##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2003[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT


For the transition period from____________ to ____________

Commission file number 0-22190



---



VERSO TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in its Charter)


MINNESOTA
    
    41-1484525(State or Other Jurisdiction
    
    (I.R.S. Employer Identification No.)of Incorporation or Organization)


400 Galleria Parkway, Suite 300, Atlanta, GA 30339
(Address of Principal Executive Offices)

(678) 589-3500
(Registrants Telephone Number, Including Area Code)



---



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 [  ].

Indicated by check mark whether registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act) Yes
[  ]  No [X].

Shares of the registrants common stock, par value $.01 per share, outstanding
as of May 14, 2003: 89,691,755.





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TABLE OF CONTENTS



|                                                     |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|CONDENSED CONSOLIDATED BALANCE SHEETS               
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                     | ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                     | PART II  OTHER INFORMATION                                                                  
|                                                     | Item 1. Legal Proceedings                                                                    
|                                                     | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                     | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                           
|CERTIFICATIONS                                      
|EXHIBIT INDEX                                       
|EX-99.1 SECTION 906 CERTIFICATION OF THE CEO        
|EX-99.2 SECTION 906 CERTIFICATION OF THE CFO        



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VERSO TECHNOLOGIES, INC.
FORM 10-Q

INDEX

Page No.Part I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2003 andDecember 31, 2002
    
    
    2Condensed Consolidated Statements of Operations for the three monthsended March 31, 2003 and 2002
    
    
    3Condensed Consolidated Statements of Cash Flows for the three monthsended March 31, 2003 and 2002
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition andResults of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    28PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    30Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    30Signature Page
    
    
    33Certifications
    
    
    34Exhibit Index
    
    
    36


1



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VERSO TECHNOLOGIES, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
(Unaudited)

March 31,
    
    December 31,2003
    
    2002ASSETS:Current assets:Cash and cash equivalents
    
    $
    269
    
    
    $
    1,294Restricted cash
    
    
    419
    
    
    
    300Accounts receivable, net
    
    
    14,825
    
    
    
    10,909Inventories
    
    
    10,136
    
    
    
    4,733Other current assets
    
    
    1,639
    
    
    
    681Total current assets
    
    
    27,288
    
    
    
    17,917Property and equipment, net
    
    
    6,126
    
    
    
    4,962Investment in Shanghai BeTrue Infotech Co. Ltd., at equity
    
    
    567
    
    
    
    600Other
intangibles, net
    
    
    3,619
    
    
    
    3,671Goodwill
    
    
    12,685
    
    
    
    12,685
    

Total assets
    
    $
    50,285
    
    
    $
    39,835LIABILITIES AND SHAREHOLDERS EQUITY:Current liabilities:Line of credit
    
    $
    2,200
    
    
    $
    800Current portion of notes payable
    
    
    6,800
    
    
    
    Accounts payable
    
    
    2,340
    
    
    
    1,993Accrued compensation
    
    
    1,662
    
    
    
    1,586Accrued expenses
    
    
    3,790
    
    
    
    4,473Unearned revenue and customer deposits
    
    
    5,959
    
    
    
    5,387Current portion of liabilities of discontinued operations
    
    
    1,283
    
    
    
    1,829Total current liabilities
    
    
    24,034
    
    
    
    16,068Liabilities of discontinued operations, net of current portion
    
    
    1,255
    
    
    
    1,302Other long-term liabilities
    
    
    962
    
    
    
    1,128Notes payable, net of current portion
    
    
    3,000
    
    
    
    Convertible subordinated debentures, net of discount
    
    
    3,772
    
    
    
    3,703Total liabilities
    
    
    33,023
    
    
    
    22,201Shareholders equity:Common stock, $.01 par value, 200,000,000 shares authorized;
89,691,755 and 89,077,846 shares issued and outstanding
    
    
    897
    
    
    
    891Additional paid-in capital
    
    
    275,488
    
    
    
    275,040Notes receivable from shareholders
    
    
    (1,578
    )
    
    
    (1,623
    )Accumulated deficit
    
    
    (255,982
    )
    
    
    (254,857
    )Deferred compensation
    
    
    (1,594
    )
    
    
    (1,797
    )Accumulated other comprehensive income (loss)  foreign currency translation
    
    
    31
    
    
    
    (20
    )Total shareholders equity
    
    
    17,262
    
    
    
    17,634Total liabilities and shareholders equity
    
    $
    50,285
    
    
    $
    39,835


The accompanying notes are an integral part of these condensed consolidated financial statements.

2



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VERSO TECHNOLOGIES, INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)
(Unaudited)

For the three months ended March 31,2003
    
    2002Revenue:Products
    
    $
    7,268
    
    
    $
    6,604Services
    
    
    5,729
    
    
    
    5,390Total revenue
    
    
    12,997
    
    
    
    11,994Cost of revenue:Products
    
    
    2,761
    
    
    
    2,331Services
    
    
    2,664
    
    
    
    2,618Total cost of revenue
    
    
    5,425
    
    
    
    4,949Gross profit:Products
    
    
    4,507
    
    
    
    4,273Services
    
    
    3,065
    
    
    
    2,772Total gross profit
    
    
    7,572
    
    
    
    7,045Operating expenses:General and administrative
    
    
    3,321
    
    
    
    3,112Sales and marketing
    
    
    1,891
    
    
    
    1,765Research and development
    
    
    1,896
    
    
    
    1,675Depreciation and amortization of property and equipment
    
    
    653
    
    
    
    762Amortization of intangibles
    
    
    212
    
    
    
    142Amortization of deferred compensation, related to
sales, general and administrative
    
    
    199
    
    
    
    324Reorganization costs
    
    
    194
    
    
    
    Total operating expenses
    
    
    8,366
    
    
    
    7,780Operating loss from continuing operations
    
    
    (794
    )
    
    
    (735
    )Other income
    
    
    9
    
    
    
    86Equity in loss of Shanghai BeTrue Infotech Co. Ltd
    
    
    (33
    )
    
    
    Interest expense, net, including $92 and $95 of
amortization of loan fees and discount on convertible
subordinated debentures in 2003 and 2002, respectively
    
    
    (307
    )
    
    
    (210
    )Loss from continuing operations before income taxes
    
    
    (1,125
    )
    
    
    (859
    )Income tax benefit (expense)
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (1,125
    )
    
    
    (859
    )Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (331
    )Net loss
    
    $
    (1,125
    )
    
    $
    (1,190
    )Net loss per common share  basic and diluted:Loss from continuing operations
    
    $
    (0.01
    )
    
    $
    (0.01
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )Net loss per common share  basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )Weighted average shares outstanding  basic and diluted
    
    
    89,437,720
    
    
    
    77,882,051


The accompanying notes are an integral part of these condensed consolidated financial statements.

3



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VERSO TECHNOLOGIES, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

For the three months ended March 31,2003
    
    2002Operating Activities:Continuing operations:Net loss from continuing operations
    
    $
    (1,125
    )
    
    $
    (859
    )Adjustments to reconcile net loss from continuing operations to net
cash used in continuing operating activities:Equity in loss of Shanghai BeTrue Infotech Co. Ltd
    
    
    33
    
    
    
    Depreciation
    
    
    653
    
    
    
    762Amortization of intangibles
    
    
    212
    
    
    
    142Amortization of deferred compensation
    
    
    199
    
    
    
    324Provision for doubtful accounts
    
    
    644
    
    
    
    351Amortization of loan fees and discount on convertible subordinated debentures
    
    
    92
    
    
    
    95Other
    
    
    12
    
    
    
    (30
    )Changes in current operating assets and liabilities, net of effects of acquisition:Accounts receivable
    
    
    (1,925
    )
    
    
    (1,430
    )Inventories
    
    
    652
    
    
    
    126Other current assets
    
    
    (375
    )
    
    
    222Accounts payable
    
    
    244
    
    
    
    (111
    )Accrued compensation
    
    
    3
    
    
    
    (928
    )Accrued expenses
    
    
    (909
    )
    
    
    (244
    )Unearned revenue and customer deposits
    
    
    86
    
    
    
    (110
    )Net cash used in continuing operating activities
    
    
    (1,504
    )
    
    
    (1,690
    )Discontinued operations:Loss from discontinued operations
    
    
    
    
    
    
    (331
    )Adjustment to reconcile loss from discontinued operations
to net cash used in discontinued operating activities
    
    
    (329
    )
    
    
    118Net cash used in discontinued operating activities
    
    
    (329
    )
    
    
    (213
    )Net cash used in operating activities
    
    
    (1,833
    )
    
    
    (1,903
    )Investing Activities:Net cash used in investing activities -
Purchases of property and equipment, net
    
    
    (167
    )
    
    
    (222
    )Software development costs capitalized
    
    
    (160
    )
    
    
    (82
    )Purchase of Clarent Corporation, net of cash acquired
    
    
    (295
    )
    
    
    Net cash used in investing activities
    
    
    (622
    )
    
    
    (304
    )Financing Activities:Borrowings on credit line, net
    
    
    1,400
    
    
    
    Proceeds from issuances of common stock, net
    
    
    
    
    
    
    183Net cash provided by financing activities
    
    
    1,400
    
    
    
    183Effect of exchange rate changes on cash
    
    
    30
    
    
    
    Decrease in cash and cash equivalents
    
    
    (1,025
    )
    
    
    (2,024
    )Cash and cash equivalents at beginning of period
    
    
    1,294
    
    
    
    7,745Cash and cash equivalents at end of period
    
    $
    269
    
    
    $
    5,721Supplemental disclosure of cash flow information:Cash payments during the period for:Interest
    
    $
    153
    
    
    $
    55Income taxes
    
    $
    10
    
    
    $
    33Non-cash investing and financing activitiesCommon stock and compensatory
options issued in reorganization
    
    $
    125
    
    
    $
    65Issuance of common stock in litigation settlement
    
    
    264
    
    
    
    Issuance of warrants in exchange for services
    
    
    119
    
    
    
    Assets acquired and liabilities assumed in conjunction with business acquisitions:Fair value of assets acquired, excluding cash
    
    $
    11,081
    
    
    $
    Consideration paid
    
    
    295
    
    
    
    Liabilities assumed
    
    $
    10,786
    
    
    $
    


The accompanying notes are an integral part of these condensed consolidated financial statements.

4



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VERSO TECHNOLOGIES, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

(Unaudited)



|1. |  | BASIS OF PRESENTATION
|-- |  | ---------------------



| |  | Verso Technologies, Inc. and subsidiaries (the Company), is a
communications technology and solutions provider for communications
service providers and enterprises seeking to implement application-based
telephony services, Internet usage management tools and outsourced
customer support services. The Companys continuing operations include
two separate business segments, the Carrier Solutions Group, which the
Company formerly referred to as its Gateway Solutions business, which
includes the Companys subsidiary NACT Telecommunications, Inc. (NACT)
and the Companys Clarent softswitching division, and the Enterprise
Solutions Group, which the Company formerly referred to as its
Applications and Services business, which includes the Companys
subsidiary Telemate.Net Software, Inc. (Telemate.Net) and the Companys
Clarent Netperformer division as well as the Companys customer response
center operations. The Carrier Solutions Group includes domestic and
international sales of hardware and software, integration, applications
and technical training and support. The Enterprise Solutions Group offers
network management, support and maintenance, customer response center
services and application services. The Company acquired NACT in July 2001
and Telemate.Net in November 2001. The Companys discontinued operations
include the Companys value-added reseller business and associated
consulting practice (legacy VAR business) and the Companys hospitality
services group (HSG), all of which were inactive by the end of the first
quarter of 2002.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The condensed consolidated financial statements include the accounts of
Verso Technologies, Inc. and its wholly-owned subsidiaries, including
Telemate.Net, NACT, Clarent Canada Ltd. and MessageClick, Inc.
(MessageClick).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Certain prior year amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation. These
reclassifications had no effect on previously reported net loss.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The condensed consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) considered necessary by management to present a fair statement
of the results of operations, financial position and cash flows. The
results reported in these condensed consolidated financial statements
should not be regarded as necessarily indicative of results that may be
expected for the entire year.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The year-end condensed consolidated balance sheet was derived from audited
consolidated financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States
of America. For further information, refer to the audited consolidated
financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2002.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. |  | MERGERS AND ACQUISITIONS
|-- |  | ------------------------



| |  | Clarent Corporation
| |  | -------------------



| |  | On February 12, 2003, to increase the Companys holdings in the
next-generation networking and technology market, the Company acquired
substantially all the business assets along with certain related
liabilities of Clarent Corporation (Clarent). The purchase
consideration was approximately $10.6 million, consisting of $9.8 million
in seller notes made by the Company and acquisition costs of approximately
$750,000. At closing of the acquisition, the Company issued three
promissory notes to Clarent: a $5.0 million secured note due February 13,
2004, which bears interest at 10% per annum, of which $500,000 is due May
13, 2003, and the remainder is due in monthly installments beginning in
June, increasing in amount each month; a $1.8 million non-interest bearing
unsecured note due February 13, 2004, of which $300,000 is due May 13,
2003 and the remainder is due in quarterly installments of $500,000; and a
$3.0 million secured note due February 12, 2008, which bears interest at
5% per annum. The assets the Company purchased from Clarent are security
for the secured notes.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|2. |  | MERGERS AND ACQUISITIONS, Continued
|-- |  | -----------------------------------



| |  | Clarent Corporation  Continued
| |  | -------------------------------



| |  | The acquisition was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities were recorded at their fair value
at the date of the acquisition.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company has prepared an initial allocation of the purchase price based
on the estimated fair values of certain assets, receivables and estimated
liabilities. The Company is continuing to obtain information as to
ultimate valuation, recoverability and realization with respect to the
fair values of certain acquired assets being held for sale, intangible
assets, and estimated liabilities. Upon resolution of the estimates and
fair values, the Company anticipates the allocation of purchase price to
be finalized prior to the end of the first quarter of 2004.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The preliminary allocation of the purchase price for the assets acquired
from Clarent, is as follows:
| |  | -----------------------------------------------------------------------------------------------------

ClarentCash and cash equivalents
    
    $
    350Restricted cash
    
    
    115Accounts receivable
    
    
    2,635Inventories
    
    
    6,055Other current assets
    
    
    626Property and equipment
    
    
    1,650Accounts payable
    
    
    (103
    )Accrued compensation
    
    
    (198
    )Accrued expenses
    
    
    (93
    )Deferred revenue
    
    
    (487
    )Purchase price
    
    $
    10,550




| |  | Pro Forma Effect of Clarent Transaction
| |  | ---------------------------------------



| |  | The results of Clarent have been included in the consolidated results
subsequent to February 12, 2003. The following unaudited pro forma
information presents the results of continuing operations of the Company
for the three months ended March 31, 2003 and 2002, as if the acquisition
of the assets from Clarent had taken place on January 1, 2002, (in
thousands, except per share amounts):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003
    
    2002Revenues
    
    $
    14,644
    
    
    $
    19,458Net loss from continuing operations
    
    $
    (4,180
    )
    
    $
    (20,400
    )Net loss
    
    $
    (4,180
    )
    
    $
    (20,731
    )Net loss from continuing operations per common share
 basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.26
    )Net loss per common share  basic and diluted
    
    
    (0.05
    )
    
    
    (0.27
    )Weighted average shares outstanding
 basic and diluted
    
    
    89,438
    
    
    
    77,882


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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|3. |  | UNCONSOLIDATED AFFILIATES
|-- |  | -------------------------



| |  | Shanghai BeTrue Infotech Co., Ltd.
| |  | ----------------------------------



| |  | On October 1, 2002, the Company acquired a 51% interest in Shanghai BeTrue
Infotech Co., Ltd. (BeTrue). The remaining 49% interest in BeTrue is
owned by Shanghai Tangsheng Investments & Development Co. Ltd (Shanghai
Tangsheng). The joint venture provides the Company with an immediate
distribution channel into the China and Asia-Pacific region for the
Companys application-based Voice over Internet Protocol gateway
solutions, billing systems, value-added applications and web filtering
solutions. Due to the shared decision making between the Company and its
equity partner, the results of BeTrue are treated as an equity investment
rather than being consolidated.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company purchased the 51% interest in BeTrue for $100,000 from NeTrue
Communications, Inc., Shanghai Tangshengs former joint venture partner
with $50,000 paid at closing, $25,000 paid on December 30, 2002, and
$25,000 paid on March 30, 2003. Upon closing the transaction, the Company
also contributed to the joint venture certain next-generation
communication equipment and software valued at approximately $236,000 and
$50,000 cash. Additionally, the Company contributed $25,000 on December
30, 2002 and $25,000 on March 30, 2003.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Summarized financial information reported by this
affiliate for the three months ended March 31, 2003 (in thousands) are as
follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------

Operating results:Revenues
    
    $
    78Operating loss
    
    $
    (77
    )Net loss
    
    $
    (65
    )


7



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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|4. |  | DISCONTINUED OPERATIONS
|-- |  | -----------------------



| |  | Following the acquisition of NACT in July 2001, the Company determined
that its legacy VAR business was not strategic to the Companys ongoing
objectives and discontinued capital and human resource investment in its
legacy VAR business. Accordingly, the Company elected to report its legacy
VAR business as discontinued operations by early adoption of Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets (SFAS No. 144).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Summary operating results of the discontinued operations for the three
months ended March 31, 2003 and 2002 (in thousands) were as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------

Three months ended March 31,2003
    
    2002Revenue
    
    $
    
    
    
    $
    223Gross (loss) profit
    
    $
    
    
    
    $
    (331
    )Operating loss
    
    $
    
    
    
    $
    (331
    )Loss from discontinued operations
    
    $
    
    
    
    $
    (331
    )




| |  | Liabilities of discontinued operations (in thousands) are as follows:
| |  | ---------------------------------------------------------------------

March 31,
    
    December 31,2003
    
    2002Accrued restructuring costs
    
    $
    1,896
    
    
    $
    2,010Other current liabilities
    
    
    642
    
    
    
    1,121Liabilities of discontinued operations
    
    $
    2,538
    
    
    $
    3,131




| |  | Accrued reorganization costs relates primarily to several leases for
buildings and equipment that were utilized by the discontinued operations
and are no longer being utilized in continuing operations. The accrual is
for all remaining payments due on these leases, less estimated amounts to
be paid by any sublessors. The accrual for one of the leases with total
payments remaining of $2.6 million assumes that the building will be
sub-leased for approximately 50% of the total lease liability over the
term of the lease.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Activity in the restructuring accrual for discontinued operations was as
follows:
| |  | ---------------------------------------------------------------------------------

Balance December 31, 2002
    
    $
    2,010Lease payments
    
    
    (240
    )Additional restructuring accrual
    
    
    126Balance March 31, 2003
    
    $
    1,896


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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|5. |  | INVENTORIES
|-- |  | -----------



| |  | Inventories consist primarily of purchased electronic components, and are
stated at the lower of cost or market. Cost is determined by using the
first-in, first-out method.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Inventories as of March 31, 2003 and December 31, 2002, are comprised of
the following (in thousands):
| |  | ------------------------------------------------------------------------------------------------------

March 31,
    
    December 31,2003
    
    2002Raw materials
    
    $
    7,071
    
    
    $
    1,566Work in process
    
    
    1,971
    
    
    
    2,380Finished goods
    
    
    1,094
    
    
    
    787Total inventories
    
    $
    10,136
    
    
    $
    4,733




|6. |  | INTANGIBLES
|-- |  | -----------



| |  | Intangible assets represent the excess of cost over the fair value of net
tangible assets acquired and identified other intangible assets, primarily
purchased software development costs and customer relationship costs. The
purchased software development costs are amortized on a straight-line
basis over estimated useful lives of three years once the projects are
placed in service. The customer relationship costs are amortized on a
straight-line basis over its estimated useful life of ten years.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Intangible assets consist of the following (in thousands):
| |  | ----------------------------------------------------------

March 31,
    
    December 31,2003
    
    2002Intangibles subject to amortization:Purchased software development
    
    $
    2,256
    
    
    $
    2,096Customer relationship
    
    
    2,403
    
    
    
    2,4034,659
    
    
    
    4,499Accumulated amortization
    
    
    (1,040
    )
    
    
    (828
    )Net intangibles subject to amortization
    
    
    3,619
    
    
    
    3,671Intangibles not subject to amortization:Goodwill
    
    
    12,685
    
    
    
    12,685Total intangibles
    
    $
    16,304
    
    
    $
    16,356


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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|6. |  | INTANGIBLES, Continued
|-- |  | ----------------------



| |  | Estimated annual amortization expense is as follows (in thousands):
| |  | -------------------------------------------------------------------

AnnualAmortizationremaining 2003
    
    $
    6372004
    
    
    9162005
    
    
    3832006
    
    
    2402007
    
    
    240Thereafter
    
    
    1,203$
    3,619




|7. |  | LOAN FACILITY WITH SILICON VALLEY BANK
|-- |  | --------------------------------------



| |  | In February 2003, the Company amended its original credit agreement (the
Original Credit Agreement) with its primary lender, Silicon Valley Bank
(Silicon) to increase the Companys credit line with Silicon from $5.0
million to $10.0 million, subject to borrowing availability. The Company
also entered into certain additional arrangements with Silicon including
an export-import (EX-IM) facility that will provide for working capital
based on the Companys international accounts receivable and inventory
related to export sales. On April 7, 2003, the Company and Silicon
further amended the credit facility to increase the EX-IM facility and to
modify certain financial covenants related to the timing of the Companys
acquisition of substantially all of the business assets along with related
liabilities of Clarent on February 12, 2003 (as amended on February 12,
2003 and April 7, 2003, the Amended Credit Agreement). The Amended
Credit Agreement is secured by substantially all of the assets of the
Company. Interest is computed at 2.0% above Silicons Base Rate (6.25% at
March 31, 2003). The Amended Credit Agreement provides for up to
$1,000,000 in letters of credit. Advances are limited by a formula based
on eligible receivables, inventories, certain cash balances, outstanding
letters of credit and certain subjective limitations. Interest payments
are due monthly, and the Amended Credit Agreement expires in August 2004.
The Amended Credit Agreement includes a loan fee of $130,000 and .375% on
unused available borrowings. Under the terms of the Amended Credit
Agreement, the Company must maintain a minimum EBITDA (earnings before
interest, taxes, depreciation and amortization), computed monthly, and may
not declare dividends or incur any additional indebtedness without the
consent of Silicon, and must comply with other financial covenants, as
defined. The Company was in compliance with these covenants as of March
31, 2003. Pursuant to the loan commitment letter with Silicon, on
February 12, 2003, the Company issued to Silicon a warrant to purchase
350,000 shares of the Companys common stock at an exercise price of $0.44
per share. The fair value of the warrant issued totaled approximately
$119,000, using the Black-Scholes option pricing method based on the
following weighted-average assumptions: expected volatility  104%;
expected life  five years; risk-free interest rate  3.0%; and expected
dividend yield  0%. The loan fees and fair value of the warrants issued
are being amortized to interest expense over the term of the Amended
Credit Agreement.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company had $2.2 million of borrowings under the Amended Credit
Agreement as of March 31, 2003. The remaining availability under the
Amended Credit Agreement at March 31, 2003 was $5.6 million.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|8. |  | CONVERTIBLE SUBORDINATED DEBENTURES
|-- |  | -----------------------------------



| |  | In connection with the acquisition of MessageClick, certain investors of
MessageClick purchased $4.5 million of the Companys 7.5% convertible
subordinated debentures and warrants to purchase an aggregate of 1,026,820
shares of the Companys common stock at an exercise price of $7.30 per
share. The debentures are convertible into the Companys common stock at
a conversion price of $4.41. The convertible subordinated debentures are
due November 22, 2005. The debentures have been discounted to reflect the
fair value of the warrants issued, totaling approximately $1.4 million,
using the Black-Scholes option pricing method based on the following
weighted-average assumptions: expected volatility  88%;
expected life  five years; risk-free interest rate  5.5%;
and expected dividend yield  0%. The unamortized discount totaled
approximately $728,000 and $797,000 at March 31,
2003 and December 31, 2002, respectively. In addition, the Company paid certain private placement fees and
attorneys fees in connection with the sale of the debentures totaling
$50,000. The fees are being amortized to interest expense over the term
of the debentures.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. |  | OTHER COMPREHENSIVE LOSS
|-- |  | ------------------------



| |  | Comprehensive loss for the three months ended March 31, 2003 and 2002 is
shown in the following table (in thousands):
| |  | ---------------------------------------------------------------------------------------------------------------------

Three months ended March 31,2003
    
    2002Net loss
    
    $
    (1,125
    )
    
    $
    (1,190
    )Other comprehensive loss:Foreign currency translation
    
    
    51
    
    
    
    (3
    )Comprehensive loss
    
    $
    (1,074
    )
    
    $
    (1,193
    )




|10. |  | SEGMENT INFORMATION
|--- |  | -------------------



| |  | The Company reports information for two segments, Carrier Solutions Group,
which the Company formerly referred to as its Gateway Solutions
business, and Enterprise Solutions Group, which the Company formerly referred to as
its Applications and Services business.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CarrierSolutionsGroup:
    
    The Companys Carrier Solutions Group consists of the operations of
the Companys switching subsidiary, NACT and the Companys Clarent
softswitching division. The Companys Carrier Solutions Group
includes hardware and software, integration, applications and
technical training and support.EnterpriseSolutionsGroup:
    
    The Companys Enterprise Solutions Group consists of the operations
of the Companys subsidiary, Telemate.Net, the Companys Clarent
Netperformer division and the Companys customer response center
services. The Enterprise Solutions Group offers application and
network design, enterprise application integration, network
management, support and maintenance, customer response center
services, enterprise management system solutions and application services.


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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|10. |  | SEGMENT INFORMATION, Continued
|--- |  | ------------------------------



| |  | Management evaluates the business segment performance based on
contributions before unallocated items. Inter-segment sales and transfers
are not significant.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Summarized financial information concerning the Companys reportable
segments is shown in the following table (in thousands):
| |  | -----------------------------------------------------------------------------------------------------------------------------

Carrier
    
    EnterpriseSolutions
    
    SolutionsGroup(a)
    
    Group(a)
    
    TotalFor
the Three Months Ended March 31,
2003Revenue
    
    $
    6,722
    
    
    $
    6,275
    
    
    $
    12,997Contribution before unallocated items
    
    
    395
    
    
    
    2,154
    
    
    
    2,5492002Revenue
    
    $
    7,525
    
    
    $
    4,469
    
    
    $
    11,994Contribution before unallocated items
    
    
    1,264
    
    
    
    1,472
    
    
    
    2,736




|(a) |  | Carrier Solutions Group includes costs associated with certain
corporate and administrative functions to support this business unit,
which functions were located in Utah through the middle of the first
quarter of 2003 at which time these functions were moved to Atlanta.
Enterprise Solutions Group includes no allocation of corporate overhead
costs. See also (b) below.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The following table reconciles the total contribution before unallocated
items to the loss from continuing operations (in thousands):
| |  | -------------------------------------------------------------------------------------------------------------------------------------

Three Months Ended March 31,2003
    
    2002Contribution before unallocated items, per above
    
    $
    2,549
    
    
    $
    2,736Corporate and administrative expenses (b)
    
    
    (2,085
    )
    
    
    (2,243
    )Depreciation
    
    
    (653
    )
    
    
    (762
    )Amortization of intangibles
    
    
    (212
    )
    
    
    (142
    )Deferred compensation
    
    
    (199
    )
    
    
    (324
    )Reorganization costs
    
    
    (194
    )
    
    
    Other income
    
    
    9
    
    
    
    86Equity in loss of Shanghai BeTrue Infotech Co. Ltd.
    
    
    (33
    )
    
    
    Interest expense, net
    
    
    (307
    )
    
    
    (210
    )Loss from continuing operations before taxes
    
    $
    (1,125
    )
    
    $
    (859
    )


12



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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|10. |  | SEGMENT INFORMATION, Continued
|--- |  | ------------------------------



|(b) |  | All Atlanta-based rent, utilities and other corporate office expenses,
corporate marketing expenses, corporate development costs and corporate
human resources, accounting and information technology functions that
support corporate, as well as, the Enterprise Solutions Group divisions
located in Atlanta are reflected in unallocated corporate, sales, general
and administrative expenses. Office expenses, human resources, accounting
and information technology costs specifically related to the Carrier
Solutions Group, through the middle of the first quarter of 2003, are
reflected in its contribution before unallocated items.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Following the acquisition of substantially all the business assets along
with certain liabilities of Clarent in February 2003, the Company began
conducting operations in Canada and the United States. The geographic
distribution of the Companys revenues and contribution before unallocated
items are as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Canada
    
    United States
    
    TotalFor
the Three Months Ended March 31,
2003Revenue
    
    $
    
    
    
    $
    12,997
    
    
    $
    12,997Contribution before unallocated items
    
    
    (484
    )
    
    
    3,033
    
    
    
    2,549




| |  | Identified assets by geographic area exclude intercompany advances and
investments in affiliates.
| |  | -------------------------------------------------------------------------------------------------

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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|11. |  | REORGANIZATION COSTS
|--- |  | --------------------



| |  | In the first quarter of 2003, the Company initiated a reorganization to
accommodate the acquisition of the assets of Clarent and eliminated 14 positions held by
employees. As a result of these actions, the Company recorded
reorganization costs of $194,000 during the three months ended March 31,
2003. The reorganization costs consist of severance costs and the balance
of the accrued severance costs as of March 31, 2003 is $34,000.
Annualized savings beginning in the second quarter of 2003 are expected to
be approximately $987,000.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12. |  | STOCK OPTIONS AND WARRANTS
|--- |  | --------------------------



| |  | The Company has a stock option plan for employees, consultants, and other
individual contributors to the Company. In addition, i
n connection with various financing and acquisition transactions, and for
services provided to the Company, the Company has issued warrants to
purchase the Companys common stock. A summary of stock options and
warrants outstanding at March 31, 2003, is as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Options and warrants issued to employees:
| |  | -----------------------------------------

Options and Warrants Outstanding
    
    Options and Warrants ExercisableRange of Exercise
    
    Outstanding at
    
    Weighted Average
    
    Exercisable
    
    Weighted AveragePrices
    
    March 31, 2003
    
    Exercise Price
    
    at March 31, 2003
    
    Exercise Price$0.19-$0.42
    
    
    3,163,419
    
    
    $
    0.29
    
    
    
    2,814,432
    
    
    $
    0.28$0.44-$0.66
    
    
    3,547,038
    
    
    $
    0.49
    
    
    
    2,120,440
    
    
    $
    0.51$0.68-$1.50
    
    
    2,478,878
    
    
    $
    1.23
    
    
    
    1,163,107
    
    
    $
    1.28$1.51-$2.14
    
    
    5,030,000
    
    
    $
    2.13
    
    
    
    3,553,000
    
    
    $
    2.13$2.15-$5.25
    
    
    3,203,333
    
    
    $
    3.80
    
    
    
    2,356,224
    
    
    $
    3.84$5.31-$18.00
    
    
    694,573
    
    
    $
    7.99
    
    
    
    609,999
    
    
    $
    7.93Total
    
    
    18,117,241
    
    
    $
    1.88
    
    
    
    12,617,202
    
    
    $
    1.97




| |  | Options and warrants issued to employees generally terminate ten
years from the date of grant. Termination dates on the options and
warrants listed above range from May 15, 2003 to March 14, 2013.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Warrants issued primarily in connection with
financing:
| |  | -------------------------------------------------------

|               |  |                      |            |                  |  |                 |      |  |  |                            
|-------------- |  | -------------------- | ---------- | ---------------- |  | --------------- | ---- |  |  | ---------------------------
|               |  | Number of            |            | Weighted Average |  |                
|Exercise Price |  | Outstanding Warrants |            | Exercise Price   |  | Expiration Date
|               |  |                      |            |                  |  |                
|$0.01-$0.01    |  |                      | 37,532     |                  |  | $               | 0.01 |  |  | September 2005-October 2006
|$0.31-$0.31    |  |                      | 9,646,302  |                  |  | $               | 0.31 |  |  | October 2007               
|$0.44-$1.98    |  |                      | 1,955,373  |                  |  | $               | 1.37 |  |  | November 2004-February 2013
|$2.25-$5.62    |  |                      | 981,699    |                  |  | $               | 4.39 |  |  | September 2003-July 2010   
|$5.65-$5.65    |  |                      | 4,502,811  |                  |  | $               | 5.65 |  |  | August 2005-September 2005 
|$6.00-$7.30    |  |                      | 1,416,820  |                  |  | $               | 6.94 |  |  | October 2006-November 2010 
|               |  |                      |            |                  |  |                 |      |  |  |                            
|Total          |  |                      | 18,540,537 |                  |  | $               | 2.44 |  |  |                            
|               |  |                      |            |                  |  |                 |      |  |  |                            



| |  | Most warrants are vested when issued.
| |  | -------------------------------------



| |  | Options and warrants outstanding as of March 31, 2003 totaled 36,657,778.
| |  | -------------------------------------------------------------------------

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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|12. |  | STOCK OPTIONS AND WARRANTS, Continued
|--- |  | -------------------------------------



| |  | The exercise price and number of outstanding warrants for certain warrants
previously issued have been adjusted according to their antidilution
provisions.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | If the Company had used the fair value-based method of accounting for its
stock option and incentive plans and charged compensation cost against
income, over the vesting period, based on the fair value of options at the
date of grant, then the net loss and net loss per common share would have
been increased to the following pro forma amounts (in thousands, except
for per share amounts):
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Three months ended March 31,2003
    
    2002Net loss, as reported
    
    $
    (1,125
    )
    
    $
    (1,190
    )Add: Stock-based compensation
expense included in net loss
    
    
    199
    
    
    
    324Less: Total stock-based employee
compensation expense determined
under fair value based method
for all awards
    
    
    (965
    )
    
    
    (824
    )Pro forma net loss
    
    $
    (1,891
    )
    
    $
    (1,690
    )Net loss per common share
As reported
    
    $
    (0.01
    )
    
    $
    (0.02
    )Pro forma
    
    
    (0.02
    )
    
    
    (0.02
    )




|13. |  | OTHER EVENTS
|--- |  | ------------



| |  | On or about February 8, 2002, William P. OReilly, a former executive
officer and director of the Company; Montana Corporation, Mr. OReillys
consulting company; Clunet R. Lewis, a former officer of the Company; and
CLR Enterprises, Inc., Mr. Lewis consulting company, filed with the
American Arbitration Association (AAA) a demand for arbitration against
the Company. Messrs. OReilly and Lewis and their respective consulting
companies sought to have enforced the Consulting Agreements dated April 1,
1999, as amended, to which they and the Company are parties (the
Consulting Agreements). Messrs. OReilly and Lewis claimed that the
Companys attempt by written notice dated June 1, 2001, to terminate the
Consulting Agreements effective March 31, 2002, was ineffective and, as a
result, such Consulting Agreements have automatically renewed for
additional two-year terms, which terms expire on March 31, 2004. Under
the terms of the Consulting Agreements, Messrs. OReilly and Lewis are to
receive, among other things, consulting fees of $250,000 and $240,000 per
year, respectively. The Company denied their claims, and the matter was
presented to an AAA arbitrator in a hearing held on December 10, 2002.
While the matter remained pending before the arbitrator for decision, the
parties settled the claims presented in the arbitration proceeding
pursuant to that certain Arbitration Award Agreement, dated as of February
3, 2003, between Mr. OReilly, Montana Corporation and the Company and
that certain Arbitration Award Agreement, dated as of February 3, 2003,
between Mr. Lewis, CLR Enterprises, Inc. and the Company (together, the
Arbitration Award Agreements). Pursuant to the Arbitration Award
Agreements, (i) on February 4, 2003, the Company issued to each of Mr.
OReilly and Mr. Lewis 275,000 restricted shares of the Companys common
stock; and (ii) on March 14, 2003, the Company entered into thirty-month
consulting agreements with each of Mr. OReilly and Mr. Lewis (together,
the New Consulting Agreements). During the terms of the New Consulting
Agreements, the Company shall pay to Mr. OReilly and Mr. Lewis an
aggregate of approximately $173,000 and $160,000, respectively, in three
installment payments, payable entirely in shares of the Companys common
stock, valued at the average closing price per share for a period of
twenty trading days prior to the date the installment payments are due.
The Arbitration Award Agreements provide that the consideration set forth
therein and in the New Consulting Agreements shall be full satisfaction of
any and all amounts the AAA arbitrator may award. On March 14, 2003, the
AAA arbitrator awarded $250,000 and $240,000 to Mr. OReilly and Mr.
Lewis, respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|13. |  | OTHER EVENTS, Continued
|--- |  | -----------------------



| |  | On or about May 21, 2001, John M. Good, a former employee of the Company,
filed a lawsuit in the Court of Common Pleas, Cuyahoga County, Ohio,
against the Company claiming, among other things, fraud, negligence,
securities fraud, breach of contract, conversion and damages resulting
from and related to the Companys alleged failure to deliver, on or about
January 3, 2000, 50,000 shares of the Companys common stock to Mr. Good
upon his exercise of an option to purchase such shares. The matter was
set for jury trial on February 17, 2003. Based upon the Companys
anticipated exposure and the cost of litigation, on January 16, 2003, the
Company and Mr. Good reached an agreement to settle all claims against the
Company, which had no material impact on the Companys consolidated
financial statements.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On or about April 29, 2002, Omni Systems of Georgia, Inc. (Omni) and
Joseph T. Dyer (Dyer) filed with the AAA a demand for arbitration
against the Company and Eltrax International, Inc., a wholly-owned
subsidiary of the Company (Eltrax International). Omni and Dyer claimed
that the Company and Eltrax International breached that certain Assignment
dated as of August 31, 1998, among Eltrax International, Dyer and Omni
(the Assignment), which was executed in connection with the Companys
acquisition of Encore Systems, Inc., Global Systems and Support, Inc. and
Five Star Systems, Inc. (collectively, the Encore Group) in 1998.
Pursuant to the Assignment, Omni and Dyer assigned and transferred to
Eltrax International all of their right, title and interest in and to a
certain computer software property management system in exchange for a
one-time payment. The Assignment also provided for an earn-out component
of the acquisition consisting of certain contingent monthly payments equal
to a percentage of the maintenance and licensing net revenues received by
Eltrax International with respect to a certain contract. Omni and Dyer
claimed that the Company and Eltrax International had not paid to Omni and
Dyer the contingent monthly payments owed to them pursuant to the
Assignment beginning in June 2002. Omni and Dyer sought recovery of over
$400,000 for contingent monthly payments allegedly owed for the period
from May 15, 2002 through January 2003, plus payments in like amounts
going forward, together with interest thereon, attorneys fees and
expenses. In January 2003, the matter was heard for six days by a
three-arbitrator panel of the AAA. On April 1, 2003, the Company received
notice that the AAA panel awarded to Omni and Dyer (i) payments and
interest thereon with respect to the Assignment in the aggregate amount of
approximately $506,000; and (ii) attorneys fees and expenses, excluding
expenses of the AAA, in the aggregate amount of approximately $199,000
(net of attorneys fees and expenses awarded to the Company), which
amounts are to be paid by Eltrax International (and not the Company) no
later than April 30, 2003. Additionally, the AAA panel determined that
Eltrax International (and not the Company) will be liable for future
payments as they become due in accordance with the terms of the
Assignment. The Company estimates that the payments to be made by Eltrax
International through 2007, pursuant to the award of the AAA panel, will
total approximately $2.4 million. These payments are additional cost of
the Companys acquisition of the Encore Group. Accordingly, the Company
accrued the total amount of the estimated payments and increased
intangibles by $2.4 million. The long-term portion of the estimated
payments is included on the Companys consolidated balance sheet in other
long-term liabilities.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|14. |  | LITIGATION
|--- |  | ----------



| |  | The Company is not a party to any material legal proceedings other than
ordinary routine claims and proceedings incidental to its business, and
the Company does not expect these claims and proceedings, either
individually or in the aggregate, to have a material adverse effect on the
Company.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|15. |  | SUBSEQUENT EVENT
|--- |  | ----------------



| |  | On April 22, 2003, the Company announced that it had signed a definitive
merger agreement for the acquisition of MCK Communications, Inc. (MCK).
In the merger, holders of MCKs common stock will be entitled to receive
an aggregate of approximately 20.0 million shares of the Companys common stock, which was
valued at $13.0 million based upon the volume weighted average
closing price per share of the Companys common stock as
reported on the Nasdaq SmallCap Market for a period of twenty
consecutive trading days ending on April 15, 2003. The MCK acquisition will be accounted for as a
purchase. The Company anticipates that the merger will close in the
third quarter of 2003, subject to (i) approval of the merger by
both the Companys and MCKs shareholders;
(ii) declaration of effectiveness by the Securities and Exchange
Commission (SEC) of a registration statement to be filed
by the Company covering the shares of the Companys common stock
to be issued in the merger; and (iii) satisfaction of other
conditions set forth in the merger agreement.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2003

(Unaudited)



|16. |  | RECENT ACCOUNTING PRONOUNCEMENTS
|--- |  | --------------------------------



| |  | In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections (SFAS No. 145),
which eliminates the requirement to report gains and losses related to
extinguishments of debt as extraordinary items. The statement also
included other amendments and technical corrections, which will not have a
material impact on the Company. The provisions of the statement related
to the treatment of debt extinguishments are required to be applied in
fiscal years beginning after May 15, 2002. Upon adoption of SFAS No. 145
in January 2003, previously recorded extraordinary items for debt
extinguishments have been reclassified to continuing operations.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS No. 146). SFAS No.
146 addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred rather than when a company
commits to such an activity and also establishes fair value as the
objective for initial measurement of the liability. The Company adopted
SFAS No. 146 in January 2003.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock
Based Compensations  Transition and Disclosure (SFAS No. 148). SFAS
No. 148 is an amendment to SFAF No. 123 providing alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Amendments are
effective for financial statements for fiscal years ended after December
15, 2002 and for interim periods beginning after December 15, 2002. The
Company has currently chosen to not adopt the voluntary change to the fair
value based method of accounting for stock-based employee compensation,
pursuant to SFAS No. 148, which, if adopted, could have a material effect
on the Companys financial position or results of operations.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In November 2002, the EITF of the FASB reached a consensus on EITF No.
00-21, Accounting for Revenue Arrangements with Multiple Element
Deliverables. The issue addresses how to account for arrangements that
may involve multiple revenue-generating activities, i.e., the delivery or
performance of multiple products, services, and/or rights to use assets.
In applying this guidance, separate contracts with the same party, entered
into at or near the same time, will be presumed to be a package, and the
consideration will be measured and allocated to the separate units based
on their relative fair values. This consensus guidance will be applicable
to agreements executed in quarters beginning after June 15, 2003. The
Company will adopt this new accounting effective July 1, 2003. The
Company is currently evaluating the impact of this change.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (Interpretation No. 45),which
clarifies the disclosure and recognition/measurement requirements related
to certain guarantees. The disclosure requirements are effective for
financial statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a prospective basis
for guarantees issued or modified after December 31, 2002. The Company
typically grants its customers a warranty, which guarantees that its
products will substantially conform to its current specifications for
twelve months from the delivery date. Historically, costs related to
these guarantees have not been significant.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research
Bulletin No. 51 (Interpretation No. 46). Interpretation No. 46
addresses the consolidation by business enterprises of variable interest
entities as defined therein. Interpretation No. 46 applies immediately to
variable interests in variable interest entities created after January 31,
2003, and to variable interests in variable interest entities obtained
after January 31, 2003. The Company is currently determining the impact
of application of this Interpretation on the Companys financial
statements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this Quarterly Report on Form 10-Q and in future filings
by the Company with the SEC and in the
Companys written and oral statements that are not statements of historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The words believe, expect,
anticipate, intend, will and similar expressions are examples of words
that identify forward-looking statements. Forward-looking statements include,
without limitation, statements regarding our future financial position,
business strategy and expected cost savings. These forward-looking statements
are based on our current beliefs, as well as assumptions we have made based
upon information currently available to us.

Each forward-looking statement reflects our current view of future events and
is subject to risks, uncertainties and other factors that could cause actual
results to differ materially from any results expressed or implied by our
forward-looking statements. Important factors that could cause actual results
to differ materially from the results expressed or implied by any
forward-looking statements include:



| |  | our ability to fund future growth;
|- |  | ----------------------------------



| |  | our ability to become profitable;
|- |  | ---------------------------------



| |  | the volatility of the price of our common stock;
|- |  | ------------------------------------------------



| |  | the low price of our common stock;
|- |  | ----------------------------------



| |  | the low trading volume of our common stock;
|- |  | -------------------------------------------



| |  | general economic conditions of the telecommunications market;
|- |  | -------------------------------------------------------------



| |  | market demand for and market acceptance of our products;
|- |  | --------------------------------------------------------



| |  | legal claims against us;
|- |  | ------------------------



| |  | our ability to integrate our business with other entities we may
subsequently acquire;
|- |  | --------------------------------------------------------------------------------------



| |  | our ability to protect our intellectual property rights;
|- |  | --------------------------------------------------------



| |  | defects in our products;
|- |  | ------------------------



| |  | our current level of indebtedness;
|- |  | ----------------------------------



| |  | new regulation and legislation;
|- |  | -------------------------------



| |  | the effects of our accounting policies and general changes in generally
accepted accounting principles;
|- |  | -------------------------------------------------------------------------------------------------------



| |  | general economic and business conditions; and
|- |  | ---------------------------------------------



| |  | other risks and uncertainties disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2002 and in our other filings with the SEC.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

All subsequent forward-looking statements relating to the matters described in
this document and attributable to us or to persons acting on our behalf are
expressly qualified in their entirety by such factors. We have no obligation
to publicly update or revise these forward-looking statements to reflect new
information, future events, or otherwise, except as required by applicable
Federal securities laws, and we caution you not to place undue reliance on
these forward-looking statements.

18



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General

The Company is a communications technology solutions provider for
communications service providers and enterprises seeking to implement
application-based telephony services, Internet usage management tools and
outsourced customer support services. The Companys continuing operations
include two separate business segments, the Carrier Solutions Group, which the
Company formerly referred to as its Gateway Solutions business, which includes
the Companys subsidiary NACT and the Companys Clarent softswitching division,
and the Enterprise Solutions Group, which the Company formerly referred to as
its Applications and Services business, which includes the Companys subsidiary
Telemate.Net, the Companys Clarent Netperformer division and the Companys
customer response center operations. The Company formed its Clarent
softswitching division and Clarent Netperformer division subsequent to the
Companys acquisition of Clarents business assets in February 2003. The
Companys discontinued operations include its legacy VAR business and HSG.

The consolidated financial statements include the accounts of Verso
Technologies, Inc. and its wholly-owned subsidiaries, including Telemate.Net,
NACT, Clarent Canada Ltd. and MessageClick.

The Company believes that the foregoing events significantly affect the
comparability of the Companys results of operations from year to year. You
should read the following discussion of the Companys results of operations and
financial condition in conjunction with the Companys consolidated financial
statements and related notes thereto included in Item 14 of the Companys
Annual Report on Form 10-K for the year ended December 31, 2002.

Results of Operations

Three Months Ended March 31, 2003, compared to Three Months Ended March 31,
2002

For the three months ended March 31, 2003, the Companys net loss totaled $1.1
million, or $.01 per share, compared with net loss of $1.2 million, or $.02 per
share, for the same period in 2002. The 2002 results included a loss from
discontinued operations of $331,000 or $.01 per share.

Continuing Operations

For the three months ended March 31, 2003, the Companys net loss from
continuing operations totaled $1.1 million, or $.01 per share, compared with a
net loss of $859,000, or $.01 per share, for the same period in 2002.

Total revenue was $13.0 million in the three months ended March 31, 2003,
reflecting an 8% increase from the same period in 2002. Products revenue was
$7.3 million in the three months ended March 31, 2003, reflecting a 10%
increase from the same period in 2002. The increase in product revenue is
comprised of $2.6 million in Clarent product sales offset by a decrease in NACT
product sales of $1.7 million. The decrease in NACT product sales is
reflective of the growing preference for the Companys customers to opt for a solution
comprised not just solely of NACT technology but one that also incorporates the
Companys Clarent softswitching technology. Services revenue was $5.7 million
in the three months ended March 31, 2003, reflecting a 6% increase from the
same period in 2002. Gross profit increased by $527,000 in the three months
ended March 31, 2003, and was 58% of revenue in 2003, compared with 59% of
revenue in the same period of 2002. The increase in gross profit dollars
resulted primarily from the acquisition of assets from Clarent on February 12,
2003, offset by a decrease in gross profit dollars from NACT. The slight
decrease in gross profit percentage was a result of the acquisition of assets
from Clarent, offset by margin improvement for Telemate.Net and the Companys
customer response center operations.

Total operating expenses incurred in continuing operations for the three months
ended March 31, 2003, were $8.4 million, an increase of $586,000 compared to
the same period of 2002. The increase is primarily attributable to the
following items: reorganization costs of $194,000, increases in general and
administrative expenses of $209,000, sales and marketing expenses of $126,000,
research and development expenses of $221,000 and amortization of intangibles
of $70,000 offset by decreases in depreciation expense of $109,000 and
amortization of deferred compensation of $125,000.

The increase in general and administrative expenses resulted from the addition
of personnel and related costs related to the acquisition of assets from
Clarent in February 2003, offset by overall decreased expenses related to
on-going cost reduction initiatives resulting in reduced personnel, telecom and
other general and administrative expenses.

The increase in sales and marketing expenses resulted from the addition of
personnel and related costs related to the acquisition of assets from Clarent
in February 2003, offset by overall decreased expenses related to on-going cost
reduction initiatives.

The increase in research and development is primarily related to the
acquisition of assets from Clarent in February 2003.

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The decrease in depreciation expense is primarily related to fully depreciated
assets net of increases related to the purchase of furniture and equipment of
approximately $167,000 and $667,000 during the first three months of 2003 and
for the last nine months of 2002, respectively, as well as depreciation related
to assets acquired from Clarent. Capital expenditures are
primarily depreciated on a straight-line basis over their estimated useful
lives of three years.

The increase in intangible amortization is primarily related to the
amortization of the customer relationship costs related to the acquisition of
Encore Group in 1998, which was awarded in arbitration in March, 2003, and
recorded in the fourth quarter of 2002.

The $125,000 decrease in amortization of deferred compensation primarily
related to the termination of certain options and full vesting of other options
outstanding since the Companys acquisitions of Telamate.Net in November 2001
and Cereus Technology Partners, Inc. (Cereus) in September 2000. The
deferred compensation represents the intrinsic value of the Telemate.Net and
Cereus unvested options outstanding at the date of the acquisitions of
Telemate.Net and Cereus and is amortized over the remaining vesting period of
the options.

In the first quarter of 2003, the Company announced a reorganization to
accommodate the acquisition of the assets of Clarent and eliminated 14 positions held by
employees. As a result of these actions, the Company recorded reorganization
costs of $194,000 during the three months ended March 31, 2003. The
reorganization costs consist of severance costs and the balance of the accrued
severance costs. Annualized savings beginning in the second quarter of 2003
are expected to be approximately $987,000.

As a percent of revenue, operating expenses from continuing operations, were
64% during the three months ended March 31, 2003 down from 65% for the same
period in 2002.

Other income was $9,000 during the three months ended March 31, 2003 compared
with $86,000 for the same period in 2002.

Equity in loss of BeTrue was $33,000 during the three months ended March 31,
2003. This amount represents the Companys 51% portion of BeTrues losses for
the quarter. The Company acquired a 51% interest in BeTrue during the fourth
quarter of 2002. Due to the shared decision making between the Company and its
equity partner, the results of BeTrue are treated as an equity investment
rather than being consolidated.

Net interest expense was $307,000 during the three months ended March 31, 2003,
an increase of $97,000 compared to the same period in 2002. The increase was
attributable to increased borrowings on the Companys line of credit and notes
payable for the acquisition of assets from Clarent, net of reductions related
to the interest on the deferred payment due for the purchase of NACT.

20



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##### Table of Contents



Business Unit Performance

Carrier Solutions
    
    Enterprise SolutionsDollars in thousands
    
    Group
    
    Group
    
    ConsolidatedFor the Three Months EndedMarch 31,
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002Revenue
    
    $
    6,722
    
    
    $
    7,525
    
    
    $
    6,275
    
    
    $
    4,469
    
    
    $
    12,997
    
    
    $
    11,994Gross profit
    
    
    3,959
    
    
    
    4,674
    
    
    
    3,613
    
    
    
    2,371
    
    
    
    7,572
    
    
    
    7,045Gross margin
    
    
    59
    %
    
    
    62
    %
    
    
    58
    %
    
    
    53
    %
    
    
    58
    %
    
    
    59
    %General and administrative
    
    
    1,207
    
    
    
    975
    
    
    
    267
    
    
    
    206
    
    
    
    1,474
    
    
    
    1,181Sales and marketing
    
    
    894
    
    
    
    903
    
    
    
    759
    
    
    
    550
    
    
    
    1,653
    
    
    
    1,453Research and development
    
    
    1,463
    
    
    
    1,532
    
    
    
    433
    
    
    
    143
    
    
    
    1,896
    
    
    
    1,675Contribution before unallocated items(a)
    
    $
    395
    
    
    $
    1,264
    
    
    $
    2,154
    
    
    $
    1,472
    
    
    
    2,549
    
    
    
    2,736Unallocated items:Corporate, sales, general and
administrative expenses(b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,085
    
    
    
    2,243Depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    653
    
    
    
    762Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212
    
    
    
    142Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199
    
    
    
    324Reorganization costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194
    
    
    
    Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (794
    )
    
    
    (735
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    86Equity in loss of Shanghai BeTrue Infotech Co. Ltd.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (307
    )
    
    
    (210
    )Loss from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,125
    )
    
    $
    (859
    )




|(a) |  | Carrier Solutions Group includes costs associated with certain corporate
and administrative functions to support this business unit, which
functions were located in Utah through the middle of the first quarter of
2003 at which time these functions were moved to Atlanta. Enterprise
Solutions Group includes no allocation of corporate overhead costs. See
also (b) below.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | All Atlanta-based rent, utilities and other corporate office expenses,
corporate marketing expenses, corporate development costs and corporate
human resources, accounting and information technology functions that
support corporate, as well as, the Enterprise Solutions Group divisions
located in Atlanta are reflected in unallocated corporate, sales, general
and administrative expenses. Office expenses, human resources, accounting
and information technology costs specifically related to the Carrier
Solutions Group, through the middle of the first quarter of 2003, are
reflected in its contribution before unallocated items.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Carrier Solutions Group

Total Carrier Solutions Group revenue was $6.7 million in the three months
ended March 31, 2003, an 11% decrease from the same period in 2002. The
decrease in revenue reflects the decrease in NACT revenues of approximately
$1.8 million offset by the operations of the Companys Clarent softswitching
division subsequent to its formation following the Companys acquisition of
Clarents business assets in February 2003 totaling $988,000. The decrease in
NACT revenue is reflective of the growing preference for the
Companys customers to opt
for a solution comprised not just solely of NACT technology but one that also
incorporates the Companys Clarent softswitching technology.

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Gross profit decreased by $715,000 in the three months ended March 31, 2003,
and was 59% percent of revenue, compared to 62% in the same period in 2002.
The decrease in gross profit dollars is related to the decrease in NACT
revenues, offset by the gross profit from the Companys Clarent softswitching
division subsequent to its formation following the Companys acquisition of
Clarents business assets in February 2003. The decrease in gross profit
percentage was a result of the acquisition of assets from Clarent, which sells
its products through distributors at lower margins than NACT.

Allocated operating expenses incurred in the Carrier Solutions Group for the
three months ended March 31, 2003, were $3.6 million, an increase of $154,000
compared to the same period in 2002. The increase in general and
administrative expenses reflects the formation of the Companys Clarent
softswitching division subsequent to the Companys acquisition of Clarents
business assets in February 2003. The decrease in sales and marketing expenses
and research and development expenses reflect cost savings in the operations of
NACT, offset by increases related to the formation of the Companys Clarent
softswitching division subsequent to the Companys acquisition of Clarents
business assets in February 2003. As a percent of revenue, operating expenses
for the Carrier Solutions Group were 53% during the three months ended March
31, 2003 up from 45% during the same period in 2002.

Enterprise Solutions Group

Total Enterprise Solutions Group revenue was $6.3 million in the three months
ended March 31, 2003, a 40% increase from the same period in 2002. The
increase in revenue is primarily related to the formation of the Companys
Clarent Netperformer division subsequent to the Companys acquisition of
Clarents business assets in February 2003.

Gross profit increased by $1.2 million in the three months ended March 31,
2003, and was 58% percent of revenue, compared with 53% of revenue in the same
period in 2002. All divisions in the Enterprise Solutions Group experienced
improvement in gross profit dollars and margin compared to the same period in
2002. The Companys addition of Clarents Netperformer division in February
2003 was the primary cause of the increase in gross profit dollars and its
margin was comparable with the overall percentage of the Enterprise Solutions
Group.

Allocated operating expenses incurred in Enterprise Solutions Group for the
three months ended March 31, 2003, were $1.5 million, an increase of $560,000
compared to the same period in 2002. The increases in general and
administrative expenses, sales and marketing expenses and research and
development expenses relates to the addition of the Clarents Netperformer
division in February 2003. As a percent of revenue, allocated operating
expenses for Enterprise Solutions Group were 23% during the three months ended
March 31, 2003 up from 20% during the same period in 2002. The increase is
attributable to the increase in research and development expenses as a
percentage of revenue related to the acquisition of Clarents
business assets.

Discontinued Operations

Following the acquisition of NACT in July of 2001, the Company determined that
its legacy VAR business was not strategic to the Companys ongoing objectives
and discontinued capital and human resource investment in its legacy VAR
business. Accordingly, the Company elected to report its legacy VAR business
as discontinued operations by early adoption of SFAS No. 144. The condensed
consolidated financial statements have been reclassified to segregate the net
assets and operating results of this business segment.

There were no results of discontinued operations for the three months ended
March 31, 2003. Summary operating results of the discontinued operations for
the three months ended March 31, 2002 (in thousands) were as follows:

Revenue
    
    $
    223Gross loss
    
    $
    (331
    )Operating loss
    
    $
    (331
    )Loss from discontinued operations
    
    $
    (331
    )


Critical and Significant Accounting Policies

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect
the amounts reported in the condensed consolidated financial statements and
accompanying notes. Factors that could affect the Companys future operating
results and cause actual results to vary from expectations include, but are not
limited to, lower than anticipated growth from existing customers, an inability
to attract new customers, and inability to successfully integrate acquisitions,
technology changes, or a decline in the financial stability of the Companys
customers. Negative developments in these or other risk factors could have a
material adverse affect on the Companys financial position and results of
operations.

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##### Table of Contents



A summary of the Companys critical and significant accounting policies
follows:

Allowance for Doubtful Accounts

The Company is required to estimate the collectibility of its trade
receivables. Considerable judgment is required in assessing the ultimate
realization of these receivables, including the creditworthiness of each
customer. The Company determines the allowance for doubtful accounts based on
a specific review of outstanding customer balances and a general reserve based
upon aging of customer accounts and write-off history. Significant changes in
required reserves have been recorded in recent periods and may occur in the
future due to the current telecommunications and general economic environments.

Inventory Obsolescence

The Company is required to state its inventories at the lower of cost or
market. In assessing the ultimate realization of inventories, the Company is
required to make judgments as to future demand requirements and compare that
with the current or committed inventory levels. The Company has recorded
changes in net realizable values in recent periods due to impact of current and
future technology trends and changes in strategic direction, such as
discontinuances of product lines, as well as, changes in market conditions due
to changes in demand requirements. It is possible that changes in the net
realizable value of inventory may continue to occur in the future due to the
current market conditions.

Revenue Recognition

The Companys principal sources of revenues are from sales of broadband
transmission networks, digital interactive subscriber systems and content
distribution networks. The Companys revenue recognition policies are in
compliance with Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, issued by the SEC. The Company recognizes revenue when
(i) there is an agreement with the customer, (ii) product is shipped and title
has passed, (iii) the amount due from the customer is fixed and determinable,
and (iv) collectibility is reasonably assured. Revenue is also recognized only
when the Company has no significant future performance obligation. At the time
of the transaction, the Company assesses whether the amount due from the
customer is fixed and determinable and collection of the resulting receivable
is reasonably assured. The Company assesses whether the amount due from the
customer is fixed and determinable based on the terms of the agreement with the
customer, including, but not limited to, the payment terms associated with the
transaction. The Company assesses collection based on a number of factors,
including past transaction history with the customer and credit-worthiness of
the customer. If the Company determines that collection of an amount due is not
reasonably assured, then the Company defers recognition of revenue until
collection becomes reasonably assured.

The Companys right of return policy, which is standard for virtually all
sales, allows a customer the right to return product for refund only if the
product does not conform to product specifications; the non-conforming product
is identified by the customer; and the customer rejects the non-conforming
product and notifies the Company within ten days of receipt. If an agreement
contains a non-standard right of return, the Company defers recognizing revenue
until the conditions of the agreement are met. From time to time, the Companys
agreements include acceptance clauses. If an agreement includes an acceptance
clause, the revenue is recorded at the time of acceptance.

Restructuring Accruals

Continuing Operations:

In the first quarter of 2003, the Company initiated a reorganization to
accommodate the acquisition of the assets of Clarent and eliminated 14 positions held by
employees. As a result of these actions, the Company recorded reorganization
costs of $194,000 during the three months ended March 31, 2003. The
reorganization costs consist of severance costs and the balance of the accrued
severance costs as of March 31, 2003 is $34,000.

23



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##### Table of Contents



Discontinued Operations:

During the second and third quarters of 2001, the Company initiated certain
restructuring plans. In conjunction with these restructuring plans, the
Company established a restructuring reserve account for the estimated costs
related to the plans. These costs primarily related to facilities closings,
severance costs and MessageClick ASP service exiting costs. For the facilities
closings cost, a reserve was established for all remaining lease payments due
on buildings and equipment that were no longer being utilized in continuing
operations, less assumptions for sub-leases. The accrual for one of the leases
with total payments remaining of $2.6 million assumes that the building will be
sub-leased for 50% of the total lease liability over the term of the lease. As
of March 31, 2003, the Company had a remaining reserve balance of approximately
$1.9 million, which is included in liabilities of discontinued operations. The
Company currently believes that this remaining estimated balance is appropriate
to cover future obligations associated with the restructurings. Activity in
the restructuring accruals was as follows:

Balance December 31, 2002
    
    $
    2,010Lease payments
    
    
    (240
    )Additional restructuring accrual
    
    
    126Balance March 31, 2003
    
    $
    1,896


Deferred Tax Asset Valuation Allowance

The Company currently has significant deferred tax assets, which are subject to
periodic recoverability assessment. Realization of the Companys deferred tax
assets is principally dependant upon achievement of projected future taxable
income. The Companys judgments regarding future profitability may change due
to market conditions, its ability to continue to successfully execute its
strategic plan and other factors. These changes, if any, may require possible
material adjustments to these deferred tax asset balances. Due to the
uncertainty of the Companys ability to recognize the entire tax benefit, the
Company established an offsetting provision for the tax assets.

Litigation and Related Contingencies

The Company is subject to proceedings, lawsuits and other claims related to
labor, product and other matters. The Company is required to assess the
likelihood of any adverse judgments or outcomes to these matters, as well as,
potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies is made by the Company with
assistance of its legal counsel after careful analysis of each individual issue
based upon the then-current facts and circumstances and discussions with legal
counsel. The required reserves may change in the future due to new
developments in each matter or changes in approach such as a change in
settlement strategy in dealing with these matters.

Intangible Assets

The Company has significant intangible assets related to goodwill and other
acquired intangibles. The determination of related estimated useful lives and
whether or not these assets are impaired involves significant judgments.
Changes in strategy and/or market conditions could significantly impact these
judgments and require adjustments to recorded asset balances. The Company
assesses the recoverability of its intangible assets by determining whether the
value of intangible assets over their remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Companys average cost of funds. For goodwill and
unamortized intangible assets, the Company performs an annual impairment test that requires a
comparison of the fair value of goodwill and unamortized intangible
assets with their carrying amounts. If the carrying amount of
goodwill and unamortized intangible asset exceeds its fair value, then an impairment loss shall be
recognized in an amount equal to that excess.

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##### Table of Contents



Liquidity and Capital Resources

Summary

Liquidity is the measurement of the Companys ability to have adequate cash or
access to cash at all times in order to meet financial obligations when due, as
well as to fund corporate expansion and other activities. Historically, the
Company has met its liquidity requirements through a combination of cash
provided by debt from third party lenders, issuances of debt and equity
securities, sale of discontinued businesses and acquisitions.

At March 31, 2003, the Company had a positive working capital position (excess
of current assets over current liabilities) of $3.3 million compared to a
positive working capital position of $1.8 million at December 31, 2002. The
Companys cash and cash equivalents totaled $269,000 at March 31, 2003, and
$1.3 million at December 31, 2002. Total long-term debt, net of discount, was
$6.8 million at September 30, 2002 and $3.7 million at December 31, 2002. At
March 31, 2003, the Company had borrowed $2.2 million under its $10.0 million
Amended Credit Agreement with Silicon. The Companys remaining borrowing
availability under the Amended Credit Agreement at March 31, 2003 was $5.6
million.

On February 12, 2003, in connection with the Companys acquisition of the
assets of Clarent, the Company amended its existing Original Credit Agreement
with Silicon, and in connection therewith, the Company and Silicon entered into
certain amendments to the existing credit facility and certain additional
credit agreements. Such amendments and additional agreements increased the
Companys asset-based revolving credit line from $5.0 million to $10.0 million
and include an EX-IM facility that will provide for working capital based on
the Companys international accounts receivable and inventory related to export
sales primarily associated with Clarents assets. The amendments and
additional agreements also extended the term of the Credit Agreement for 18
months (through August 13, 2004). On April 7, 2003, the Company and Silicon
further amended the credit facility to increase the EX-IM facility and to
modify certain financial covenants related to the timing of the closing of the
Clarent Asset Purchase.

On February 12, 2003, the Company acquired substantially all the business
assets and assumed certain related liabilities of Clarent for $9.8 million in
notes. At the closing of the acquisition, the Company issued three promissory
notes to Clarent: a $5.0 million secured note due February 13, 2004, which
bears interest at 10% per annum, of which $500,000 is due May 13, 2003, and the
remainder is due in monthly installments increasing in amount; a $1.8 million
non-interest bearing unsecured note due February 13, 2004, of which $300,000 is
due May 13, 2003 and the remainder is due in quarterly installments of
$500,000; and a $3.0 million secured note due February 12, 2008, which bears
interest at 5% per annum. The assets the Company purchased from Clarent secure
the secured notes.

Cash Flow

Cash used in the Companys continuing operations in the three months ended
March 31, 2003 totaled approximately $1.5 million compared with cash used in
continuing operations of $1.7 million in the same period in 2002. The
Companys use of cash in continuing operations during the three months ended
March 31, 2003 resulted primarily from cash used for changes in current
operating assets and liabilities of approximately $2.2 million and was offset
by cash provided from continuing operations of $723,000 (net loss from
continuing operations of $1.1 million reduced by non-cash charges totaling $1.8
million, including depreciation and amortization of $1.2 million and provision
for doubtful accounts of $644,000).

Cash used in the Companys discontinued operations in the three months ended
March 31, 2003 totaled $329,000 compared with cash used in discontinued
operations of $213,000 in the same period in 2002.

The Company used cash in investing activities in the three months ended March
31, 2003 of approximately $622,000, compared to $304,000 in the same period of
2002. In the three months ended March 31, 2003, the Company used $295,000 in
cash, net of cash acquired, related to the acquisition of the assets of
Clarent. The Company spent $167,000 and $222,000 on capital expenditures in
the three months ended March 31, 2003 and 2002, respectively. The Company also
invested $160,000 and $82,000 on purchased software development costs in the
three months ended March 31, 2003 and 2002, respectively.

Cash provided by financing activities totaled approximately $1.4 million in the
three months ended March 31, 2003, compared to $183,000 in the same period of
2002. The Company borrowed $1.4 million on the Companys credit line in the
three months ended March 31, 2003 and received proceeds from the issuance of
the Companys common stock totaling $183,000 in the three months ended March
31, 2002.

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##### Table of Contents



Contractual Obligations and Commercial Commitments

The following summarizes the Companys future contractual obligations at March
31, 2003 (in thousands):

Less than
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    4-5 years
    
    5 yearsLine of credit
    
    $
    2,200
    
    
    $
    
    
    
    $
    2,200
    
    
    $
    
    
    
    $
    Additional payments for the acquisition of
Encore Group
    
    
    2,403
    
    
    
    1,441
    
    
    
    766
    
    
    
    196
    
    
    
    Notes payable for the purchase of Clarent
    
    
    9,800
    
    
    
    6,800
    
    
    
    
    
    
    
    3,000
    
    
    
    Convertible subordinated debentures
    
    
    4,500
    
    
    
    
    
    
    
    4,500
    
    
    
    
    
    
    
    Operating leases:Continuing operations
    
    
    15,638
    
    
    
    2,747
    
    
    
    5,089
    
    
    
    4,191
    
    
    
    3,611Discontinued operations
    
    
    1,896
    
    
    
    641
    
    
    
    541
    
    
    
    376
    
    
    
    338Total contractual cash obligations
    
    $
    36,437
    
    
    $
    11,629
    
    
    $
    13,096
    
    
    $
    7,763
    
    
    $
    3,949


Sources of Cash

For 2003, the Company expects that its primary sources of cash will be from
cash on hand, working capital provided by operating activities, borrowings
under its Amended Credit Agreement with Silicon and other possible sources,
including issuances of equity or debt securities. The Company believes that,
with its current operations, which generated positive net income from
continuing operations before interest, taxes, depreciation, amortization of
intangibles and amortization of deferred compensation (EBITDA) for the last
six quarters, it will have sufficient liquidity from these sources to meet its
current financial obligations through 2003. The Amended Credit Agreement with
Silicon, however, is subject to certain financial covenants and limitations on
the Companys ability to access funds under the Amended Credit Agreement. If
the Company is in violation of the Amended Credit Agreement, or does not have
sufficient eligible accounts receivable and inventory to support the level of
borrowings it may need, the Company may be unable to draw on the Amended Credit
Agreement to the extent necessary. To the extent the Company does not have
borrowing availability under the Amended Credit Agreement, the Company may be
required to obtain additional sources of capital, sell assets, obtain an
amendment to the Amended Credit Agreement or otherwise restructure its
outstanding indebtedness. If the Company is unable to obtain additional
capital, sell assets, obtain an amendment to the Amended Credit Agreement or
otherwise restructure its outstanding indebtedness, then the Company may not be
able to meet its obligations.

The Companys short-term cash needs are to cover working capital needs,
including cash operating losses, if any, capital expenditures, transaction
costs related to the acquisition of Clarents assets, payments on the secured
and unsecured notes made by the Company in connection with the such
acquisition, totaling approximately $6.8 million plus interest due February 13,
2004, payments pursuant to the award of the AAA panel in connection with the
Assignment totaling approximately $1.4 million and payments related to
discontinued operations. At March 31, 2003, liabilities of discontinued
operations included $1.9 million in lease payments related to discontinued
operations. The Company expects to pay out approximately $641,000 related to
discontinued operations in the next twelve months.

The Companys long-term cash needs are related to the costs of growing its
current business as well as prospective businesses to be acquired, including
capital expenditures and working capital. The Company expects to meet these
cash needs through cash from operations, if any, cash on hand, borrowings under
the Amended Credit Agreement or other debt facilities, if available, as well as
through possible issuances of equity or debt securities. If sufficient
borrowing capacity under a working capital line of credit is unavailable (or if
the Company is unable to restructure its existing Amended Credit Agreement in
the event that the Company requires additional borrowing capacity), or if the
Company is otherwise unable to obtain additional capital or sell assets, then
the Company may not be able to meet its obligations and growth plans.

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Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145 which eliminates the requirement to
report gains and losses related to extinguishments of debt as extraordinary
items. The statement also included other amendments and technical corrections,
which will not have a material impact on the Company. The provisions of the
statement related to the treatment of debt extinguishments are required to be
applied in fiscal years beginning after May 15, 2002. Upon adoption of SFAS
No. 145 in January 2003, previously recorded extraordinary items for debt
extinguishments have been reclassified to continuing operations.

In June 2002, the FASB issued SFAS No. 146. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred rather than when a company commits to such an activity
and also establishes fair value as the objective for initial measurement of the
liability. The Company adopted SFAS No. 146 in January 2003.

In December 2002, the FASB issued SFAS No. 148. SFAS No. 148 is an amendment
to SFAF No. 123 providing alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. Amendments are effective for financial statements for fiscal
years ended after December 15, 2002 and for interim periods beginning after
December 15, 2002. The Company has currently chosen to not adopt the voluntary
change to the fair value based method of accounting for stock-based employee
compensation, pursuant to SFAS No. 148, which, if adopted, could have a
material effect on the Companys financial position or results of operations.

In November 2002, the EITF of the FASB reached a consensus on EITF No. 00-21,
Accounting for Revenue Arrangements with Multiple Element Deliverables. The
issue addresses how to account for arrangements that may involve multiple
revenue-generating activities, i.e., the delivery or performance of multiple
products, services, and/or rights to use assets. In applying this guidance,
separate contracts with the same party, entered into at or near the same time,
will be presumed to be a package, and the consideration will be measured and
allocated to the separate units based on their relative fair values. This
consensus guidance will be applicable to agreements executed in quarters
beginning after June 15, 2003. The Company will adopt this new accounting
effective July 1, 2003. The Company is currently evaluating the impact of this
change.

In November 2002, the FASB issued FASB Interpretation No. 45. Interpretation
No. 45 clarifies the disclosure and recognition/measurement requirements
related to certain guarantees. The disclosure requirements are effective for
financial statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The Company typically
grants its customers a warranty, which guarantees that its products will
substantially conform to its current specifications for twelve months from the
delivery date. Historically, costs related to these guarantees have not been
significant.

In January 2003, the FASB issued Interpretation No. 46. Interpretation No. 46
addresses the consolidation by business enterprises of variable interest
entities as defined therein. Interpretation No. 46 applies immediately to
variable interests in variable interest entities created after January 31,
2003, and to variable interests in variable interest entities obtained after
January 31, 2003. The Company is currently determining the impact of
application of this Interpretation on the Companys financial statements.

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##### Table of Contents



ITEM 3: Quantitative and Qualitative Disclosures about Market Risk

Market Risk

The Company is exposed to various market risks, including changes in interest
rates and foreign currency exchange rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest rates
and foreign currency exchange rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company has also not entered into financial instruments to manage and
reduce the impact of changes in interest rates and foreign currency exchange
rates although the Company may enter into such transactions in the future.

Interest Rate Risks

The Companys notes payable and convertible subordinated debentures at March
31, 2003, carry interest rates, which are fixed. The Companys line of credit
carries interest rates, which vary with the prime rate. Accordingly, any
increases in the banks prime rate will reduce the Companys earnings. A 1%
increase in the prime rate on the Companys $2.2 million line of credit at
March 31, 2003 would result in an annual interest expense increase of
approximately $22,000.

Foreign Currency Risks

Products sold outside of the United States of America are transacted in U.S.
dollars and therefore the Company is not exposed to foreign currency exchange
risk. Transactions with the Companys Canadian subsidiary present foreign
currency exchange risk. The principal transactions are personnel and related
costs. The intercompany balance is denominated in U.S. dollars and changes in
foreign currency rates would result in foreign currency gains and losses.
Using the intercompany balance at March 31, 2003, a 10% strengthening of the
U.S. dollar against the Canadian dollar would result in a foreign currency
transaction loss of approximately $183,000. To date, foreign exchange gains and
losses have not been significant.

ITEM 4: Controls and Procedures



|(a) |  | Evaluation of Disclosure Controls and Procedures.
|--- |  | -------------------------------------------------

The Companys Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Companys disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of a date within 90
days prior to the filing date of this quarterly report (the Evaluation Date).
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Companys disclosure controls and procedures are effective
in alerting them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be included in
the Companys periodic filings under the Exchange Act.



|(b) |  | Changes in Internal Controls.
|--- |  | -----------------------------

Since the Evaluation Date, there have not been any significant changes in the
Companys internal controls or in other factors that could significantly affect
such controls.

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##### Table of Contents






PART II  OTHER INFORMATION




Item 1. Legal Proceedings



| |  | The Company is not a party to any material legal proceedings other than
ordinary routine claims and proceedings incidental to its business,
and the Company does not expect these claims and proceedings, either
individually or in the aggregate, to have a material adverse effect on the
Company. In addition, as previously disclosed in the Companys Annual
Report on Form 10-K for the year ended December 31, 2002, certain
proceedings against the Company have been resolved as discussed below.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On or about February 8, 2002, Mr. OReilly, a former executive officer and
director of the Company; Montana Corporation, Mr. OReillys consulting
company; Mr. Lewis, a former officer of the Company; and CLR Enterprises,
Inc., Mr. Lewis consulting company, filed with the AAA a demand for
arbitration against the Company. Messrs. OReilly and Lewis and their
respective consulting companies sought to have enforced the Consulting
Agreements. Messrs. OReilly and Lewis claimed that the Companys attempt
by written notice dated June 1, 2001, to terminate the Consulting
Agreements effective March 31, 2002, was ineffective and, as a result,
such Consulting Agreements automatically renewed for additional two-year
terms, which terms expire on March 31, 2004. Under the terms of the
Consulting Agreements, Messrs. OReilly and Lewis are to receive, among
other things, consulting fees of $250,000 and $240,000 per year,
respectively. The Company denied their claims, and the matter was
presented to an AAA arbitrator in a hearing held on December 10, 2002.
While the matter remained pending before the arbitrator for decision, the
parties settled the claims presented in the arbitration proceeding
pursuant to certain Arbitration Award Agreements whereby (i) on February
4, 2003, the Company issued to each of Mr. OReilly and Mr. Lewis 275,000
shares of the Companys restricted common stock; and (ii) on March 14,
2003, the Company entered into the New Consulting Agreements with Mr.
OReilly and Mr. Lewis. During the terms of the New Consulting
Agreements, the Company shall pay to Mr. OReilly and Mr. Lewis an
aggregate of approximately $173,000 and $160,000, respectively, in three
installment payments due on January 21, 2004, January 21, 2005, and
January 21, 2006, payable entirely in shares of the Companys restricted
common stock, valued at the average closing price per share of the
Companys common stock for a period of twenty trading days prior to the
date the installment payments are due. The Arbitration Award Agreements
provide that the consideration set forth therein and in the New Consulting
Agreements shall be full satisfaction of any and all amounts the AAA
arbitrator may award. On March 14, 2003, the AAA arbitrator awarded
$250,000 and $240,000 to Mr. OReilly and Mr. Lewis, respectively, plus
$22,000 in attorneys fees and expenses.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On or about April 29, 2002, Omni and Dyer filed with the AAA a demand for
arbitration against the Company and Eltrax International. Omni and Dyer
claimed that the Company and Eltrax International breached the Assignment.
Pursuant to the Assignment, Omni and Dyer assigned and transferred to
Eltrax International all of their right, title and interest in and to a
certain computer software property management system in exchange for a
one-time payment. The Assignment also provided for an earn-out component
of the acquisition consisting of certain contingent monthly payments equal
to a percentage of the maintenance and licensing net revenues received by
Eltrax International with respect to a certain contract. Omni and Dyer
claimed that the Company and Eltrax International had not paid to Omni and
Dyer the contingent monthly payments owed to them pursuant to the
Assignment beginning in June 2002. Omni and Dyer sought recovery of over
$400,000 for contingent monthly payments allegedly owned for the period
from May 15, 2002 through January 2003, plus payments in like amounts
going forward, together with interest thereon, attorneys fees and
expenses. In January 2003, the matter was heard for six days by a
three-arbitrator panel of the AAA. On April 1, 2003, the Company received
notice that the AAA panel awarded to Omni and Dyer (i) payments and
interest thereon with respect to the Assignment in the aggregate amount of
approximately $506,000; and (ii) attorneys fees and expenses, excluding
expenses of the AAA, in the aggregate amount of approximately $199,000
(net attorneys fees and expenses awarded to the Company), which amounts
are to be paid by Eltrax International (and not the Company) no later than
April 30, 2003. Additionally, the AAA panel determined that Eltrax
International (and not the Company) will be liable for future payments as
they become due in accordance with the terms of the Assignment.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On or about May 21, 2001, John M. Good, a former employee of the Company,
filed a lawsuit in the Court of Common Pleas, Cuyahoga County, Ohio,
against the Company claiming, among other things, fraud, negligence,
securities fraud, breach of contract, conversion and damages resulting
from and related to the Companys alleged failure to deliver, on or about
January 3, 2000, 50,000 shares of the Companys common stock to Mr. Good
upon his exercise of an option to purchase such shares. The matter was
set for jury trial on February 17, 2003. Based upon the Companys
anticipated exposure and the expected cost of litigation, on January 16,
2003, the Company and Mr. Good reached an agreement to settle all claims
against the Company.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents






Item 2. Changes in Securities and Use of Proceeds



| |  | In connection with amending the Original Credit Agreement with Silicon, on
February 12, 2003, the Company issued to Silicon a warrant to purchase
350,000 shares of the Companys common stock. The warrant may be
exercised with respect to all of the underlying shares of the Companys
common stock at any time from February 12, 2003, until February 12, 2008,
at an exercise price of $0.44 per share of the Companys common stock.
The number of shares of the Companys common stock underlying the warrant
and the exercise price of the warrant are subject to certain adjustments
described in the warrant and that certain Antidilution Agreement, dated as
of February 12, 2003, between the Company and Silicon. The shares of the
Companys common stock underlying the warrant are entitled to certain
piggy back registration rights as set forth in that certain Registration
Rights Agreement, dated as of February 12, 2003, between the Company and
Silicon. The warrant issued to Silicon was issued without registration
under the Securities Act of 1933, as amended (the Securities Act), in
reliance upon the exemption from registration set forth in Regulation D
promulgated pursuant to Section 4(2) of the Securities Act (Regulation
D). The Company based such reliance upon factual representations made to
the Company by Silicon as to Silicons investment intent, sophistication,
and status as an accredited investor, as that term is defined in Rule
501 of Regulation D, among other things.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Pursuant to the terms of the Arbitration Award Agreements executed as part
of a settlement of claims made by Mr. Lewis and Mr. OReilly against the
Company, on February 4, 2003, the Company issued 275,000 shares of the
Companys restricted common stock to each of Mr. Lewis and Mr. OReilly.
The shares issued under the Arbitration Award Agreements and to be issued
under the New Consulting Agreements constitute full satisfaction of the
award granted by an AAA arbitrator to Mr. OReilly and Mr. Lewis of
$250,000 and $240,000, respectively, and attorneys fees and expenses of
$22,000. The shares of the Companys restricted common stock are entitled
to certain piggy back registration rights as set forth in the
Arbitration Award Agreements. The shares of the Companys restricted
common stock were issued without registration under the Securities Act, in
reliance upon the exemptions from the registration set forth in Section
4(2) of the Securities Act and Regulation D. The Company based such
reliance upon factual representations made to the Company by each of Mr.
Lewis and Mr. OReilly as to their investment intent, sophistication, and
status as an accredited investor, among other things.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 6. Exhibits and Reports on Form 8-K

(a)
    
    Exhibits2.1
    
    
    Asset Purchase Agreement dated as of December 13, 2002, by and
between the Company and Clarent Corporation. (The schedules to
the Asset Purchase Agreement have been omitted from this
Report pursuant to Item 601(b)(2) of Regulation S- K, and the
Company agrees to furnish copies of such omitted schedules
supplementally to the SEC upon request). *2.2
    
    
    First Amendment to the Asset Purchase Agreement dated as of
February 4, 2003, by and between the Company and Clarent
Corporation. **4.1
    
    
    Warrant to Purchase Stock dated February 12, 2003, granted to
Silicon Valley Bank by the Company. **4.2
    
    
    Registration Rights Agreement dated as of February 12, 2003,
by and between the Company and Silicon Valley Bank. **4.3
    
    
    Antidilution Agreement dated as of February 12, 2003, by and
between the Company and Silicon Valley Bank. **10.1
    
    
    Amendment to Loan Documents dated February 12, 2003, by and
among the Company, NACT Telecommunications, Inc., Telemate.Net
Software, Inc. and Silicon Valley Bank. **10.2
    
    
    Loan and Security Agreement (Exim Program) dated February 12,
2003, by and among the Company, NACT Telecommunications, Inc.,
Telemate.Net Software, Inc. and Silicon Valley Bank. **10.3
    
    
    Borrower Agreement dated February 12, 2003, by and among the
Company, NACT Telecommunications, Inc., Telemate.Net Software,
Inc. and Silicon Valley Bank. **10.4
    
    
    Secured Promissory Note in principal amount of $4.0 million
made by the Company in favor of Silicon Valley Bank dated
February 12, 2003. **


30



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##### Table of Contents



(a)
    
    Exhibits10.5
    
    
    Subordination Agreement dated February 12, 2003, by and among
the Company, Clarent Corporation and Silicon Valley Bank. **10.6
    
    
    Loan and Security Agreement dated as of February 12, 2003, by
and between the Company and Clarent Corporation. **10.7
    
    
    Secured Subordinated Promissory Note in principal amount of
$5.0 million made by the Company in favor of Clarent
Corporation dated February 12, 2003. **10.8
    
    
    Secured Subordinated Promissory Note in principal amount of
$3.0 million made by the Company in favor of Clarent
Corporation dated February 12, 2003. **10.9
    
    
    Unsecured Subordinated Promissory Note in principal amount of
$1.8 million made by the Company in favor of Clarent
Corporation dated February 12, 2003. **10.10
    
    
    Bill of Sale, Assignment and Assumption Agreement dated as of
February 12, 2003, by and between the Company and Clarent
Corporation. **10.11
    
    
    Assignment of Patent Rights dated as of February 7, 2003, made
by Clarent Corporation to the Company. **10.12
    
    
    Assignment of Trademarks dated as of February 12, 2003, by and
between the Company and Clarent Corporation. **10.13
    
    
    Intellectual Property and Security Agreement dated as of
February 12, 2003, by and between the Company and Clarent
Corporation. **10.14
    
    
    Cross-Corporate Continuing Guaranty dated as of February 12,
2003, among the Company, Telemate.Net Software, Inc., NACT
Telecommunications, Inc. and Clarent Canada Ltd. ***10.15
    
    
    Lease for 1221 West Mineral Avenue, dated as of February 11,
2003, between the Company and A.S. Burger Investments, LLC.
***10.16
    
    
    Movable Hypothec dated as of February 20, 2003, between the
Company and Silicon Valley Bank. ***10.17
    
    
    Movable Hypothec dated as of February 20, 2003, between the
Clarent Canada Ltd. and Silicon Valley Bank. ***10.18
    
    
    Settlement Agreement and Full Release of Claims dated as of
February 12, 2003, between the Company and John M. Good. ***10.19
    
    
    Arbitration Award
Agreement dated February 3, 2003, and among
the Company, Clunet R. Lewis and CLR Enterprises, Inc. ***10.20
    
    
    Arbitration Award
Agreement dated February 3, 2003, among the
Company, William P. OReilly and Montana Corporation. ***10.21
    
    
    Consulting Agreement dated as of March 14, 2003, between the
Company and William P. OReilly. ***10.22
    
    
    Consulting Agreement dated as of March 14, 2003, between the
Company and Clunet R. Lewis. ***10.23
    
    
    Amendment to Loan Documents dated April 7, 2003, among the
Company, Telemate.Net Software, Inc., NACT Telecommunications,
Inc. and Silicon Valley Bank. ***10.24
    
    
    Amendment to Loan Documents (EXIM Program) dated April 7,
2003, among the Company, Telemate.Net Software, Inc., NACT
Telecommunications, Inc. and Silicon Valley Bank. ***99.1
    
    
    Certification of the Companys Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


31



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##### Table of Contents



(a)
    
    Exhibits99.2
    
    
    Certification of the Companys Chief Financial Office pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.




|* |  | Incorporated by reference to the Companys Current
Report on Form 8-K filed with the SEC on December 17, 2002.
|- |  | --------------------------------------------------------------------------------------------------------------



|** |  | Incorporated by reference to the Companys Current
Report on Form 8-K filed with the SEC on February 13, 2003.
|-- |  | --------------------------------------------------------------------------------------------------------------



|*** |  | Incorporated by reference to the Companys Annual
Report on Form 10-K for the year ended December 31, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------



|(b) |  | Reports on Form 8-K.
|--- |  | --------------------



| |  | During the quarter ended March 31, 2003, the Company filed a Current
Report on Form 8-K reporting pursuant to Item 2 thereof the
Companys acquisition of substantially all of the business assets
and related liabilities of Clarent.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents






SIGNATURE

Pursuant to the requirements 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.

VERSO TECHNOLOGIES, INC.Date:  May 15, 2003
    
    /s/ Juliet M. ReisingExecutive Vice President and Chief Financial Officer
(duly authorized signatory and
Principal Financial and Accounting Officer)


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##### Table of Contents






CERTIFICATIONS

I, Steven A. Odom, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Verso Technologies, Inc.;
|-- |  | -------------------------------------------------------------------------------



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



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



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



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



| | (b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: May 15, 2003

/s/ Steven A. OdomSteven A. OdomChairman of the Board and Chief Executive Officer


34



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##### Table of Contents



I, Juliet M. Reising, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Verso Technologies, Inc.;
|-- |  | -------------------------------------------------------------------------------



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



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



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



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



| | (b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: May 15, 2003

/s/ Juliet M. ReisingJuliet M. Reising
Executive Vice President and Chief
Financial Officer


35



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##### Table of Contents






EXHIBIT INDEX

2.1
    
    Asset Purchase Agreement dated as of December 13, 2002, by and between
the Company and Clarent Corporation. (The schedules to the Asset
Purchase Agreement have been omitted from this Report pursuant to Item
601(b)(2) of Regulation S- K, and the Company agrees to furnish copies
of such omitted schedules supplementally to the SEC upon request). *2.2
    
    First Amendment to the Asset Purchase Agreement dated as of February 4,
2003, by and between the Company and Clarent Corporation. **4.1
    
    Warrant to Purchase Stock dated February 12, 2003, granted to Silicon
Valley Bank by the Company. **4.2
    
    Registration Rights Agreement dated as of February 12, 2003, by and
between the Company and Silicon Valley Bank. **4.3
    
    Antidilution Agreement dated as of February 12, 2003, by and between
the Company and Silicon Valley Bank. **10.1
    
    Amendment to Loan Documents dated February 12, 2003, by and among the
Company, NACT Telecommunications, Inc., Telemate.Net Software, Inc. and
Silicon Valley Bank. **10.2
    
    Loan and Security Agreement (Exim Program) dated February 12, 2003, by
and among the Company, NACT Telecommunications, Inc., Telemate.Net
Software, Inc. and Silicon Valley Bank. **10.3
    
    Borrower Agreement dated February 12, 2003, by and among the Company,
NACT Telecommunications, Inc., Telemate.Net Software, Inc. and Silicon
Valley Bank. **10.4
    
    Secured Promissory Note in principal amount of $4.0 million made by the
Company in favor of Silicon Valley Bank dated February 12, 2003. **10.5
    
    Subordination Agreement dated February 12, 2003, by and among the
Company, Clarent Corporation and Silicon Valley Bank. **10.6
    
    Loan and Security Agreement dated as of February 12, 2003, by and
between the Company and Clarent Corporation. **10.7
    
    Secured Subordinated Promissory Note in principal amount of $5.0
million made by the Company in favor of Clarent Corporation dated
February 12, 2003. **10.8
    
    Secured Subordinated Promissory Note in principal amount of $3.0
million made by the Company in favor of Clarent Corporation dated
February 12, 2003. **10.9
    
    Unsecured Subordinated Promissory Note in principal amount of $1.8
million made by the Company in favor of Clarent Corporation dated
February 12, 2003. **10.10
    
    Bill of Sale, Assignment and Assumption Agreement dated as of February
12, 2003, by and between the Company and Clarent Corporation. **10.11
    
    Assignment of Patent Rights dated as of February 7, 2003, made by
Clarent Corporation to the Company. **10.12
    
    Assignment of Trademarks dated as of February 12, 2003, by and between
the Company and Clarent Corporation. **10.13
    
    Intellectual Property and Security Agreement dated as of February 12,
2003, by and between the Company and Clarent Corporation. **10.14
    
    Cross-Corporate Continuing Guaranty dated as of February 12, 2003,
among the Company, Telemate.Net Software, Inc., NACT
Telecommunications, Inc. and Clarent Canada Ltd. ***10.15
    
    Lease for 1221 West Mineral Avenue, dated as of February 11, 2003,
between the Company and A.S. Burger Investments, LLC. ***10.16
    
    Movable Hypothec dated as of February 20, 2003, between the Company and
Silicon Valley Bank. ***10.17
    
    Movable Hypothec dated as of February 20, 2003, between the Clarent
Canada Ltd. and Silicon Valley Bank. ***


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##### Table of Contents



10.18
    
    Settlement Agreement and Full Release of Claims dated as of February
12, 2003, between the Company and John M. Good. ***10.19
    
    Arbitration Award Agreement dated February 3, 2003, and among the
Company, Clunet R. Lewis and CLR Enterprises, Inc. ***10.20
    
    Arbitration Award Agreement dated February 3, 2003, among the Company,
William P. OReilly and Montana Corporation. ***10.21
    
    Consulting Agreement dated as of March 14, 2003, between the Company
and William P. OReilly. ***10.22
    
    Consulting Agreement dated as of March 14, 2003, between the Company
and Clunet R. Lewis. ***10.23
    
    Amendment to Loan Documents dated April 7, 2003, among the Company,
Telemate.Net Software, Inc., NACT Telecommunications, Inc. and Silicon
Valley Bank. ***10.24
    
    Amendment to Loan Documents (EXIM Program) dated April 7, 2003, among
the Company, Telemate.Net Software, Inc., NACT Telecommunications, Inc.
and Silicon Valley Bank. ***99.1
    
    Certification of the Companys Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.99.2
    
    Certification of the Companys Chief Financial Office pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.




|* |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed with the SEC on December 17, 2002.
|- |  | --------------------------------------------------------------------------------------------------------------



|** |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed with the SEC on February 13, 2003.
|-- |  | --------------------------------------------------------------------------------------------------------------



|*** |  | Incorporated by reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------

37