Table
      of Contents


**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





(Mark
      One)





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the quarterly period ended June 30, 2007





OR





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from ___________ to ___________





Commission
      file number: 000-22190








**VERSO
      TECHNOLOGIES, INC.**


(Exact
      name of registrant as specified in its charter)




Minnesota
              41-1484525(State
                  of incorporation)
              (I.R.S.
                  EmployerIdentification
                  No.)
  400
      Galleria Parkway, Suite 200


Atlanta,
      GA 30339


(Address
      of principal executive offices, including zip code)








**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
o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
                  Accelerated filer  o
              Accelerated
                  filer  o
              Non-Accelerated
                  filer  x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  x    
No
      o




The
      number of shares outstanding of the issuer's common stock as of August 14,
      2007
      was 58,891,389.














**VERSO
      TECHNOLOGIES, INC.**


**FORM
      10-Q**


**INDEX**




Page
                  No.Part
                  I.
              FINANCIAL
                  INFORMATIONItem
                  1.
              Financial
                  StatementsCondensed
                  Consolidated Balance Sheets as of June 30, 2007
                  (unaudited) and December 31, 2006
              2Condensed
                  Consolidated Statements of Operations for the three
                  and six months ended June 30, 2007 and 2006 (unaudited)
              3Condensed
                  Consolidated Statements of Cash Flows for the
                  six months ended June 30, 2007 and 2006 (unaudited)
              4Notes
                  to Condensed Consolidated Financial Statements
                  (unaudited)
              5Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              24Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              38Item
                  4.
              Controls
                  and Procedures
              38PART
                  II.
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              39Item
                  1A.
              Risk
                  Factors
              41Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              42Item
                  6.
              Exhibits
              43Signature
                  Page
              44Exhibit
                  Index
              45








**VERSO
                  TECHNOLOGIES, INC.****CONDENSEDCONSOLIDATED
                  BALANCE
                  SHEETS****(in
                  thousands, except share
                  data)**
  **June
                  30,**
              
              **December
                  31,****2007**
              
              **2006****(Unaudited)**
              
              **(Audited)****ASSETS:**Current
                  assets:Cash
                  and cash equivalents
              
              $
              2,041
              
              $
              1,134Restricted
                  cash
              
              
              685
              
              
              1,041Accounts
                  receivable, net
              
              
              10,488
              
              
              10,058Inventories
              
              
              7,023
              
              
              7,184Other
                  current assets
              
              
              1,020
              
              
              1,027Current
                  portion of note receivable
              
              
              -
              
              
              324Total
                  current assets
              
              
              21,257
              
              
              20,768Property
                  and equipment, net
              
              
              1,742
              
              
              1,807Loan
                  issuance costs, net
              
              
              2,663
              
              
              3,427Investment
              
              
              667
              
              
              745Note
                  receivable, net of current portion
              
              
              -
              
              
              1,810Other
                  intangibles, net
              
              
              7,589
              
              
              5,068Goodwill
              
              
              6,021
              
              
              3,224Total
                  assets
              
              $
              39,939
              
              $
              36,849**LIABILITIES
                  AND SHAREHOLDERS' EQUITY:**Current
                  liabilities:Credit
                  facility
              
              $
              5,819
              
              $
              3,945Accounts
                  payable
              
              
              3,322
              
              
              2,665Accrued
                  compensation
              
              
              2,303
              
              
              2,268Accrued
                  expenses
              
              
              4,551
              
              
              3,592Purchase
                  price payable for acquisition
              
              
              -
              
              
              1,500Current
                  portion of accrued loss on sublease
              
              
              533
              
              
              465Current
                  portion of liabilities of discontinued operations
              
              
              1,106
              
              
              1,081Current
                  portion of convertible debentures
              
              
              4,219
              
              
              3,375Unearned
                  revenue and customer deposits
              
              
              3,267
              
              
              2,645Total
                  current liabilities
              
              
              25,120
              
              
              21,536Accrued
                  loss on sublease, net of current portion
              
              
              580
              
              
              773Credit
                  facility, net of current portion
              
              
              2,813
              
              
              3,938Other
                  long term liabilities
              
              
              24
              
              
              -Liabilities
                  of discontinued operations, net of current portion
              
              
              258
              
              
              361Notes
                  payable
              
              
              2,930
              
              
              2,862Convertible
                  subordinated debentures, net of discount
              
              
              3,372
              
              
              4,700Total
                  liabilities
              
              
              35,097
              
              
              34,170Shareholders'
                  equity:Common
                  stock, $.01 par value, authorized shares of
                  120,000,000;57,058,559
                  and 41,691,911 shares issued and outstanding
              
              
              571
              
              
              417Additional
                  paid-in capital
              
              
              366,062
              
              
              352,303Deferred
                  compensaton
              
              
              (274
              )
              
              -Accumulated
                  deficit
              
              
              (361,244
              )
              
              (349,767
              )Accumulated
                  other comprehensive income (loss) - foreign currency
                  translation
              
              
              (273
              )
              
              (274
              )Total
                  shareholders' equity
              
              
              4,842
              
              
              2,679Total
                  liabilities and shareholders' equity
              
              $
              39,939
              
              $
              36,849




2


**VERSO
                  TECHNOLOGIES, INC.****CONDENSEDCONSOLIDATED
                  STATEMENTS OF
                  OPERATIONS****(In
                  thousands, except share data)****(Unaudited)**
  **For
                  the three months ended**
              ****
              **For
                  the six months ended**
              ********
              ****
              **June
                  30, 2007**
              ****
              **June
                  30, 2006**
              ****
              **June
                  30, 2007**
              ****
              **June
                  30, 2006**Revenue:Products
              
              $
              8,769
              
              $
              5,156
              
              $
              17,046
              
              $
              8,753Services
              
              
              3,801
              
              
              3,225
              
              
              8,009
              
              
              6,416Total
                  revenue
              
              
              12,570
              
              
              8,381
              
              
              25,055
              
              
              15,169Cost
                  of revenue:Products:Product
                  costs
              
              
              5,083
              
              
              2,671
              
              
              9,726
              
              
              4,328Amortization
                  of intangibles
              
              
              255
              
              
              175
              
              
              398
              
              
              369Total
                  cost of product
              
              
              5,338
              
              
              2,846
              
              
              10,124
              
              
              4,697Services
              
              
              2,846
              
              
              2,188
              
              
              6,007
              
              
              4,284Total
                  cost of revenue
              
              
              8,184
              
              
              5,034
              
              
              16,131
              
              
              8,981Gross
                  profit:Products
              
              
              3,431
              
              
              2,310
              
              
              6,922
              
              
              4,056Services
              
              
              955
              
              
              1,037
              
              
              2,002
              
              
              2,132Total
                  gross profit
              
              
              4,386
              
              
              3,347
              
              
              8,924
              
              
              6,188Operating
                  expenses:General
                  and administrative
              
              
              3,027
              
              
              2,211
              
              
              5,899
              
              
              4,644Sales
                  and marketing
              
              
              2,483
              
              
              1,801
              
              
              4,870
              
              
              3,574Research
                  and development
              
              
              2,421
              
              
              1,994
              
              
              4,501
              
              
              3,773Depreciation
                  and amortization
              
              
              711
              
              
              402
              
              
              1,362
              
              
              866Reorganization
                  expense
              
              
              389
              
              
              -
              
              
              389
              
              
              -Total
                  operating expenses
              
              
              9,031
              
              
              6,408
              
              
              17,021
              
              
              12,857Operating
                  loss from continuing operations
              
              
              (4,645
              )
              
              (3,061
              )
              
              (8,097
              )
              
              (6,669
              )Other
                  income (expense), net:Other
                  income (expense)
              
              
              (241
              )
              
              -
              
              
              (246
              )
              
              2Equity
                  in loss of investment
              
              
              (32
              )
              
              (41
              )
              
              (78
              )
              
              (107
              )Interest
                  expense, net, including $1,015, $931, $2,048 and$1,836
                  of amortization of loan fees and discount onconvertible
                  debentures in each period, respectively
              
              
              (1,540
              )
              
              (1,257
              )
              
              (3,056
              )
              
              (2,524
              )Other
                  expense, net
              
              
              (1,813
              )
              
              (1,298
              )
              
              (3,380
              )
              
              (2,629
              )Loss
                  from continuing operations before income taxes
              
              
              (6,458
              )
              
              (4,359
              )
              
              (11,477
              )
              
              (9,298
              )Income
                  tax benefit (expense)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Loss
                  from continuing operations
              
              
              (6,458
              )
              
              (4,359
              )
              
              (11,477
              )
              
              (9,298
              )Loss
                  on disposal of discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  loss on disposal from discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              $
              (6,458
              )
              $
              (4,359
              )
              $
              (11,477
              )
              $
              (9,298
              )Net
                  loss per common share - basic and diluted:Loss
                  from continuing operations
              
              $
              (0.12
              )
              $
              (0.13
              )
              $
              (0.23
              )
              $
              (0.29
              )Loss
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              -$
              (0.12
              )
              $
              (0.13
              )
              $
              (0.23
              )
              $
              (0.29
              )Weighted
                  average shares outstanding - basic and diluted
              
              
              54,782,828
              
              
              33,591,796
              
              
              50,570,558
              
              
              31,772,906


3





**VERSO
                  TECHNOLOGIES, INC. AND SUBSIDIARIES****CONDENSEDCONSOLIDATED
                  STATEMENTS OF CASH
                  FLOWS****(In
                  thousands, except share data)****(Unaudited)****For
                  the six months ended****June
                  30, 2007**
              
              **June
                  30, 2006****Operating
                  Activities:**Continuing
                  operations:Net
                  loss from continuing operations
              
              $
              (11,477
              )
              $
              (9,298
              )Adjustments
                  to reconcile net loss from continuing operations to netcash
                  used in continuing operating activities:Equity
                  in income of investment
              
              
              78
              
              
              107Stock
                  based compensation
              
              
              649
              
              
              159Non-cash
                  interest expense
              
              
              398
              
              
              -Depreciation
                  and amortization
              
              
              1,759
              
              
              1,235Provision
                  for doubtful accounts
              
              
              76
              
              
              124Loss
                  on prepayment of notes receivable
              
              
              231
              
              
              -Amortization
                  of loan fees and discount on convertible subordinated
                  debentures
              
              
              2,049
              
              
              1,836Other
              
              
              (26
              )
              
              (98
              )Changes
                  in current operating assets and liabilities, net of effects of
                  acquisitions:Accounts
                  receivable
              
              
              (384
              )
              
              (1,537
              )Inventories
              
              
              178
              
              
              (968
              )Other
                  current assets
              
              
              180
              
              
              (157
              )Accounts
                  payable
              
              
              177
              
              
              896Accrued
                  compensation
              
              
              (19
              )
              
              (59
              )Accrued
                  expenses
              
              
              234
              
              
              1,075Unearned
                  revenue and customer deposits
              
              
              524
              
              
              391Net
                  cash used in continuing operating activities
              
              
              (5,373
              )
              
              (6,294
              )Discontinued
                  operations:Loss
                  from discontinued operations
              
              
              -
              
              
              -Adjustment
                  to reconcile loss from discontinued operationsto
                  net cash used in discontinued operating activities, rental
                  payments
              
              
              (121
              )
              
              (1,510
              )Net
                  cash used in discontinued operating activities
              
              
              (121
              )
              
              (1,510
              )Net
                  cash used in operating activities
              
              
              (5,494
              )
              
              (7,804
              )**Investing
                  Activities:**Continuing
                  operations:Net
                  cash provided by (used in) investing activities for continuing
                  operations
                  -Decrease
                  in restricted cash
              
              
              356
              
              
              187Purchases
                  of property and equipment
              
              
              (139
              )
              
              (197
              )Purchase
                  of iMarc
              
              
              (1,815
              )
              
              -Purchase
                  of Sentito, net of acquisition costs
              
              
              1,051
              
              
              -Net
                  cash used in investing activities for continuing
                  operations
              
              
              (547
              )
              
              (10
              )Discontinued
                  operations:Proceeds
                  from notes receivable
              
              
              1,880
              
              
              550Net
                  cash provided by investing activities for discontinued
                  operations
              
              
              1,880
              
              
              550Net
                  cash provided by investing activities
              
              
              1,333
              
              
              540Net
                  cash used in operating and investing activities
              
              
              (4,161
              )
              
              (7,264
              )**Financing
                  Activities:**Net
                  borrowings on line of credit
              
              
              749
              
              
              2,056Payments
                  of notes payable
              
              
              -
              
              
              (1,350
              )Proceeds
                  from private placement, net
              
              
              4,297
              
              
              6,762Proceeds
                  from issuances of common stock in connection with theexercise
                  of options and warrants, net
              
              
              9
              
              
              24Net
                  cash provided by financing activities
              
              
              5,055
              
              
              7,492**Effect
                  of exchange rate changes on cash**
              
              
              13
              
              
              17Increase
                  in cash and cash equivalents
              
              
              907
              
              
              245Cash
                  and cash equivalents at beginning of period
              
              
              1,134
              
              
              1,079Cash
                  and cash equivalents at end of period
              
              $
              2,041
              
              $
              1,324**Supplemental
                  disclosure of cash flow information:****Cash
                  payments (receipts) during the periods for:**Interest
              
              $
              631
              
              $
              392Income
                  taxes
              
              $
              6
              
              $
              4**Non-cash
                  investing and financing activities**Stock
                  consideration for acquisitions:WSECI-
                  issuance of 70,504 and 65,379 shares of common stock
              
              $
              71
              
              $
              95Verilink
                  - issuance of 2,900,000 shares of common stock
              
              
              -
              
              
              2,784Verilink
                  - issuance of 8765.7122 shares of Class C preferred stock
              
              
              -
              
              
              2,784Sentito
                  - Issuance of 7,631,465 shares of common stock
              
              
              6,580
              
              
              -Issuance
                  of common stock and warrants in exchange for services
              
              
              -
              
              
              123Compensatory
                  common stock and options issued
              
              
              595
              
              
              159Issuance
                  of common stock in lieu of principal
              
              
              1,688
              
              
              -Stock
                  issued for payment of note receivable
              
              
              70
              
              
              -Assets
                  aquired and liabilities assumed in conjunction with business
                  acquisitions:Fair
                  value of assets acquired, excluding cash and restricted
                  cash
              
              
              6,749
              
              
              7,339Liabilities
                  assumed
              
              
              (1,038
              )
              
              (1,434
              )










4




**NOTESTO
      CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**


(Unaudited)





**1.**  **BASIS
      OF PRESENTATION**





Verso
      Technologies, Inc., a Minnesota corporation (“we,” “our,” “us,” or the
“Company”), is a global technology company providing next generation
      communications network solutions offering a core-to-edge product portfolio
      to
      service providers and enterprises. Our product offerings include WiMAX, cellular
      backhaul, voice over broadband, voice over internet protocol (“VoIP”),
      integrated access devices, and internet usage solutions which are enabled by
      our
      hardware and software. These products enable customers to reduce communications
      costs, generate additional revenue and secure and optimize network bandwidth.
      We
      manufacture, deliver, and support these hardware, software, and service
      solutions primarily to large wireline, cellular, wireless and satellite carriers
      and other customers. Our solutions are used by companies in several industries
      and government, including mission critical satellite and wireless communications
      of all kinds.





Our
      operations include two separate business segments: (i) the Technologies Group,
      which includes our softswitching, I-Master, and NetPerformer divisions and
      our
      subsidiaries, Telemate.Net Software, Inc. (“Telemate.Net”), Verso Verilink, LLC
      (“Verso Verilink”), and sentitO Networks, Inc. (“Sentito”); and (ii) the
      Advanced Applications Services Group, which includes our technical applications
      support group and customer care center. The Technologies Group includes domestic
      and international sales of hardware and software, integration, applications
      and
      technical training and support. The Technologies Group offers software-based
      solutions (which include hardware) for customers seeking to build converged
      packet-based voice and data networks. In addition, the Technologies Group offers
      software-based solutions for internet access and usage management that include
      call accounting and usage reporting for internet protocol (“IP”) network
      devices. In 2006, the Technologies Group added the product suites from the
      Verilink Acquisition and the iMarc Acquisition (each defined below). These
      products provide access, multiplexing and transport of voice and data services.
      In addition, these products have enhanced our technology offerings, provided
      substantial revenue to us, and delivered three large tier 1 North American
      customers in AT&T, Inc., Verizon Communications, Inc. and Alcatel-Lucent.
      The Advanced Applications Services Group includes outsourced technical
      application services and application installation and training services to
      both
      customers of the Technologies Group and outside customers.





On
      April
      17, 2007, we acquired Sentito, a provider of media and signaling gateway
      equipment to the telecommunications market (the “Sentito
      Acquisition”) ,
      by means of merger of SN Acquisition Corporation, a wholly-owned subsidiary
      of
      ours, into Sentito, pursuant to that certain Agreement and Plan of Merger,
      dated
      as of April 4, 2007, (the “Merger Agreement”).





On
      December 29, 2006, we purchased certain assets of Paradyne Networks, Inc.
      (“Paradyne”) related to the business of manufacturing, selling and supporting
      the iMarc product line (the “iMarc Acquisition”). The iMarc product line is a
      family of asynchronous transfer mode (“ATM”), IP service units, and branch
      monitors that provide intelligent demarcation between carrier and enterprise
      networks, allowing for easier management.





On
      June
      16, 2006, we acquired all of the outstanding equity interests (the “Verilink
      Acquisition”) of Winslow Asset Holdings, LLC (“Holdings”), now known as Verso
      Verilink, from Winslow Asset Group, LLC (“Group”) pursuant to that certain
      Securities Purchase Agreement dated as of June 15, 2006 among Verso, Holdings
      and Group (the “Securities Purchase Agreement”). At the time of the Verilink
      Acquisition, Holdings’ assets consisted of substantially all of the business
      assets of Verilink Corporation and Larscom Incorporated (together, the “Verilink
      Sellers”), other than the accounts receivable and certain fixed assets.
      Holdings’ assets were used by the Verilink Sellers in their business of
      developing, manufacturing, marketing and selling broadband access solutions
      for
      computer networks.





In
      January 2005, we sold substantially all of the operating assets of our NACT
      Telecommunications, Inc., now known as Provo Pre-Paid (Delaware) Corp. (“NACT”),
      and MCK Communications, Inc., now known as Needham (Delaware) Corp. (“MCK”),
      businesses to better focus our capital and management resources on areas which
      we believe have greater potential given our strategy to focus on next-generation
      network and solutions and to improve cash utilization. In addition, we disposed
      of our NACT business due to our new product strategy of an open-standards,
      pre-paid next-generation solution that could better address growing market
      opportunities and enable us to offer a competitive product for Tier 1 and Tier
      2
      carriers.





5





**1.** **BASIS
      OF PRESENTATION, Continued**





In
      March
      2005, we acquired the I-Master platform from WSECI, Inc., a Delaware corporation
      formerly known as Jacksonville Technology Associates, Inc. (“WSECI”), after
      forming a strategic partnership with WSECI in the latter half of 2004. We
      believe that this I-Master platform permits us to offer a solution that
      better addresses our growing market opportunities.





The
      consolidated financial statements include the accounts of Verso Technologies,
      Inc. and our wholly-owned subsidiaries, including Telemate.Net; Clarent Canada
      Ltd., now known as Verso Technologies Canada Inc. (“Verso Canada”), Verso
      Verilink, Sentito, MCK and NACT. MCK and NACT are reflected in discontinued
      operations. These subsidiaries were acquired and were all accounted for as
      purchases (see Note 2).





Certain
      prior year amounts in the condensed 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, including recurring adjustments, considered
      necessary by management to present a fair statement of the results of our
      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. The accompanying condensed consolidated
      unaudited quarterly financial statements are presented in accordance with the
      rules and regulations of the Securities and Exchange Commission (“SEC”) and do
      not include all disclosures normally 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
      our
      Annual Report on Form 10-K for the year ended December 31, 2006 (the “Annual
      Report”).





**2.**
            **MERGERS
                AND ACQUISITIONS**





**Acquisition
      of Sentito**





On
      April
      17, 2007, we acquired Sentito, a provider of media and signaling gateway
      equipment to the telecommunications market, by means of merger of SN Acquisition
      Corporation, a wholly-owned subsidiary of ours, into Sentito, pursuant to that
      certain Agreement and Plan of Merger, dated as of April 4, 2007, among us,
      Sentito, SN Acquisition Corporation and Brett Hauser as the Stockholders’ Agent.
      As consideration for this merger, we became obligated to issue to the
      stockholders of Sentito immediately prior to this merger: (i) an aggregate
      of
      7,631,465 restricted shares of our common stock, par value $.01 per share,
      of
      which 984,721 shares are being held in escrow to satisfy indemnification claims
      which we may make pursuant to the Merger Agreement and 1,230,902 shares are
      being held in escrow and will be released upon the completion of certain
      in-progress Sentito customer activity; and (ii) five-year warrants to purchase
      an aggregate of 841,121 shares of common stock with an exercise price of $1.25
      per share (the “Sentito Warrants”). Furthermore, we may become obligated to
      issue to the former stockholders of Sentito a number of shares of common stock
      with an aggregate value of $3.0 million, to be valued at the time of such
      issuance, if we recognize revenue of $12.0 million during the twelve-month
      period following the closing of this merger attributable to the Sentito business
      or customers (the “Contingent Consideration”).





Pursuant
      to the Merger Agreement, we may pay such portion of the Contingent Consideration
      otherwise payable pursuant to the Merger Agreement in cash to the extent
      necessary to avoid violating the shareholder approval requirements of
      Marketplace Rule 4350 of The Nasdaq Stock Market, LLC (the “Rule”). We have
      agreed to use commercially reasonable efforts to seek shareholder approval
      of
      the issuance in connection with this merger of a number of shares of common
      stock in excess of 20% of the number of shares of common stock outstanding
      prior
      to the execution of the Merger Agreement for purposes of complying with the
      Rule.








6





**2.**
            **MERGERS
                AND ACQUISITIONS,
                Continued**





**Acquisition
      of Sentito - (Continued)**





The
      Sentito Acquisition was recorded under the purchase method of accounting. The
      total purchase price of $7.4 million consisted of (i) 7,631,465 shares of our
      common stock, (ii) 841,121 warrants to purchase shares of our common stock
      with
      an exercise price of $1.25 per share; and (iii) direct transaction costs of
      approximately $837,000. A summary of the total purchase consideration is as
      follows (in thousands):





Value
                of common stock issued
            
            $
            5,998Value
                of warrants issued
            
            
            582Direct
                transaction costs
            
            
            837Total
                purchase consideration
            
            $
            7,417





Under
      the
      purchase method of accounting, the total estimated purchase price is allocated
      to the net tangible and intangible assets based on their estimated fair values
      as of the date of acquisition. Based on management’s estimate of fair values,
      the estimated purchase price was allocated as follows (in
      thousands):




**Purchase**
              **Price**
              **Allocation**Tangible
                assets:Cash
            
            $
            1,706Accounts
                Receivable
            
            
            484Inventories
            
            
            40Other
                assets
            
            
            220Property
                and Equipment
            
            
            509Intangible
                assets
            
            
            5,496Liabilities
                assumed
            
            
            (1,038
            )Total
                estimated purchase price allocation
            
            $
            7,417





**Acquisition
      of iMarc Product Line Business**





On
      December 29, 2006, we entered into an Asset Purchase Agreement (the “Purchase
      Agreement”) with Paradyne and, for certain limited purposes, Zhone Technologies,
      Inc., Paradyne’s parent (“Zhone”), pursuant to which we have (i) purchased
      certain assets from, and assumed certain liabilities of, Paradyne relating
      to
      its business (the “iMarc Business”) of manufacturing, selling and supporting the
      iMarc product line for an aggregate purchase price of $2.5 million and (ii)
      agreed to purchase certain other remaining assets relating to the iMarc Business
      as provided in the Purchase Agreement. Since July 1, 2006, Verso Verilink has
      served pursuant to a Reseller Agreement (the “Reseller Agreement”) as a
      non-exclusive reseller within the United States for certain Zhone products.
      The
      amount of consideration paid by us pursuant to the Purchase Agreement was
      determined as a result of arms’ length negotiations between us, and Zhone
      and Paradyne.





The
      iMarc product line is closely aligned with our portfolio and distribution model,
      which we expanded as a result of the Verilink Acquisition. In particular, the
      iMarc product line strengthens our access offerings, substantially expands
      our
      Tier-1 customer base, and is complementary to the Verso Verilink WanSuite®
product line. Prior to the iMarc Acquisition, we served as a reseller of Zhone
      products and therefore have a strong existing knowledge of the products and
      market, as well as long-term relationships with relevant senior
      management.





Pursuant
      to the Purchase Agreement, on December
      29, 2006 ,
      we acquired from Paradyne certain engineering equipment and service contracts
      relating to the iMarc Business, assumed from Paradyne certain liabilities
      relating to the iMarc Business as specified in the Purchase Agreement and paid
      to Paradyne $1.0 million in cash in connection with the foregoing. We
      utilized our borrowing availability under our existing credit facility with
      Laurus Master Fund, Ltd., our primary lender (“Laurus”), to fund the $1.0
      million paid on such date.








7





**2.**
            **MERGERS
                AND ACQUISITIONS,
                Continued**





**Acquisition
      of iMarc product line business - (Continued)**





On
      December 29, 2006, the Company and Paradyne also entered into (i) a license
      agreement pursuant to which Paradyne licensed to us rights to certain
      intellectual property relating to the iMarc Business on an exclusive basis
      (the
“Transferred IP”) through January 19, 2007 and rights to certain other
      intellectual property relating to the iMarc Business on a non-exclusive basis
      for perpetuity (provided that we completed the purchase of the Transferred
      IP
      from Paradyne as provided in the Purchase Agreement); and (ii) an
      Adaptation of Reseller Agreement which modifies and supplements the Reseller
      Agreement to provide that Paradyne shall provide certain contract manufacturing
      services to us with respect to the iMarc products through June 30, 2007.





After
      the Closing Date, the Company, Zhone and Paradyne amended the Purchase Agreement
      by entering into Amendment No. 1 and Amendment No. 2 thereto on January 25,
      2007
      and February 7, 2007, respectively. Pursuant to the Purchase Agreement, as
      amended, we agreed to pay Paradyne $1,250,000 in exchange for the assignment
      to
      us of the Transferred IP, of which $1.0 million was payable, and was paid,
      on
      January 31, 2007 and $250,000 was payable, and was paid, on March 31, 2007.
      Upon receiving the payment on March 30, 2007, Paradyne assigned the Transferred
      IP to us. In accordance with the terms of Amendment No. 2 to the Purchase
      Agreement, we paid to Paradyne $250,000 on June 28, 2007 in exchange for
      Paradyne’s sale to us of certain manufacturing equipment previously required to
      be sold in connection with the payment for the Transferred IP. In addition,
      on
      June 28, 2007, we purchased inventory related to the iMarc business totaling
      $315,000. Amendment No. 2 to the Purchase Agreement also amended the terms
      of the covenant not to compete to which Zhone and Paradyne (and their respective
      controlled affiliates) are bound in light of the amended payment terms described
      above.





The
      iMarc Acquisition was recorded under the purchase method of accounting, and
      the
      estimated purchase price was allocated based on the fair value of the assets
      acquired and liabilities assumed. The total purchase price of $2,575,000
      consisted of (i) $1.0 million in cash at closing; (ii) three installments
      totaling $1.5 million; $1.0 million and $250,000 paid January 31, 2007,
      March 31, 2007 and June 28, 2007 respectively; and (iii) direct transaction
      costs of approximately $75,000. A summary of the total purchase consideration
      is
      as follows (in thousands):





Cash
                paid
            
            $
            2,500Direct
                transaction costs
            
            
            75Total
                purchase consideration
            
            $
            2,575





Under
      the purchase method of accounting, the total estimated purchase price is
      allocated to the net tangible and intangible assets based on their estimated
      fair values as of the date of acquisition. Based on management’s estimate of
      fair values, the estimated purchase price was allocated as follows (in
      thousands):





**Purchase**
              **Price**
              **Allocation**Tangible
                assets:Property
                & equipment, net
            
            $
            180Other
                assets
            
            
            15Goodwill
            
            
            710Other
                intangible assets- customer relationship
            
            
            1,900Liabilities
                assumed
            
            
            (230
            )Total
                estimated purchase price allocation
            
            $
            2,575











8





**2.**
            **MERGERS
                AND ACQUISITIONS,
                Continued**





**Acquisition
      of Business Assets of Verilink**





On
      June
      16, 2006, as a result of the Verilink Acquisition, we acquired substantially
      all
      of the business assets of the Verilink Sellers other than accounts receivable
      and certain fixed assets, and assumed certain liabilities, and issued (i)
      2,900,000 shares of our common stock, par value $.01 per share, and (ii) 8,766
      shares of our newly-designated Series C preferred stock, which were subsequently
      converted in November 2006 into 2,900,000 shares of common stock. The
      Verilink Acquisition bolstered our product offerings and adds several domestic
      Tier-1 relationships. The Verilink product suite includes products that provide
      access, multiplexing and transport of voice and data services that extend legacy
      networks as well as next generation converged access solutions that deliver
      voice, data and video to business customers.





The
      Verilink Acquisition was recorded under the purchase method of accounting,
      and
      the estimated purchase price was allocated based on the fair value of the assets
      acquired and liabilities assumed. The total purchase price of $5,906,000
      consisted of (i) 2,900,000 shares of our common stock issued upon consummation
      of the Verilink Acquisition and valued at approximately $2,784,000, using a
      fair
      value per share of $0.96; (ii) 8,766 shares of our Series C preferred stock
      issued upon consummation of the Verilink Acquisition and valued at approximately
      $2,784,000, which equaled the fair value of the common stock because the
      preferred shares were automatically convertible into 2,900,000 common shares
      upon the effectiveness of an amendment to our Articles of Incorporation to
      increase the number of our authorized shares of common stock to 120,000,000;
      and
      (iii) direct transaction costs of approximately $338,000. The fair value of
      our
      common stock issued was determined using the eleven-trading-day average price
      surrounding the date the assets were sold by the Verilink Sellers (June 15,
      2006). A summary of the total purchase consideration is as follows (in
      thousands):





Value
                of common stock issued
            
            $
            2,784Value
                of Series C preferred stock issued
            
            
            2,784Direct
                transaction costs
            
            
            338Total
                purchase consideration
            
            $
            5,906





We
      acquired the Verilink business assets as a result of the acquisition of
      Holdings, which acquired the business assets directly from Verilink Sellers
      on
      June 15, 2006. In connection with the acquisition, Group appointed us as sole
      collection agent for the Verilink receivables that Group retained. In connection
      with this collection arrangement, we receive a collection fee equal to 50%
      of
      the initial $750,000 of Verilink receivables we collect and 25% of the remaining
      Verilink receivables that we collect. As of June 30, 2007, we had earned
      approximately $629,000 in collection fees upon collection of Verilink
      receivables. Such collection fees have been recorded as part of the net assets
      acquired. Under the purchase method of accounting, the total estimated purchase
      price is allocated to the net tangible and intangible assets based on their
      estimated fair values as of the date of acquisition. Based on management’s
      estimate of fair values, the estimated purchase price was allocated as follows
      (in thousands):





**Purchase**
              **Price**
              **Allocation**Tangible
                assets:Inventories
            
            $
            3,664Property
                & equipment, net
            
            
            499Other
                assets
            
            
            294Intangible
                assets
            
            
            2,041Liabilities
                assumed
            
            
            (592
            )Total
                estimated purchase price allocation
            
            $
            5,906








9





**2.**
            **MERGERS
                AND ACQUISITIONS,
                Continued**





**Acquisition
      of Assets of**  **WSECI,
      Inc.**





On
      March
      31, 2005, we acquired substantially all of the operating assets of WSECI
      pursuant to the Asset Purchase Agreement (“WSECI Asset Purchase Agreement”)
      dated as of February 23, 2005 by and among us, WSECI and all of the shareholders
      of WSECI. WSECI is a provider of an internet protocol-based, revenue assurance
      platform which enables the deployment of multiple voice and next-generation
      services to the carrier market. The fair value of the initial acquisition cost
      was approximately $1.1 million, consisting of 190,000 shares of our common
      stock
      with a fair value of $331,000, $50,000 in cash, the payment of certain
      liabilities of approximately $613,000 and acquisition costs of approximately
      $114,000. The acquisition was accounted for as a purchase.





Pursuant
      to the WSECI Asset Purchase Agreement, we became obligated to issue to WSECI
      additional contingent consideration of $269,000 based on the sales of certain
      WSECI products and services. The contingent consideration was payable in cash
      or
      shares of our common stock at our election. Through the year ended December
      31,
      2006, under this provision, we issued an additional 139,136 shares of our common
      stock with a fair value of $199,000. In addition, during the six months ended
      June 30, 2007, under this provision, we issued an additional 62,950  shares
      of
      our common stock with a fair value of $70,000. The additional shares issued
      were
      recorded as an increase in other intangibles-current technology which is being
      amortized over the remaining estimated life of the original purchased
      technology.





The
      adjusted allocation of the costs of the acquisition of WSECI (initial cost
      plus
      contingent payments) is as follows (in thousands):


WSECIProperty
                  and equipment
              
              $
              52Accounts
                  receivable
              
              
              93Other
                  intangibles
              
              
              1,578Cost
                  of acquisition
              
              $
              1,723








The
      following unaudited pro forma information presents the results of our continuing
      operations as if the Verilink Acquisition, iMarc Acquisition and the Sentito
      Acquisition had taken place on January 1, 2006. Certain adjustments have been
      made to reflect the impact of the purchase transaction. These pro forma results
      have been prepared for comparative purposes only and are not indicative of
      what
      would have occurred had the acquisition been made at the beginning of the
      respective periods, or of the results which may occur in the future (in
      thousands, except per share amounts):





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
              **2007**
            
            **June
                30,**
              **2006**
            
            **June
                30,**
              **2007**
            
            **June
                30,**
              **2006**Net
                sales
            
            $
            12,615
            
            $
            14,707
            
            $
            25,298
            
            $
            30,317Net
                loss
            
            $
            (7,106
            )
            $
            (7,803
            )
            $
            (14,201
            )
            $
            (20,812
            )Earnings
                (loss) per share, basic
            
            $
            (0.12
            )
            $
            (0.17
            )
            $
            (0.26
            )
            $
            (0.46
            )Earnings
                (loss) per share, diluted
            
            $
            (0.12
            )
            $
            (0.17
            )
            $
            (0.26
            )
            $
            (0.46
            )








10





**3.** **EQUITY
      INVESTMENT**





On
      October 1, 2002, we 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 us with a distribution channel in the China and
      Asia-Pacific region for our application-based VoIP gateway solutions, billing
      systems, value-added applications and web filtering solutions. Due to the shared
      decision making between us and our equity partner, the results of BeTrue are
      treated as an equity investment rather than being consolidated. We evaluate
      our
      investments in partially owned entities in accordance with Financial Accounting
      Standards Board (“FASB”) Interpretation No. 46 (R), “Consolidation of Variable
      Interest Entities.” If the investment is a “Variable Interest Entity” or a “VIE”
and we are the primary beneficiary, as defined by FIN 46 (R), we account for
      such interest as if it were a consolidated subsidiary. We have determined that
      BeTrue is not a VIE.





We
      purchased the 51% interest in BeTrue for $100,000 from NeTrue Communications,
      Inc., Shanghai Tangsheng’s former joint venture partner. We also contributed to
      the joint venture certain next generation communication equipment and software
      valued at approximately $236,000 and cash in the amount of
      $100,000.





Summarized
      financial information reported by this affiliate for the three and six months
      ended June 30, 2007 and 2006, respectively, are as follows (in
      thousands):


**Three
                  months ended**
              
              **Six
                  months ended****June
                  30,**
              
              **June
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Operating
                  results:Revenues
              
              $
              36
              
              $
              708
              
              $
              51
              
              $
              708Operating
                  loss
              
              $
              (64
              )
              $
              (80
              )
              $
              (154
              )
              $
              (210
              )Net
                  loss
              
              $
              (64
              )
              $
              (80
              )
              $
              (154
              )
              $
              (210
              )








**4.** **DISCONTINUED
      OPERATIONS**





In
      January 2005, we sold substantially all of the operating assets of our NACT
      and
      MCK businesses to better focus our capital and management resources on areas
      which we believe have greater potential given our strategy to focus on
      next-generation network and solutions to improve cash utilization. In addition,
      we disposed of our NACT business because we wanted to move toward an
      open-standards, pre-paid next-generation solution that could better address
      growing market opportunities and enable us to offer a competitive product for
      Tier 1 and Tier 2 carriers. We believe that the I-Master platform which we
      acquired from WSECI in March 2005, after forming a strategic partnership with
      WSECI in the latter half of 2004, permits us to offer a better solution.
      Further, we disposed of our MCK business because we intend to focus on
      next-generation solutions for service providers and the MCK products did not
      fit
      that profile. The operations of NACT and MCK businesses have been reclassified
      as discontinued operations in our consolidated financial
      statements.





Assets
      and liabilities of discontinued operations (in thousands) are as
      follows:


**June
                  30,**
              
              **December
                  31,****2007**
              
              **2006**Notes
                  receivable
              
              $
              -
              
              $
              2,134Liabilities
                  of discontinued operations:Accrued
                  rent
              
              $
              770
              
              $
              792Other
                  current liabilities
              
              
              594
              
              
              650Liabilities
                  of discontinued operations
              
              $
              1,364
              
              $
              1,442





11





**4.** **DISCONTINUED
      OPERATIONS, Continued**





In
      connection with the disposition of the MCK business, CITEL Technologies Limited
      (“Citel U.K.”) and CITEL Technologies, Inc. (“Citel U.S.” and together with
      CITEL U.K., “CITEL”) issued to us a convertible secured promissory note in
      principal amount of $3,500,000 (the “Note”). The outstanding principal under the
      Note accrued interest at an annual rate of 6%. Under certain circumstances
      described in the Note, all or any portion of the principal outstanding under
      the
      Note could be converted at our option into shares of the capital stock of
      Citel U.K. CITEL’s obligations under the Note are secured by a security interest
      in certain assets sold to CITEL.





On
      June
      30, 2006, in connection with the completion of the admission (“Admission”) of
      Citel U.K.’s entire issued share capital to the AIM market of the London Stock
      Exchange plc (“AIM”), the Company and CITEL amended the Note such that the
      principal balance of the Note became due and payable as follows: $870,000 to
      be
      paid within one business day of Admission, followed by six monthly installments
      of $75,000 commencing 12 months from the date of Admission, and all remaining
      outstanding principal and accrued interest under the Note being due and payable
      on January 21, 2008. The $870,000 was received in July, 2006. We agreed to
      irrevocably waive our rights to be prepaid on the Note in accordance with the
      terms of the Note as a result of (and limited to the transactions associated
      with) the Admission; however, the waiver given by us did not waive any
      subsequent right to be prepaid under the Note in accordance with its terms.





On
      May
      25, 2007, we entered into an agreement with CITEL and Citel PLC pursuant to
      which CITEL prepaid the Note, by making an immediate cash payment to us of
      approximately $1.9 million. In addition, Citel PLC was required to issue to
      us
      62,424 shares of Citel PLC’s capital stock (the “Citel Shares”), which Citel
      Shares had a market value of approximately $70,000 as of May 24, 2007 and,
      based
      upon representations made by CITEL to us, are fully tradable on the AIM market
      of the London Stock Exchange. We have agreed not to sell or transfer the Citel
      Shares prior to January 21, 2008, the original maturity date of the Note. Upon
      receipt of the prepayment and the Citel Shares, we canceled the Note and
      released our security interest in the collateral securing the Note. Prior to
      entering into this agreement, approximately $2.2 million of principal and
      interest was outstanding under the Note. We recognized a loss of approximately
      $231,000 associated with the write-off of interest associated with the
      prepayment transaction.





Accrued
      rent relates primarily to several leases for buildings and equipment that 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 contains one lease with total payments remaining through
      January 31, 2010 of $1,150,000 and assumes that the building will be sub-leased
      for approximately 58% of the total lease liability over the remaining term
      of
      the lease.





The
      activity in the liabilities of discontinued operations (in thousands) for the
      three and months ended June 30, 2007 and 2006 was as follows:


**Three
                  months ended June 30,**
              
              **Six
                  months ended June 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Balance
                  beginning of period
              
              $
              1,503
              
              $
              2,322
              
              $
              1,442
              
              $
              2,531Lease
                  payments, net of sublease receipts
              
              
              (117
              )
              
              (1,119
              )
              
              (22
              )
              
              (1,279
              )Other
                  payments
              
              
              6
              
              
              (13
              )
              
              (20
              )
              
              (51
              )Legal
                  and other costs of disposal
              
              
              (28
              )
              
              (72
              )
              
              (36
              )
              
              (83
              )Balance
                  end of period
              
              $
              1,364
              
              $
              1,118
              
              $
              1,364
              
              $
              1,118








12





**5.** **INVENTORIES**





Inventories
      consist primarily of purchased electronic components, and are stated at the
      lower of cost or market. Cost is determined by using average cost. Inventories
      as of June 30, 2007 and December 31, 2006 are comprised of the following (in
      thousands):


**June
                  30,**
              
              **December
                  31,****2007**
              
              **2006**Raw
                  materials
              
              $
              5,257
              
              $
              5,157Work
                  in process
              
              
              267
              
              
              78Finished
                  goods
              
              
              1,499
              
              
              1,949Total
                  Inventories
              
              $
              7,023
              
              $
              7,184


On
      July 18, 2006, we entered into an agreement (the “CM Agreement”) with CM
      Solutions, Inc. (“CM”), our contract manufacturer of our Verilink product line.
      Pursuant to the CM Agreement, CM has purchased certain electrical components
      valued at $2.0 million from us for use in the manufacture of finished goods
      to be purchased by us. In addition, we have agreed to assign to CM an additional
      amount of unused electrical components valued at $2.0 million for which
      title will remain with us. We have an obligation under the CM Agreement to
      purchase during the first two years, products assembled by CM using electrical
      components valued at $2.0 million (the “Assembled Products”). Furthermore, we
      have agreed to submit purchase orders to CM in a minimum amount of $2.0 million
      per quarter for the next three years or until the obligation to purchase the
      Assembled Products has been satisfied.




In
      connection with executing the CM Agreement, the Company and CM entered into
      a
      three-year Manufacturing Agreement which sets forth the terms and conditions
      under which CM shall manufacture the Assembled Products. As of June 30, 2007,
      CM
      had used $1,339,000 of electrical components in the manufacture of the Assembled
      Products, reduced the outstanding commitment to utilize $2.0 million of
      electrical components in the first two years of the agreements to approximately
      $661,000 which reduced the inventory currently assigned to CM to approximately
      $661,000. The remaining assigned inventory is reflected as inventory on the
      consolidated balance sheets as of June 30, 2007. The assigned inventory is
      not
      eligible for inclusion in the borrowing base under our credit agreement with
      Laurus.





The
      inventory amounts above are net of inventory reserves of $1.7 million at June
      30, 2007 and December 31, 2006.











13





**6.** **GOODWILL
      AND OTHER INTANGIBLES**





Intangible
      assets represent the excess of cost over the fair value of net tangible assets
      acquired and identified other intangible assets which consist of current
      technology and customer relationships which are amortized on a straight-line
      basis over their estimated useful life . Goodwill associated with acquisitions is not being amortized; in accordance
      with
      Statement of Financial Accounting Standards No. 142, “Goodwill and Other
      Intangible Assets”.





Goodwill
      and other intangible assets consist of the following (in
      thousands):


**Amortization****Period
                  in**
                **months**
              
              **June
                    30,****2007**
              
              **December
                    31,****2006**Intangibles
                  subject to amortization:Current
                  technology
              
              36
                  months
              
              $
              5,098
              
              $
              2,328Customer
                  relationship
              
              36-120
                  months
              
              
              6,344
              
              
              5,561Weighted
                  average months
              
              54
                  months
              
              
              11,442
              
              
              7,889Accumulated
                  amortization:Current
                  technology
              
              
              
              
              
              (2,083
              )
              
              (1,685
              )Customer
                  relationship
              
              
              
              
              
              (1,770
              )
              
              (1,136
              )Net
                  intangibles subject to amortization
              
              
              
              
              
              7,589
              
              
              5,068Goodwill
              
              
              
              
              
              6,021
              
              
              3,224Total
                  goodwill and other intangibles
              
              
              
              
              $
              13,610
              
              $
              8,292





**7.**
            **LOAN
                FACILITIES**





Our
      credit facility with Laurus consists of two tranches: (i) an
      $8.0 million tranche, the availability of which is subject to a borrowing
      base (“Tranche A”); and (ii) a $6.0 million tranche, of which
      $5.0 million is outstanding and the remainder of which will be available
      when we generate EBITDA (earnings before interest, income taxes, depreciation
      and amortization and non-cash stock compensation expense) in excess of $500,000
      in any one fiscal quarter (“Tranche B”). Borrowing availability under Tranche B
      is not subject to a borrowing base. Borrowing ability under Tranche A is
      determined pursuant to a formula which is based on the value of our eligible
      accounts receivables and inventory. Borrowings under Tranche A accrue interest
      at a rate of prime rate plus 2%, provided that the interest rate shall not
      be
      less than 9% (10.25% at June 30, 2007). Borrowing ability under Tranche B is
      reduced from the $6.0 million amount by $187,500 per month beginning February
      2007, and borrowings under Tranche B accrue interest at a fixed rate of 15%.
      Borrowings under the credit facility shall be made first under Tranche B to
      the
      extent of availability thereunder and then under Tranche A to the extent of
      availability thereunder.





As
      of
      June 30, 2007, we had outstanding borrowings including interest under Tranche
      A
      and Tranche B of $3,632,000 and $5,000,000, respectively. The remaining
      borrowing availability under the credit facility at June 30, 2007 was $2.6
      million under Tranche A and $0 under Tranche B.





On
      December 29, 2006, in connection with the iMarc Acquisition, Laurus expanded
      our
      borrowing availability of Tranche B from $4.0 million to $5.0 million despite
      that we had not satisfied the EBITDA conditions. In connection with such
      increase, we issued a warrant to purchase 330,470 shares of common stock at
      an
      exercise price of $0.91 per share on December 29, 2006. This amount represents
      half of the additional warrants that are available under the terms of the credit
      facility and are issuable upon the earlier of (i) the date which is 18 months
      after the date of the closing of the credit facility and (ii) the date upon
      which the borrowing availability under Tranche B equals $6.0 million
      (without regard to the monthly deductions thereto commencing on February 1,
      2007). Additionally, a perpetual warrant to purchase 150,000 shares of common
      stock at an exercise price of $0.01 per share was issued in connection with
      this
      event.





Our
      obligations under the credit facility are secured by a first priority security
      interest in all of our assets and a pledge of all of the outstanding equity
      interests of Telemate.Net, Verso Verilink and Sentito.








14





**7.**
            **LOAN
                FACILITIES, Continued**





Loan
      issuance costs are recognized in accordance with FASB Accounting
      Principles Board Opinion 21,
      “Interest on Receivables and Payables,” and are recorded as a deferred charge
      and included in prepaid loan issuance costs on our balance sheet. We amortize
      these costs over the original term of the notes. Amortization is calculated
      based on the interest method or straight line method based on an allocation
      of
      the costs over the relative fair values of the line of credit and term debt.
      During the three and six months ended June 30, 2007 and 2006, we recorded
      interest expense from the amortization of the loan issuances costs of
      approximately $276,000 and $43,000 and $551,000 and $48,000, respectively. The
      unamortized loan issuance costs associated with the credit facility totaled
      approximately $2.2 million at June 30, 2007.





**8.**
            **CONVERTIBLE
                DEBENTURES**





*Senior
      Unsecured Convertible Debentures*





On
      February 4, 2005, we completed a private placement of senior unsecured
      convertible debentures and warrants pursuant to a securities purchase agreement
      with certain institutional investors. We issued $13,500,000 of senior unsecured
      convertible debentures, Series A warrants exercisable for 2,200,000 shares
      of
      our common stock and Series B warrants exercisable for 2,000,000 shares of
      our
      common stock. In connection with the private placement, we received net proceeds
      of approximately $12,500,000, including $1,600,000 in restricted cash, net
      of
      expenses. The debentures have been discounted to reflect the fair value of
      the
      warrants issued, totaling approximately $4,500,000. In addition, after
      allocation of the fair value of the warrants issued, the remaining fair value
      of
      the debentures resulted in a computed beneficial conversion feature with a
      fair
      value of $3,600,000. The amount was recorded as a discount in the third quarter
      of 2005 as a result of additional analysis of the calculation of the beneficial
      conversion feature.





The
      discount is being amortized to interest expense over the life of the senior
      unsecured convertible debentures. The unamortized discount totaled approximately
      $2.8 million at June 30, 2007. The senior unsecured convertible debentures
      bear
      interest at a rate of 6.75%, and are due February 2009 and are convertible
      into
      approximately 5,400,000 shares of our common stock at an initial conversion
      price of $2.50 per share, subject to anti-dilution adjustments and certain
      limitations. Interest is payable on a quarterly basis and principal became
      payable on a quarterly basis beginning in August 2006. The Series A warrants
      issued in connection with the private placement are exercisable for a period
      of
      five years commencing on February 4, 2005 and at an initial exercise price
      of
      $3.60 per share.





The
      Series B warrants issued in connection with the private placement were
      exercisable for a period of 90 days, commencing on June 16, 2005, and had an
      exercise price of $3.90 per share. The Series B warrants expired in September
      2005. We paid certain private placement fees and attorney’s fees totaling
      $993,000 and issued Series A warrants, on the same terms as disclosed above,
      exercisable for 302,400 shares of our stock with a value of $561,000, in
      connection with the private placement. The fees were recorded as loan issuance
      fees and are being amortized to interest expense over the term of the
      debentures. The unamortized fees totaled approximately $504,000 at June 30,
      2007.





**9.** **OTHER
      COMPREHENSIVE LOSS**





Comprehensive
      loss for the three and six months ended June 30, 2007 and 2006 is shown in
      the
      following table (in thousands):


Three
                  months ended June 30,
              
              Six
                  months ended June 30,2007
              
              2006
              
              2007
              
              2006Net
                  loss
              
              $
              (6,458
              )
              $
              (4,359
              )
              $
              (11,447
              )
              $
              (9,298
              )Other
                  comprehensive loss:Foreign
                  currency translation
              
              
              (21
              )
              
              (78
              )
              
              1
              
              
              (101
              )Comprehensive
                  loss
              
              $
              (6,479
              )
              $
              (4,437
              )
              $
              (11,446
              )
              $
              (9,399
              )











15





**10.**
            **SEGMENT
                INFORMATION**





We
      information for two segments, the Technologies Group and the Advanced
      Applications Services Group. Management evaluates the business segment
      performance based on contributions before unallocated items. Inter-segment
      sales
      and transfers are not significant.





Technologies
      Group:


The
      Technologies Group includes our softswitching, I-Master, and NetPerformer
      divisions and our subsidiaries, Telemate.Net, Verso Verilink and Sentito. The
      Technologies Group includes domestic and international sales of hardware and
      software, integration, applications and technical training and support. The
      Technologies Group offers software-based solutions (which include hardware)
      for
      companies seeking to build private, converged packet-based voice and data
      networks. In addition, the Technologies Group offers software-based solutions
      for Internet access and usage management that include call accounting and usage
      reporting for IP network devices. In 2006, the Technologies Group added the
      product suites from the Verilink Acquisition and the iMarc Acquisition. These
      products provide access, multiplexing and transport of voice and data services.
      In 2007, the Technologies Group added the products and technology from the
      Sentito Acquisition.





Advanced
      Applications Services Group:


Our
      Advanced Applications Services Group, consists of our technical applications
      support group and includes outsourced technical application services and
      application installation and training services to both customers of the
      Technologies Group and outside customers.





Summarized
      financial information concerning our reportable segments for the three months
      ended June 30, 2007 and 2006 is shown in the following table (in
      thousands):


**Advanced****Technologies**
              
              **Application****Group**
              
              **Services
                  Group**
              
              **Total****For
                  the Three Months Ended June 30, 2007**Revenue
              
              $
              10,646
              
              $
              1,924
              
              $
              12,570(Loss)
                  contribution before unallocated items
              
              
              (1,913
              )
              
              220
              
              
              (1,693
              )**At
                  June 30, 2007**Goodwill
              
              
              4,568
              
              
              1,453
              
              
              6,021Total
                  assets
              
              
              29,531
              
              
              3,470
              
              
              33,001**For
                  the Three Months Ended June 30, 2006**Revenue
              
              
              6,657
              
              
              1,724
              
              
              8,381(Loss)
                  contribution before unallocated items
              
              
              (1,067
              )
              
              (1
              )
              
              (1,068
              )**At
                  December 31, 2006**Goodwill
              
              
              1,771
              
              
              1,453
              
              
              3,224Total
                  assets
              
              
              23,168
              
              
              3,864
              
              
              27,032








16





**10.**
            **SEGMENT
                INFORMATION, Continued**





The
      following table reconciles the contribution before unallocated items to the
      loss
      before discontinued operations for the three months ended June 30, 2007 and
      2006
      (in thousands):


**Three
                    months ended June 30,****2007**
                
                **2006**Loss
                    before unallocated items, per above
                
                $
                (1,693
                )
                $
                (1,068
                )Corporate
                    general and administrative expenses
                
                
                (1,695
                )
                
                (1,414
                )Corporate
                    research and development
                
                
                (34
                )
                
                (85
                )Depreciation
                    and amortization
                
                
                (711
                )
                
                (402
                )Stock
                    based compensation
                
                
                (123
                )
                
                (92
                )Reorganizaton
                    expense
                
                
                (389
                )
                
                -Other
                
                
                (1,813
                )
                
                (1,298
                )Loss
                    from continuing operations
                
                $
                (6,458
                )
                $
                (4,359
                )





Summarized
      financial information concerning our reportable segments for the six months
      ended June 30, 2007 and 2006 is shown in the following table (in
      thousands):


**Advanced****Technologies**
              
              **Application****Group**
              
              **Services
                  Group**
              
              **Total****For
                  the Six Months Ended June 30, 2007**Revenue
              
              $
              21,014
              
              $
              4,041
              
              $
              25,055(Loss)
                  contribution before unallocated items
              
              
              (2,695
              )
              
              288
              
              
              (2,407
              )**For
                  the Six Months Ended June 30, 2006**Revenue
              
              
              11,538
              
              
              3,631
              
              
              15,169(Loss)
                  contribution before unallocated items
              
              
              (2,644
              )
              
              200
              
              
              (2,444
              )








The
      following table reconciles the contribution before unallocated items to the
      loss
      before discontinued operations for the six months ended June 30, 2007 and 2006
      (in thousands):


**Six
                  months ended June 30,****2007**
              
              **2006**Loss
                  before unallocated items, per above
              
              $
              (2,407
              )
              $
              (2,444
              )Corporate
                  general and administrative expenses
              
              
              (3,345
              )
              
              (3,112
              )Corporate
                  research and development
              
              
              (60
              )
              
              (111
              )Depreciation
                  and amortization
              
              
              (1,362
              )
              
              (866
              )Stock
                  based compensation
              
              
              (534
              )
              
              (136
              )Reorganization
                  expense
              
              
              (389
              )Other
              
              
              (3,380
              )
              
              (2,629
              )Loss
                  from continuing operations
              
              $
              (11,477
              )
              $
              (9,298
              )








17








**10.**
            **SEGMENT
                INFORMATION, Continued**








The
      following table reconciles the segments’ total assets to our total assets (in
      thousands):


June
                  30,
              
              December
                  31,2007
              
              2006Total
                  assets before unallocated items, per above
              
              $
              33,001
              
              $
              27,032Corporate
                  assets:Cash
                  and cash equivalents
              
              
              2,041
              
              
              1,134Restricted
                  cash
              
              
              685
              
              
              1,041Current
                  portion of notes receivable
              
              
              -
              
              
              324Other
                  current assets
              
              
              266
              
              
              394Property
                  and equipment, net
              
              
              616
              
              
              942Loan
                  issuance costs
              
              
              2,663
              
              
              3,427Investment
              
              
              667
              
              
              745Notes
                  receivable, net of current portion
              
              
              -
              
              
              1,810$
              39,939
              
              $
              36,849





Following
      the acquisition of substantially all the operating assets along with certain
      liabilities of Clarent Corporation in February 2003, we began conducting
      research and development in Canada. International sales of our products and
      services continue to originate only from the United States. The geographic
      distribution of our revenue and contribution before unallocated items (in
      thousands) are as follows:


**Canada**
              
              **United
                  States**
              
              **Total****For
                  the Three Months ended June 30, 2007**Revenue
              
              $
              -
              
              $
              12,570
              
              $
              12,570(Loss)
                  contribution before unallocated Items
              
              
              (1,105
              )
              
              (588
              )
              
              (1,693
              )**For
                  the Three Months ended June 30, 2006**Revenue
              
              
              -
              
              
              8,381
              
              
              8,381Loss
                  before unallocated Items
              
              
              (1,281
              )
              
              213
              
              
              (1,068
              )**For
                  the Six Months ended June 30, 2007**Revenue
              
              
              -
              
              
              25,055
              
              
              25,055(Loss)
                  contribution before unallocated Items
              
              
              (2,247
              )
              
              (160
              )
              
              (2,407
              )**For
                  the Six Months ended June 30, 2006**Revenue
              
              
              -
              
              
              15,169
              
              
              15,169Loss
                  before unallocated Items
              
              
              (2,575
              )
              
              131
              
              
              (2,444
              )**At
                  June 30, 2007**Total
                  Assets
              
              
              268
              
              
              39,671
              
              
              39,939**At
                  December 31, 2006**Total
                  Assets
              
              
              551
              
              
              36,298
              
              
              36,849








18





**11.**
            **REORGANIZATION
                COSTS**





In
      the second quarter of 2007, we terminated a senior executive. As a result of
      this action, we recorded reorganization costs of $389,000 representing our
      severance obligation.





In
      the
      second quarter of 2005, we entered into a sublease agreement with an unrelated
      party to sublease excess office space at our facility in Atlanta, Georgia.
      The
      excess space was primarily due to reductions in the corporate staffing in prior
      years. As a result of these actions, we recorded an accrual of approximately
      $2,600,000 for all remaining payments due on this lease, less amounts to be
      paid
      by the sublessor, as well as write-offs for furniture and leasehold
      improvements. We expect to save approximately $1.6 million over the term of
      the
      sublease, which expires January 31, 2010. The balance of the accrued loss on
      sublease is approximately $1.1 million at June 30, 2007.





**12.**
            **STOCK
                OPTIONS AND WARRANTS**





We
      have a
      stock incentive plan for employees, members of the board of directors,
      consultants, and other individual contributors to the Company which enables
      us
      to grant, as of June 30, 2007, up to 7,000,000 qualified and nonqualified
      incentive stock options as well as other stock-based awards. In addition, in
      connection with various financing and acquisition transactions, and for services
      provided to us, we have issued warrants to purchase our common stock. A summary
      of stock options and warrants outstanding at June 30, 2007 is as
      follows:




**OPTIONS
      AND WARRANTS ISSUED TO EMPLOYEES**


**Range
                  of**
              
              **Outstanding
                  at**
              
              **Weighted
                  Average**
              
              **Exercisable
                  at**
              
              **Weighted
                  Average****Exercise
                  Prices**
              
              **June
                  30, 2007**
              
              **Exercise
                  Price**
              
              **June
                  30, 2007**
              
              **Exercise
                  Price**$1.00-$1.45
              
              
              1,937,848
              
              $
              1.21
              
              
              409,598
              
              $
              1.39$1.46-$2.50
              
              
              557,020
              
              
              2.22
              
              
              546,520
              
              
              2.23$2.51-$5.30
              
              
              76,828
              
              
              3.10
              
              
              74,828
              
              
              3.09$5.31-$7.50
              
              
              75,642
              
              
              6.75
              
              
              75,642
              
              
              6.75$7.51-$90.00
              
              
              799,905
              
              
              13.86
              
              
              799,905
              
              
              13.86Total
              
              
              3,447,243
              
              $
              4.47
              
              
              1,906,493
              
              $
              7.14


Options
      and warrants issued to employees generally terminate ten years from the date
      of
      grant. Termination dates for the options and warrants listed above range from
      January 3, 2008 to November 20, 2016.





A
      summary of the status of stock options and warrants granted to employees,
      directors and consultants as of June 30, 2007, and the changes during the six
      months ended June 30, 2007 is presented below :


**Number
                  of**
                **Shares
                  of**
                **Underlying**
                **Options**
              
              **Weighted**
                **Average**
                **Exercise**
                **Prices**Outstanding
                  at beginning of period
              
              
              4,638,493
              
              $
              4.28Granted
              
              
              100,000
              
              
              1.24Exercised
              
              
              -
              
              
              -Forfeited
              
              
              (960,000
              )
              
              1.47Expired
              
              
              (331,250
              )
              
              9.46Outstanding
                  at end of period
              
              
              3,447,243
              
              $
              4.47Exercisable
                  at end of period
              
              
              1,906,493
              
              $
              7.14





The
      weighted average grant date fair value for options granted during the three
      and
      six months ended June 30, 2007 was $89,000 and $89,000,
      respectively.








19





**12.**  **STOCK
      OPTIONS AND WARRANTS, Continued**





A
      summary
      of warrants issued primarily in connection with financing transactions is as
      follows:


**Exercise
                  Price**
              
              **Outstanding
                  Warrants**
              
              **Exercise
                  Price**
              
              **Expiration
                  Date**$0.01-$1.25
              
              
              6,135,468
              
              $
              1.00
              
              September
                2011 and beyond$1.56
              
              
              5,614,692
              
              
              1.56
              
              August
                2011$1.83.-$2.45
              
              
              3,262,400
              
              
              2.30
              
              February
                2010 - February 2015$5.14
              
              
              491,505
              
              
              5.14
              
              February
                2011Total
              
              
              15,504,065
              
              $
              1.61





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





A
      summary of the status of warrants issued primarily in connection with financing
      as of June 30, 2007, and the changes during the six months ended June 30, 2007
      is presented below :


**Number
                  of**
                **Outstanding**
                **Warrants**
              
              **Weighted**
                **Average**
                **Exercise**
                **Prices**Outstanding
                  at beginning of period
              
              
              11,962,944
              
              $
              1.81Granted
              
              
              3,541,121
              
              
              1.24Exercised
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -Outstanding
                  at end of period
              
              
              15,504,065
              
              $
              1.61Exercisable
                  at end of period
              
              
              15,504,065
              
              $
              1.61





The
      warrants to purchase 2.7 million shares of our common stock issued in connection
      with the private placement in January and February 2007, are exercisable for
      a
      period of five years and at an exercise price of $1.24 per share.





The
      warrants to purchase 841,121 shares of our common stock issued in connection
      with the Sentito Merger in April 2007, are exercisable for a period of five
      years at an exercise price of $1.25.





In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      “SFAS” No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which is a
      revision of SFAS No. 123. Generally, the approach in SFAS No. 123(R) is similar
      to the approach described in SFAS No. 123. However, SFAS No. 123 (R) requires
      all share-based payments to employees, including grants of employee stock
      options, to be recognized in the income statement based on their fair values.
      Pro forma disclosure is no longer an alternative. Effective January 1, 2006,
      we
      adopted SFAS No. 123(R) using the modified prospective method. Under this
      transition method, compensation cost recognized in 2006 includes: (i)
      compensation costs for all share-based payments granted prior to, but not fully
      vested as of January 1, 2006, based on the grant date fair value as calculated
      under the pro forma disclosure-only expense provisions of SFAS No. 123, and
      (ii)
      compensation cost for all share-based payments granted subsequent to January
      1,
      2006, based on the grant date fair value estimated in accordance with provisions
      of SFAS No. 123(R). The adoption of SFAS No. 123(R) primarily resulted in
      compensation expense being recorded for stock options. The results for prior
      periods have not been restated.





During
      the three months ended June 30, 2007 and 2006, we recorded compensation expense
      of $159,000 and $104,000 respectively, related to the expensing of our stock
      options. During the six months ended June 30, 2007 and 2006, we recorded
      compensation expense of $649,000 and $159,000, respectively, related to the
      expensing of our stock options.








20





**12.**
            **STOCK
                OPTIONS AND WARRANTS,
                Continued**





The
      fair
      value of options granted in the six months ended June 30, 2007 and 2006, based
      on the Black-Scholes valuation model, used the following
      assumptions:


Six
                  Months Ended
              
              Six
                  Months EndedJune
                  30, 2007
              
              June
                  30, 2006Risk-free
                  interest rate
              4.9%
              
              5.0%Expected
                  life
              4
                  years
              
              4
                  yearsExpected
                  volatility
              92.60%
              
              106.00%Expected
                  dividend yield
              0.0%
              
              0.0%





As
      of
      June 30, 2007, there was $1.2 million of total unrecognized compensation cost
      related to unvested options. The cost is expected to be recognized over the
      weighted-average period of 2.3 years.





We
      define
      in-the-money stock options at June 30, 2007 as options that had exercise prices
      that were lower than the $0.83 market price of the common stock at that date.
      As
      of June 30, 2007, there were no stock options outstanding that were
      in-the-money.





A
      summary
      of the status of nonvested stock options at June 30, 2007 and the changes during
      the six months ended June 30, 2007 is presented below:


Nonvested
                  shares atJanuary
                  1, 2007
              
              
              2,422,753Granted
              
              
              100,000Vested
              
              
              (22,003
              )Forfeited
              
              
              (960,000
              )Nonvested
                  shares atJune
                  30, 2007
              
              
              1,540,750





Our
      stock incentive plan also provides for stock purchase authorizations, stock
      bonus awards and issuance of restricted stock. In January 2007, restricted
      stock
      awards totaling 420,000 were granted under the stock incentive plan to our
      board
      of directors for their board services during 2007. The shares vest 25% on March
      30, 2007, June 29, 2007, September 28, 2007 and December 31, 2007, respectively.
      Upon issuance we recorded deferred compensation of $547,000. For the three
      and
      six months ended June 30, 2007, we recorded stock-based compensation, related
      to
      these restricted shares, of $137,000 and $274,000, respectively. As of June
      30,
      2007, deferred compensation of $274,000 is recorded on our consolidated balance
      sheet.





During
      the first quarter of 2007, stock awards totaling 25,167, which were immediately
      vested, were granted under the stock incentive plan. For the three months ended
      March 31, 2007, we recorded stock-based compensation of $23,300 related to
      these
      shares.





During
      the second quarter of 2007, stock awards totaling 39,912, which were immediately
      vested, were granted under the stock incentive plan. For the three months ended
      June 30, 2007, we recorded stock-based compensation of $35,400 related to these
      shares. In addition, 85,000 restricted stock awards were granted to employees
      under the stock incentive plan and vest over a service period of approximately
      3.5 years. For the three months ended June 30, 2007, we recorded stock-based
      compensation of $5,600 related to these shares.





21








**13.**
            **NET
                LOSS PER SHARE**





Basic
      and
      diluted net loss per share are computed in accordance with SFAS No. 128,
“Earnings Per Share,” using the weighted average number of common shares
      outstanding. The diluted net loss per share for the three and six months ended
      June 30, 2007 and 2006 does not include the effect of the common stock
      equivalents, calculated by the treasury stock method, as their impact would
      be
      anti-dilutive. Using the treasury stock method, common stock equivalents are
      as
      follows:


For
                  the three months ended
              
              For
                  the six months endedJune
                  30,
              
              June
                  30,2007
              
              2006
              
              2007
              
              2006Shares
                  issuable under conversion of preferred stock
              
              
              -
              
              
              478,022
              
              
              -
              
              
              240,332Shares
                  issuable under stock options
              
              
              -
              
              
              1,428
              
              
              91
              
              
              5,319Shares
                  issuable pursuant to warrantsto
                  purchase common stock
              
              
              794,755
              
              
              4,779
              
              
              906,172
              
              
              4,808794,755
              
              
              484,229
              
              
              906,263
              
              
              250,459





**14.**
            **PRIVATE
                PLACEMENT**





On
      January 30, 2007, February 2, 2007, February 5, 2007 and February 9, 2007,
      we
      issued 2,000,000 shares, 2,000,000 shares, 250,000 shares, and 750,000 shares
      of
      our common stock, respectively, and warrants to purchase 1,080,000 shares,
      1,080,000 shares, 135,000 shares, and 405,000 shares of our common stock,
      respectively, in a private placement transaction for an aggregate purchase
      price
      of approximately $5,000,000, or $1.00 per share. The warrants issued in
      connection with the private placement are exercisable for a period of five
      years
      at an exercise price of $1.25 per share. We received proceeds from the private
      placement of approximately $4,297,000, net of expenses.





**15.**
            **COMMON
                STOCK ISSUED IN CONNECTION WITH ACQUISITION OF BUSINESS ASSETS OF
                WSECI**





As
      described in Note 2 - Mergers and Acquisitions: WSECI, we issued during the
      quarter ended March 31, 2007 62,950 shares of our common stock, as contingent
      consideration pursuant to the WSECI Asset Purchase Agreement.





**16.**
            **COMMON
                STOCK ISSUED IN CONNECTION WITH ACQUISITION OF
                SENTITO**





As
      described in Note 2 - Mergers and Acquisitions: Acquisition of Sentito, we
      issued during the quarter ended June 30, 2007, 7,631,465 restricted shares
      of
      our common stock, pursuant to the Merger Agreement.





**17.**
            **LITIGATION**





Except
      as
      described in Note 18 to our audited consolidated financial statements included
      in the Annual Report, we are not a party to any material pending legal
      proceedings other than ordinary routine litigation incidental to our business,
      and we do not expect this ordinary litigation to have a material adverse effect
      on the Company. Except as otherwise provided in Part II, Item 1 “Legal
      Proceedings” of this Quarterly Report, there have been no material developments
      regarding the pending material legal proceedings described in Note 18 to our
      audited consolidated financial statements included in the Annual Report during
      the six months ended June 30, 2007.








22





**18.**
            **INCOME
                TAXES**





On
      January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
      109” (“FIN 48”), with no impact on beginning retained earnings. This statement
      clarifies the criteria that an individual tax position must satisfy for some
      or
      all of the benefits of that position to be recognized in a company’s financial
      statements. FIN 48 prescribes a recognition threshold of more-likely-than-not,
      and a measurement attribute for all tax positions taken or expected to be taken
      on a tax return, in order for those tax positions to be recognized in financial
      statements. As of January 1, 2007, we had no unrecognized tax benefits.





We
      believe it is possible that a portion of our net operating losses may not be
      utilizable due to the operation of Internal Revenue Code section 382. We have
      not performed a comprehensive analysis to determine any limitation. Accordingly,
      upon completion of such an analysis, it may be necessary to record additional
      unrecognized tax benefits associated with our inability to fully utilize our
      net
      operating losses as a result of a section 382 limitation.





We
      recognize potential accrued interest and penalties related to unrecognized
      tax
      benefits within our income tax expense. Due to our net operating loss
      carryforward position, we recognized no interest and penalties at January 1,
      2007 associated with our uncertain tax positions.





Tax
      years
      2003, 2004, 2005 and 2006 remain subject to examination by Federal and State
      taxing authorities. Our primary state tax jurisdictions are Alabama, California,
      Colorado, Georgia, Minnesota, Pennsylvania, Utah and our international
      jurisdictions are the United Kingdom and Canada. Open tax years for all
      jurisdictions are for the tax years 2003 to 2006 with the exception of the
      United Kingdom, for which the open tax years are 2004 to 2006.





We
      do not
      currently anticipate that the total amount of unrecognized tax benefits will
      significantly increase or decrease during the twelve month period ended December
      31, 2007.








**19.**
            **RECENT
                ACCOUNTING PRONOUNCEMENTS**




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement.” This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles, and expands disclosures about
      fair
      value measurements. This statement applies under other accounting pronouncements
      that require or permit fair value measurements. SFAS No. 157 is effective for
      fiscal years beginning after November 15, 2007. We are currently assessing
      the
      impact of the adoption of SFAS No. 157 will have on our consolidated financial
      statements.











23





**Item
                2:**
            **Management’sDiscussion
                and Analysis of Financial Condition
                and Results of Operations**





Certain
      statements in this Quarterly Report and in future filings by us with the SEC
      and
      in our 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:





-
            the
                volatility of the price of our common
                stock;


-
            the
                delisting of our common stock from the Nasdaq Capital Market if the
                bid
                price falls and remains below $1.00 per share for a specified
                period;


-
            our
                obligation to pay liquidated damages to certain investors under certain
                circumstances;


-
            we
                may be unable to fund future
                growth;


-
            the
                risks associated with acquisitions;


-
            our
                ability to be profitable;


-
            our
                ability to attract and retain qualified
                personnel;


-
            general
                economic conditions of the telecommunications
                market;


-
            our
                research and development
                expenditures;


-
            market
                demand for, and market acceptance of, our
                products;


-
            legal
                claims against us, including, but not limited to, claims of patent
                infringement;


-
            our
                ability to protect our intellectual
                property;


-
            defects
                in our products;


-
            our
                obligations to indemnifycertain
                customers;


-
            our
                exposure to risks inherent in international operations and emerging
                markets;


-
            our
                dependence on contract manufacturers and
                suppliers;


-
            general
                economic and business conditions;and


-
            otherrisks
                and uncertaintiesdisclosed in theAnnual
                Reportand
                in our other filings with the SEC.





All
      subsequent forward-looking statements relating to the matters described in
      this
      Quarterly Report 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.








**Overview**





We
      are 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. Our continuing operations include two separate business segments:
      (i)
      the Technologies Group, which includes our softswitching and NetPerformer
      divisions (the two businesses acquired from Clarent Corporation in February
      2003), our I-Master division (acquired from WSECI in March 2005) and our
      subsidiaries, Telemate.Net, Verso Verilink (acquired from Group in June 2006)
      and Sentito (acquired by merger in April 2007); and (ii) the Advanced
      Applications Services Group, which includes our technical applications support
      group. The Technologies Group includes domestic and international sales of
      hardware and software, integration, applications and technical training and
      support. The Technologies Group offers hardware-based solutions (which include
      software) for companies seeking to build private, packet-based voice and data
      networks, and software-based solutions for Internet access and usage management
      that include call accounting and usage reporting for IP network devices, and
      the
      product suite acquired in the Verilink Acquisition that provides access,
      multiplexing and transport of voice and data services that extend legacy
      networks as well as next generation converged access solutions. The products
      and
      technology acquired in the Sentito Acquisition augment our softswitching
      division’s product offerings. The Advanced Applications Services Group includes
      outsourced technical application services and application installation and
      training services to outside customers, as well as customers of the Technologies
      Group.




24




Since
      2001, we have been selling products to the carrier market and focusing our
      strategic direction on developing and marketing next-generation communications
      products. Our current business was built on acquisitions made by us by
      leveraging the economic downturn in the telecommunications area. In the first
      quarter of 2003, we acquired substantially all of the operating assets of
      Clarent Corporation, which provided us with patented VoIP technologies for
      both
      the carrier and enterprise markets (primarily serving international markets)
      and
      significantly increased our market share in the worldwide softswitch
      market.





Our
      strategy through 2003 was to add next-generation communications products to
      our
      suite of products through strategic acquisitions and to leverage these
      operations through cost reductions to enhance cash flow. With the acquisition
      of
      substantially all of the operating assets of Clarent Corporation, we moved
      our
      growth strategy toward international markets. As the acquisition of
      substantially all of the operating assets of Clarent Corporation was funded
      primarily by short-term seller financing, generating cash flow from operations
      during 2003 was required to meet the debt repayment obligations. As such, we
      leveraged our combined operations, reducing sales, general and administrative
      costs (as compared to costs prior to the acquisition), while preserving the
      research and development expenditures, which are vital to our long-term growth
      and viability.





In
      2004,
      we began moving towards an open standards platform, and we significantly
      increased our expenditures for sales and marketing to focus on long-term
      sustainable revenue growth. In the first quarter of 2004, we completed a private
      placement raising approximately $16.5 million, net of expenses, to fund the
      expanded sales and marketing programs. As expected, these additional
      expenditures significantly increased the operating loss from continuing
      operations in 2004.





In
      January 2005, we disposed of substantially all of the operating assets of our
      NACT and MCK businesses to better focus our capital and management resources
      on
      areas which we believe have greater potential given our strategy to focus on
      next-generation network and solutions to improve cash utilization. In addition,
      we disposed of our NACT business because we wanted to move toward an
      open-standards, pre-paid next-generation solution that could better address
      growing market opportunities and enable us to offer a competitive product for
      Tier 1 and Tier 2 carriers. We believe that the I-Master platform, which we
      acquired from WSECI in March 2005 after forming a strategic partnership with
      WSECI in the latter half of 2004, permits us to offer a better solution.
      Further, we disposed of our MCK business because we intend to focus on
      next-generation solutions for service providers and the MCK products did not
      fit
      that profile. The operations of the NACT and MCK businesses have been
      reclassified as discontinued operations in the our consolidated financial
      statements.





On
      June
      16, 2006, we acquired all of the outstanding equity interests of Verso Verilink
      from Group pursuant to the Purchase Agreement. At the time of the Verilink
      Acquisition, Holdings’ assets consisted of substantially all of the business
      assets of the Verilink Sellers, other than the accounts receivable and certain
      fixed assets of the Verilink Sellers which were transferred to Group prior
      to
      the Verilink Acquisition. Holdings’ assets were used by the Verilink Sellers in
      their business of developing, manufacturing, marketing and selling broadband
      access solutions for computer networks.





On
      December 29, 2006, pursuant to the iMarc Acquisition, we purchased certain
      assets of Paradyne related to the iMarc Business. The iMarc product line is
      a
      family of ATM, IP service units, and branch monitors that provides intelligent
      demarcation between carrier and enterprise networks, allowing for easier
      management. The iMarc product line is complementary to the Verilink product
      line
      and is being integrated into the Verilink business.





On
      April
      17, 2007, we acquired Sentito, a provider of media and signaling gateway
      equipment to the telecommunications market. The acquisition expands our product
      portfolio and further supports our strategy of providing fully integrated next
      generation communications solutions to the carrier market. In addition, the
      transaction is expected to enable us to take advantage of an active Russian
      and
      Eastern European distribution partnership.





We
      believe that the foregoing events significantly affect the comparability of
      our
      results of operations from year to year and period to period. You should read
      the following discussion of our results of operations and financial condition
      in
      conjunction with our consolidated financial statements and related notes thereto
      included in Part I, Item 1 of this Quarterly Report.







25




***Results
      of Operations***





**Three
      Months Ended June 30, 2007 Compared to Three Months Ended June 30,
      2006**





For
      the
      three months ended June 30, 2007, our net loss totaled $6,458,000, or $0.12
      per
      share, compared with a net loss of $4,359,000, or $0.13 per share, for the
      same
      period in 2006.





*Continuing
      Operations*





For
      the
      three months ended June 30, 2007, our net loss from continuing operations
      totaled $6,458,000, or $0.12 per share, compared with a net loss of $4,359,000
      or $0.13 per share, for the same period in 2006.





Total
      revenue was $12,570,000 in the three months ended June 30, 2007, reflecting
      a
      50% increase from the same period in 2006. Products revenue increased from
      $5,156,000 in the three months ended June 30, 2006 to $8,769,000 in the three
      months ended June 30, 2007. The increase in product revenue in the Technologies
      Group is attributable to the Verilink product suite and the iMarc product line
      acquired in June 2006 and December 2006, respectively. Services revenue was
      $3,801,000 for the three months ended June 30, 2007, reflecting a 18% increase
      from the same period in 2006, the increase in revenue is primarily due to the
      addition of the Verilink professional services group, partially offset by
      declines in the other divisions of the Technologies Group product
      services.





Gross
      profit was 35% of revenue in the three months ended June 30, 2007, compared
      to
      40% of revenue for the same period in 2006. The decline in gross margin
      percentage is primarily due to the impact of the lower gross margins on the
      Verilink business, which was acquired in June 2006. Gross margin in the Verilink
      business is lower than our historical gross margin due to the significance
      of
      Verilink’s professional services business in its overall revenue mix and the mix
      of our other product sales in the second quarter of 2007.




Total
      operating expenses incurred for the three months ended June 30, 2007, were
      $9,031,000, an increase of $2,623,000 compared with the same period in 2006.
      The
      operating expenses associated with Verilink, iMarc and Sentito, which were
      acquired in June 2006, December 2006 and April 2007, respectively, resulted
      in
      overall increased operating expenses of approximately $2,397,000 compared with
      the second quarter of 2006. For the categories of operating expenses, the
      increase is primarily attributable to the following items: increase in general
      and administrative expenses of $783,000, sales and marketing expenses of
      $657,000 and research and development expenses of $430,000. In addition, we
      also
      incurred increased operating expenses associated with stock based compensation
      of $55,000, depreciation and amortization of $309,000, and reorganization
      expense of $389,000.





General
      and administrative expenses for the three months ended June 30, 2007, were
      $3,027,000, an increase of $816,000 compared to the same period in 2006. The
      increase is primarily attributable to Verilink’s and Sentito’s general and
      administrative expenses of $559,000 and stock compensation expense.





Sales
      and
      marketing expenses for the three months ended June 30, 2007 were $2,483,000,
      an
      increase of $682,000 compared to the same period in 2006. The increase is
      primarily due to the addition of Verilink and Sentito’s expenses of $935,000
      partially offset by the reduction of other sales and marketing program
      expenses.





Research
      and development expenses for the three months ended June 30, 2007 were
      $2,421,000, an increase of $427,000 compared to the same period in 2006. The
      increase in expense is attributed to Verilink and Sentito expenses of $886,000
      partially offset by a reduction of softswitching division personnel and related
      costs of $140,000.





The
      increase in depreciation and amortization expense is related to additional
      amortization associated with the acquired intangibles of the Verilink, iMarc,
      and Sentito businesses partially offset by the effect of fully depreciated
      assets and lower capital additions.





During
      the three months ended June 30, 2007, we terminated a senior executive. As
      a
      result of this action, we recorded reorganization costs associated with a
      severance arrangement of $389,000.





As
      a
      percent of revenue, operating expenses were 72% during the three months ended
      June 30, 2007 as compared with 76% for the same period in 2006.







26




Other
      expense of $241,000 for the three months ended June 30, 2007 includes $231,000
      for the loss on the discount associated with the prepayment of the Note from
      Citel PLC.





Equity
      in loss of investment was $32,000 during the three months ended June 30, 2007,
      compared with a loss of $41,000 for the same period in 2006. This amount
      represents our portion of BeTrue’s losses or income.





Net
      interest expense was $1,540,000 during the three months ended June 30, 2007,
      an
      increase of $283,000 compared with the same period in 2006. Included in net
      interest expenses was amortization of loan fees and discount on convertible
      debentures which were $1,015,000 for the three months ended June 30, 2007 as
      compared to $931,000 for the three months ended June 30, 2006. The increase
      in
      the interest expenses was primarily attributable to interest and amortization
      of
      the loan issuance costs associated with the credit facility.





Business
      Unit Performance





**Packet-based**
              
              **Advanced****Technologies**
              
              **Applications**(Dollars
                  in thousands)
              
              **Group**
              
              **Services
                  Group**
              
              **Consolidated****For
                  the Three Months Ended June 30,**
              
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Revenue
              
              $
              10,646
              
              $
              6,657
              
              $
              1,924
              
              $
              1,724
              
              $
              12,570
              
              $
              8,381Gross
                  profit
              
              
              3,874
              
              
              3,151
              
              
              512
              
              
              195
              
              
              4,386
              
              
              3,346Gross
                  margin
              
              
              36
              %
              
              47
              %
              
              27
              %
              
              11
              %
              
              35
              %
              
              40
              %General
                  and administrative
              
              
              1,051
              
              
              592
              
              
              157
              
              
              110
              
              
              1,208
              
              
              702Sales
                  and marketing
              
              
              2,323
              
              
              1,706
              
              
              125
              
              
              86
              
              
              2,448
              
              
              1,792Research
                  and development
              
              
              2,387
              
              
              1,908
              
              
              -
              
              
              -
              
              
              2,387
              
              
              1,908Stock
                  based compensation
              
              
              26
              
              
              12
              
              
              10
              
              
              -
              
              
              36
              
              
              12(Loss)
                  contribution before unallocated items
              
              $
              (1,913
              )
              $
              (1,067
              )
              $
              220
              
              $
              (1
              )
              
              (1,693
              )
              
              (1,068
              )Unallocated
                  items:Corporate
                  general and administrative
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,695
              
              
              1,414Corporate
                  research and development
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              34
              
              
              85Depreciation
                  and amortization
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              711
              
              
              402Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              123
              
              
              92Reorganization
                  expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              389
              
              
              -Operating
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,645
              )
              
              (3,061
              )Other
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,813
              )
              
              (1,298
              )Loss
                  before income taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (6,458
              )
              $
              (4,359
              )




**Technologies
      Group**





Total
      revenue from the Technologies Group was $10,646,000 in the three months ended
      June 30, 2007, a 60% increase from the same period in 2006. The increase was
      primarily attributable to the revenues related to the Verilink and iMarc product
      suites acquired on June 16, 2006 and December 29, 2006, respectively, and
      softswitching products, partially offset by a decline in revenue for the
      NetPerformer, I-Master and Telemate.Net products.





Gross
      profit increased by $723,000 in the three months ended June 30, 2007, and was
      36% of revenue, compared with 47% in the same period in 2006. The increase
      in
      gross profit dollars is attributable to the increase in revenue. The decline
      in
      gross margin percentage is due to several factors, the most significant being
      the impact of the lower gross margins on Verilink business, which was acquired
      in June of 2006. Gross margin in the Verilink business is lower than our
      historical gross margin due to the significance of Verilink’s professional
      services business in its overall revenue mix. Other factors include the mix
      of
      our other product sales in the second quarter of 2007 and the costs associated
      with consolidating our production operations.






27




Allocated
      operating expenses incurred in the Technologies Group for the three months
      ended
      June 30, 2007, were $5,787,000, an increase of $1,569,000 compared to the same
      period in 2006. The increase in general and administrative expenses resulted
      primarily from the increase of $559,000 for Verilink, iMarc, and Sentito net
      of
      decreases in softswitching division expense. The increase in sales and marketing
      expenses of $617,000 to $2,323,000 is primarily attributable to $935,000
      increase for Verilink and Sentito partially offset by a reduction in marketing
      personnel and programs and a reduction in other sales expenses. The increase
      in
      research and development expenses resulted from Verilink and Sentito expenses
      of
      $886,000 partially offset by reductions in the softswitching division. As a
      percent of revenue, operating expenses for the Technologies Group were 54%
      during the three months ended June 30, 2007, a decrease from 63% during the
      same
      period in 2006.





**Advanced
      Applications Services Group**





Total
      revenue for the Advanced Applications Services Group was $1,924,000 in the
      three
      months ended June 30, 2007, a 12% increase from the same period in 2006. The
      increase in revenue is related to an increase in outsourced services for a
      significant hospitality related customer.





Gross
      profit increased by $317,000 in the three months ended June 30, 2007, and was
      27% of revenue, compared with 11% of revenue in the same period in 2006. The
      increase in gross profit dollars and gross margin percentage was primarily
      attributable to enhanced utilization of the existing support
      infrastructure.





Allocated
      operating expenses incurred in Advanced Applications Services Group for the
      three months ended June 30, 2007, were $292,000 an increase of $96,000 compared
      to the same period in 2006.





*Discontinued
      Operations*





No
      discontinued operations were recorded in the three months ended June 30, 2007
      since we disposed of substantially all of the operating assets of our NACT
      and
      MCK businesses in January 2005.








**Six
      Months Ended June 30, 2007, Compared to Six Months Ended June 30,
      2006**





For
      the
      six months ended June 30, 2007, our net loss totaled $11,447,000, or $0.23
      per
      share, compared with a net loss of $9,298,000, or $0.29 per share, for the
      same
      period in 2006.





*Continuing
      Operations*





For
      the
      six months ended June 31, 2007, our net loss from continuing operations totaled
      $11,447,000, or $0.23 per share, compared with a net loss of $9,298,000 or
      $0.29
      per share, for the same period in 2006.





Total
      revenue was $25,055,000 in the six months ended June 30, 2007, reflecting an
      65%
      increase from the same period in 2006. Products revenue increased from
      $8,753,000 in the six months ended June 30, 2006 to $17,046,000 in the six
      months ended June 30, 2007. The increase in product revenue in the Technologies
      Group is attributable to the Verilink product suite and the iMarc product line
      acquired in June 2006 and December 2006, respectively. Services revenue was
      $8,009,000 for the six months ended June 30, 2007, reflecting a 25% increase
      from the same period in 2006, primarily due to the increase in revenue from
      Verilink professional services group, net of declines primarily in the other
      divisions of the Technologies Group product services.





Gross
      profit was 36% of revenue in the six months ended June 30, 2007, compared to
      41%
      of revenue for the same period in 2006. The decline in gross margin percentage
      is due to several factors: first, the impact of the lower gross margins on
      the
      Verilink business, which was acquired in June 2006. Gross margin in the Verilink
      business is lower than our historical gross margin due to the significance
      of
      Verilink’s professional services business in its overall revenue mix.





Total
      operating expenses incurred for the six months ended June 30, 2007, were
      $17,021,000, an increase of $4,164,000 compared with the same period in 2006.
      Verilink, iMarc and Sentito operating expenses added approximately $3,896,000
      to
      total operating expenses. On a functional basis, the increase is primarily
      attributable to the following items: increase in general and administrative
      expenses of $857,000, sales and marketing expenses of $1,235,000 and research
      and development expenses of $697,000. In addition, we also incurred increased
      operating expenses associated with stock based compensation of $490,000,
      depreciation and amortization of $496,000, and reorganization expense of
      $389,000.




28





General
      and administrative expenses for the six months ended June 30, 2007, were
      $5,899,000, an increase of $1,255,000 compared to the same period in 2006.
      The
      increase is attributable to Verilink and Sentito general and administrative
      expenses of $879,000, and stock compensation expense.





Sales
      and
      marketing expenses for the six months ended June 30, 2007 were $4,870,000,
      an
      increase of $1,296,000 compared to the same period in 2006. The increase is
      primarily due to the addition of Verilink and Sentito expenses of $1,662,000
      partially offset by the reduction of other sales and marketing program
      expenses.





Research
      and development expenses for the six months ended June 30, 2007 were $4,501,000,
      an increase of $728,000 compared to the same period in 2006. The increase in
      expense is attributed to Verilink and Sentito expenses of $1,325,000 partially
      offset by a reduction of softswitching division personnel and related costs
      of
      $140,000.





The
      increase in depreciation and amortization expense is related to additional
      amortization associated with the acquired intangibles of the Verilink, iMarc,
      and Sentito businesses partially offset by the effect of fully depreciated
      assets and lower capital additions.





During
      the six months ended June 30, 2007, we terminated a senior executive. As a
      result of this action, we recorded reorganization costs associated with
      severance of $389,000.





As
      a
      percent of revenue, operating expenses were 68% during the six months ended
      June
      30, 2007 as compared with 85% for the same period in 2006.





Additional
      other expense of $246,000 was recorded during the six months ended June 30,
      2007
      compared with a net other income of $2,000 for the same period in 2006. The
      increase for the six months ended June 30, 2007 relates to the $231,000 loss
      on
      the discount associated with the prepayment of the Note from Citel
      PLC.





Equity
      in loss of investment was $78,000 during the six months ended June 30, 2007,
      compared with a loss of $107,000 for the same period in 2006. This amount
      represents our portion of BeTrue’s losses or income.





Net
      interest expense was $3,056,000 during the six months ended June 30, 2007,
      an
      increase of $532,000 compared with the same period in 2006. Included in net
      interest expenses was amortization of loan fees and discount on convertible
      debentures which were $2,048,000 for the six months ended June 30, 2007 as
      compared to $1,836,000 for the six months ended June 30, 2006. The increase
      in
      the interest expenses was primarily attributable to interest and amortization
      of
      the loan issuance costs associated with the credit facility.







29




Business
      Unit Performance


**Packet-based**
              
              **Advanced****Technologies**
              
              **Applications**(Dollars
                  in thousands)
              
              **Group**
              
              **Services
                  Group**
              
              **Consolidated****For
                  the Six Months Ended June 30,**
              
              **2007**
              
              **2006**
              
              **2007**
              
              **2006**
              
              **2007**
              
              **2006**Revenue
              
              $
              21,014
              
              $
              11,538
              
              $
              4,041
              
              $
              3,631
              
              $
              25,055
              
              $
              15,169Gross
                  profit
              
              
              8,093
              
              
              5,591
              
              
              831
              
              
              597
              
              
              8,924
              
              
              6,188Gross
                  margin
              
              
              39
              %
              
              48
              %
              
              21
              %
              
              16
              %
              
              36
              %
              
              41
              %General
                  and administrative
              
              
              1,732
              
              
              1,154
              
              
              288
              
              
              236
              
              
              2,020
              
              
              1,390Sales
                  and marketing
              
              
              4,560
              
              
              3,396
              
              
              233
              
              
              161
              
              
              4,793
              
              
              3,557Research
                  and development
              
              
              4,403
              
              
              3,662
              
              
              -
              
              
              -
              
              
              4,403
              
              
              3,662Stock
                  based compensation
              
              
              93
              
              
              23
              
              
              22
              
              
              -
              
              
              115
              
              
              23(Loss)
                  contribution before unallocated items
              
              $
              (2,695
              )
              $
              (2,644
              )
              $
              288
              
              $
              200
              
              
              (2,407
              )
              
              (2,444
              )Unallocated
                  items:Corporate
                  general and administrative
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,345
              
              
              3,112Corporate
                  research and development
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              60
              
              
              111Depreciation
                  and amortization
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,362
              
              
              866Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              534
              
              
              136Reorganization
                  expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              389
              
              
              -Operating
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,097
              )
              
              (6,669
              )Other
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,380
              )
              
              (2,629
              )Loss
                  before income taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (11,477
              )
              $
              (9,298
              )




**Technologies
      Group**





Total
      revenue from the Technologies Group was $21,014,000 in the six months ended
      June
      30, 2007, a 82% increase from the same period in 2006. The increase was
      attributable to the revenue related to the Verilink and iMarc product suites
      acquired on June 16, 2006 and December 29, 2006, respectively, and softswitching
      products, net of decline in revenue for the NetPerformer, I-Master and
      Telemate.Net products.





Gross
      profit increased by $2,502,000 in the six months ended June 30, 2007, and was
      39% of revenue, compared with 48% in the same period in 2006. The increase
      in
      gross profit dollars is attributable to the increase in revenue. The most
      significant factor in the decline in gross margin percentage is due to the
      impact of the lower gross margins on Verilink business, which was acquired
      in
      June of 2006. Gross margin in the Verilink business is lower than our historical
      gross margin due to the significance of Verilink’s professional services
      business in its overall revenue mix.





Allocated
      operating expenses incurred in the Technologies Group for the six months ended
      June 30, 2007, were $10,788,000, an increase of $2,553,000 compared to the
      same
      period in 2006. The increase in general and administrative expenses resulted
      primarily from the increase of $879,000 for Verilink, iMarc and Sentito net
      of
      decreases in Softswitch expense. The increase in sales and marketing expenses
      of
      $1,235,000 to $4,560,000 is primarily attributable to $1,662,000 increase for
      Verilink, and Sentito partially offset by a reduction in marketing personnel
      and
      programs and a reduction in other sales expense. The increase in research and
      development expenses resulted from Verilink and Sentito expenses of $1,326,000
      partially offset by reductions in Softswitch expense. As a percent of revenue,
      operating expenses for the Technologies Group were 51% during the six months
      ended June 30, 2007, a decrease from 71% during the same period in
      2006.




30





**Advanced
      Applications Services Group**





Total
      revenue for the Advanced Applications Services Group was $4,041,000 in the
      six
      months ended June 30, 2007, an 11% increase from the same period in 2006. The
      increase in revenue is related to an increase in outsourced services for a
      significant hospitality related customer.





Gross
      profit increased by $234,000 in the six months ended June 30, 2007, and was
      21%
      of revenue, compared with 16% of revenue in the same period in 2006. The
      increase in gross profit dollars and gross margin percentage was primarily
      attributable to enhanced utilization of the existing support
      infrastructure.





Allocated
      operating expenses incurred in Advanced Applications Services Group for the
      six
      months ended June 30, 2007, were $543,000 an increase of $146,000 compared
      to
      the same period in 2006.





*Discontinued
      Operations*





No
      discontinued operations were recorded in the six months ended June 30, 2007
      since we disposed of substantially all of the operating assets of our NACT
      and
      MCK businesses in January 2005.








**Critical
      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 consolidated financial statements and accompanying
      notes. We base these estimates and assumptions on historical experience and
      evaluate them on an on-going basis to ensure they remain reasonable under
      current conditions. Factors that could affect our 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, an inability to successfully integrate acquisitions and
      technology changes, or a decline in the financial stability of our customers.
      Negative developments in these or other risk factors could have a material
      adverse affect on our financial position and results of operations. Actual
      results could differ from management estimates. There were no changes to our
      critical accounting policies and estimates included in our Annual Report. A
      summary of our critical accounting policies follows:





***Revenue
      Recognition***





We
      recognize revenue when persuasive evidence of an agreement exists, delivery
      has
      occurred, the fee is fixed and determinable, and collection of the resulting
      receivable is reasonably assured. The determination of whether the
      collectibility is reasonably assured is based upon an assessment of the
      creditworthiness of the customers. In instances where the collection of a
      receivable is not reasonably assured, the revenue and related costs are
      deferred.





Deferred
      revenue generally represents amounts collected for which revenue has not yet
      been recognized. It is principally comprised of deferred maintenance revenue.





We
      recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101,
“Revenue Recognition in Financial Statements” as updated by SAB No. 104 and in
      accordance with Emerging Issues Task Force 00-21, “Revenue Arrangements with
      Multiple Deliverables”, Statement of Position (“SOP”) No. 97-2, “Software
      Revenue Recognition” (“SOP No. 97-2”) and SOP No. 98-9, “Software Revenue
      Recognition with Respect to Certain Transactions” (“SOP No. 98-9”).





SOP
      No.
      97-2 generally requires revenue earned on software arrangements involving
      multiple elements to be allocated to each element based on the relative fair
      values of the elements. The fair value of an element must be based on the
      evidence that is specific to the vendor. License revenue allocated to software
      products generally is recognized upon delivery of the products or deferred
      and
      recognized in future periods to the extent that an arrangement includes one
      or
      more elements to be delivered at a future date and for which fair values have
      not been established. Revenue allocated to maintenance is recognized ratably
      over the maintenance term which is typically twelve months and revenue allocated
      to training and other service elements, such as implementation and training,
      are
      recognized as the services are performed.




31





Under
      SOP
      No. 98-9, if evidence of fair value of all undelivered elements exists, but
      evidence does not exist for one or more delivered elements, then revenue is
      recognized using the residual method. Under the residual method, the fair value
      of the undelivered elements is deferred and the remaining portion of the
      arrangement fee is allocated to the delivered element and recognized as
      revenue.





We
      routinely analyze and establish, as necessary, reserves at the time of shipment
      for product returns and allowances and warranty costs.





As
      a
      consequence of the Verilink
      Acquisition ,
      we now
      have certain distributors who have the right to return product for stock
      rotation purposes. Every quarter, stock rotation rights are limited to a
      percentage of invoiced sales to the distributor in the prior quarter. The
      percentage of sales used to determine the stock rotation right is based upon
      the
      terms of the executed distributor agreements with us. We reduce revenue and
      maintain a reserve for an estimate of potential stock rotation returns related
      to the current period product revenue. Management analyzes historical returns,
      channel inventory levels, current economic trends and changes in customer demand
      for our products when evaluating the adequacy of the reserve for stock rotation
      returns.





***Allowance
      for Doubtful Accounts***





We
      are
      required to estimate the collectibility of our trade receivables. Considerable
      judgment is required in assessing the ultimate realization of these receivables,
      including the creditworthiness of each customer. The evaluation is based on
      credit information and collection history concerning the customer up and through
      the determination date. We determine 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
      and updates to customer credit information and collection activity.





***Inventory
      Obsolescence***





We
      are
      required to state our inventories at the lower of cost or market. In assessing
      the ultimate realization of inventories, we make judgments as to future demand
      requirements and compare that demand with the current and committed inventory
      levels. We have recorded changes in net realizable values in recent periods
      due
      to the 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. Estimates of the future
      demand for inventory are based on historical usage for different products,
      as
      well as estimates of inventory required to fulfill maintenance requirements
      for
      products previously sold. 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.








***Liabilities
      of Discontinued Operations***





In
      January 2005, we disposed of substantially all of the operating assets of our
      NACT and MCK businesses. As a result of these sales, certain liabilities of
      MCK
      are now classified as discontinued operations and netted against these
      liabilities are sublease payments to be received by us for one lease obligation
      through March 31, 2007.





During
      2001, we initiated certain restructuring plans and discontinued operations
      of
      our legacy value-added reseller business. In conjunction with these
      restructuring plans, we established a restructuring reserve account for the
      estimated costs related to the plans. These costs primarily related to
      facilities closings, severance costs and other businesses 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 through January 31, 2010 of $1,154,000
      is offset by sublease receipts to us totaling $448,000 through the end of the
      lease term and assumes an amount of $223,000 for the extension of one of the
      subleases through the end of the lease term.





As
      of
      June 30, 2007, we had a remaining balance of approximately $1,364,000 in
      liabilities of discontinued operations. We currently believe that this remaining
      estimated balance is sufficient to cover future obligations associated with
      the
      restructurings; however, changes in these estimates could occur based on changes
      in the financial condition of the subleases.




32





***Deferred
      Tax Asset Valuation Allowance***





We
      currently have significant deferred tax assets, which are subject to periodic
      recoverability assessment. Realization of our deferred tax assets is principally
      dependant upon achievement of projected future taxable income. Our judgments
      regarding future profitability may change due to market conditions, our ability
      to continue to successfully execute our 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 our ability to recognize the entire
      tax benefit, we established an offsetting provision for the tax
      assets.





***Litigation
      and Related Contingencies***





We
      are
      subject to proceedings, lawsuits and other claims related to labor, product
      and
      other matters. We are 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 us with assistance of our legal counsel after careful
      analysis of each individual issue based upon the then-current facts and
      circumstances. 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.





***Goodwill,
      Intangible Assets and Long-Lived Assets***





Goodwill
      represents the excess of costs over the fair value of net assets of businesses
      acquired. Goodwill and intangible assets acquired in a purchase business
      combination and determined to have an indefinite useful life are not amortized,
      but instead are tested for impairment at least annually in accordance with
      provisions of SFAS No. 142. Significant estimates are made with respect to
      the
      impairment testing. SFAS No. 142 also requires that intangible assets with
      estimable useful lives be amortized over their respective estimated useful
      lives
      to their estimated residual values, and reviewed for impairment in accordance
      with SFAS No. 144.





In
      accordance with SFAS No. 144, long-lived assets, such as property, plant and
      equipment and purchased assets subject to amortization are reviewed for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of the asset may not be recoverable. Recoverability of assets
      to
      be held and used is measured by a comparison of the carrying amount of an asset
      to estimated undiscounted future cash flows expected to be generated by the
      asset. If the carrying amount of an asset exceeds its estimated future cash
      flows, an impairment charge is recognized by the amount by which the carrying
      amount of the asset exceeds the fair value of the asset. Significant estimates
      are made with respect to recoverability and fair value assessments.





**Liquidity
      and Capital Resources**





***Summary***





Liquidity
      is the measurement of our 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. For the last three years, we have
      met
      our liquidity requirements through a combination of cash provided by debt from
      third party lenders, issuances of debt and equity securities and purchases
      and
      divestitures of other businesses.





At
      June
      30, 2007, we had a negative working capital position (excess of current assets
      over current liabilities) of $3,863,000 compared to a negative working capital
      position of $768,000 at December 31, 2006. Our cash and restricted cash totaled
      $2,726,000 at June 30, 2007 and $2,175,000 at December 31, 2006. Total long-term
      debt, net of discount, was $9,977,000 at June 30, 2007 and $12,634,000 at
      December 31, 2006.





On
      September 20, 2006, we entered into the Security Agreement with our primary
      lender which provides for a three-year, $14.0 million revolving credit
      facility. The new credit facility replaced our prior $10.0 million credit
      facility.





The
      credit facility consists of two tranches: (i) Tranche A, an
      $8.0 million tranche, the availability of which is subject to a borrowing
      base; and (ii) Tranche B a $6.0 million tranche, of which
      $5.0 million is outstanding and the remainder of which will be available
      when we generate EBITDA (earnings before interest, income taxes, depreciation
      and amortization and non-cash stock compensation expense) in excess of $500,000
      in any one fiscal quarter. Borrowing availability under Tranche B is not subject
      to a borrowing base. Borrowing ability under Tranche A is determined pursuant
      to
      a formula which is based on the value of our eligible accounts receivables
      and
      inventory and borrowings under Tranche A accrue interest at a rate of prime
      rate
      plus 2%, provided that the interest rate shall not be less than 9% (10.25%
      at
      June 30, 2007). Borrowing ability under Tranche B is reduced from the initial
      $6.0 million amount by $187,500 per month, beginning in February 2007, and
      borrowings under Tranche B accrue interest at a fixed rate of 15%. Borrowings
      under the credit facility shall be made first under Tranche B to the extent
      of
      availability thereunder and then under Tranche A to the extent of availability
      thereunder.





33





As
      of
      June 30, 2007, we had outstanding borrowings including interest under Tranche
      A
      and Tranche B of $3,569,000 and $5,063,000, respectively. The remaining
      borrowing availability under the credit facility at June 30, 2007 was $2.6
      million under Tranche A and $0 under Tranche B.  In June 2007, we purchased
      credit insurance on our international accounts receivable.  We are now able
      to include our insured international accounts receivable in our borrowing base
      which has expanded our availability as previously we were restricted to only
      domestic accounts receivable in our borrowing base.





On
      February 4, 2005, we completed a private placement of senior unsecured
      convertible debentures and warrants pursuant to a securities purchase agreement
      with certain institutional investors. We issued $13,500,000 of senior unsecured
      convertible debentures, Series A warrants exercisable for 2,200,000 shares
      of
      our common stock and Series B warrants exercisable for 2,000,000 shares of
      our
      common stock. The senior unsecured convertible debentures bear interest at
      6.75%
      per annum and are due February 2009 and are convertible into approximately
      5,400,000 shares of our common stock at an initial conversion price of $2.50
      per
      share, subject to anti-dilution adjustments and certain limitations. Interest
      is
      payable on a quarterly basis and principal became payable on a quarterly basis
      beginning August 2006. The Series A warrants issued in connection with the
      private placement are exercisable for a period of five years commencing on
      February 4, 2005 and at an exercise price of $3.60 per share. The Series B
      warrants issued in connection with the private placement were exercisable for
      a
      period of 90 days, commencing on June 16, 2005 and had an exercise price of
      $3.90 per share. The Series B warrants expired in September 2005. We received
      net proceeds of approximately $12,500,000, including $1,600,000 in restricted
      cash, net of expenses.





On
      February 12, 2003, we acquired substantially all the business assets and assumed
      certain related liabilities of Clarent Corporation for $9,800,000 in notes.
      At
      June 30, 2007, a $3,000,000 secured note due February 12, 2008, which bears
      interest at 5% per annum, remains outstanding. The assets we purchased from
      Clarent Corporation secure the note.





On
      February 17, 2006, we issued, in a private placement, 5,400,000 shares of our
      common stock and warrants to purchase 5,400,000 shares of our common stock
      for
      an aggregate purchase price of approximately $7,100,000, or $1.30 per share.
      The
      warrants issued in connection with the private placement are exercisable, after
      six months, for a period of five years at an exercise price of $1.56 per share.
      We received proceeds from the private placement of approximately $6,800,000,
      net
      of expenses.





On
      June
      30, 2006, in connection with the completion of the Admission of Citel U.K.’s
      entire issued share capital to AIM, the Company and CITEL amended the Note
      such
      that the principal balance of the Note became due and payable as follows:
      $870,000 to be paid within one business day of Admission; followed by 6 monthly
      installments of $75,000 commencing 12 months from the date of Admission; and
      all
      remaining outstanding principal and accrued interest under this note will be
      due
      and payable on January 21, 2008. In July 2006, we received the $870,000 as
      contemplated by the amendment to the Note.




On
      July
      18, 2006, we entered into the CM Agreement with CM, our contract manufacturer
      of
      our Verilink product line. Pursuant to the CM Agreement, CM has purchased
      certain electrical components valued at $2.0 million from us for use in the
      manufacture of finished goods to be purchased by the Company. In addition,
      we
      have agreed to assign to CM an additional amount of unused electrical components
      valued at $2.0 million for which title will remain with us. We have an
      obligation under the CM Agreement to purchase during the first two years,
      products assembled by CM using electrical components valued at $2.0 million.
      Furthermore, we have agreed to submit purchase orders to CM in a minimum amount
      of $2.0 million per quarter for the next three years or until the obligation
      to
      purchase the Assembled Products has been satisfied.




In
      connection with executing the CM Agreement, the Company and CM entered into
      a
      three-year Manufacturing Agreement which sets forth the terms and conditions
      under which CM shall manufacture the Assembled Products. As of June 30, 2007
      CM
      had used $1,339,000 of electrical components in the manufacture of the Assembled
      Products, reduced the outstanding commitment to utilize $2.0 million of
      electrical components in the first two years of the agreements to approximately
      $661,000 which reduced the inventory currently assigned to CM to approximately
      $661,000. The remaining assigned inventory is reflected as inventory on the
      balance sheet as of June 30, 2007. The assigned inventory is not eligible for
      inclusion in the borrowing base under our credit facility






34




In
      January and February 2007, we issued 5,000,000 shares of common stock and
      warrants to purchase 2,700,000 shares of our common stock in private placement
      transactions for an aggregate purchase price of $5,000,000, or $1.00 per share.
      The warrants issued in connection with the private placement are exercisable
      for
      a period of five years at an exercise price of $1.25 per share. We received
      proceeds from the private placement of approximately $4.4 million, net of
      expenses.




On
      May
      25, 2007, we entered into an agreement with CITEL and Citel PLC pursuant to
      which CITEL prepaid the Note, by making an immediate cash payment to us of
      approximately $1.9 million. In addition, Citel PLC was required to issue to
      us
      62,424 Citel Shares which had a market value of approximately $70,000 as of
      May
      24, 2007 and, based upon representations made by CITEL to us, are fully tradable
      on the AIM market of the London Stock Exchange. We have agreed not to sell
      or
      transfer the Citel Shares prior to January 21, 2008, the original maturity
      date
      of the Note. We received the Citel Shares and we canceled the Note and released
      our security interest in the collateral securing the Note.





***Cash
      Flow***





Cash
      used
      in our continuing operations in the six months ended June 30, 2007 totaled
      $5,373,000 compared with $6,294,000 in the same period in 2006. The cash used
      in
      continuing operations during the six months ended June 30, 2007 resulted
      primarily from cash used by continuing operations of $6,263,000 (net loss from
      continuing operations of $11,477,000 reduced by net non-cash charges totaling
      $5,214,000, including depreciation and amortization of $1,759,000, amortization
      of loan fees and discount on convertible subordinated debentures of $2,049,000,
      provision for doubtful accounts of $76,000, interest expense of $398,000, equity
      in loss of investment of $78,000, loss on debt restructuring of $231,000 and
      stock based compensation of $649,000) partially offset by the net increase
      in
      current operating assets and liabilities of $890,000. This compares to cash
      used
      by continuing operations of $5,935,000 (net loss from continuing operations
      of
      $9,298,000, reduced by net non-cash charges totaling $3,363,000 including
      depreciation and amortization of $1,235,000, amortization of loan fees and
      discount on convertible subordinated debentures of $1,836,000, provision for
      doubtful accounts of $124,000, equity in loss of investment of $107,000 and
      stock based compensation of $159,000) further reduced by the net decrease in
      current operating assets and liabilities of $359,000 for the six months ended
      June 30, 2006.





Cash
      used
      in our discontinued operations in the six months ended June 30, 2007 totaled
      $121,000 compared to $1,510,000 in the same period in 2006.





Cash
      used
      by investing activities for continuing operations in the six months ended June
      30, 2007 of $547,000 compares to cash used in investing activities for
      continuing operations in the six months ended June 30, 2006 of $10,000. In
      the
      six months ended June 30, 2007 we used $1,815,000 in cash related to the iMarc
      Acquisition and Sentito provided us $1,051,000 in cash related to the
      acquisition. During the six months ended June 30, 2007 restricted cash decreased
      by $356,000 compared to a decrease of $187,000 in the same period in 2006.
      We
      spent $139,000 and $197,000 on capital expenditures in the six months ended
      June
      30, 2007 and 2006, respectively.





Cash
      provided by investing activities for discontinued operations in the six months
      ended June 30, 2007 was $1,880,000, compared to $550,000 in the same period
      of
      2006 that relates to the note issued to it in the sale of the MCK
      business.





Cash
      provided by financing activities totaled $5,055,000 in the six months ended
      June
      30, 2007 compared to $7,492,000 in the same period of 2006. For the six months
      ended June 30, 2007, we received proceeds from a private placement of $4,297,000
      (net of associated fees) and from borrowings on the line of credit of $749,000.
      For the six months ended June 30, 2006, we received proceeds from a private
      placement of $6,792,000 (net of associated fees) and from borrowings on the
      line
      of credit of $2,056,000 which were offset by a payments of $1,350,000 on our
      notes payable.





**Contractual
      Obligations and Commercial Commitments**





The
      following summarizes our future contractual obligations at June 30, 2007 (in
      thousands) and excludes interest expense and sublease rentals and assumes that
      leases are not renewed.




35




Less
                    than
                
                
                
                
                
                AfterContractual
                    Obligations
                
                Total
                
                1
                    year
                
                1-3
                    years
                
                4-5
                    years
                
                5
                    yearsLine
                    of credit
                
                $
                8,632
                
                $
                5,819
                
                $
                2,813
                
                $
                -
                
                $
                -Notes
                    payable for the purchase of Clarent
                
                
                3,000
                
                
                3,000
                
                
                -
                
                
                -
                
                
                -Senior
                    unsecured convertible debentures
                
                
                10,406
                
                
                4,219
                
                
                6,187
                
                
                -
                
                
                -Operating
                    leases:Continuing
                    operations
                
                
                5,524
                
                
                2,289
                
                
                3,235
                
                
                -
                
                
                -Discontinued
                    operations
                
                
                1,000
                
                
                381
                
                
                619
                
                
                -Total
                    contractual cash obligations
                
                $
                28,562
                
                $
                15,708
                
                $
                12,854
                
                $
                -
                
                $
                -




We
      remain
      a guarantor on a lease through December 2009 used in the operations of the
      NACT
      business, which we sold in January 2005. The total commitment related to this
      lease is approximately $1,555,000.





**Sources
      of Cash**





We
      have a
      history of incurring operating losses, and as a result, we have not yet been
      able to generate positive cash flow from operations. For the remainder of 2007,
      we expect that our primary sources of cash will be from cash on hand, borrowings
      under our credit facility as well as other sources. We are currently working
      on
      several initiatives to continue to reduce the cash used in continuing operations
      and to ensure that it has sufficient liquidity to cover our needs for the next
      twelve months.





During
      January and February 2007,we issued through private placement transactions
      an
      aggregate of 5.0 million shares of common stock and warrants to acquire 2.7
      million shares of our common stock for an aggregate purchase price of $5.0
      million. The warrants are exercisable over a 5-year period commencing with
      their
      issuance at a per share exercise price equal to $1.25. We received approximately
      $4.4 million, net of expenses.





As
      previously mentioned, on September 20, 2006, we entered into a new credit
      facility which provides for a three-year, $14.0 million revolving credit
      facility. The new credit facility replaced our prior $10.0 million credit
      facility and thus increased our availability of working capital. As of June
      30,
      2007, we had outstanding borrowings including interest under Tranche A and
      Tranche B of $3,569,000 and $5,063,000, respectively. The remaining borrowing
      availability under the credit facility at June 30, 2007 was $2.6 million under
      Tranche A and none under Tranche B.





Availability
      for borrowings under Tranche A of our credit facility is subject to limitations
      as determined pursuant to a formula which is based on the value of our eligible
      accounts receivables and inventory. If we do not have sufficient eligible
      accounts receivable and inventories to support the level of borrowings we may
      need, then we may be unable to draw on the credit facility to the extent
      necessary. To the extent we do not have borrowing availability under the credit
      facility, we may be required to obtain additional sources of capital, sell
      assets, obtain an amendment to the Security Agreement or otherwise restructure
      our outstanding indebtedness.





Additional
      borrowings other than pursuant to the credit facility must be approved by our
      primary lender and may have to be approved by the holders of the secured note
      issued by us in connection with the acquisition of substantially all of the
      operating assets of Clarent Corporation, which note is due in 2008, and the
      holders of the convertible subordinated debentures. If we are unable to obtain
      additional capital, sell assets, obtain an amendment to the Security Agreement
      or otherwise restructure our outstanding indebtedness, then we may not be able
      to meet our obligations.





We
      have taken, and continue to take, steps that we believe will not only increase
      revenues and gross margins but also will make us more efficient and reduce
      operational expenses. The acquisition of Verilink, completed in June 2006,
      has
      contributed significantly to increased revenues, gross margin and reduced
      operating losses. In December 2006, we acquired the iMarc product line which
      is
      being integrated into the Verilink operations and also is expected to contribute
      to reductions in operating losses. These acquisitions have provided us with
      two
      new U.S. based Tier 1 carrier customers. In addition, our sources of revenues
      have transitioned from a majority of revenues being from international sources
      to a mix which is approximately equal between U.S. and international sources.
      This transition has substantially improved our cash flow through a reduction
      in
      days sales outstanding in receivables. Revenue growth is viewed as the key
      driver to continue the improvement in the reduction of the operating losses
      and
      cash used from operations. During 2006, we introduced new products including
      product bundles comprised of two or more of our proprietary technology products;
      and shifted resources to focus on fewer but larger and more strategic OEM and
      distributor relationships. The reorganization of our sales and distribution
      network is expected to contribute to our future revenue growth as well as
      business acquisitions and strategic partnerships. Although gross margins are
      dependent on many different factors, including revenue volume, product mix
      and
      discounting, we believe that in general, gross margins should improve with
      revenue increases by leveraging departmental and other non-variable costs.
      In
      addition, we anticipate improved margins from higher value solution sales such
      as the product bundles.




In
      August 2007, we instituted a restructuring program
      which included a workforce reduction of approximately 12%.  These
      restructuring activities are expected to yield up to $1.0 million in reduced
      operating costs on a quarterly basis.  The savings from this program will
      begin in the third quarter of 2007 but will be more pronounced in the fourth
      quarter when we will receive a full quarter of benefit.  We will be
      recording a restructuring charge in the third quarter of 2007 associated with
      this program.




36





Our
      business strategy calls for growth internally as well as through acquisitions.
      In connection with the recently acquired Sentito business, we have incurred
      certain incremental costs and expenses associated with the integration
      process. We have completed the integration process of Sentito and
      consolidated their operations from two facilities to one, reduced the staff
      level in the engineering group and have fully integrated the finance functions
      into the corporte finance team in Atlanta.





Our
      short-term cash needs are for working capital, including cash operating losses,
      capital expenditures, payments on the convertible subordinated debentures of
      approximately $4.2 million in the next twelve months, to the extent that we
      do
      not elect to make these payments in stock, interest payments on debt
      outstanding, payments of the accrued loss on sublease and payments related
      to
      discontinued operations as well as payments related to prospective businesses
      we
      may acquire, if any. In addition we have scheduled payments of approximately
      $2.2 million on the Tranche B of the credit facility and $3.0 million on the
      note payable for the purchase of substantially all the operating assets of
      Clarent Corporation to be made in the next twelve months. We expect to pay
      out
      approximately $2.2 million related to lease payments, net of sublease rental,
      in
      the next twelve months.





Our
      long-term cash needs are related to the costs of growing our current business
      as
      well as prospective businesses we may acquire, if any, including capital
      expenditures and working capital. Management also believes that maintaining
      sufficient research and development investments in product technologies is
      critical to the future success of our business plan. In addition, we will make
      required payments on our senior unsecured convertible debentures, to the extent
      that we do not elect to make these payments in stock, payments on Tranche B
      of
      our credit facility, the accrued loss on sublease, and liabilities of
      discontinued operations.





We
      expect to meet these short-term and long-term cash needs through cash from
      operations, if any, cash on hand, borrowings under the credit facility or other
      debt facilities, if available, as well as through possible issuances of equity
      or debt securities, or through the sale of assets or businesses.  If
      sufficient borrowing capacity under a working capital line of credit is
      unavailable (or if we are unable to restructure our existing credit facility
      in
      the event that we require additional borrowing capacity), or if we are otherwise
      unable to obtain additional capital or sell assets, then we may not be able to
      meet our obligations and growth plans.





37





**Item
      3: Quantitativeand Qualitative Disclosures About
      Market Risk**





*Market
      Risk*





We
      are
      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. We do not enter into derivatives or other financial instruments
      for trading or speculative purposes. We have also not entered into financial
      instruments to manage and reduce the impact of changes in interest rates and
      foreign currency exchange rates although we may enter into such transactions
      in
      the future.





*Interest
      Rate Risks*




Our
      notes
      payable and convertible subordinated debentures at June 30, 2007, carry interest
      rates which are fixed. Tranche A of our line of credit with Laurus carries
      interest rates which vary with the prime rate. Accordingly, if we have any
      indebtedness outstanding under Tranche A, then any increases in the prime rate
      will reduce our earnings. A 1% increase in the prime rate on the $3.5 million
      outstanding under our line of credit at June 30, 2007 would result in an annual
      interest expense increase of approximately $35,000.





*Foreign
      Currency Risks*





Products
      sold outside of the United States of America are transacted in U.S. dollars
      and,
      therefore, we are not exposed to foreign currency exchange risk on these
      transactions. Transactions with Verso Canada and Verso Technologies (UK)
      Limited, an indirect, wholly-owned subsidiary of ours, 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 June 30, 2007, a 10% strengthening of the U.S. dollar
      against the Canadian dollar and the British pound would result in a foreign
      currency transaction loss of approximately $44,000. To date, foreign exchange
      gains and losses have not been significant.





**Item
      4: Controlsand Procedures**





Our
      Chief Executive Officer and Chief Financial Officer have evaluated the
      effectiveness of our disclosure controls and procedures (as such term is defined
      in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
      as
      amended (the “Exchange Act”)) as of the end of the period covered by this
      Quarterly Report, as required by paragraph (b) of Rules 13(a)-15 or 15(d)-15
      of
      the Exchange Act. Based on such evaluation, such officers have concluded that,
      as of the end of the period covered by this Quarterly Report, our disclosure
      controls and procedures are effective.





During
      the quarter ended June 30, 2007, there was not any change in our internal
      control over financial reporting identified in connection with the evaluation
      required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that
      has
      materially affected, or is reasonably likely to materially affect, our control
      over financial reporting.








38





**PART
      II -OTHER INFORMATION**


**Item
      1. LegalProceedings**





Except
      as
      described in Note 16 to our consolidated financial statements included in the
      Annual Report and as provided in our Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2007 and as set forth below, we are not a party to
      any
      material pending legal proceedings, other than ordinary routine litigation
      incidental to our business, and we do not expect this ordinary litigation to
      have a material adverse effect on us. There has been no material developments
      regarding the pending material legal proceedings described in Note 16 to our
      consolidated financial statements included in the Annual Report during the
      six
      months ended June 30, 2007 except as noted in our Quarterly Report on Form
      10-Q
      for the quarter ended March 31, 2007 and as noted below:





In
      December 2001, a complaint was filed in the Southern District of New York
      seeking an unspecified amount of damages on behalf of an alleged class of
      persons who purchased shares of MCK’s common stock between the date of MCK’s
      initial public offering and December 6, 2000. The complaint named as defendants
      MCK and certain of its former officers and other parties as underwriters of
      its
      initial public offering (the “MCK defendants”). The plaintiffs allege, among
      other things, that MCK’s prospectus, contained in the Registration Statement on
      Form S-1 filed with the SEC, was materially false and misleading because it
      failed to disclose that the investment banks which underwrote MCK’s initial
      public offering of securities and others received undisclosed and excessive
      brokerage commissions, and required investors to agree to buy shares of
      securities after the initial public offering was completed at predetermined
      prices as a precondition to obtaining initial public offering allocations.
      The
      plaintiffs further allege that these actions artificially inflated the price
      of
      MCK’s common stock after the initial public offering. This case is one of many
      with substantially similar allegations known as the “Laddering Cases” filed
      before the Southern District of New York against a variety of unrelated issuers
      (the “Issuers”), directors and officers (the “Laddering Directors and Officers”)
      and underwriters (the “Underwriters”), and have been consolidated for pre-trial
      purposes before one judge to assist with administration. A motion to dismiss
      addressing issues common to the companies and individuals who have been sued
      in
      these actions was filed in July 2002. After a hearing on the motion to dismiss
      the Court, on February 19, 2003, denied dismissal of the claims against MCK
      as
      well as other Issuers. Although MCK believes that the claims asserted are
      meritless, MCK and other Issuers have negotiated a tentative settlement with
      the
      plaintiffs. The terms of the tentative settlement agreement provide, among
      other
      things, that (i) the insurers of the Issuers will deliver a surety undertaking
      in the amount of $1 billion payable to the plaintiffs to settle the actions
      against all Issuers and the Laddering Directors and Officers; (ii) each Issuer
      will assign to a litigation trust, for the benefit of the plaintiffs, any claims
      it may have against its Underwriters in the initial public offering for excess
      compensation in the form of fees or commissions paid to such Underwriters by
      their customers for allocation of initial public offering shares; (iii) the
      plaintiffs will release all claims against the Issuers and the Laddering
      Directors and Officers asserted or which could have been asserted in the actions
      arising out of the factual allegations of the amended complaints; and (iv)
      appropriate releases and bar orders and, if necessary, judgment reductions,
      will
      be entered to preclude the Underwriters and any non-settling defendants from
      recovering any amounts from the settling Issuers or the Laddering Directors
      and
      Officers by way of contribution or indemnification. Prior to our acquisition
      of
      MCK, MCK’s board of directors voted to approve the tentative settlement. On
      February 15, 2005, the judge presiding over the Laddering Cases granted
      preliminary approval of the proposed settlement, subject to some changes, which
      were subsequently submitted. The judge issued an order on August 31, 2005,
      further approving modifications to the settlement and certifying the class.
      Notice of the settlement has been distributed to the settlement class members.
      The deadline for filing objections to the settlement is March 24, 2006, and
      a
      fairness hearing was held April 26, 2006. On
      December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a
      ruling reversing class certification for purposes of the litigation. The
      plaintiffs petitioned for rehearing and rehearing en banc, and the Second
      Circuit Court denied the request on April 9, 2007. The
      plaintiffs are considering ways to define a new class in the case. The
      Court has not yet ruled on the settlement approval motion, including the effect
      on the settlement class of the Second Circuit’s decision regarding the
      litigation class. No
      provision was recorded for this matter in the financial statements of MCK
      prepared prior to its acquisition by us because MCK believed that its portion
      of
      the proposed settlement would be paid by its insurance carrier. We agree with
      MCK’s treatment of this matter.







39




Needham
      (Nevada) Corp., a direct subsidiary of MCK and, hence, an indirect subsidiary
      of
      the Company (“MCK Nevada”), was named a defendant in a lawsuit filed in Norfolk
      County, Massachusetts by Entrata Communications, Inc. (“Entrata”) in 2002. The
      case arises out of a dispute between Entrata and one of its largest
      shareholders, Superwire.com, Inc. (“Superwire”). Pursuant to a contract with
      Entrata, MCK Nevada was obligated to pay Entrata $750,000 in early 2002. In
      order to take advantage of a $100,000 discount offered for early payment, MCK
      Nevada paid Entrata $650,000 in November 2001, in full satisfaction of its
      contractual obligations. The funds were placed in escrow with Superwire’s
      California law firm, Jeffers, Shaff & Falk, LLP (“JSF”), which agreed not to
      disburse the funds until the dispute between Entrata and Superwire had been
      resolved. Nevertheless, Entrata contends that it never received the funds from
      MCK Nevada and that the funds were diverted to Superwire and JSF. Through the
      lawsuit, Entrata seeks to recover from both MCK Nevada and Superwire the
      $750,000 that MCK Nevada would have owed in 2002. MCK Nevada asserted
      counterclaims against Entrata, and cross-claims against Superwire, for fraud
      and
      breach of contract. On October 11, 2002, Superwire and Entrata filed
      cross-motions for summary judgment against each other. The court denied both
      motions on March 13, 2003. Following denial of the cross-motions for summary
      judgment, MCK Nevada filed a motion to add JSF and two of its partners, Barry
      D.
      Falk and Mark R. Ziebell, as third-party defendants. The court had given the
      parties until March 17, 2004 to complete discovery. Before the completion of
      the
      discovery period, Entrata filed a Chapter 7 bankruptcy proceeding pursuant
      to
      the United States Bankruptcy Code. Entrata did not continue prosecution of
      the
      case after the bankruptcy filing. On September 9, 2005, the case was dismissed
      without prejudice by the court for lack of prosecution. On September 7, 2006,
      Entrata’s counsel filed a motion for relief from dismissal on the grounds of
      excusable neglect. The court granted Entrata’s motion. On May 25, 2007, Entrata
      filed a Motion for Partial Summary Judgment asking the court to award damages
      of
      $750,000 plus prejudgment interest against MCK Nevada. The court allowed the
      motion on August 6, 2007. We believe the court’s decision was in error, and we
      plan to appeal the decision. We also intend to prosecute our third-party claims.
      In addition, the court has entered a default judgment against Superwire and
      we
      expect to obtain a judgment requiring Superwire to indemnify MCK Nevada against
      Entrata’s claims, although there can be no assurance that Superwire has the
      ability to pay any such judgment. No amounts, other than the original payment,
      were provided for this matter in the financial statements of MCK prepared prior
      to its acquisition by us. No amount has been accrued for this matter in our
      financial statements.








40





**Item
      1A. RiskFactors**





In
      addition to the other information set forth in this Quarterly Report, you should
      carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in
      the Annual Report and Part II, “Item 1A. Risk Factors” in our Quarterly Report
      on Form 10-Q for the quarter ended March 31, 2007, which could materially affect
      our business, financial condition or future results. These risks are not the
      only risk factors facing us. Additional risks and uncertainties not currently
      known to us or that we currently deem to be immaterial also may materially
      adversely affect our business, financial condition and/or operating
      results.





The
      risk
      factors included in Part I, “Item 1.A. Risk Factors” in the Annual Report have
      not materially changed other than as set forth in Part II, “Item 1A. Risk
      Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31,
      2007 and as set forth below.





***Our
      common stock may be delisted from The Nasdaq Capital
      Market.***




Our
      common stock is currently quoted on The Nasdaq Capital Market. We must satisfy
      certain minimum listing maintenance requirements to maintain such quotation,
      including a series of financial tests relating to shareholders equity or net
      income or market value, public float, number of market makers and shareholders,
      market capitalization, and maintaining a minimum bid price of $1.00 per share
      for the common stock. In the past, we have experienced periods in which the
      minimum bid price for the common stock fell below $1.00 per share.




On
      June 26, 2007, The Nasdaq Stock Market, LLC notified us that for the
      30 consecutive business days preceding June 26, 2007 the bid price for our
      common stock had closed below the minimum $1.00 per share requirement for
      continued inclusion of the common stock on The Nasdaq Capital Market as required
      by Marketplace Rule 4310(c)(4) (the “ Rule ”).
      In
      accordance with Marketplace Rule 4310(c)(8)(D), we have 180 calendar days,
      or until December 24, 2007, to regain compliance with the Rule. We may
      regain compliance with the Rule if the bid price of the common stock closes
      at $1.00 per share or more for a minimum of 10 consecutive business days at
      anytime before December 24, 2007. If compliance with the Rule cannot
      be demonstrated by December 24, 2007 and, except for the bid price
      requirement, we meet The Nasdaq Capital Market initial listing criteria set
      forth in Marketplace Rule 4310(c), then we will have an additional 180
      calendar day compliance period in which to demonstrate compliance with the
      Rule.
      If we do not regain compliance with the Rule prior to December 24,
      2007 and we are not eligible for the additional compliance period, then The
      Nasdaq Stock Market, LLC will notify us that the common stock will be
      delisted.




If
      our
      common stock is delisted from The Nasdaq Capital Market, then the common stock
      may trade on the Over-the-Counter-Bulletin Board, which is viewed by most
      investors as a less desirable and less liquid market place. Delisting from
      The
      Nasdaq Capital Market could make trading the common stock more difficult for
      our
      investors, leading to declines in share price. Delisting of our common stock
      would also make it more difficult and expensive for us to raise additional
      capital. Furthermore, delisting of our common stock is an event of default
      under
      our credit facility with our primary lender, our outstanding senior unsecured
      convertible debentures and, through certain cross default provisions, the Loan
      and Security Agreement we entered into with Clarent Corporation in connection
      with our acquisition of substantially all of the business assets, and certain
      related liabilities, of Clarent Corporation on February 12,
      2003.




***We
      may be required to pay liquidated damages to certain of our investors under
      certain circumstances.***





Pursuant
      to the registration rights agreements we have entered into with the investors
      who purchased our securities in a private placement transaction conducted by
      us
      in January and February 2007, we have agreed to pay to such investors certain
      liquidated damages in the event we do not meet certain of our obligations under
      such registration rights agreements. The registration statement filed on behalf
      of the investors was declared effective by the SEC on June 14, 2007. If this
      registration statement cease to remain continuously effective or the investors
      are not permitted to use the prospectus of which such registration statement
      is
      a part as required by the registration rights agreements for more than fifteen
      (15) consecutive calendar days or more than an aggregate of twenty (20) calendar
      days during any twelve (12)-month period, then on the date of such event and
      each monthly anniversary of such date until we are able to cure such event,
      we
      will be required to pay to the investors a cash payment equal to 1.5% of the
      aggregate purchase price paid by such investors for the securities purchased
      by
      them in the private placement; however, the maximum aggregate liquidated damages
      we may be obligated to pay may not exceed $1,200,000. If we are unable to
      satisfy our obligations under such registration rights agreements and we are
      obligated to pay liquidated damages, it may have a materially adverse effect
      on
      our cash flow and results of operations.




41





***We
      have significant market overhang which could adversely affect the trading price
      of our common stock.***




As
      of
      August 14, 2007, we had (i) 58,891,389 shares of common stock outstanding,
      (ii) approximately 2.0 million shares of common stock issuable upon
      exercise of outstanding options, (iii) approximately 15.1 million
      shares of common stock issuable upon exercise of outstanding warrants and
      (iv) approximately 5.1 million shares of common stock issuable upon
      conversion of the principal amount of our outstanding convertible debentures.
      If
      all the outstanding options, warrants and convertible debentures were exercised
      or converted, as applicable, by their holders, then approximately an additional
      22.2 million shares of common stock would be outstanding. This would represent
      an approximate 38% increase in our outstanding common stock. The convertible
      debentures are convertible, and a vast majority of the outstanding options
      and
      warrants are exercisable, at prices currently above the public trading prices
      of
      the common stock. However, in the event that even a portion of these outstanding
      options and warrants were to be exercised, or a portion of the convertible
      debentures were to be converted, the resulting dilution could depress the
      trading price of the common stock. We have registered all of the potential
      dilutive shares of common stock for resale pursuant to registration statements
      we have filed with the SEC. If a significant portion of these shares are sold
      in
      the public marketplace by the selling shareholders identified in these
      registration statements, then such sales could also have a severe and adverse
      material affect on the trading price of the common stock.




**Item
      2. UnregisteredSales of Equity Securities and
      Use of
      Proceeds.**





On
      July
      31, 2007, we issued an aggregate of 442,716 shares (the “Shares”) of our common
      stock to Laurus upon exercise by Laurus of a portion of a warrant to purchase
      shares of our common stock (the “Laurus Warrant”) issued to Laurus in connection
      with our credit agreement with Laurus. Pursuant to the terms of the Laurus
      Warrant, Laurus exercised the Laurus Warrant on a cashless basis and, in
      connection with such exercise, 6,324 shares of our common stock underlying
      the
      Laurus Warrant were cancelled in payment of the cashless exercise price. The
      Shares were issued without registration under the Securities Act of 1933 (the
      “Securities Act”) in reliance upon the exemption from registration set forth in
      Section 4(2) of the Securities Act. We based such reliance upon representations
      made by Laurus regarding its investment intent and sophistication, among other
      things.








42





**Item
      6. Exhibits**





The
      exhibits required to be furnished with this Quarterly Report are listed on
      the
      exhibit index attached hereto.













43





**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: August
              14, 2007
            By:
            /s/ Martin
              D.
              KidderChief
                Financial Officer (duly authorized signatory
              and
                Principal Financial and Accounting
                Officer)












































































44





**EXHIBITINDEX**





**Exhibit
                No.**
            
            **Exhibit**
            
            **Method
                of Filing**2.1
            
            Agreement
                and Plan of Merger, dated as of April 4, 2007, among the Company,
                sentitO
                Networks, Inc., SN Acquisition Corporation and Brett Hauser as the
                Stockholders’ Agent. (The schedules to the Agreement and Plan of Merger
                have been omitted from this Current Report pursuant to Item 601(b)(2)
                of
                Regulation S-K, and the Company agrees to furnish copies of such
                omitted
                copies supplementally to the Securities and Exchange Commission upon
                request.)
            
            Incorporated
                by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K
                filed April 5, 2007.3.1
            
            Amended
                and Restated Articles of Incorporation of the Company.
            
            Incorporated
                by reference to Exhibit 3.1 to the Company’s Registration Statement on
                Form S-18 (File No. 33-51456).3.2
            
            Amendment
                to the Amended and Restated Articles of Incorporation of the Company,
                as
                amended.
            
            Incorporated
                by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
                filed October 2, 2000.3.3
            
            Amendment
                to the Amended and Restated Articles of Incorporation of the Company,
                as
                amended.
            
            Incorporated
                by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
                filed November 19, 2001.3.4
            
            Amendment
                to the Amended and Restated Articles of Incorporation of the Company,
                amended.
            
            Incorporated
                by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q
                for the quarter ended June 30, 2005.3.5
            
            Articles
                of Amendment to the Company’s Articles of Incorporation, effective as of
                October 11, 2005.
            
            Incorporated
                by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
                filed October 7, 2005.3.6
            
            The
                Company’s Amended and Restated Bylaws, adopted October 24,
                2005.
            
            Incorporated
                by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
                filed October 7, 2005.3.7
            
            Statement
                of Rights of Series C Preferred Stock of the Company, effective June
                16,
                2005.
            
            Incorporated
                by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
                filed June 21, 2006.3.8
            
            Articles
                of Amendment to the Company’s Articles of Incorporation, effective as of
                November 7, 2006.
            
            Incorporated
                by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
                filed November 13, 2006.4.1
            
            Form
                of Registration Rights Agreement dated April 17, 2007, entered into
                between the Company and the shareholders signatory thereto in connection
                with the Company’s acquisition of sentitO Networks, Inc.
            
            Incorporated
                by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
                filed April 23, 2007.4.2
            
            Form
                of Warrant issued on April 17, 2007 in connection with the Company’s
                acquisition of sentitO Networks, Inc.
            
            Incorporated
                by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K
                filed April 23, 2007.10.1
            
            Escrow
                Agreement, dated as of April 17, 2007, among the Company, the
                Stockholders’ Agent and SunTrust Bank, a Georgia banking
                corporation.
            
            Incorporated
                by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
                filed April 23, 2007.10.2
            
            Agreement
                among the Company, Citel Technologies Limited, Citel Technologies,
                Inc.,
                MCK Canada Operations Inc. and Citel PLC executed on May 25, 2007
                but
                dated May 24, 2007.
            
            Incorporated
                by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
                filed June 1, 2007.10.3
            
            Consulting
                and Separation Agreement between the Company and Montgomery Bannerman,
                dated June 30, 2007.
            
            Incorporated
                by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K
                filed July 6, 2007.








45
 
   10.4
              
              Amendment
                  to Intellectual Property Security Agreement dated as of May 10,
                  2007 among
                  the Registrant, Telemate.Net Software, Inc., Verso Verilink, LLC
                  and
                  Laurus Master Fund, Ltd.
              
              Incorporated
                  by reference to Exhibit 10.6 to the Company’s Form 10-Q for the quarter
                  ended March 31, 2007.10.5
              
              Trademark
                  Assignment of Security dated as of May 10, 2007 among the Registrant
                  and
                  Laurus Master Fund, Ltd.
              
              Incorporated
                  by reference to Exhibit 10.7 to the Company’s Form 10-Q for the quarter
                  ended March 31, 2007.10.6
              
              Patent
                  Assignment of Security dated as of May 10, 2007 among the Registrant
                  and
                  Laurus Master Fund, Ltd.
              
              Incorporated
                  by reference to Exhibit 10.8 to the Company’s Form 10-Q for the quarter
                  ended March 31, 2007.10.7
              
              Patent
                  Assignment of Security dated as of April 18, 2007 among sentitO
                  Networks,
                  Inc. and Laurus Master Fund, Ltd.
              
              Incorporated
                  by reference to Exhibit 10.9 to the Company’s Form 10-Q for the quarter
                  ended March 31, 2007.10.8
              
              Patent
                  Assignment of Security dated as of April 18, 2007 among sentitO
                  Networks,
                  Inc. and Laurus Master Fund, Ltd.
              
              Incorporated
                  by reference to Exhibit 10.10 to the Company’s Form 10-Q for the quarter
                  ended March 31, 2007.10.9
              
              Joinder
                  Agreement dated as of April 17, 2007 among sentitO Networks, Inc.
                  and
                  Laurus Master Fund, Ltd.
              
              Incorporated
                  by reference to Exhibit 10.11 to the Company’s Form 10-Q for the quarter
                  ended March 31, 2007.31.1
              
              Rule
                  13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Executive
                  Officer.
              
              Filed
                  herewith.31.2
              
              Rule
                  13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Financial
                  Officer.
              
              Filed
                  herewith.32.1
              
              Section
                  1350 Certification by the Registrant’s Chief Executive
                  Officer.
              
              Filed
                  herewith.32.2
              
              Section
                  1350 Certification by the Registrant’s Chief Financial
                  Officer.
              
              Filed
                  herewith.














46