           ===========      ==========      ==========

SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
   Cash paid during the year for interest                                  $     3,492      $    3,138      $    7,397
                                                                           ===========      ==========      ==========
   Cash paid during the year for income taxes                              $       850      $    2,882      $    2,646
                                                                           ===========      ==========      ==========

                                          See notes to consolidated financial statements.
</TABLE>


                                      F-7
<PAGE>

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
--------------------------------------------------------------------------------

1.      ORGANIZATION AND BUSINESS

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


2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Principles of  Consolidation  - The  consolidated  financial  statements
        include the accounts of 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, 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 bank time deposits,  money market funds
        placed with major banks and financial institutions, corporate commercial
        paper, corporate medium-term notes, 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 using the asset and
        liability method. Under this method, deferred tax assets and liabilities
        are determined based on differences  between financial reporting and tax
        bases of assets and liabilities,  and are measured using the enacted tax
        rates and laws that are  expected to be in effect  when the  differences
        are expected to reverse.


                                      F-8
<PAGE>

        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 or 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 are capitalized
        upon the  establishment of  technological  feasibility and are amortized
        over the estimated  useful life of the software,  which to date has been
        four  years or less.  Amortization  begins  in the  period  in which the
        related   product  is  available  for  general   release  to  customers.
        Amortization expenses amounted to $2,453,000,  $3,079,000 and $3,546,000
        in 1995, 1996 and 1997, respectively.

        Functional Currency and Foreign Currency  Transaction Gains and Losses -
        The United States dollar (the  "dollar") is the  functional  currency of
        the major  portion  of the  Company's  foreign  operations.  Most of the
        Company's  sales,  and  materials   purchased  for  manufacturing,   are
        denominated  in or  linked  to  the  dollar.  Certain  operating  costs,
        principally  salaries,  of foreign  operations are  denominated in local
        currencies.  In  those  instances  where  a  foreign  subsidiary  has  a
        functional  currency  other than the  dollar,  the  Company  records any
        necessary  foreign  currency   translation   adjustment,   reflected  in
        stockholders' equity, at the end of each reporting period.

        Net  losses  from  foreign  currency   transactions,   included  in  the
        consolidated statements of income,  approximated $249,000,  $731,000 and
        $1,555,000 in 1995, 1996 and 1997, 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.  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, 1997, there were outstanding  forward contracts
        to purchase approximately $3,500,000 in Western European currencies. The
        Company also purchases foreign exchange options which permit, but do not
        require,  the Company to exchange  foreign  currencies  at a future date
        with another party at a contracted  exchange  rate. To finance  premiums
        paid on such  options,  from  time to time the  Company  may also  write
        offsetting   options  at  exercises  prices  which  limit,  but  do  not
        eliminate,  the effect of purchased  options as a hedge.  As of December
        31,  1997,  the  Company  had  purchased  foreign  exchange  options  of
        $8,000,000 and written foreign exchange options of $8,000,000 in Western
        European currencies.


                                      F-9
<PAGE>

        Other  Assets - Licenses of patent  rights and acquired  "know-how"  are
        recorded at cost and amortized using the  straight-line  method over the
        estimated  useful lives of the related  technology,  not exceeding  five
        years.  Goodwill and other  intangible  assets  associated with acquired
        subsidiaries  are  amortized  over  periods  ranging from five to twelve
        years.  Debt issue costs are  amortized  over the  ten-year  term of the
        related debt, on a straight-line basis.

        Long-Lived Assets - The Company reviews for the impairment of long-lived
        assets and certain  identifiable  intangibles whenever events or changes
        in  circumstances  indicate that the carrying amount of an asset may not
        be  recoverable.  An impairment  loss would be recognized when estimated
        future  cash flows  expected to result from the use of the asset and its
        eventual   disposition  is  less  than  its  carrying  amount.  No  such
        impairment losses have been identified by the Company.

        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.

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


3.      RESEARCH AND DEVELOPMENT

        A  significant   portion  of  the  Company's  research  and  development
        operations are located in Israel where the Company  derives  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  1995,  1996 and 1997,  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")  under  which  the  funding
        organization   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.  The Company is required to pay  royalties to the
        OCS based on the sale of products incorporating  technology developed in
        these projects.  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.  The
        amounts  reimbursed  by the OCS for the years  1995,  1996 and 1997 were
        $7,735,000, $9,172,000 and $16,276,000, respectively.


                                      F-10
<PAGE>

4.      SHORT-TERM INVESTMENTS

        The  Company   classifies   all  of  its   short-term   investments   as
        available-for-sale   securities.   The   following   is  a  summary   of
        available-for-sale securities as of December 31, 1997:
<TABLE>
<CAPTION>

                                                                  Gross               Gross         Estimated
                                                              Unrealized          Unrealized          Fair
                                            Cost                  Gains              Losses           Value
                                         ----------------------------------------------------------------------
                                                                  (In thousands)

<S>                                      <C>                    <C>                <C>               <C>
        U.S. treasury notes              $     248              $      4           $     -           $      252
        Corporate debt securities           35,685                    50                 -               35,735
        U.S. Government
           agency bonds                        749                     -                 -                  749
                                         ---------              --------           -------           ----------
        Total debt securities               36,682                    54                 -               36,736
                                         ---------              --------           -------           ----------

        Common stock                        14,359                 2,787             1,687               15,459
        Mutual funds investing in
           U.S. government and
           agencies obligations              1,929                    35                 -                1,964
        Preferred stock                      5,981                   880               233                6,628
                                        ----------              --------           -------           ----------
        Total equity securities             22,269                 3,702             1,920               24,051
                                        ----------              --------           -------           ----------

                                        $   58,951              $  3,756           $ 1,920           $   60,787
                                        ==========              ========           =======           ==========



        The  following  is a  summary  of  available-for-sale  securities  as of
December 31, 1996:

                                                                  Gross               Gross         Estimated
                                                              Unrealized          Unrealized          Fair
                                            Cost                  Gains              Losses           Value
                                         ----------------------------------------------------------------------
                                                                   (In thousands)

        U.S. treasury notes              $     347              $      4           $   -             $      351
        Corporate debt securities           12,493                     5               -                 12,498
        U.S. government
               agency bonds                    746                     2               -                    748
                                         ---------              --------           -------           ----------
        Total debt securities               13,586                    11               -                 13,597
                                         ---------              --------           -------           ----------

        Common stock                        15,300                 2,878               986               17,192
        Mutual funds investing in
           U.S. government and
           agencies obligations              1,929                    10               -                  1,939
        Preferred stock                      6,431                   349                44                6,736
                                        ----------              --------           -------           ----------
        Total equity securities             23,660                 3,237             1,030               25,867
                                        ----------              --------           -------           ----------

                                        $   37,246              $  3,248           $ 1,030           $   39,464
                                        ==========              ========           =======           ==========
</TABLE>



        During 1997,  the gross  realized  gains on sales of securities  totaled
        approximately   $4,037,000  and  the  gross   realized   losses  totaled
        approximately $2,503,000.

        The  amortized  cost and  estimated  fair  value of debt  securities  at
December 31, 1997, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
                                                                                   Estimated
                                                                Cost               Fair Value
                                                                ----               ----------
                                                                      (In thousands)

<S>                                                          <C>                     <C>
        Due in one year or less                              $  15,041               $  15,047
        Due after one year through three years                  21,591                  21,638
        Due after three years                                       50                      51
                                                             ---------               ---------

                                                             $  36,682               $  36,736
                                                             =========               =========
</TABLE>


                                      F-11
<PAGE>

5.      INVENTORIES
<TABLE>
<CAPTION>

        Inventories consist of:
                                                                                        December 31,
                                                                                -------------------------
                                                                                  1996             1997
                                                                                  ----             ----
                                                                                      (In thousands)

<S>                                                                             <C>              <C>
                      Raw materials                                             $ 17,681         $  15,766
                      Work in process                                              7,853            10,098
                      Finished goods                                               5,960             9,356
                                                                                --------         ---------
                                                                                $ 31,494         $  35,220
                                                                                ========         =========
</TABLE>



6.      PROPERTY AND EQUIPMENT

        Property and equipment consists of:
<TABLE>
<CAPTION>

                                                                                        December 31,
                                                                                -------------------------
                                                                                  1996             1997
                                                                                  ----             ----
                                                                                      (In thousands)

<S>                                                                             <C>              <C>
                      Fixtures and equipment                                    $ 28,943         $  41,826
                      Transportation vehicles                                      3,237             2,845
                      Leasehold improvements                                         283               372
                                                                                --------         ---------
                                                                                  32,463            45,043
                      Less accumulated depreciation
                             and amortization                                    (14,422)          (19,938)
                                                                                ---------        ----------

                                                                                $ 18,041         $  25,105
                                                                                ========         =========
</TABLE>


                                      F-12
<PAGE>

7.      OTHER ASSETS

        Other assets consist of:
<TABLE>
<CAPTION>

                                                                                        December 31,
                                                                                -------------------------
                                                                                  1996             1997
                                                                                  ----             ----
                                                                                      (In thousands)
<S>                                                                             <C>              <C>
           Software development costs, net of accumulated
                 amortization of $9,103 and $12,649                             $ 10,143         $  12,605

           Other assets                                                            5,952             7,495
                                                                                --------         ---------

                                                                                $ 16,095         $  20,100
                                                                                ========         =========
</TABLE>



8.      ACQUISITIONS

        On January 14, 1998, Boston  Technology,  Inc., a Delaware  corporation,
        ("BTI")  merged  with and into  Comverse in a  transaction  that will be
        accounted  for  as  a  pooling  of  interests.  BTI  designs,  develops,
        manufactures,  markets and  supports  standard and  customized  enhanced
        services  platforms and software  applications for the telephone network
        operator  market.  Pursuant  to the merger,  the issued and  outstanding
        shares of BTI at the effective date of the merger were converted into an
        aggregate of approximately  18,141,185 shares of Comverse's common stock
        and  outstanding  options  and  warrants  to  purchase  BTI  stock  were
        converted  into  options  and  warrants  to  purchase  an  aggregate  of
        3,458,265 Comverse shares.

        Unaudited pro forma consolidated  statement of income data for the years
ended December 31, 1995, 1996, and 1997 are as follows:

<TABLE>
<CAPTION>

                                                          CTI            BTI          Adjustments         Combined
                                                          ---            ---          -----------         --------
                                                                        (In thousands, except per share amounts)
        1995
<S>                                                  <C>               <C>              <C>               <C>
        Sales                                        $   137,149       $   105,267                        $   242,416
        Net income (loss)                            $    17,050       $   (14,890)                       $     2,160
        Earnings per share - diluted                 $      0.75                                          $      0.06

        1996
        Sales                                        $   197,181       $   192,458                        $   389,639
        Net income                                   $    27,988       $    14,149                        $    42,137
        Earnings per share - diluted                 $      1.16                                          $      1.01

        1997
        Sales                                        $   280,281       $   210,525      $    (1,866)      $   488,940
        Net income (loss)                            $    43,500       $    (7,503)     $    (1,472)      $    34,525
        Earnings per share - diluted                 $      1.61                                          $      0.75
</TABLE>


                                      F-13
<PAGE>

        The pro forma  adjustments  relate to the  elimination  of  intercompany
transactions between CTI and BTI.

        The  unaudited pro forma  consolidated  statement of income data combine
        the  historical  statement  of income  data of the Company for the years
        ended December 31, 1995, 1996 and 1997 with the historical  statement of
        income data of BTI for the fiscal years ended  January 31, 1996 and 1997
        and the eleven months ended December 31, 1997, respectively.

        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.


9.      ACCOUNTS PAYABLE AND ACCRUED EXPENSES

        Accounts payable and accrued expenses consist of:
<TABLE>
<CAPTION>

                                                                                       December 31,
                                                                                -------------------------
                                                                                  1996            1997
                                                                                  ----            ----
                                                                                     (In thousands)

<S>                                                                             <C>            <C>
                        Accounts payable                                        $ 19,929       $  23,387
                        Accrued salaries                                           4,737           7,491
                        Accrued vacation                                           2,951           4,286
                        Accrued royalties                                          3,426           5,052
                        Other accrued expenses                                     9,488           8,516
                                                                                --------       ---------
                                                                                $ 40,531       $  48,732
                                                                                ========       =========
</TABLE>


10.    BANK LOANS

       As of December  31,  1997,  a  subsidiary  of Comverse has a bank loan of
       $16,500,000. The loan has an interest rate of 6% and is repayable in July
       1998. The loan is secured by a $16,500,000 deposit with the bank.


11.    CONVERTIBLE SUBORDINATED DEBENTURES

       In  October  1996,  the  Company  issued   $115,000,000   of  convertible
       subordinated  debentures  bearing  interest at 5-3/4% per annum,  payable
       semi-annually.  The debentures  mature on October 1, 2006. The debentures
       are convertible into shares of the Company's common stock at a conversion
       price of $45.75 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  October  12,  1999 to par on October 1,
       2001.  The debenture  holders may require the Company to  repurchase  the
       debentures  at par in the  event  that  the  common  stock  ceases  to be
       publicly  traded and, in certain  instances,  upon a change in control of
       the Company.


                                      F-14
<PAGE>

        In  November  1993,  the  Company  issued   $60,000,000  of  convertible
        subordinated  debentures  bearing interest at 5-1/4% per annum,  payable
        semi-annually. In November 1996, the Company called these debentures for
        redemption.  All of the debentures were converted into 3,096,768  shares
        of common stock.


12.     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  with its chief  executive
        officer to  provide a  severance  payment  upon the  termination  of his
        employment with the Company. Approximately $1,186,000 and $1,398,000 has
        been accrued as of December 31, 1996 and 1997, respectively, relating to
        this liability.


13.     RELATED PARTIES

        The Company  paid or accrued  legal fees to one of its  directors in the
amounts  of  $298,000,   $254,000,   and  $422,000  in  1995,   1996  and  1997,
respectively.


14.     STOCK OPTIONS

       Employee Stock Options - At December 31, 1997, 3,719,516 shares of common
       stock were  reserved  for  issuance  upon the  exercise  of options  then
       outstanding  and 239,763  options were  available  for future grant under
       Comverse's Stock Option Plans,  under which options may be granted to key
       employees,  directors,  and  other  persons  rendering  services  to  the
       Company.  Options which are designated as "incentive stock options" under
       the option plans may be granted with an exercise  price not less than the
       fair market value of the  underlying  shares at the date of grant and are
       subject to certain  quantity and other  limitations  specified in Section
       422 of the  Internal  Revenue  Code.  Options  which are not  intended to
       qualify as incentive  stock options may be granted at any price,  but not
       less than the par value of the underlying shares, and without restriction
       as to amount.  The  options  and the  underlying  shares  are  subject to
       adjustment  in  accordance  with the  terms of the  plans in the event of
       stock dividends, recapitalizations and similar transactions. The right to
       exercise the options generally vests in 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:


                                      F-15
<PAGE>

<TABLE>
<CAPTION>

                                                                               Year Ended December 31,
                                                          -----------------------------------------------------
                                                              1995                 1996                  1997
                                                              ----                 ----                  ----

<S>                                                        <C>                  <C>                    <C>
       Outstanding at beginning of year                    2,455,755            2,677,333              3,392,847
       Granted during the year                               650,200            1,086,526               897,400
       Exercised during the year                            (370,442)            (276,362)             (457,948)
       Canceled, terminated and expired                      (58,180)             (94,650)             (112,783)
                                                          ----------          -----------              --------

       Outstanding at end of year                           2,677,333            3,392,847             3,719,516
                                                          ===========           ==========          ============
</TABLE>


       At December  31,  1997,  options to purchase an  aggregate  of  1,441,428
       shares were vested and currently  exercisable  under the option plans and
       options to purchase an additional  2,278,088 shares vest at various dates
       extending through the year 2001.

       Weighted  average option  exercise price  information for the years 1995,
1996 and 1997 was as follows:
<TABLE>
<CAPTION>

                                                               1995                  1996                  1997
                                                               ----                  ----                  ----

<S>                                                         <C>                   <C>                   <C>
       Outstanding at beginning of year                     $  6.77               $  8.48               $ 13.86
       Granted during the year                                13.58                 25.17                 42.92
       Exercised during the year                               5.62                  5.63                  7.83
       Canceled, terminated and expired                       11.22                 14.95                 25.89
       Exercisable at year end                                 5.19                  6.46                  8.01
</TABLE>



       Significant  option groups  outstanding  at December 31, 1997 and related
weighted average price and life information were as follows:
<TABLE>
<CAPTION>

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

<S>    <C>         <C>         <C>                <C>              <C>                <C>              <C>
       $  1.40 -   $10.00      1,402,545          5.32             $   7.22           1,258,045        $  6.90
       $ 10.20 -   $23.75      1,139,571          7.87                18.68             180,983          15.29
       $ 33.25 -   $44.25      1,157,000          9.34                40.36                   0              0
       $ 45.25 -   $45.25         20,400          5.49                45.25               2,400        $ 45.25
                             -----------          ----             --------           ---------        -------

                               3,719,516          7.35             $  21.25           1,441,428        $  8.01
                             ===========          ====             ========           =========        =======
</TABLE>


       The  Company  applies   Accounting   Principles  Board  Opinion  No.  25,
       "Accounting for Stock Issued to Employees,"  and related  interpretations
       in accounting for its option plans. Accordingly, as all options have been
       granted at  exercise  prices  equal to fair  market  value on the date of
       grant,  no  compensation  expense has been  recognized  by the Company in
       connection with its stock-based compensation plans. Had compensation cost
       for the Company's stock option plans been determined  based upon the fair
       value at the grant date for awards under these plans  consistent with the
       methodology  prescribed under Statement of Financial Accounting Standards
       ("SFAS")  No.  123,  "Accounting  for  Stock-Based   Compensation",   the
       Company's  net income and  earnings  per share would have been reduced by
       approximately  $1,067,000,  $2,676,000 and  $7,401,000 or $.04,  $.09 and
       $.28 per diluted share in 1995, 1996 and 1997, respectively. The weighted
       average fair value of the options  granted during 1995,  1996 and 1997 is
       estimated  at $8.40,  $13.66 and  $23.14 on the date of grant  (using the
       Black-Scholes  option pricing model) with the following  weighted average
       assumptions for 1995, 1996 and 1997, respectively: volatility of 67%, 55%
       and 54%,  risk-free interest rate of 6.8%, 6.1% and 6.5%, and an expected
       life of five years in 1995, 1996 and 1997.


                                      F-16
<PAGE>

       Options  on  Subsidiary  Shares  -  Comverse  has  granted  to its  chief
       executive officer,  under the terms of his employment agreement,  options
       to acquire  7.5% of the  equity of  Comverse's  subsidiaries,  other than
       Efrat  Future  Technology,  Ltd.  ("Efrat").  In  addition,  Comverse has
       granted to certain other key executives of the Company options to acquire
       shares of certain subsidiaries, other than 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 in the aggregate up to 23.6% 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  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 a
       committee of the Board of Directors.  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.


15.    EARNINGS PER SHARE ("EPS")

        In 1997, the Company adopted SFAS No. 128,  "Earnings Per Share".  Basic
        earnings per share is determined by using the weighted average number of
        shares of common stock outstanding during each period.  Diluted earnings
        per share further assumes the issuance of common shares for all dilutive
        potential  common shares  outstanding.  The calculation for earnings per
        share  for  each of the  three  years  ended  December  31,  1997 was as
        follows:
<TABLE>
<CAPTION>

                                           1995                           1996                          1997
                                -----------------------------  --------------------------   --------------------------
                                                    Per-Share                   Per Share                    Per Share
                                 Income   Shares   Amount      Income    Shares  Amount      Income    Shares Amount
                                                          (In thousands, except per share data)

        Basic EPS
<S>                             <C>        <C>      <C>       <C>         <C>     <C>       <C>        <C>     <C>
        Net Income              $ 17,050   21,122   $ 0.81    $ 27,988    21,931  $ 1.28    $ 43,500   25,017  $  1.74
                                                    ======                        ======                       =======

        Effect of Dilutive
             Securities
        Options                             1,480                          1,815                        2,082
        Convertible debentures                                   2,586     2,701
                                --------  -------   ------    --------   -------

        Diluted EPS             $ 17,050   22,602   $ 0.75    $ 30,574    26,447  $ 1.16    $ 43,500   27,099  $  1.61
                                ========  =======   ======    ========   =======  ======    ========   ======  =======
</TABLE>


        Debentures  convertible  into  3,096,768  shares,  2,513,661  shares and
        2,513,661  shares were  outstanding  as of December 31,  1995,  1996 and
        1997, respectively,  but were not included in the computation of diluted
        EPS because the effect of including them would be antidilutive.


                                      F-17
<PAGE>

16.     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,
                                                                                    ----------------------------
                                                                                          1996             1997
                                                                                          ----             ----
                                                                                            (In thousands)

<S>                                                                                 <C>              <C>
                   Current assets                                                   $    85,841      $   131,262
                   Property and equipment, net                                           13,548           19,523
                   Software development costs, net                                        9,394           12,134
                   Other assets                                                              80            1,757
                                                                                    -----------      -----------

                      Total assets                                                      108,863          164,676
                                                                                    -----------      -----------

                   Current liabilities                                                   32,323           43,942
                   Other liabilities                                                      2,258            2,849
                                                                                    -----------      -----------

                      Total liabilities                                                  34,581           46,791
                                                                                    -----------      -----------

                           Net assets                                               $    74,282      $   117,885
                                                                                    ===========      ===========
</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,
                                                                     -----------------------------------------
                                                                       1995            1996            1997
                                                                       ----            ----            ----
                                                                                  (In thousands)

<S>                                                                  <C>            <C>           <C>
                  Total revenues                                     $  72,843      $   95,766    $   156,337
                  Costs and expenses                                    71,430         112,056        166,726
                                                                     ---------      ----------    -----------
                  Operating income (loss)                            $   1,413      $  (16,290)   $   (10,389)
                                                                     =========      ===========   ============
</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
        shown in the table due to the exclusion of intercompany revenue. Foreign
        operations  in  1996  and  1997  were   profitable   when   intercompany
        transactions are included.


                                      F-18
<PAGE>

17.     INCOME TAXES

        The provision for income taxes consists of the following:
<TABLE>
<CAPTION>

                                                                                    Year Ended December 31,
                                                                           -----------------------------------
                                                                               1995          1996         1997
                                                                               ----          ----         ----
                                                                                       (In thousands)
           Current:
<S>                                                                        <C>          <C>          <C>
             Federal                                                       $     529    $   1,544    $   3,471
             State                                                               272          560          678
             Foreign                                                           1,022        1,950        1,941
                                                                           ---------    ---------    ---------

                                                                               1,823        4,054        6,090
                                                                           ---------    ---------    ---------

           Deferred (benefit):
             Federal                                                              25         (621)      (1,151)
             State                                                               (12)         (97)        (107)
             Foreign                                                             221           22          (17)
                                                                           ---------    ---------    ----------

                                                                                 234         (696)      (1,275)
                                                                           ---------    ----------   ----------

                                                                           $   2,057    $   3,358    $   4,815
                                                                           =========    =========    =========
</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,
                                                                           -----------------------------------
                                                                               1995           1996           1997
                                                                               ----           ----           ----

<S>                                                                             <C>            <C>            <C>
                  U.S. Federal statutory rate                                   35%            35%            35%
                  Consolidated worldwide income
                       in excess of U.S. income                                (31)           (30)           (28)
                  Foreign income taxes                                           7              6              4
                  Other                                                          -              -             (1)
                                                                           -------      ---------       --------
                  Company's effective tax rate                                  11%            11%            10%
                                                                           =======      =========       ========
</TABLE>



         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, 1996 and 1997 are as follows:


                                      F-19
<PAGE>

<TABLE>
<CAPTION>

                                                                                    1996                    1997
                                                                                    ----                    ----
                                                                                          (In thousands)
<S>                                                                               <C>                   <C>
           Deferred tax liability:
             Expenses deductible for tax purposes and
               not for financial reporting purposes                               $    890              $    846
             Unrealized gain on available-for-sale securities                          674                   679
                                                                                  --------              --------
                                                                                  $  1,564              $  1,525
                                                                                  ========              ========

           Deferred tax asset:
             Reserves not currently deductible                                    $  3,024              $  3,092
             Tax loss carryforwards                                                  1,091                   482
             Inventory capitalization                                                  197                   420
             Other                                                                     223                   853
                                                                                  --------              --------
                                                                                     4,535                 4,847

           Less: valuation allowance                                                (3,814)               (2,684)
                                                                                  ---------             ---------

                 Total deferred tax asset                                         $    721              $  2,163
                                                                                  ========              ========
</TABLE>

        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.


18.     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.

        Sales by geographic  regions,  as a percentage  of total sales,  for the
years ended December 31, 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>

                                                                      1995       1996      1997
                                                                      ----       ----      ----

<S>                                                                  <C>         <C>       <C>
                           United States                                29%        28%       25%
                           Canada                                        4%         3%        2%
                           Europe                                       31%        39%       45%
                           Far East/Australia                           24%        21%       17%
                           Latin America                                 2%         1%        4%
                           Other                                        10%         8%        7%
                                                                     ------     ------     -----

                           Total                                       100%       100%      100%
                                                                     ======     ======     =====
</TABLE>


19.     COMMITMENTS AND CONTINGENCIES

        Leases - The Company leases office,  manufacturing,  and warehouse space
        under  non-cancelable  operating  leases.  Rent  expense  for all leased
        premises  approximated  $3,014,000,  $3,511,000  and $6,287,000 in 1995,
        1996, and 1997, respectively.


                                      F-20
<PAGE>

        As of December 31, 1997,  the minimum  rent  obligations  of the Company
were approximately as follows:
                                                                 Amount
                                                                 ------
                                                             (In thousands)

                          1998                                $    7,585
                          1999                                     4,047
                          2000                                     2,892
                          2001                                     2,639
                          2002 and thereafter                      6,971
                                                              ----------

                                                              $   24,134

        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
        $875,000  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 $93,170 for each year of his  previous  and current  employment
        with the  Company,  which  is  increased  by the  rate of 10% per  annum
        compounded    for   each   year   of    employment,    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.  The agreements also provide for
        the executive to receive options entitling him to purchase 7-1/2% of the
        equity of Comverse's subsidiaries,  other than Efrat, at prices equal to
        the higher of book value of the underlying  shares at the date of option
        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.

        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 6% of net sales of the related  products  and, in
        the case of royalties  due to government  funding  sources in respect of
        research  and  development  projects,  are required to be paid until the
        funding  organization has received total royalties  ranging from 100% to
        150% of the amounts  received by the Company under the approved  project
        budgets.


                                      F-21
<PAGE>

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

       Investments - In 1997, wholly-owned  subsidiaries of Comverse and Quantum
       Industrial  Holdings Ltd. organized two new companies to make investments
       primarily  relating to Israel,  including  investments in high technology
       ventures.  Each  participant  committed  a total  of  $25,000,000  to the
       capital  of  the  new   companies,   for  use  as   suitable   investment
       opportunities  are identified.  Quantum  Industrial  Holdings Ltd. is the
       principal  direct  investment  vehicle of the Quantum  Group,  a group of
       investment funds managed by Soros Fund Management LLC.

        Guaranties  - The Company has obtained  bank  guaranties  primarily  for
        performance of certain obligations under contracts with customers. These
        guaranties,  which aggregated approximately  $11,800,000 at December 31,
        1997,  are to be  released by the  Company's  performance  of  specified
        contract  milestones,  which are  scheduled  to be  completed  primarily
        during 1998.

        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.


20.     FAIR VALUE OF FINANCIAL INSTRUMENTS

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

                                                          December 31, 1996                  December 31, 1997
                                                     ---------------------------      ------------------------
                                                      Carrying        Estimated         Carrying           Estimated
                                                       Amount        Fair Value          Amount           Fair Value
                                                       ------        ----------          ------           ----------
                                                                        (In thousands)
<S>                                                 <C>            <C>                 <C>                 <C>
       Liabilities:
         Convertible subordinated
            debentures                              $  115,000     $ 119,456           $  115,000          $  122,188

       Off-balance sheet financial instruments:
       Foreign exchange forward contracts
         used for hedging purposes                  $    -        $       64           $   -               $     (157)
</TABLE>


                                      F-22
<PAGE>

        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, 1997.  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.


21.     RECENTLY ISSUED ACCOUNTING STANDARDS

        In June 1997, the Financial  Accounting  Standards Board issued SFAS No.
        130,  "Reporting  Comprehensive  Income".  This Statement  requires that
        changes in comprehensive  income be shown in a financial  statement that
        is displayed  with the same  prominence as other  financial  statements.
        SFAS No. 130 is effective for periods beginning after December 15, 1997.

        In June 1997, the Financial  Accounting  Standards Board issued SFAS No.
        131,   "Disclosure   about   Segments  of  an  Enterprise   and  Related
        Information".  SFAS No. 131 specifies new guidelines  for  determining a
        company's  operating  segments and related  requirements for disclosure.
        The  Company  is in the  process  of  evaluating  the  impact of the new
        standard  on  the  presentation  of its  financial  statements  and  the
        disclosures  therein.  SFAS No. 131 is effective  for periods  beginning
        after December 15, 1997.

        In October 1997, the American  Institute of Certified Public Accountants
        issued  Statement  of  Position  ("SOP")  No.  97-2,  "Software  Revenue
        Recognition".  This Statement  specifies certain changes for determining
        the  recognition of software  revenue.  The Company is in the process of
        evaluating  the impact of the SOP on its revenue  recognition  policies.
        SOP No. 97-2 is effective for periods beginning after December 15, 1997.


                                      F-23
<PAGE>

22.     QUARTERLY INFORMATION (UNAUDITED)

        The following table shows selected results of operations for each of the
quarters during 1996 and 1997.
<TABLE>
<CAPTION>

                                                                                Fiscal Quarter Ended
                            March 31,     June 30,     Sept. 30,    Dec. 31,     March 31,    June 30,     Sept. 30,     Dec. 31,
                              1996          1996         1996         1996         1997         1997         1997          1997
                              ----          ----         ----         ----         ----         ----         ----          ----
                                                          (In thousands, except per share amounts)

<S>                         <C>          <C>          <C>           <C>          <C>          <C>          <C>          <C>
Sales                       $  40,410    $  46,629    $  51,892     $ 58,250     $ 63,473     $  67,015    $  72,193    $  77,600
Interest and Other Income       1,786        2,078        2,216        4,050        4,045         4,176        3,751        4,236
                            ---------    ---------    ---------     --------     --------     ---------    ---------    ---------
   Total Revenues           $  42,196    $  48,707    $  54,108     $ 62,300     $ 67,518     $  71,191    $  75,944    $  81,836
                            =========    =========    =========     ========     ========     =========    =========    =========

Gross profit                $  23,058    $  26,615    $  29,782     $ 33,407     $ 36,540     $  38,576    $  41,612    $  44,696
Net income $                    5,507    $   6,851    $   7,235     $  8,395     $  9,587     $  10,770    $  11,338    $  11,805
                            ==========   ==========   ===========  =========     ============  ===========  ========    =========
</TABLE>

<TABLE>
<CAPTION>

Earnings per share:
<S>                         <C>           <C>         <C>            <C>          <C>         <C>          <C>          <C>
   Basic                    $   0.26      $   0.32    $    0.34      $  0.36      $  0.39     $    0.43    $    0.45    $    0.47
                            ========      ========    =========      =======      =======     =========    =========    =========

   Diluted                  $   0.24      $   0.29    $    0.30      $  0.33      $  0.36     $    0.40    $    0.42    $    0.44
                            ========      ========    =========      =======      =======     =========    =========    =========
</TABLE>


The difference  between income per share 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 25,  1998

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 25,  1998
--------------------------------------------
Kobi Alexander, President,
Chairman of the Board and
Chief Executive Officer; Director


/s/ Igal Nissim                                                March 25,  1998
--------------------------------------------
Igal Nissim, Chief Financial Officer


/s/ Zvi Alexander                                              March 25,  1998
--------------------------------------------
Zvi Alexander, Director


/s/ Gregory C. Carr                                            March 25,  1998
--------------------------------------------
Gregory Carr, Director


/s/ John H. Friedman                                           March 25,  1998
--------------------------------------------
John H. Friedman, Director


/s/ Francis E. Girard                                          March 25,  1998
--------------------------------------------
Francis Girard, Director


/s/ Sam Oolie                                                  March 25,  1998
--------------------------------------------
Sam Oolie, Director


/s/ William F. Sorin                                           March 25,  1998
--------------------------------------------
William F. Sorin, Director


/s/ Carmel Vernia                                              March 25,  1998
--------------------------------------------
Carmel Vernia, Director


/s/ Shaula Yemini                                              March 25,  1998
--------------------------------------------
Shaula Yemini, Director