##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2003

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT

For the transition period from  to

Commission file number 0-22190



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VERSO TECHNOLOGIES, INC.

(Exact Name of Registrant as
Specified in its Charter)


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

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

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



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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .

Indicated by check mark whether registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act) Yes  NoX.

Shares of the registrants common stock, par value $.01 per share, outstanding
as of August 12, 2003: 96,005,118.





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VERSO TECHNOLOGIES, INC.
FORM 10-Q

INDEX

|                                                                                              |                                                                                                                      |  |          |   | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- |  | -------- | - | 
|                                                                                              |                                                                                                                      |  | Page No.
|                                                                                              |                                                                                                                      |  |         
|Part I. FINANCIAL INFORMATION                                                                 |                                                                                                                      |  |          |  
|Item 1. Financial Statements                                                                  |                                                                                                                      |  |          |  
|                                                                                              | Condensed Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002                                      |  |          | 2 | 
|                                                                                              | Condensed Consolidated Statements of Operations for the three months
and the six months ended June 30, 2003 and 2002 |  |          | 3 | 
|                                                                                              | Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002                      |  |          | 4 | 
|                                                                                              | Notes to Condensed Consolidated Financial Statements                                                                 |  |          | 5 | 
|Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations |                                                                                                                      |  | 19       |  
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                      |  | 31       |  
|Item 4. Controls and Procedures                                                               |                                                                                                                      |  | 31       |  
|PART II. OTHER INFORMATION                                                                    |                                                                                                                      |  |          |  
|Item 1. Legal Proceedings                                                                     |                                                                                                                      |  | 32       |  
|Item 2. Changes in Securities and Use of Proceeds                                             |                                                                                                                      |  | 32       |  
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                      |  | 32       |  
|Signature Page                                                                                |                                                                                                                      |  | 34       |  
|Exhibit Index                                                                                 |                                                                                                                      |  | 35       |  

1



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##### 



VERSO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)

|                                                               |                                                                                                                                       |                            |                                            |          |          |        |              |          |        |        | 
|-------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | -------- | -------- | ------ | ------------ | -------- | ------ | ------ | 
|                                                               |                                                                                                                                       |                            |                                            |          | June 30, |        | December 31,
|                                                               |                                                                                                                                       |                            |                                            |          | 2003     |        | 2002        
|                                                               |                                                                                                                                       |                            |                                            |          |          |        |             
|ASSETS:                                                        |                                                                                                                                       |                            |                                            |          |          |        |              |         
|Current assets:                                                |                                                                                                                                       |                            |                                            |          |          |        |              |         
|                                                               | Cash and cash equivalents                                                                                                             |                            | $                                          | 1,207    |          |        | $            | 1,294    |       
|                                                               | Restricted cash                                                                                                                       |                            |                                            | 430      |          |        |              | 300      |       
|                                                               | Accounts receivable, net of allowance for doubtful accounts of $2,465
and $1,853 at June 30, 2003 and December 31, 2002, respectively |                            |                                            | 14,711   |          |        |              | 10,909   |       
|                                                               | Inventories                                                                                                                           |                            |                                            | 10,302   |          |        |              | 4,733    |       
|                                                               | Other current assets                                                                                                                  |                            |                                            | 2,281    |          |        |              | 681      |       
|                                                               |                                                                                                                                       |                            |                                            |          |          |        |              |         
|                                                               |                                                                                                                                       | Total current assets       |                                            |          | 28,931   |        |              |          | 17,917 |       
|Property and equipment, net                                    |                                                                                                                                       |                            | 4,141                                      |          |          |        | 4,962        |         
|Investment                                                     |                                                                                                                                       |                            | 548                                        |          |          |        | 600          |         
|Other intangibles, net                                         |                                                                                                                                       |                            | 3,566                                      |          |          |        | 3,671        |         
|Goodwill                                                       |                                                                                                                                       |                            | 12,685                                     |          |          |        | 12,685       |         
|                                                               |                                                                                                                                       |                            |                                            |          |          |        |              |         
|                                                               |                                                                                                                                       |                            | Total assets                               |          | $        | 49,871 |              |          | $      | 39,835 | 
|                                                               |                                                                                                                                       |                            |                                            |          |          |        |              |         
|LIABILITIES AND SHAREHOLDERS EQUITY:                          |                                                                                                                                       |                            |                                            |          |          |        |              |         
|Current liabilities:                                           |                                                                                                                                       |                            |                                            |          |          |        |              |         
|                                                               | Line of credit                                                                                                                        |                            | $                                          | 2,848    |          |        | $            | 800      |       
|                                                               | Current portion of notes payable                                                                                                      |                            |                                            | 5,750    |          |        |              |         |       
|                                                               | Accounts payable                                                                                                                      |                            |                                            | 2,715    |          |        |              | 1,993    |       
|                                                               | Accrued compensation                                                                                                                  |                            |                                            | 2,332    |          |        |              | 1,586    |       
|                                                               | Accrued expenses                                                                                                                      |                            |                                            | 2,903    |          |        |              | 4,473    |       
|                                                               | Unearned revenue and customer deposits                                                                                                |                            |                                            | 5,527    |          |        |              | 5,387    |       
|                                                               | Current portion of liabilities of discontinued operations                                                                             |                            |                                            | 1,241    |          |        |              | 1,829    |       
|                                                               |                                                                                                                                       |                            |                                            |          |          |        |              |         
|                                                               |                                                                                                                                       | Total current liabilities  |                                            |          | 23,316   |        |              |          | 16,068 |       
|Liabilities of discontinued operations, net of current portion |                                                                                                                                       |                            | 1,101                                      |          |          |        | 1,302        |         
|Other long-term liabilities                                    |                                                                                                                                       |                            | 809                                        |          |          |        | 1,128        |         
|Notes payable, net of current portion                          |                                                                                                                                       |                            | 3,000                                      |          |          |        |             |         
|Convertible subordinated debentures, net of discount           |                                                                                                                                       |                            | 3,841                                      |          |          |        | 3,703        |         
|                                                               |                                                                                                                                       |                            |                                            |          |          |        |              |         
|                                                               |                                                                                                                                       | Total liabilities          |                                            |          | 32,067   |        |              |          | 22,201 |       
|                                                               |                                                                                                                                       |                            |                                            |          |          |        |              |         
|Shareholders equity:                                          |                                                                                                                                       |                            |                                            |          |          |        |              |         
|                                                               | Common stock, $.01 par value, 200,000,000 shares authorized;
92,188,094 and 89,077,846 shares issued and outstanding                  |                            |                                            | 922      |          |        |              | 891      |       
|                                                               | Additional paid-in capital                                                                                                            |                            |                                            | 276,279  |          |        |              | 275,040  |       
|                                                               | Notes receivable from shareholders                                                                                                    |                            |                                            | (1,578   | )        |        |              | (1,623   | )     
|                                                               | Accumulated deficit                                                                                                                   |                            |                                            | (256,373 | )        |        |              | (254,857 | )     
|                                                               | Deferred compensation                                                                                                                 |                            |                                            | (1,399   | )        |        |              | (1,797   | )     
|                                                               | Accumulated other comprehensive loss  foreign currency translation                                                                   |                            |                                            | (47      | )        |        |              | (20      | )     
|                                                               |                                                                                                                                       |                            |                                            |          |          |        |              |         
|                                                               |                                                                                                                                       | Total shareholders equity |                                            |          | 17,804   |        |              |          | 17,634 |       
|                                                               |                                                                                                                                       |                            |                                            |          |          |        |              |         
|                                                               |                                                                                                                                       |                            | Total liabilities and shareholders equity |          | $        | 49,871 |              |          | $      | 39,835 | 
|                                                               |                                                                                                                                       |                            |                                            |          |          |        |              |         

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

2



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##### 



VERSO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)

|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |        |      |        |        |  
|------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---------------------------- | ------------------------ | -------------------------------------------------- | ---- | ----------------------------------- | ---------- | --------------------------------- | ---- | ------ | ---------- | ------ | ---- | ------ | ---------- | ------ | ---- | ------ | ------ | -
|                                                        |                                                                                     |                              |                          |                                                    |      | For the three months ended June 30, |            | For the six months ended June 30,
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                  
|                                                        |                                                                                     |                              |                          |                                                    |      | 2003                                |            | 2002                              |      | 2003   |            | 2002  
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |       
|Revenue:                                                |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        | Products                                                                            |                              | $                        | 9,856                                              |      |                                     | $          | 6,086                             |      |        | $          | 17,124 |      |        | $          | 12,690 |     
|                                                        | Services                                                                            |                              |                          | 6,002                                              |      |                                     |            | 5,585                             |      |        |            | 11,731 |      |        |            | 10,975 |     
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        |                                                                                     |                              | Total revenue            |                                                    |      | 15,858                              |            |                                   |      | 11,671 |            |        |      | 28,855 |            |        |      | 23,665 |       
|Cost of revenue:                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        | Products                                                                            |                              |                          | 3,340                                              |      |                                     |            | 2,274                             |      |        |            | 6,101  |      |        |            | 4,605  |     
|                                                        | Services                                                                            |                              |                          | 2,984                                              |      |                                     |            | 2,519                             |      |        |            | 5,648  |      |        |            | 5,137  |     
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        |                                                                                     |                              | Total cost of revenue    |                                                    |      | 6,324                               |            |                                   |      | 4,793  |            |        |      | 11,749 |            |        |      | 9,742  |       
|Gross profit:                                           |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        | Products                                                                            |                              |                          | 6,516                                              |      |                                     |            | 3,812                             |      |        |            | 11,023 |      |        |            | 8,085  |     
|                                                        | Services                                                                            |                              |                          | 3,018                                              |      |                                     |            | 3,066                             |      |        |            | 6,083  |      |        |            | 5,838  |     
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        |                                                                                     |                              | Total gross profit       |                                                    |      | 9,534                               |            |                                   |      | 6,878  |            |        |      | 17,106 |            |        |      | 13,923 |       
|Operating expenses:                                     |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        | General and administrative                                                          |                              |                          | 3,927                                              |      |                                     |            | 2,996                             |      |        |            | 7,248  |      |        |            | 6,108  |     
|                                                        | Sales and marketing                                                                 |                              |                          | 2,201                                              |      |                                     |            | 1,866                             |      |        |            | 4,092  |      |        |            | 3,631  |     
|                                                        | Research and development                                                            |                              |                          | 2,383                                              |      |                                     |            | 1,464                             |      |        |            | 4,279  |      |        |            | 3,139  |     
|                                                        | Depreciation and amortization of property and equipment                             |                              |                          | 543                                                |      |                                     |            | 716                               |      |        |            | 1,196  |      |        |            | 1,478  |     
|                                                        | Amortization of intangibles                                                         |                              |                          | 213                                                |      |                                     |            | 147                               |      |        |            | 425    |      |        |            | 289    |     
|                                                        | Amortization of deferred compensation, related to
sales, general and administrative |                              |                          | 194                                                |      |                                     |            | 324                               |      |        |            | 393    |      |        |            | 648    |     
|                                                        | Reorganization costs                                                                |                              |                          |                                                   |      |                                     |            |                                  |      |        |            | 194    |      |        |            |       |     
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        |                                                                                     |                              | Total operating expenses |                                                    |      | 9,461                               |            |                                   |      | 7,513  |            |        |      | 17,827 |            |        |      | 15,293 |       
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        |                                                                                     |                              |                          | Operating income (loss) from continuing operations |      |                                     | 73         |                                   |      |        | (635       | )      |      |        | (721       | )      |      |        | (1,370 | )
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|Other (expense) income, net:                            |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        |                                                                                     | Other income                 |                          |                                                    | 9    |                                     |            |                                   | 345  |        |            |        | 18   |        |            |        | 431  |       
|                                                        |                                                                                     | Equity in loss of investment |                          |                                                    | (19  | )                                   |            |                                   |     |        |            |        | (52  | )      |            |        |     |       
|                                                        |                                                                                     | Interest expense, net        |                          |                                                    | (454 | )                                   |            |                                   | (309 | )      |            |        | (761 | )      |            |        | (519 | )     
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        |                                                                                     |                              |                          | Other (expense) income, net                        |      |                                     | (464       | )                                 |      |        | 36         |        |      |        | (795       | )      |      |        | (88    | )
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|Loss from continuing operations before income taxes     |                                                                                     |                              | (391                     | )                                                  |      |                                     | (599       | )                                 |      |        | (1,516     | )      |      |        | (1,458     | )     
|Income tax benefit (expense)                            |                                                                                     |                              |                         |                                                    |      |                                     |           |                                   |      |        |           |        |      |        |           |       
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|Loss from continuing operations                         |                                                                                     |                              | (391                     | )                                                  |      |                                     | (599       | )                                 |      |        | (1,516     | )      |      |        | (1,458     | )     
|Loss from discontinued operations, net of income taxes  |                                                                                     |                              |                         |                                                    |      |                                     |           |                                   |      |        |           |        |      |        | (331       | )     
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|Net loss                                                |                                                                                     | $                            | (391                     | )                                                  |      | $                                   | (599       | )                                 |      | $      | (1,516     | )      |      | $      | (1,789     | )     
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|Net loss per common share  basic and diluted:          |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|                                                        | Loss from continuing operations                                                     |                              | $                        | (0.00                                              | )    |                                     | $          | (0.01                             | )    |        | $          | (0.02  | )    |        | $          | (0.02  | )   
|                                                        | Loss from discontinued operations                                                   |                              |                          |                                                   |      |                                     |            |                                  |      |        |            |       |      |        |            |       |     
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|Net loss per common share  basic and diluted           |                                                                                     | $                            | (0.00                    | )                                                  |      | $                                   | (0.01      | )                                 |      | $      | (0.02      | )      |      | $      | (0.02      | )     
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       
|Weighted average shares outstanding  basic and diluted |                                                                                     |                              | 91,062,189               |                                                    |      |                                     | 78,254,493 |                                   |      |        | 90,246,011 |        |      |        | 78,069,301 |       
|                                                        |                                                                                     |                              |                          |                                                    |      |                                     |            |                                   |      |        |            |        |      |        |            |       

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

3



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##### 



VERSO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |        |        |        |        |  
|------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------------------------------------------------- | ------ | --------------------------------- | ------ | ------ | ------ | ------ | ------ | -
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        | For the six months ended June 30,
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                  
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        | 2003                              |        | 2002  
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|Operating Activities:                             |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  | Continuing operations:                            |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |        |       
|                                                  |                                                   | Net loss from continuing operations                                                                                             |                                               | $                                                                                   | (1,516 | )                                 |        | $      | (1,458 | )     
|                                                  |                                                   | Adjustments to reconcile net loss from continuing operations to net
cash provided by (used in) continuing operating activities: |                                               |                                                                                     |        |                                   |        |        |        |       
|                                                  |                                                   |                                                                                                                                 |                                               | Equity in loss of investment                                                        |        |                                   | 52     |        |        |        |       |  
|                                                  |                                                   |                                                                                                                                 |                                               | Depreciation                                                                        |        |                                   | 1,196  |        |        |        | 1,478  |  
|                                                  |                                                   |                                                                                                                                 |                                               | Amortization of intangibles                                                         |        |                                   | 425    |        |        |        | 289    |  
|                                                  |                                                   |                                                                                                                                 |                                               | Amortization of deferred compensation                                               |        |                                   | 393    |        |        |        | 648    |  
|                                                  |                                                   |                                                                                                                                 |                                               | Provision for doubtful accounts                                                     |        |                                   | 1,268  |        |        |        | 804    |  
|                                                  |                                                   |                                                                                                                                 |                                               | Amortization of loan fees and discount on convertible subordinated debentures       |        |                                   | 205    |        |        |        | 265    |  
|                                                  |                                                   |                                                                                                                                 |                                               | Other                                                                               |        |                                   | (83    | )      |        |        | 86     |  
|                                                  |                                                   |                                                                                                                                 |                                               | Changes in current operating assets and liabilities, net of effects of acquisition: |        |                                   |        |        |        |        |        |  
|                                                  |                                                   |                                                                                                                                 |                                               | Accounts receivable                                                                 |        |                                   | (2,028 | )      |        |        | (3,462 | )
|                                                  |                                                   |                                                                                                                                 |                                               | Inventories                                                                         |        |                                   | 2,058  |        |        |        | 371    |  
|                                                  |                                                   |                                                                                                                                 |                                               | Other current assets                                                                |        |                                   | (576   | )      |        |        | 253    |  
|                                                  |                                                   |                                                                                                                                 |                                               | Accounts payable                                                                    |        |                                   | 619    |        |        |        | 573    |  
|                                                  |                                                   |                                                                                                                                 |                                               | Accrued compensation                                                                |        |                                   | 673    |        |        |        | (837   | )
|                                                  |                                                   |                                                                                                                                 |                                               | Accrued expenses                                                                    |        |                                   | (2,117 | )      |        |        | (498   | )
|                                                  |                                                   |                                                                                                                                 |                                               | Unearned revenue and customer deposits                                              |        |                                   | (340   | )      |        |        | (346   | )
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  |                                                   |                                                                                                                                 |                                               | Net cash provided by (used in) continuing operating activities                      |        |                                   | 229    |        |        |        | (1,834 | )
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  | Discontinued operations:                          |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |        |       
|                                                  |                                                   | Loss from discontinued operations                                                                                               |                                               |                                                                                     |       |                                   |        |        | (331   | )     
|                                                  |                                                   | Adjustment to reconcile loss from discontinued operations
to net cash used in discontinued operating activities                 |                                               |                                                                                     | (525   | )                                 |        |        | (127   | )     
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  |                                                   |                                                                                                                                 |                                               | Net cash used in discontinued operating activities                                  |        |                                   | (525   | )      |        |        | (458   | )
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  |                                                   |                                                                                                                                 |                                               | Net cash used in operating activities                                               |        |                                   | (296   | )      |        |        | (2,292 | )
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|Investing Activities:                             |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  |                                                   | Purchases of property and equipment, net                                                                                        |                                               |                                                                                     | (297   | )                                 |        |        | (446   | )     
|                                                  |                                                   | Software development costs capitalized                                                                                          |                                               |                                                                                     | (320   | )                                 |        |        | (161   | )     
|                                                  |                                                   | Purchase of Clarent Corporation, net of cash acquired                                                                           |                                               |                                                                                     | (1,026 | )                                 |        |        |       |       
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  |                                                   |                                                                                                                                 | Net cash used in investing activities         |                                                                                     |        | (1,643                            | )      |        |        | (607   | )     
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|Financing Activities:                             |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  | Payments of note payable for the purchase of NACT |                                                                                                                                 |                                               |                                                                                    |        |                                   |        | (1,500 | )     
|                                                  | Payments of notes payable                         |                                                                                                                                 |                                               | (1,050                                                                              | )      |                                   |        |       |       
|                                                  | Payments of notes receivable from shareholders    |                                                                                                                                 |                                               |                                                                                    |        |                                   |        | 15     |       
|                                                  | Borrowings on credit line, net                    |                                                                                                                                 |                                               | 2,048                                                                               |        |                                   |        |       |       
|                                                  | Proceeds from issuances of common stock, net      |                                                                                                                                 |                                               | 812                                                                                 |        |                                   |        | 292    |       
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  |                                                   | Net cash provided by (used in) financing activities                                                                             |                                               |                                                                                     | 1,810  |                                   |        |        | (1,193 | )     
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|Effect of exchange rate changes on cash           |                                                   |                                                                                                                                 | 42                                            |                                                                                     |        |                                   |       |       
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  |                                                   |                                                                                                                                 | Decrease in cash and cash equivalents         |                                                                                     |        | (87                               | )      |        |        | (4,092 | )     
|Cash and cash equivalents at beginning of period  |                                                   |                                                                                                                                 | 1,294                                         |                                                                                     |        |                                   | 7,745  |       
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|Cash and cash equivalents at end of period        |                                                   | $                                                                                                                               | 1,207                                         |                                                                                     |        | $                                 | 3,653  |       
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|Supplemental disclosure of cash flow information: |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  | Cash payments during the period for:              |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |        |       
|                                                  |                                                   | Interest                                                                                                                        |                                               | $                                                                                   | 447    |                                   |        | $      | 147    |       
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  |                                                   | Income taxes                                                                                                                    |                                               | $                                                                                   | 10     |                                   |        | $      | 38     |       
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  | Non-cash investing and financing activities       |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |        |       
|                                                  |                                                   | Common stock and compensatory
options issued in reorganization                                                                  |                                               | $                                                                                   | 125    |                                   |        | $      |       |       
|                                                  |                                                   | Issuance of common stock in arbitration settlement                                                                              |                                               |                                                                                     | 264    |                                   |        |        | 403    |       
|                                                  |                                                   | Issuance of warrants in exchange for services                                                                                   |                                               |                                                                                     | 119    |                                   |        |        | 211    |       
|                                                  |                                                   | Assets acquired and liabilities assumed in conjunction with business acquisitions:                                              |                                               |                                                                                     |        |                                   |        |        |        |       
|                                                  |                                                   |                                                                                                                                 | Fair value of assets acquired, excluding cash |                                                                                     | $      | 11,974                            |        |        | $      |       |       
|                                                  |                                                   |                                                                                                                                 | Consideration paid                            |                                                                                     |        | 1,026                             |        |        |        |       |       
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       
|                                                  |                                                   |                                                                                                                                 |                                               | Liabilities assumed                                                                 |        | $                                 | 10,948 |        |        | $      |       |  
|                                                  |                                                   |                                                                                                                                 |                                               |                                                                                     |        |                                   |        |       

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

4



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(Unaudited)



|1. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Verso Technologies, Inc. and subsidiaries (the Company), is a
communications technology and solutions provider for communications
service providers and enterprises seeking to implement application-based
telephony services, Internet usage management tools and outsourced
customer support services. The Companys continuing operations include
two separate business segments, the Carrier Solutions Group, which the
Company formerly referred to as its Gateway Solutions business, which
includes the Companys Clarent softswitching division and the Companys
subsidiary NACT Telecommunications, Inc. (NACT), and the Enterprise
Solutions Group, which the Company formerly referred to as its
Applications and Services business, which includes the Companys Clarent
Netperformer division and the Companys subsidiary Telemate.Net Software,
Inc. (Telemate.Net) as well as the Companys customer response center
operations. The Carrier Solutions Group includes domestic and
international sales of hardware and software, integration, applications
and technical training and support. The Enterprise Solutions Group offers
network management, support and maintenance, customer response center
services and application services. The Company acquired substantially all
the business assets of Clarent Corporation in February 2003, NACT in July
2001 and Telemate.Net in November 2001. The Companys discontinued
operations include the Companys value-added reseller business and
associated consulting practice (legacy VAR business) and the Companys
hospitality services group (HSG), all of which were inactive by the end
of the first quarter of 2002.
|  
|   |  | The condensed consolidated financial statements include the accounts of
Verso Technologies, Inc. and its wholly-owned subsidiaries, including
Telemate.Net, NACT and Clarent Canada Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Certain prior year amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation. These
reclassifications had no effect on previously reported net loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | The condensed consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) considered necessary by management to present a fair statement
of the results of operations, financial position and cash flows. The
results reported in these condensed consolidated financial statements
should not be regarded as necessarily indicative of results that may be
expected for the entire year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The year-end condensed consolidated balance sheet was derived from audited
consolidated financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States
of America. For further information, refer to the audited consolidated
financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|2. |  | MERGERS AND ACQUISITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Clarent Corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | On February 12, 2003, to increase the Companys position in the
next-generation networking and technology market, the Company acquired
substantially all the business assets along with certain related
liabilities of Clarent Corporation (Clarent). The purchase
consideration was approximately $11.5 million, consisting of $9.8 million
in seller notes made by the Company and acquisition costs of approximately
$1.7 million. At closing of the acquisition, the Company issued three
promissory notes to Clarent: a $5.0 million secured note due February 13,
2004, which bears interest at 10% per annum, of which $750,000 was paid
through June 30, 2003, and the remainder is due in monthly installments
continuing in July 2003 of $250,000, increasing to $500,000 in September
2003 and $750,000 in December 2003; a $1.8 million non-interest bearing
unsecured note due February 13, 2004, of which $300,000 was paid through
June 30, 2003 and the remainder is due in quarterly installments of
$500,000; and a $3.0 million secured note due February 12, 2008, which
bears interest at 5% per annum. The assets the Company purchased from
Clarent are security for the secured notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

5



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|2. |  | MERGERS AND ACQUISITIONS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Clarent Corporation  Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | The acquisition was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities were recorded at their fair value
at the date of the acquisition.                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | The Company has prepared an initial allocation of the purchase price based
on the estimated fair values of certain assets, receivables and estimated
liabilities. The Company is continuing to obtain information as to
ultimate valuation, recoverability and realization with respect to the
fair values of inventory and other acquired assets being held for sale, intangible
assets, and estimated liabilities. Upon resolution of the estimates and
fair values, the Company anticipates the allocation of purchase price to
be finalized prior to the end of the first quarter of 2004.
|  
|   |  | The preliminary allocation of the purchase price for the assets acquired
from Clarent, as adjusted, is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                          |  |         |        |  
|------------------------- |  | ------- | ------ | -
|                          |  | Clarent
|                          |  |        
|Cash and cash equivalents |  | $       | 350    |  
|Restricted cash           |  |         | 115    |  
|Accounts receivable       |  |         | 3,042  |  
|Inventories               |  |         | 7,627  |  
|Other current assets      |  |         | 1,111  |  
|Property and equipment    |  |         | 79     |  
|Accounts payable          |  |         | (103   | )
|Accrued compensation      |  |         | (198   | )
|Accrued expenses          |  |         | (93    | )
|Deferred revenue          |  |         | (480   | )
|                          |  |         |        |  
|Purchase price            |  | $       | 11,450 |  
|                          |  |         |        |  



| |  | Pro Forma Effect of Clarent Transaction                                                                                                                                                                                                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The results of Clarent have been included in the consolidated results
subsequent to February 12, 2003. The following unaudited pro forma
information presents the results of continuing operations of the Company
for the three months and six months ended June 30, 2003 and 2002, as if
the acquisition of the assets from Clarent had taken place on January 1,
2002, (in thousands, except per share amounts):

|                                                     |                     |   |                             |        |                           |   |        |        |      |   |        |        |   |   |         |        |  
|---------------------------------------------------- | ------------------- | - | --------------------------- | ------ | ------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------- | ------ | -
|                                                     |                     |   | Three months ended June 30, |        | Six months ended June 30,
|                                                     |                     |   |                             |        |                          
|                                                     |                     |   | 2003                        |        | 2002                      |   | 2003   |        | 2002
|                                                     |                     |   |                             |        |                           |   |        |        |     
|Revenues                                             |                     | $ | 15,858                      |        |                           | $ | 21,707 |        |      | $ | 30,502 |        |   | $ | 41,165  |       
|Net loss from continuing operations                  |                     | $ | (391                        | )      |                           | $ | (2,728 | )      |      | $ | (3,510 | )      |   | $ | (25,316 | )     
|Net loss                                             |                     | $ | (391                        | )      |                           | $ | (2,728 | )      |      | $ | (3,510 | )      |   | $ | (25,647 | )     
|Net loss from continuing operations per common share |                     |   |                             |        |                           |   |        |        |      |   |        |        |   |   |         |       
|                                                     |  basic and diluted |   | $                           |       |                           |   | $      | (0.03  | )    |   | $      | (0.04  | ) |   | $       | (0.32  | )
|Net loss per common share  basic and diluted        |                     | $ |                            |        |                           | $ | (0.03  | )      |      | $ | (0.04  | )      |   | $ | (0.33   | )     
|Weighted average shares outstanding                  |                     |   |                             |        |                           |   |        |        |      |   |        |        |   |   |         |       
|                                                     |  basic and diluted |   |                             | 91,062 |                           |   |        | 78,254 |      |   |        | 90,246 |   |   |         | 78,069 |  

6



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|3. |  | UNCONSOLIDATED AFFILIATES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Shanghai BeTrue Infotech Co., Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | In October 2002, the Company acquired a 51% interest in Shanghai BeTrue
Infotech Co., Ltd. (BeTrue). The remaining 49% interest in BeTrue is
owned by Shanghai Tangsheng Investments & Development Co. Ltd (Shanghai
Tangsheng). The joint venture provides the Company with an immediate
distribution channel into the China and Asia-Pacific region for the
Companys application-based Voice over Internet Protocol gateway
solutions, billing systems, value-added applications and web filtering
solutions. Due to the shared decision making between the Company and its
equity partner, the results of BeTrue are treated as an equity investment
rather than being consolidated.
|  
|   |  | The Company purchased the 51% interest in BeTrue for $100,000 from NeTrue
Communications, Inc., Shanghai Tangshengs former joint venture partner.
The Company also contributed to the joint venture certain next-generation
communication equipment and software valued at approximately $236,000 and
$100,000 cash.                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Summarized financial information reported by this affiliate for the three
month and six months ended June 30, 2003 (in thousands) are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                   |  |                    |     |                  |  |   |      |  
|------------------ |  | ------------------ | --- | ---------------- |  | - | ---- | -
|Operating results: |  | June 30, 2003     
|                   |  |                   
|                   |  | Three months ended |     | Six months ended
|                   |  |                    |     |                 
|Revenues           |  | $                  | 581 |                  |  | $ | 660  |  
|                   |  |                    |     |                  |  |   |      |  
|Operating loss     |  | $                  | (39 | )                |  | $ | (116 | )
|                   |  |                    |     |                  |  |   |      |  
|Net loss           |  | $                  | (38 | )                |  | $ | (103 | )
|                   |  |                    |     |                  |  |   |      |  

7



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|4. |  | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Following the acquisition of NACT in July 2001, the Company determined
that its legacy VAR business was not strategic to the Companys ongoing
objectives and discontinued capital and human resource investment in its
legacy VAR business. Accordingly, the Company elected to report its legacy
VAR business as discontinued operations by early adoption of Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets (SFAS No. 144).
|  
|   |  | Summary operating results of the discontinued operations for the three
months and six months ended June 30, 2003 and 2002 (in thousands) were as
follows:                                                                                                                                                                                                                                                                                                                                                       

|                                  |  |                             |   |                           |  |      |   |      |  |   |   |  |  |   |      |  
|--------------------------------- |  | --------------------------- | - | ------------------------- |  | ---- | - | ---- |  | - | - |  |  | - | ---- | -
|                                  |  | Three months ended June 30, |   | Six months ended June 30,
|                                  |  |                             |   |                          
|                                  |  | 2003                        |   | 2002                      |  | 2003 |   | 2002
|                                  |  |                             |   |                           |  |      |   |     
|Revenue                           |  | $                           |  |                           |  | $    |  |      |  | $ |  |  |  | $ | 223  |  
|                                  |  |                             |   |                           |  |      |   |      |  |   |   |  |  |   |      |  
|Gross (loss) profit               |  | $                           |  |                           |  | $    |  |      |  | $ |  |  |  | $ | (331 | )
|                                  |  |                             |   |                           |  |      |   |      |  |   |   |  |  |   |      |  
|Operating loss                    |  | $                           |  |                           |  | $    |  |      |  | $ |  |  |  | $ | (331 | )
|                                  |  |                             |   |                           |  |      |   |      |  |   |   |  |  |   |      |  
|Loss from discontinued operations |  | $                           |  |                           |  | $    |  |      |  | $ |  |  |  | $ | (331 | )
|                                  |  |                             |   |                           |  |      |   |      |  |   |   |  |  |   |      |  



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

|                            |                                        |   |          |       |              |   |       |       | 
|--------------------------- | -------------------------------------- | - | -------- | ----- | ------------ | - | ----- | ----- | 
|                            |                                        |   | June 30, |       | December 31,
|                            |                                        |   | 2003     |       | 2002        
|                            |                                        |   |          |       |             
|Accrued restructuring costs |                                        | $ | 1,785    |       |              | $ | 2,010 |      
|Other current liabilities   |                                        |   | 557      |       |              |   | 1,121 |      
|                            |                                        |   |          |       |              |   |       |      
|                            | Liabilities of discontinued operations |   | $        | 2,342 |              |   | $     | 3,131 | 
|                            |                                        |   |          |       |              |   |       |      



| |  | Accrued reorganization costs relates primarily to several leases for
buildings and equipment that were utilized by the discontinued operations
and are no longer being utilized in continuing operations. The accrual is
for all remaining payments due on these leases, less estimated amounts to
be paid by any sublessors. The accrual for one of the leases with total
payments remaining of $2.5 million assumes that the building will be
sub-leased for approximately 50% of the total lease liability over the
term of the lease.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Activity in the restructuring accrual for discontinued operations was as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                 |  |   |       |  
|-------------------------------- |  | - | ----- | -
|Balance December 31, 2002        |  | $ | 2,010 |  
|Lease payments                   |  |   | (426  | )
|Additional restructuring accrual |  |   | 201   |  
|                                 |  |   |       |  
|Balance June 30, 2003            |  | $ | 1,785 |  
|                                 |  |   |       |  

8



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|5. |  | INVENTORIES                                                                                                                                                                 
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Inventories consist primarily of purchased electronic components, and are
stated at the lower of cost or market. Cost is determined by using the
first-in, first-out method.
|  
|   |  | Inventories as of June 30, 2003 and December 31, 2002, are comprised of
the following (in thousands):                                                                       

|                |                   |   |          |        |              |   |       |       | 
|--------------- | ----------------- | - | -------- | ------ | ------------ | - | ----- | ----- | 
|                |                   |   | June 30, |        | December 31,
|                |                   |   | 2003     |        | 2002        
|                |                   |   |          |        |             
|Raw materials   |                   | $ | 8,157    |        |              | $ | 1,566 |      
|Work in process |                   |   | 1,489    |        |              |   | 2,380 |      
|Finished goods  |                   |   | 656      |        |              |   | 787   |      
|                |                   |   |          |        |              |   |       |      
|                | Total inventories |   | $        | 10,302 |              |   | $     | 4,733 | 
|                |                   |   |          |        |              |   |       |      



|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, primarily
purchased software development costs and customer relationship costs. The
purchased software development costs are amortized on a straight-line
basis over estimated useful lives of three years once the projects are
placed in service. The customer relationship costs are amortized on a
straight-line basis over its estimated useful life of ten years.
|  
|   |  | Goodwill and other intangible assets consist of the following (in
thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                     |                                |                                         |        |          |       |              |        |       |       | 
|------------------------------------ | ------------------------------ | --------------------------------------- | ------ | -------- | ----- | ------------ | ------ | ----- | ----- | 
|                                     |                                |                                         |        | June 30, |       | December 31,
|                                     |                                |                                         |        | 2003     |       | 2002        
|                                     |                                |                                         |        |          |       |             
|Intangibles subject to amortization: |                                |                                         |        |          |       |              |        |      
|                                     | Purchased software development |                                         | $      | 2,416    |       |              | $      | 2,096 |      
|                                     | Customer relationship          |                                         |        | 2,403    |       |              |        | 2,403 |      
|                                     |                                |                                         |        |          |       |              |        |      
|                                     |                                |                                         | 4,819  |          |       |              | 4,499  |      
|                                     | Accumulated amortization       |                                         |        | (1,253   | )     |              |        | (828  | )    
|                                     |                                |                                         |        |          |       |              |        |      
|                                     |                                | Net intangibles subject to amortization |        |          | 3,566 |              |        |       | 3,671 | 
|Goodwill                             |                                |                                         | 12,685 |          |       |              | 12,685 |      
|                                     |                                |                                         |        |          |       |              |        |      
|Total goodwill and other intangibles |                                | $                                       | 16,251 |          |       | $            | 16,356 |      
|                                     |                                |                                         |        |          |       |              |        |      

9



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|6. |  | GOODWILL AND OTHER INTANGIBLES, Continued                          
|-- |  | -------------------------------------------------------------------
|  
|   |  | Estimated annual amortization expense is as follows (in thousands):

|               |            |      |       |              |     | 
|-------------- | ---------- | ---- | ----- | ------------ | --- | 
|               |            |      |       | Annual      
|               |            |      |       | Amortization
|               |            |      |       |             
|remaining 2003 |            | $    | 425   |             
|               |            | 2004 |       |              | 916 | 
|               |            | 2005 |       |              | 542 | 
|               |            | 2006 |       |              | 240 | 
|               |            | 2007 |       |              | 240 | 
|               | Thereafter |      |       | 1,203        |    
|               |            |      |       |             
|               |            | $    | 3,566 |             
|               |            |      |       |             



|7. |  | LOAN FACILITY WITH SILICON VALLEY BANK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In February 2003, the Company amended its original credit agreement (the
Original Credit Agreement) with its primary lender, Silicon Valley Bank
(Silicon) to increase the Companys credit line with Silicon from $5.0
million to $10.0 million, subject to borrowing availability. The Company
also entered into certain additional arrangements with Silicon including
an export-import (EX-IM) facility that will provide for working capital
based on the Companys international accounts receivable and inventory
related to export sales. On April 7, 2003, the Company and Silicon
further amended the credit facility to increase the EX-IM facility and to
modify certain financial covenants related to the timing of the Companys
acquisition of substantially all of the business assets along with related
liabilities of Clarent on February 12, 2003 (as amended on February 12,
2003 and April 7, 2003, the Amended Credit Agreement). The Amended
Credit Agreement is secured by substantially all of the assets of the
Company. Interest is computed at 2.0% above Silicons Base Rate (6.25% at
June 30, 2003). The Amended Credit Agreement provides for up to
$1,000,000 in letters of credit. Advances are limited by a formula based
on eligible receivables, inventories, certain cash balances, outstanding
letters of credit and certain subjective limitations. Interest payments
are due monthly, and the Amended Credit Agreement expires in August 2004.
The Amended Credit Agreement includes a loan fee of $170,000 and .375% on
unused available borrowings. Under the terms of the Amended Credit
Agreement, the Company must maintain a minimum EBITDA (earnings before
interest, taxes, depreciation and amortization), computed monthly, and may
not declare dividends or incur any additional indebtedness without the
consent of Silicon, and must comply with other financial covenants, as
defined. The Company was in compliance with these covenants as of June
30, 2003. Pursuant to the loan commitment letter with Silicon, on
February 12, 2003, the Company issued to Silicon a warrant to purchase
350,000 shares of the Companys common stock at an exercise price of $0.44
per share. The fair value of the warrant issued totaled approximately
$119,000, using the Black-Scholes option pricing method based on the
following weighted-average assumptions: expected volatility  104%;
expected life  five years; risk-free interest rate  3.0%; and expected
dividend yield  0%. The loan fees and fair value of the warrants issued
are being amortized to interest expense over the term of the Amended
Credit Agreement.
|  
|   |  | The Company had $2.8 million of borrowings under the Amended Credit
Agreement as of June 30, 2003. The remaining availability under the
Amended Credit Agreement at June 30, 2003 was $5.1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

10



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|8. |  | CONVERTIBLE SUBORDINATED DEBENTURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In connection with the acquisition of MessageClick, certain investors of
MessageClick purchased $4.5 million of the Companys 7.5% convertible
subordinated debentures and warrants to purchase an aggregate of 1,026,820
shares of the Companys common stock at an exercise price of $7.30 per
share. The debentures are convertible into the Companys common stock at
a conversion price of $4.41 per share. The convertible subordinated
debentures are due November 22, 2005. The debentures have been discounted
to reflect the fair value of the warrants issued, totaling approximately
$1.4 million, using the Black-Scholes option pricing method based on the
following weighted-average assumptions: expected volatility  88%;
expected life  five years; risk-free interest rate  5.5%; and expected
dividend yield  0%. The unamortized discount totaled approximately
$659,000 and $797,000 at June 30, 2003 and December 31, 2002,
respectively. In addition, the Company paid certain private placement
fees and attorneys fees in connection with the sale of the debentures
totaling $50,000. The fees are being amortized to interest expense over
the term of the debentures.
|  
|9. |  | OTHER COMPREHENSIVE LOSS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | Comprehensive loss for the six months ended June 30, 2003 and 2002 is
shown in the following table (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                          |                              |   |                             |     |                           |   |      |   |      |   |        |     |   |   |        |    |  
|------------------------- | ---------------------------- | - | --------------------------- | --- | ------------------------- | - | ---- | - | ---- | - | ------ | --- | - | - | ------ | -- | -
|                          |                              |   | Three months ended June 30, |     | Six months ended June 30,
|                          |                              |   |                             |     |                          
|                          |                              |   | 2003                        |     | 2002                      |   | 2003 |   | 2002
|                          |                              |   |                             |     |                           |   |      |   |     
|Net loss                  |                              | $ | (391                        | )   |                           | $ | (599 | ) |      | $ | (1,516 | )   |   | $ | (1,789 | ) 
|Other comprehensive loss: |                              |   |                             |     |                           |   |      |   |      |   |        |     |   |   |        |   
|                          | Foreign currency translation |   |                             | (78 | )                         |   |      |  |      |   |        | (27 | ) |   |        | (3 | )
|                          |                              |   |                             |     |                           |   |      |   |      |   |        |     |   |   |        |   
|Comprehensive loss        |                              | $ | (469                        | )   |                           | $ | (599 | ) |      | $ | (1,543 | )   |   | $ | (1,792 | ) 
|                          |                              |   |                             |     |                           |   |      |   |      |   |        |     |   |   |        |   



|10. |  | SEGMENT INFORMATION                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company reports information for two segments, Carrier Solutions Group,
which the Company formerly referred to as its Gateway Solutions business,
and Enterprise Solutions Group, which the Company formerly referred to as
its Applications and Services business.

|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Carrier    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Solutions  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Group:     |  | The Companys Carrier Solutions Group consists of the operations of
the Companys Clarent softswitching division and the Companys
switching subsidiary, NACT. The Companys Carrier Solutions Group
includes hardware and software, integration, applications and
technical training and support.                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Enterprise |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Solutions  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Group:     |  | The Companys Enterprise Solutions Group consists of the operations
of the Companys Clarent Netperformer division, the Companys
subsidiary, Telemate.Net and the Companys customer response center
services. The Enterprise Solutions Group offers hardware-based
solutions for companies seeking to build private, packet-based voice
& data networks. Additionally, the Enterprise Group offers
software-based solutions for Internet access and usage management
that include call accounting and usage reporting for IP network
devices. These solutions are supported by the Companys customer
response center services, which include outsourced technical support
and application installation and training services.

11



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|10. |  | SEGMENT INFORMATION, Continued                                                                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Management evaluates the business segment performance based on
contributions before unallocated items. Inter-segment sales and transfers
are not significant.
|   
|    |  | Summarized financial information concerning the Companys reportable
segments is shown in the following table (in thousands):                                

|                                      |      |   |           |  |            |   |       |  |  |   |        |  | 
|------------------------------------- | ---- | - | --------- |  | ---------- | - | ----- |  |  | - | ------ |  | 
|                                      |      |   | Carrier   |  | Enterprise |   |       |  | 
|                                      |      |   | Solutions |  | Solutions  |   |       |  | 
|                                      |      |   | Group     |  | Group      |   | Total
|                                      |      |   |           |  |            |   |      
|For the Three Months Ended June 30,   |      |   |           |  |            |   |       |  |  |   |        | 
|                                      | 2003 |   |           |  |            |   |       |  |  |   |        |  | 
|Revenue                               |      | $ | 9,129     |  |            | $ | 6,729 |  |  | $ | 15,858 | 
|Contribution before unallocated items |      |   | 1,459     |  |            |   | 1,735 |  |  |   | 3,194  | 
|                                      | 2002 |   |           |  |            |   |       |  |  |   |        |  | 
|Revenue                               |      | $ | 7,080     |  |            | $ | 4,591 |  |  | $ | 11,671 | 
|Contribution before unallocated items |      |   | 1,006     |  |            |   | 1,515 |  |  |   | 2,521  | 



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

|                                                    |  |                             |        |      |  |   |        |  
|--------------------------------------------------- |  | --------------------------- | ------ | ---- |  | - | ------ | -
|                                                    |  | Three Months Ended June 30,
|                                                    |  | 2003                        |        | 2002
|                                                    |  |                             |        |     
|Contribution before unallocated items, per above    |  | $                           | 3,194  |      |  | $ | 2,521  |  
|Corporate and administrative expenses               |  |                             | (2,171 | )    |  |   | (1,969 | )
|Depreciation                                        |  |                             | (543   | )    |  |   | (716   | )
|Amortization of intangibles                         |  |                             | (213   | )    |  |   | (147   | )
|Deferred compensation                               |  |                             | (194   | )    |  |   | (324   | )
|Other income                                        |  |                             | 9      |      |  |   | 345    |  
|Equity in loss of investment                        |  |                             | (19    | )    |  |   |       |  
|Interest expense, net                               |  |                             | (454   | )    |  |   | (309   | )
|                                                    |  |                             |        |      |  |   |        |  
|Loss from continuing operations before income taxes |  | $                           | (391   | )    |  | $ | (599   | )
|                                                    |  |                             |        |      |  |   |        |  

12



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



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

|                                       |      |   |           |  |            |   |        |  |  |   |        |  | 
|-------------------------------------- | ---- | - | --------- |  | ---------- | - | ------ |  |  | - | ------ |  | 
|                                       |      |   | Carrier   |  | Enterprise |   |        |  | 
|                                       |      |   | Solutions |  | Solutions  |   |        |  | 
|                                       |      |   | Group     |  | Group      |   | Total 
|                                       |      |   |           |  |            |   |       
|For the Six Months Ended June 30,
2003 |      |   |           |  |            |   |        |  |  |   |        | 
|Revenue                                |      | $ | 15,851    |  |            | $ | 13,004 |  |  | $ | 28,855 | 
|Contribution before unallocated items  |      |   | 1,854     |  |            |   | 3,697  |  |  |   | 5,551  | 
|                                       | 2002 |   |           |  |            |   |        |  |  |   |        |  | 
|Revenue                                |      | $ | 14,605    |  |            | $ | 9,060  |  |  | $ | 23,665 | 
|Contribution before unallocated items  |      |   | 2,270     |  |            |   | 2,804  |  |  |   | 5,074  | 



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

|                                                    |  |                           |        |      |  |   |        |  
|--------------------------------------------------- |  | ------------------------- | ------ | ---- |  | - | ------ | -
|                                                    |  | Six Months Ended June 30,
|                                                    |  |                          
|                                                    |  | 2003                      |        | 2002
|                                                    |  |                           |        |     
|Contribution before unallocated items, per above    |  | $                         | 5,551  |      |  | $ | 5,074  |  
|Corporate and administrative expenses               |  |                           | (4,064 | )    |  |   | (4,029 | )
|Depreciation                                        |  |                           | (1,196 | )    |  |   | (1,478 | )
|Amortization of intangibles                         |  |                           | (425   | )    |  |   | (289   | )
|Deferred compensation                               |  |                           | (393   | )    |  |   | (648   | )
|Reorganization costs                                |  |                           | (194   | )    |  |   |       |  
|Other income                                        |  |                           | 18     |      |  |   | 431    |  
|Equity in loss of investment                        |  |                           | (52    | )    |  |   |       |  
|Interest expense, net                               |  |                           | (761   | )    |  |   | (519   | )
|                                                    |  |                           |        |      |  |   |        |  
|Loss from continuing operations before income taxes |  | $                         | (1,516 | )    |  | $ | (1,458 | )
|                                                    |  |                           |        |      |  |   |        |  



| |  | Following the acquisition of substantially all the business assets along
with certain liabilities of Clarent in February 2003, the Company began
conducting research and development in Canada. International sales of the
Companys products and services continue to originate only from the United
States. The geographic distribution of the Companys revenues and
contribution before unallocated items are as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         |  |        |        |               |  |       |        |  |  |   |        | 
|---------------------------------------- |  | ------ | ------ | ------------- |  | ----- | ------ |  |  | - | ------ | 
|                                         |  | Canada |        | United States |  | Total
|                                         |  |        |        |               |  |      
|For the Three Months Ended June 30,
2003 |  |        |        |               |  |       |        |  |  |   |        | 
|Revenue                                  |  | $      |       |               |  | $     | 15,858 |  |  | $ | 15,858 | 
|Contribution before unallocated items    |  |        | (883   | )             |  |       | 4,077  |  |  |   | 3,194  | 
|For the Six Months Ended June 30,
2003   |  |        |        |               |  |       |        |  |  |   |        | 
|Revenue                                  |  | $      |       |               |  | $     | 28,855 |  |  | $ | 28,855 | 
|Contribution before unallocated items    |  |        | (1,368 | )             |  |       | 6,919  |  |  |   | 5,551  | 

13



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|11. |  | REORGANIZATION COSTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In the first quarter of 2003, the Company initiated a reorganization to
accommodate the acquisition of the assets of Clarent and eliminated 14
positions held by employees. As a result of these actions, the Company
recorded reorganization costs of $194,000 during the six months ended June
30, 2003. The reorganization costs consist of severance costs and the
balance of the accrued severance costs as of June 30, 2003 is $16,000.
Annualized savings beginning in the second quarter of 2003 are expected to
be approximately $987,000.
|   
|12. |  | STOCK OPTIONS AND WARRANTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | The Company has a stock option plan for employees, consultants, and other
individual contributors to the Company. In addition, in connection with
various financing and acquisition transactions, and for services provided
to the Company, the Company has issued warrants to purchase the Companys
common stock. A summary of stock options and warrants outstanding at June
30, 2003, is as follows:                                                                                                                                           
|   
|    |  | Options and warrants issued to employees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                  |  |                                  |            |                                  |  |                  |      |                  |  |  |            |  |  |   |      | 
|----------------- |  | -------------------------------- | ---------- | -------------------------------- |  | ---------------- | ---- | ---------------- |  |  | ---------- |  |  | - | ---- | 
|                  |  | Options and Warrants Outstanding |            | Options and Warrants Exercisable
|                  |  |                                  |            |                                 
|Range of Exercise |  | Outstanding at                   |            | Weighted Average                 |  | Exercisable      |      | Weighted Average
|Prices            |  | June 30, 2003                    |            | Exercise Price                   |  | at June 30, 2003 |      | Exercise Price  
|                  |  |                                  |            |                                  |  |                  |      |                 
|$0.19-$0.50       |  |                                  | 4,250,711  |                                  |  | $                | 0.41 |                  |  |  | 2,381,102  |  |  | $ | 0.39 | 
|$0.51-$1.19       |  |                                  | 2,858,881  |                                  |  | $                | 0.97 |                  |  |  | 1,394,874  |  |  | $ | 0.87 | 
|$1.20-$1.50       |  |                                  | 612,500    |                                  |  | $                | 1.43 |                  |  |  | 532,500    |  |  | $ | 1.45 | 
|$1.51-$2.14       |  |                                  | 5,030,000  |                                  |  | $                | 2.14 |                  |  |  | 3,509,375  |  |  | $ | 2.14 | 
|$2.15-$4.00       |  |                                  | 1,552,001  |                                  |  | $                | 3.11 |                  |  |  | 1,134,116  |  |  | $ | 3.09 | 
|$4.14-$5.13       |  |                                  | 1,517,866  |                                  |  | $                | 4.32 |                  |  |  | 961,142    |  |  | $ | 4.39 | 
|$5.22-$18.00      |  |                                  | 934,979    |                                  |  | $                | 7.28 |                  |  |  | 891,786    |  |  | $ | 7.23 | 
|                  |  |                                  |            |                                  |  |                  |      |                  |  |  |            |  |  |   |      | 
|Total             |  |                                  | 16,756,938 |                                  |  | $                | 2.03 |                  |  |  | 10,804,895 |  |  | $ | 2.27 | 
|                  |  |                                  |            |                                  |  |                  |      |                  |  |  |            |  |  |   |      | 

14



---



##### 





| |  | Options and warrants issued to employees generally terminate ten
years from the date of grant. Termination dates on the options and
warrants listed above range from July 15, 2003 to June 26, 2013.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Warrants issued primarily in connection with financing:                                                                                                                                             

|               |  |                      |            |                  |  |                 |      |  |  |                            
|-------------- |  | -------------------- | ---------- | ---------------- |  | --------------- | ---- |  |  | ---------------------------
|               |  | Number of            |            | Weighted Average |  |                
|Exercise Price |  | Outstanding Warrants |            | Exercise Price   |  | Expiration Date
|               |  |                      |            |                  |  |                
|$0.01          |  |                      | 37,532     |                  |  | $               | 0.01 |  |  | September 2005-October 2006
|$0.31          |  |                      | 9,577,502  |                  |  | $               | 0.31 |  |  | October 2007               
|$0.44-$1.98    |  |                      | 1,955,373  |                  |  | $               | 1.37 |  |  | November 2004-February 2008
|$2.11-$3.09    |  |                      | 432,920    |                  |  | $               | 2.85 |  |  | August 2004-February
2005  
|$4.03-$5.00    |  |                      | 575,219    |                  |  | $               | 4.68 |  |  | January
2004-November 2005 
|$5.25-$5.65    |  |                      | 4,650,498  |                  |  | $               | 5.64 |  |  | February
2005-October 2006 
|$6.00-$7.30    |  |                      | 1,176,820  |                  |  | $               | 7.13 |  |  | November
2005-October 2006 
|               |  |                      |            |                  |  |                 |      |  |  |                            
|Total          |  |                      | 18,405,864 |                  |  | $               | 2.40 |  |  |                            
|               |  |                      |            |                  |  |                 |      |  |  |                            



| |  | Most warrants are vested when issued.                                   
| |  | ------------------------------------------------------------------------
|
| |  | Options and warrants outstanding as of June 30, 2003 totaled 34,987,802.

15



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|12. |  | STOCK OPTIONS AND WARRANTS, Continued                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The exercise price and number of outstanding warrants for certain warrants
previously issued have been adjusted according to their antidilution
provisions.                                                                                                                                                                                                                                          
|   
|    |  | If the Company had used the fair value-based method of accounting for its
stock option and incentive plans and charged compensation cost against
income, over the vesting period, based on the fair value of options at the
date of grant, then the net loss and net loss per common share would have
been increased to the following pro forma amounts (in thousands, except
for per share amounts):

|                                                                                                              |                    |   |                             |       |                           |   |        |        |      |   |        |        |   |   |        |        |  
|------------------------------------------------------------------------------------------------------------- | ------------------ | - | --------------------------- | ----- | ------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                                                              |                    |   | Three months ended June 30, |       | Six months ended June 30,
|                                                                                                              |                    |   | 2003                        |       | 2002                      |   | 2003   |        | 2002
|                                                                                                              |                    |   |                             |       |                           |   |        |        |     
|Net loss, as reported                                                                                         |                    | $ | (391                        | )     |                           | $ | (599   | )      |      | $ | (1,516 | )      |   | $ | (1,458 | )     
|Add: Stock-based compensation
expense included in net loss                                                    |                    |   | 194                         |       |                           |   | 324    |        |      |   | 393    |        |   |   | 648    |       
|Less: Total stock-based employee
compensation expense determined
under fair value based method
for all awards |                    |   | (673                        | )     |                           |   | (1,148 | )      |      |   | (1,643 | )      |   |   | (2,296 | )     
|                                                                                                              |                    |   |                             |       |                           |   |        |        |      |   |        |        |   |   |        |       
|                                                                                                              | Pro forma net loss |   | $                           | (870  | )                         |   | $      | (1,423 | )    |   | $      | (2,766 | ) |   | $      | (3,106 | )
|                                                                                                              |                    |   |                             |       |                           |   |        |        |      |   |        |        |   |   |        |       
|Net loss per common share                                                                                     |                    |   |                             |       |                           |   |        |        |      |   |        |        |   |   |        |       
|                                                                                                              | As reported        |   | $                           |      |                           |   | $      | (0.01  | )    |   | $      | (0.02  | ) |   | $      | (0.02  | )
|                                                                                                              | Pro forma          |   |                             | (0.01 | )                         |   |        | (0.02  | )    |   |        | (0.03  | ) |   |        | (0.04  | )



|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 months and six months ended June 30, 2003 and 2002 does
not include the effect of the common stock equivalents, calculated by
the treasury stock method, as their impact would be antidilutive.
Using the treasury stock method, excluded common stock equivalents
are as follows:

|                                                              |  |  |                            |  |                          |  |           |  |      |  |           |  |  |  |           |  | 
|------------------------------------------------------------- |  |  | -------------------------- |  | ------------------------ |  | --------- |  | ---- |  | --------- |  |  |  | --------- |  | 
|                                                              |  |  | For the
three months ended |  | For the
six months ended
|                                                              |  |  | June, 30                   |  | June, 30                
|                                                              |  |  |                            |  |                         
|                                                              |  |  | 2003                       |  | 2002                     |  | 2003      |  | 2002
|                                                              |  |  |                            |  |                          |  |           |  |     
|Shares
issuable under stock options                           |  |  | 3,688,933                  |  |                          |  | 2,606,123 |  |      |  | 2,913,553 |  |  |  | 3,145,285 | 
|Shares
issuable pursuant to warrants to purchase common stock |  |  | 7,076,784                  |  |                          |  | 46,363    |  |      |  | 6,013,190 |  |  |  | 86,364    | 
|                                                              |  |  |                            |  |                          |  |           |  |     
|                                                              |  |  | 10,765,717                 |  |                          |  | 2,652,486 |  |      |  | 8,926,743 |  |  |  | 3,231,649 | 
|                                                              |  |  |                            |  |                          |  |           |  |     

16



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##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|14. |  | OTHER EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On or about April 29, 2002, Omni Systems of Georgia, Inc. (Omni) and
Joseph T. Dyer (Dyer) filed with the American Arbitration
Association (AAA) a demand for arbitration
against the Company and Eltrax International, Inc., a wholly-owned
subsidiary of the Company (Eltrax International). Omni and Dyer claimed
that the Company and Eltrax International breached that certain Assignment
dated as of August 31, 1998, among Eltrax International, Dyer and Omni
(the Assignment), which was executed in connection with the Companys
acquisition of Encore Systems, Inc., Global Systems and Support, Inc. and
Five Star Systems, Inc. (collectively, the Encore Group) in 1998.
Pursuant to the Assignment, Omni and Dyer assigned and transferred to
Eltrax International all of their right, title and interest in and to a
certain computer software property management system in exchange for a
one-time payment. The Assignment also provided for an earn-out component
of the acquisition consisting of certain contingent monthly payments equal
to a percentage of the maintenance and licensing net revenues received by
Eltrax International with respect to a certain contract. Omni and Dyer
claimed that the Company and Eltrax International had not paid to Omni and
Dyer the contingent monthly payments owed to them pursuant to the
Assignment beginning in June 2002. Omni and Dyer sought recovery of over
$400,000 for contingent monthly payments allegedly owed for the period
from May 15, 2002 through January 2003, plus payments in like amounts
going forward, together with interest thereon, attorneys fees and
expenses. In January 2003, the matter was heard for six days by a
three-arbitrator panel of the AAA. On April 1, 2003, the Company received
notice that the AAA panel awarded to Omni and Dyer (i) payments and
interest thereon with respect to the Assignment in the aggregate amount of
approximately $506,000; and (ii) attorneys fees and expenses, excluding
expenses of the AAA, in the aggregate amount of approximately $199,000
(net of attorneys fees and expenses awarded to the Company), which
amounts are to be paid by Eltrax International no later than April 30,
2003. Additionally, the AAA panel determined that Eltrax International
will be liable for future payments as they become due in accordance with
the terms of the Assignment. The Company estimates that the payments to be
made by Eltrax International through 2007, pursuant to the award of the
AAA panel, will total approximately $2.4 million. These payments are
additional cost of the Companys acquisition of the Encore Group.
Accordingly, the Company accrued the total amount of the estimated
payments and increased intangibles by $2.4 million. The long-term portion
of the estimated payments is included on the Companys consolidated
balance sheet in other long-term liabilities.
|   
|15. |  | PURCHASE OF MCK COMMUNICATION, INC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | On April 22, 2003, the Company announced that it had signed a definitive
merger agreement as of April 21, 2003 for the acquisition of MCK
Communications, Inc. (MCK), which merger agreement was subsequently
amended as of June 13, 2003. In the merger, holders of MCKs common stock
will be entitled to receive an aggregate of approximately 18.3 million
shares of the Companys common stock, which was valued at $25.0 million.
The MCK acquisition will be accounted for as a purchase. The Company
anticipates that the merger will close in the third
quarter of 2003, subject to (i) approval by MCKs shareholders; (ii)
declaration of effectiveness by the Securities and Exchange Commission
(SEC) of a registration statement to be filed by the Company covering
the shares of the Companys common stock to be issued in the merger; and
(iii) satisfaction of other conditions set forth in the merger agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | In April 2003, the Company
negotiated an agreement to purchase MCK in which the MCK stockholders
would be entitled to receive approximately 20.0 million shares of the
Companys common stock which was valued at $13.0 million, based
on the volume weighted average closing price per share of the
Companys common stock as reported on the Nasdaq Small Cap
Market for the twenty trading day period beginning March 19,
2003 and ending April 15, 2003. As part of the original
agreement, the Company was to receive $7.5 million in cash. The terms
of the agreement were revised on June 13, 2003. Under the
amended terms, MCK stockholders are entitled to receive approximately
18.3 million shares of the Companys common stock and the cash
in the transaction was reduced from $7.5 million to approximately
$6.4 million. Although the number of shares to be issued in the
transaction was reduced by the amendment, the amendment changed the
measurement date for valuing the Companys share to be issued in
the transaction. As a result of the rise in the price of the
Company stock, the revised valuation for the Companys
shares increased to $25.0 million. As a result of this, the Company
expects the vast majority of this increase in valuation of the shares
to be written off against goodwill, as either an impairment charge or
as a reduction in the purchase price.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|16. |  | LITIGATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | The Company is not a party to any material legal proceedings other than
ordinary routine claims and proceedings incidental to its business, and
the Company does not expect these claims and proceedings, either
individually or in the aggregate, to have a material adverse effect on the
Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

17



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|17. |  | RECENT ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections (SFAS No. 145),
which eliminates the requirement to report gains and losses related to
extinguishments of debt as extraordinary items. The statement also
included other amendments and technical corrections, which will not have a
material impact on the Company. The provisions of the statement related
to the treatment of debt extinguishments are required to be applied in
fiscal years beginning after May 15, 2002. Upon adoption of SFAS No. 145
in January 2003, previously recorded extraordinary items for debt
extinguishments have been reclassified to continuing operations.                                                                      
|   
|    |  | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS No. 146). SFAS No.
146 addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred rather than when a company
commits to such an activity and also establishes fair value as the
objective for initial measurement of the liability. The Company adopted
SFAS No. 146 in January 2003.                                                
|   
|    |  | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock
Based Compensations  Transition and Disclosure (SFAS No. 148). SFAS
No. 148 is an amendment to SFAF No. 123 providing alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Amendments are
effective for financial statements for fiscal years ended after December
15, 2002 and for interim periods beginning after December 15, 2002. The
Company has currently chosen to not adopt the voluntary change to the fair
value based method of accounting for stock-based employee compensation,
pursuant to SFAS No. 148, which, if adopted, could have a material effect
on the Companys financial position or results of operations.                                                                       
|   
|    |  | In February 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Liabilities and Equity
(SFAS No. 150), which is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS No. 150 establishes standards
for the Companys classification of liabilities in the financial
statements that have characteristics of both liabilities and equity. The
application of SFAS No. 150 is not expected to have a material
adverse effect on the Companys financial statements.                                                                                                                                                                                                                                                                                                              
|   
|    |  | In November 2002, the EITF of the FASB reached a consensus on EITF No.
00-21, Accounting for Revenue Arrangements with Multiple Element
Deliverables. The issue addresses how to account for arrangements that
may
involve multiple revenue-generating activities, i.e., the delivery or
performance of multiple products, services, and/or rights to use assets.
In applying this guidance, separate contracts with the same party, entered
into at or near the same time, will be presumed to be a package, and the
consideration will be measured and allocated to the separate units based
on their relative fair values. This consensus guidance will be applicable
to agreements executed in quarters beginning after June 15, 2003. The
Company will adopt this new accounting effective July 1, 2003. The
Company is currently evaluating the impact of this change.
|   
|    |  | In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (Interpretation No. 45),which
clarifies the disclosure and recognition/measurement requirements related
to certain guarantees. The disclosure requirements are effective for
financial statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a prospective basis
for guarantees issued or modified after December 31, 2002. The Company
typically grants its customers a warranty, which guarantees that its
products will substantially conform to its current specifications for
twelve months from the delivery date. Historically, costs related to
these guarantees have not been significant.                            

18



---



##### 



VERSO TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2003

(Unaudited)



|17. |  | RECENT ACCOUNTING PRONOUNCEMENTS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research
Bulletin No. 51 (Interpretation No.46). Interpretation No. 46
addresses the consolidation by business enterprises of variable interest
entities as defined therein. Interpretation No. 46 applies immediately to
variable interests in variable interest entities created after January 31,
2003, and to variable interests in variable interest entities obtained
after January 31, 2003. The Company is currently determining the impact
of application of this Interpretation on the Companys financial
statements.

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

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

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



|- |  | our ability to fund future growth;                                                                                 
|- |  | -------------------------------------------------------------------------------------------------------------------
| 
|- |  | our ability to become profitable;                                                                                  
| 
|- |  | the volatility of the price of our common stock;                                                                   
| 
|- |  | the historically low price of our common stock;                                                                    
| 
|- |  | the historically low trading volume of our common stock;                                                           
| 
|- |  | market demand for and market acceptance for our products;                                                          
| 
|- |  | our ability to protect our intellectual property rights;                                                           
| 
|- |  | our current level of indebtedness;                                                                                 
| 
|- |  | new regulation and legislation;                                                                                    
| 
|- |  | trends for the continued growth of our business and other businesses we may
acquire, including the business of MCK;
| 
|- |  | our ability to successfully market existing products and services and
develop and market new products and services;
| 
|- |  | our ability to integrate our business with other entities we may
subsequently acquire;                             
| 
|- |  | our ability to expand our market for existing products and services;                                               

19



---



##### 





|- |  | the effects of our accounting policies and general changes in accounting
principles generally accepted in the United States of America               
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
| 
|- |  | general economic conditions of the telecommunications market; and                                                                                    
| 
|- |  | other risks and uncertainties disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2002 and in our other filings with the SEC.

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

20



---



##### 



General

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

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

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

Results of Operations

Three Months Ended June 30, 2003, compared to Three Months Ended June 30, 2002

For the three months ended June 30, 2003, the Companys net loss totaled
$391,000, or $.00 per share, compared with net loss of $599,000, or $.01 per
share, for the same period in 2002.

Total revenue was $15.9 million in the three months ended June 30, 2003,
reflecting a 36% increase from the same period in 2002. Products revenue was
$9.9 million in the three months ended June 30, 2003, reflecting a 62% increase
from the same period in 2002. The $3.8 million increase in product revenue is
comprised of $1.9 million net increase for the Carrier Group and $1.9 million
increase for the Enterprise Group, attributable to Clarent product sales offset
by a decrease in NACT product sales. With the Companys strategy of focusing on
next generation communications solutions, it expects more growth in the Clarent
products than the NACT products as there is a greater market for the Clarent
products and as some customer needs previously filled by NACT products can now
be better served by Clarent products or a combination of both. Services
revenue was $6.0 million in the three months ended June 30, 2003, reflecting a
7% increase from the same period in 2002. Gross profit increased by $2.7
million in the three months ended June 30, 2003, and was 60% of revenue in
2003, compared with 59% of revenue in the same period of 2002. The increase in
gross profit dollars resulted primarily from the increase in revenues. The
slight increase in gross profit percentage was primarily a result of a few of
the Companys Clarent softswitching division
transactions with high margins.

Total operating expenses incurred for the three months ended June 30, 2003,
were $9.5 million, an increase of $1.9 million compared to the same period of
2002. The increase is primarily attributable to the following items: increases
in general and administrative expenses of $931,000, sales and marketing
expenses of $335,000, research and development expenses of $919,000 and
amortization of intangibles of $66,000 offset by decreases in depreciation
expense of $173,000 and amortization of deferred compensation of $130,000.

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

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

The increase in research and development is primarily related to research and
development activities at the Companys Clarent softswitching division and
Clarent Netperformer division.

The decrease in depreciation expense is primarily related to fully depreciated
assets net of increases related to the purchase of furniture and equipment of
approximately $297,000 and $443,000 during the first six months of 2003 and for
the last six months of 2002, respectively. Capital expenditures are primarily
depreciated on a straight-line basis over their estimated useful lives of three
years.

21



---



##### 



The increase in intangible amortization is primarily related to the
amortization of the customer relationship costs related to the acquisition of
Encore Group in 1998, recorded in the fourth quarter of 2002.

The $130,000 decrease in amortization of deferred compensation primarily
related to the termination of certain options and full vesting of other options
outstanding since the Companys acquisitions of Telemate.Net in November 2001
and Cereus Technology Partners, Inc. (Cereus) in September 2000. The
deferred compensation represents the intrinsic value of the Telemate.Net and
Cereus unvested options outstanding at the date of the acquisitions of
Telemate.Net and Cereus and is amortized over the remaining vesting period of
the options.

As a percent of revenue, operating expenses from continuing operations, were
60% during the three months ended June 30, 2003 down from 64% for the same
period in 2002.

Other income was $9,000 during the three months ended June 30, 2003 compared
with $345,000 for the same period in 2002. Included in other income during
the three months ended June 30, 2002 was $254,000 of non-recurring transactions
related to insurance proceeds and the gain on sale of non-operating assets.

Equity in loss of investment was $19,000 during the three months ended June 30,
2003. This amount represents the Companys 51% portion of BeTrues losses for
the quarter. The Company acquired a 51% interest in BeTrue during the fourth
quarter of 2002. Due to the shared decision making between the Company and its
equity partner, the results of BeTrue are treated as an equity investment
rather than being consolidated.

Net interest expense was $454,000 during the three months ended June 30, 2003,
an increase of $145,000 compared to the same period in 2002. The increase was
attributable to increased borrowings on the Companys line of credit and notes
payable for the acquisition of assets from Clarent, net of reductions related
to the interest on the deferred payment due for the purchase of NACT.

Business Unit Performance

|                             |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        |       |    |   |        |       |      |  
|---------------------------- | ----------------------------------------------------- | ----------------------- | -------------------- | ----------------------------------- |  | -------------------------- | ----- | ------------ |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ------ | ----- | -- | - | ------ | ----- | ---- | -
|                             |                                                       |                         |                      | For the
Three Months Ended June 30,
|                             |                                                       |                         |                      |                                    
|                             |                                                       |                         |                      | Carrier Solutions Group             |  | Enterprise Solutions Group |       | Consolidated
|                             |                                                       |                         |                      |                                     |  |                            |       |             
|                             |                                                       |                         |                      | 2003                                |  | 2002                       |       | 2003         |  | 2002 |       | 2003  |  | 2002
|                             |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |     
|                             |                                                       |                         | Dollars in thousands
|Revenue                      |                                                       | $                       | 9,129                |                                     |  | $                          | 7,080 |              |  | $    | 6,729 |       |  | $    | 4,591 |       |  | $ | 15,858 |       |    | $ | 11,671 |      
|                             |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        |       |    |   |        |      
|Gross profit                 |                                                       |                         | 5,840                |                                     |  |                            | 4,346 |              |  |      | 3,694 |       |  |      | 2,532 |       |  |   | 9,534  |       |    |   | 6,878  |      
|Gross margin                 |                                                       |                         | 64                   | %                                   |  |                            | 61    | %            |  |      | 55    | %     |  |      | 55    | %     |  |   | 60     | %     |    |   | 59     | %    
|General and administrative   |                                                       |                         | 1,553                |                                     |  |                            | 1,045 |              |  |      | 426   |       |  |      | 317   |       |  |   | 1,979  |       |    |   | 1,362  |      
|Sales and marketing          |                                                       |                         | 1,087                |                                     |  |                            | 912   |              |  |      | 891   |       |  |      | 619   |       |  |   | 1,978  |       |    |   | 1,531  |      
|Research and development     |                                                       |                         | 1,741                |                                     |  |                            | 1,383 |              |  |      | 642   |       |  |      | 81    |       |  |   | 2,383  |       |    |   | 1,464  |      
|                             |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        |       |    |   |        |      
|                             | Contribution before unallocated items                 |                         | $                    | 1,459                               |  |                            | $     | 1,006        |  |      | $     | 1,735 |  |      | $     | 1,515 |  |   |        | 3,194 |    |   |        | 2,521 |     
|                             |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        |       |    |   |        |      
|Unallocated items:           |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        |       |    |   |        |      
|                             | Corporate, sales, general and
administrative expenses |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        | 2,171 |    |   |        | 1,969 |     
|                             | Depreciation                                          |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        | 543   |    |   |        | 716   |     
|                             | Amortization of intangibles                           |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        | 213   |    |   |        | 147   |     
|                             | Amortization of deferred compensation                 |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        | 194   |    |   |        | 324   |     
|                             |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        |       |    |   |        |      
|                             |                                                       | Operating
income (loss) |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        |       | 73 |   |        |       | (635 | )
|Other income                 |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   | 9      |       |    |   | 345    |      
|Equity in loss of investment |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   | (19    | )     |    |   |       |      
|Interest expense, net        |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   | (454   | )     |    |   | (309   | )    
|                             |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        |       |    |   |        |      
|                             | Loss from continuing operations                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   | $      | (391  | )  |   | $      | (599  | )   
|                             |                                                       |                         |                      |                                     |  |                            |       |              |  |      |       |       |  |      |       |       |  |   |        |       |    |   |        |      

Carrier Solutions Group

Total Carrier Solutions Group revenue was $9.1 million in the three months
ended June 30, 2003, a 29% increase from the same period in 2002. The net
increase in product revenue is attributable to Clarent product sales offset by
a decrease in NACT product sales. With Companys strategy of focusing on next
generation communications solutions, it expects more growth in the Clarent
products than the NACT products as there is a greater market for the Clarent
products and as some customer needs previously filled by NACT products can now
be better served by Clarent products or a combination of both.

Gross profit increased by $1.5 million in the three months ended June 30, 2003,
and was 64% percent of revenue, compared to 61% in the same period in 2002.
The increase in gross profit dollars is related to the increase in revenue and
gross profit percentage. The increase in gross profit percentage was a result
of a few sales of the Companys Clarent softswitching division transactions
with high margins.

Allocated operating expenses incurred in the Carrier Solutions Group for the
three months ended June 30, 2003, were $4.4 million, an increase of $1.0
million compared to the same period in 2002. The increase in general and
administrative expenses reflects the formation of the Companys Clarent
softswitching division subsequent to the Companys acquisition of Clarents
business assets in February 2003 and an increase in general and administrative
expenses at NACT. The increase in sales and marketing expenses and research
and development expenses reflect increases related to the formation of the
Companys Clarent softswitching division subsequent to the Companys
acquisition of Clarents business assets in February 2003 offset by cost
savings in the operations of NACT. As a percent of revenue, operating expenses
for the Carrier Solutions Group were 48% during the three months ended June 30,
2003 up from 47% during the same period in 2002.

Enterprise Solutions Group

Total Enterprise Solutions Group revenue was $6.7 million in the three months
ended June 30, 2003, a 47% increase from the same period in 2002. The increase
in revenue is primarily related to the formation of the Companys Clarent
Netperformer division subsequent to the Companys acquisition of Clarents
business assets in February 2003.

Gross profit increased by $1.2 million in the three months ended June 30, 2003,
and was 55% percent of revenue, compared with 55% of revenue in the same period
in 2002. All divisions in the Enterprise Solutions Group experienced
improvement in gross profit margin compared to the same period in 2002. The
Companys addition of Clarents Netperformer division in February 2003 was the
primary cause of the increase in gross profit dollars although its margin was
slightly less than the overall percentage of the Enterprise Solutions Group.

Allocated operating expenses incurred in Enterprise Solutions Group for the
three months ended June 30, 2003, were $2.0 million, an increase of $942,000
compared to the same period in 2002. The increases in general and
administrative expenses, sales and marketing expenses and research and
development expenses relates to the addition of the Clarents Netperformer
division in February 2003. As a percent of revenue, allocated operating
expenses for Enterprise Solutions Group were 29% during the three months ended
June 30, 2003 up from 22% during the same period in 2002. The increase is
attributable to the increase in research and development expenses as a
percentage of revenue related to the operations of the Companys Clarent
Netperformer division.

22



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##### 



Six Months Ended June 30, 2003, compared to Six Months Ended June 30, 2002

For the six months ended June 30, 2003, the Companys net loss totaled $1.5
million, or $.02 per share, compared with net loss of $1.8 million, or $.02 per
share, for the same period in 2002. The 2002 results included a loss from
discontinued operations of $331,000 or $.00 per share.

Continuing Operations

For the six months ended June 30, 2003, the Companys net loss from continuing
operations totaled $1.5 million, or $.02 per share, compared with a net loss of
$1.5 million, or $.02 per share, for the same period in 2002.

Total revenue was $28.9 million in the six months ended June 30, 2003,
reflecting a 22% increase from the same period in 2002. Products revenue was
$17.1 million in the six months ended June 30, 2003, reflecting a 35% increase
from the same period in 2002. The $4.4 million increase in product revenue is
comprised of $880,000 net increase for the Carrier Group and $3.5 million
increase for the Enterprise Group, attributable to Clarent product sales offset
by a decrease in NACT product sales. With the Companys strategy of focusing on
next generation communications solutions, it expects more growth in the Clarent
products than the NACT products as there is a greater market for the Clarent
products and as some customer needs previously filled by NACT products can now
be better served by Clarent products or a combination of both. Services
revenue was $11.7 million in the six months ended June 30, 2003, reflecting a
7% increase from the same period in 2002. Gross profit increased by $3.2
million in the six months ended June 30, 2003, and was 59% of revenue in 2003,
compared with 59% of revenue in the same period of 2002. The increase in gross
profit dollars resulted primarily from the increase in revenues.

Total operating expenses incurred in continuing operations for the six months
ended June 30, 2003, were $17.8 million, an increase of $2.5 million compared
to the same period of 2002. The increase is primarily attributable to the
following items: reorganization costs of $194,000, increases in general and administrative
expenses of $1.1 million, sales and marketing expenses of $461,000, research
and development expenses of $1.1 million and amortization of intangibles of
$136,000 offset by decreases in depreciation expense of $282,000 and
amortization of deferred compensation of $255,000.

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

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

The increase in research and development is primarily related to research and
development activities at the Companys Clarent softswitching division and
Clarent Netperformer division.

The decrease in depreciation expense is primarily related to fully depreciated
assets net of increases related to the purchase of furniture and equipment of
approximately $297,000 and $443,000 during the first six months of 2003 and for
the last six months of 2002, respectively. Capital expenditures are primarily
depreciated on a straight-line basis over their estimated useful lives of three
years.

The increase in intangible amortization is primarily related to the
amortization of the customer relationship costs related to the acquisition of
Encore Group in 1998, recorded in the fourth quarter of 2002.

The $255,000 decrease in amortization of deferred compensation primarily
related to the termination of certain options and full vesting of other options
outstanding since the Companys acquisitions of Telemate.Net in November 2001
and Cereus Technology Partners, Inc. (Cereus) in September 2000. The
deferred compensation represents the intrinsic value of the Telemate.Net and
Cereus unvested options outstanding at the date of the acquisitions of
Telemate.Net and Cereus and is amortized over the remaining vesting period of
the options.

In the first quarter of 2003, the Company announced a reorganization to
accommodate the acquisition of the assets of Clarent and eliminated 14
positions held by employees. As a result of these actions, the Company
recorded reorganization costs of $194,000 during the six months ended June 30,
2003. The reorganization costs consist of severance. Annualized savings
beginning in the second quarter of 2003 are expected to be approximately
$987,000.

As a percent of revenue, operating expenses from continuing operations, were
62% during the six months ended June 30, 2003 down from 65% for the same period
in 2002.

23



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Other income was $18,000 during the six months ended June 30, 2003 compared
with $431,000 for the same period in 2002. Included in other income during the
six months ended June 30, 2002 was $254,000 of non-recurring transactions
related to insurance proceeds and the gain on sale of non-operating assets.

Equity in loss of investment was $52,000 during the six months ended June 30,
2003. This amount represents the Companys 51% portion of BeTrues losses for
the six months. The Company acquired a 51% interest in BeTrue during the
fourth quarter of 2002. Due to the shared decision making between the Company
and its equity partner, the results of BeTrue are treated as an equity
investment rather than being consolidated.

Net interest expense was $761,000 during the six months ended June 30, 2003, an
increase of $242,000 compared to the same period in 2002. The increase was
attributable to increased borrowings on the Companys line of credit and notes
payable for the acquisition of assets from Clarent, net of reductions related
to the interest on the deferred payment due for the purchase of NACT.

Business Unit Performance

|                             |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         |        |      |   |        |        |        |  
|---------------------------- | ----------------------------------------------------- | -------------- | ------ | --------------------------------- |  | -------------------------- | ------ | ------------ |  | ---- | ------ | ----- |  | ---- | ----- | ----- |  | - | ------- | ------ | ---- | - | ------ | ------ | ------ | -
|                             |                                                       |                |        | For the
Six Months Ended June 30,
|                             |                                                       |                |        |                                  
|                             |                                                       |                |        | Carrier Solutions Group           |  | Enterprise Solutions Group |        | Consolidated
|                             |                                                       |                |        |                                   |  |                            |        |             
|                             |                                                       |                |        | 2003                              |  | 2002                       |        | 2003         |  | 2002 |        | 2003  |  | 2002
|                             |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |     
|                             |                                                       |                |        | Dollars in thousands             
|Revenue                      |                                                       | $              | 15,851 |                                   |  | $                          | 14,605 |              |  | $    | 13,004 |       |  | $    | 9,060 |       |  | $ | 28,8550 |        |      | $ | 23,665 |       
|                             |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         |        |      |   |        |       
|Gross profit                 |                                                       |                | 9,798  |                                   |  |                            | 9,021  |              |  |      | 7,308  |       |  |      | 4,902 |       |  |   | 17,106  |        |      |   | 13,923 |       
|Gross margin                 |                                                       |                | 62     | %                                 |  |                            | 62     | %            |  |      | 56     | %     |  |      | 54    | %     |  |   | 59      | %      |      |   | 59     | %     
|General and administrative   |                                                       |                | 2,761  |                                   |  |                            | 2,020  |              |  |      | 886    |       |  |      | 705   |       |  |   | 3,647   |        |      |   | 2,725  |       
|Sales and marketing          |                                                       |                | 1,980  |                                   |  |                            | 1,816  |              |  |      | 1,649  |       |  |      | 1,169 |       |  |   | 3,629   |        |      |   | 2,985  |       
|Research and development     |                                                       |                | 3,203  |                                   |  |                            | 2,915  |              |  |      | 1,076  |       |  |      | 224   |       |  |   | 4,279   |        |      |   | 3,139  |       
|                             |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         |        |      |   |        |       
|                             | Contribution before unallocated items                 |                | $      | 1,854                             |  |                            | $      | 2,270        |  |      | $      | 3,697 |  |      | $     | 2,804 |  |   |         | 5,551  |      |   |        | 5,074  |       
|                             |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         |        |      |   |        |       
|Unallocated items:           |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         |        |      |   |        |       
|                             | Corporate, sales, general and
administrative expenses |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         | 4,064  |      |   |        | 4,029  |       
|                             | Depreciation                                          |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         | 1,196  |      |   |        | 1,478  |       
|                             | Amortization of intangibles                           |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         | 425    |      |   |        | 289    |       
|                             | Amortization of deferred compensation                 |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         | 393    |      |   |        | 648    |       
|                             | Reorganization costs                                  |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         | 194    |      |   |        |       |       
|                             |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         |        |      |   |        |       
|                             |                                                       | Operating loss |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         |        | (721 | ) |        |        | (1,370 | )
|Other income                 |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   | 18      |        |      |   | 431    |       
|Equity in loss of investment |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   | (52     | )      |      |   |       |       
|Interest expense, net        |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   | (761    | )      |      |   | (519   | )     
|                             |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         |        |      |   |        |       
|                             | Loss from continuing operations                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   | $       | (1,516 | )    |   | $      | (1,458 | )     
|                             |                                                       |                |        |                                   |  |                            |        |              |  |      |        |       |  |      |       |       |  |   |         |        |      |   |        |       

Carrier Solutions Group

Total Carrier Solutions Group revenue was $15.9 million in the six months ended
June 30, 2003, a 9% increase from the same period in 2002. The net increase in
product revenue is attributable to Clarent product sales offset by a decrease
in NACT product sales. With Companys strategy of focusing on next generation
communications solutions, it expects more growth in the Clarent products than
the NACT products as there is a greater market for the Clarent products and as
some customer needs previously filled by NACT products can now be better served
by Clarent products or a combination of both.

Gross profit increased by $777,000 in the six months ended June 30, 2003, and
was 62% percent of revenue, compared to 62% in the same period in 2002. The
increase in gross profit dollars is related to increased revenues.

Allocated operating expenses incurred in the Carrier Solutions Group for the
six months ended June 30, 2003, were $7.9 million, an increase of $1.2 million
compared to the same period in 2002. The increase in general and
administrative expenses reflects the formation of the Companys Clarent
softswitching division subsequent to the Companys acquisition of Clarents
business assets in February 2003. The increase in sales and marketing expenses
and research and development expenses reflect increases related to the
formation of the Companys Clarent softswitching division subsequent to the
Companys acquisition of Clarents business assets in February 2003 offset by
cost savings in the operations of NACT. As a percent of revenue, operating
expenses for the Carrier Solutions Group were 50% during the six months ended
June 30, 2003 up from 46% during the same period in 2002.

Enterprise Solutions Group

Total Enterprise Solutions Group revenue was $13.0 million in the six months
ended June 30, 2003, a 44% increase from the same period in 2002. The increase
in revenue is primarily related to the formation of the Companys Clarent
Netperformer division subsequent to the Companys acquisition of Clarents
business assets in February 2003.

Gross profit increased by $2.4 million in the six months ended June 30, 2003,
and was 56% percent of revenue, compared with 54% of revenue in the same period
in 2002. All divisions in the Enterprise Solutions Group experienced
improvement in gross profit dollars and margin compared to the same period in
2002. The Companys addition of Clarents Netperformer division in February
2003 was the primary cause of the increase in gross profit dollars and its
margin was comparable with the overall percentage of the Enterprise Solutions
Group.

Allocated operating expenses incurred in Enterprise Solutions Group for the six
months ended June 30, 2003, were $3.6 million, an increase of $1.5 million
compared to the same period in 2002. The increases in general and
administrative expenses, sales and marketing expenses and research and
development expenses relates to the addition of the Clarents Netperformer
division in February 2003. As a percent of revenue, allocated operating
expenses for Enterprise Solutions Group were 28% during the six months ended
June 30, 2003 up from 23% during the same period in 2002. The increase is
attributable to the increase in research and development expenses as a
percentage of revenue related to the operations of the Companys Clarent
Netperformer division.

Discontinued Operations

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

There were no results of discontinued operations for the six months ended June
30, 2003. Summary operating results of the discontinued operations for the six
months ended June 30, 2002 (in thousands) were as follows:

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

24



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Critical and Significant Accounting Policies

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

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

Allowance for Doubtful Accounts

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

Inventory Obsolescence

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

Revenue Recognition

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

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

Restructuring Accruals

Continuing Operations:

In the first quarter of 2003, the Company initiated a reorganization to
accommodate the acquisition of the assets of Clarent and eliminated 14
positions held by employees. As a result of these actions, the Company
recorded reorganization costs of $194,000 during the six months ended June 30,
2003. The reorganization costs consist of severance costs and the balance of
the accrued severance costs as of June 30, 2003 is $16,000.

25



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Discontinued Operations:

During the second and third quarters of 2001, the Company initiated certain
restructuring plans. In conjunction with these restructuring plans, the
Company established a restructuring reserve account for the estimated costs
related to the plans. These costs primarily related to facilities closings,
severance costs and MessageClick ASP service exiting costs. For the facilities
closings cost, a reserve was established for all remaining lease payments due
on buildings and equipment that were no longer being utilized in continuing
operations, less assumptions for sub-leases. The accrual for one of the leases
with total payments remaining of $2.5 million assumes that the building will be
sub-leased for 50% of the total lease liability over the term of the lease. As
of June 30, 2003, the Company had a remaining reserve balance of approximately
$1.8 million, which is included in
liabilities of discontinued operations. The Company currently believes that
this remaining estimated balance is appropriate to cover future obligations
associated with the restructurings. Activity in the restructuring accruals was
as follows:

|                                 |  |   |       |  
|-------------------------------- |  | - | ----- | -
|Balance December 31, 2002        |  | $ | 2,010 |  
|Lease payments                   |  |   | (426  | )
|Additional restructuring accrual |  |   | 201   |  
|                                 |  |   |       |  
|Balance June 30, 2003            |  | $ | 1,785 |  
|                                 |  |   |       |  

Deferred Tax Asset Valuation Allowance

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

Litigation and Related Contingencies

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

Intangible Assets

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

26



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Liquidity and Capital Resources

Summary

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

At June 30, 2003, the Company had a positive working capital position (excess
of current assets over current liabilities) of $5.6 million compared to a
positive working capital position of $1.8 million at December 31, 2002. The
Companys cash and cash

27



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equivalents totaled $1.2 million at June 30, 2003, and $1.3 million at December
31, 2002. Total long-term debt, net of discount, was
$6.8 million at June 30, 2003 and $3.7 million at December 31, 2002. At June 30, 2003, the Company
had borrowed $2.8 million under its $10.0 million Amended Credit Agreement with
Silicon. The Companys remaining borrowing availability under the Amended
Credit Agreement at June 30, 2003 was $5.1 million.

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

On February 12, 2003, the Company acquired substantially all the business
assets and assumed certain related liabilities of Clarent for $9.8 million in
notes. At the closing of the acquisition, the Company issued three promissory
notes to Clarent: a $5.0 million secured note due February 13, 2004, which
bears interest at 10% per annum, of which $750,000 was paid through June 30,
2003, and the remainder is due in monthly installments continuing in July at
$250,000, increasing to $500,000 in September and $750,000 in December; a $1.8
million non-interest bearing unsecured note due February 13, 2004, of which
$300,000 was paid through June 30, 2003 and the remainder is due in quarterly
installments of $500,000; and a $3.0 million secured note due February 12,
2008, which bears interest at 5% per annum. The assets the Company purchased
from Clarent secure the secured notes.

Cash Flow

Cash provided by the Companys continuing operations in the six months ended
June 30, 2003 totaled approximately $229,000 compared with cash used in
continuing operations of $1.8 million in the same period in 2002. The
Companys source of cash in continuing operations during the six months ended
June 30, 2003 resulted primarily from cash provided from continuing operations
of $2.0 million (net loss from continuing operations of $1.5 million reduced by
non-cash charges totaling $3.5 million, including depreciation and amortization
of $2.2 million and provision for doubtful accounts of $1.3 million) offset by
cash used for changes in current operating assets and liabilities of
approximately $1.7 million.

Cash used in the Companys discontinued operations in the six months ended June
30, 2003 totaled $525,000 compared with cash used in discontinued operations of
$458,000 in the same period in 2002.

The Company used cash in investing activities in the six months ended June 30,
2003 of approximately $1.6 million, compared to $607,000 in the same period of
2002. In the six months ended June 30, 2003, the Company used $1.0 million in
cash, net of cash acquired, related to the acquisition of the assets of
Clarent. The Company spent $297,000 and $446,000 on capital expenditures in
the six months ended June 30, 2003 and 2002, respectively. The Company also
invested $320,000 and $161,000 on purchased software development costs in the
six months ended June 30, 2003 and 2002, respectively.

Cash provided by financing activities totaled approximately $1.8 million in the
six months ended June 30, 2003, compared to cash used of $1.2 million in the
same period of 2002. The Company borrowed $2.0 million on the Companys credit
line, received proceeds from the issuance of the Companys
common stock totaling $812,000 and
paid $1.1 million on the notes payable for the purchase of the assets of
Clarent in the six months ended June 30, 2003. The Company received proceeds
from the issuance of the Companys common stock totaling $292,000 and paid
$1.5 million on the notes payable for the purchase of NACT in the six months
ended June 30, 2002.

28



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##### 



Contractual Obligations and Commercial Commitments

The following summarizes the Companys future contractual obligations at June
30, 2003 (in thousands):

|                                                        |                         |       |        |        |  |           |           |       |  |         |        |       |  |   |       |       |       |   |       |       | 
|------------------------------------------------------- | ----------------------- | ----- | ------ | ------ |  | --------- | --------- | ----- |  | ------- | ------ | ----- |  | - | ----- | ----- | ----- | - | ----- | ----- | 
|                                                        |                         |       |        |        |  |           | Less than |       |  |         |        |       |  |   |       |       | After |  
|Contractual Obligations                                 |                         | Total |        | 1 year |  | 1-3 years | 4-5 years |       |  | 5 years |       
|                                                        |                         |       |        |        |  |           |           |      
|Line of credit                                          |                         | $     | 2,848  |        |  | $         |          |       |  | $       | 2,848  |       |  | $ |      |       |       | $ |      |      
|Additional payments for the acquisition of
Encore Group |                         |       | 1,463  |        |  |           | 654       |       |  |         | 662    |       |  |   | 147   |       |       |   |      |      
|Notes payable                                           |                         |       | 8,750  |        |  |           | 5,750     |       |  |         |       |       |  |   | 3,000 |       |       |   |      |      
|Convertible subordinated debentures                     |                         |       | 4,500  |        |  |           |          |       |  |         | 4,500  |       |  |   |      |       |       |   |      |      
|Operating leases:                                       |                         |       |        |        |  |           |           |       |  |         |        |       |  |   |       |       |       |   |       |      
|                                                        | Continuing operations   |       |        | 14,910 |  |           |           | 2,680 |  |         |        | 4,975 |  |   |       | 4,159 |       |   |       | 3,096 | 
|                                                        | Discontinued operations |       |        | 1,706  |  |           |           | 605   |  |         |        | 429   |  |   |       | 380   |       |   |       | 292   | 
|                                                        |                         |       |        |        |  |           |           |       |  |         |        |       |  |   |       |       |       |   |       |      
|Total contractual cash obligations                      |                         | $     | 34,177 |        |  | $         | 9,689     |       |  | $       | 13,414 |       |  | $ | 7,686 |       |       | $ | 3,388 |      
|                                                        |                         |       |        |        |  |           |           |       |  |         |        |       |  |   |       |       |       |   |       |      

Sources of Cash

For 2003, the Company expects that its primary sources of cash will be from
cash on hand, working capital provided by operating activities, borrowings
under its Amended Credit Agreement with Silicon, repayment of its notes
receivable from shareholders and other possible sources, including issuances of
equity or debt securities, including exercise of options and warrants. The
Company believes that, with its current operations, which generated positive
income from continuing operations before interest, taxes, depreciation,
amortization of intangibles and amortization of deferred compensation
(EBITDA) for the last seven quarters, it will have sufficient liquidity from
these sources to meet its current financial obligations through 2003.
Additionally, in July 2003, the Company received cash proceeds of $1.1 million
from the exercise of options and warrants and $1.6 million from the early
retirement of notes receivable from shareholders. The Amended Credit Agreement
with Silicon, however, is subject to certain financial covenants and
limitations on the Companys ability to access funds under the Amended Credit
Agreement. If the Company is in violation of the Amended Credit Agreement, or
does not have sufficient eligible accounts receivable and inventory to support
the level of borrowings it may need, the Company may be unable to draw on the
Amended Credit Agreement to the extent necessary. To the extent the Company
does not have borrowing availability under the Amended Credit Agreement, the
Company may be required to obtain additional sources of capital, sell assets,
obtain an amendment to the Amended Credit Agreement or otherwise restructure
its outstanding indebtedness. If the Company is unable to obtain additional
capital, sell assets, obtain an amendment to the Amended Credit Agreement or
otherwise restructure its outstanding indebtedness, then the Company may not be
able to meet its obligations.

The Companys short-term cash needs are to cover working capital needs,
including cash operating losses, if any, capital expenditures, transaction
costs related to the acquisition of Clarents assets and MCK, payments on the secured
and unsecured notes made by the Company in connection with the
acquisition of Clarents assets, totaling approximately $5.8 million plus interest due February 13,
2004 and payments related to discontinued operations. At June 30, 2003,
liabilities of discontinued operations included $1.8 million in lease payments
related to discontinued operations. The Company expects to pay out
approximately $605,000 related to discontinued operations in the next twelve
months.

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

Recent Accounting Pronouncements

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

29



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##### 



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

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

In February 2003, the FASB issued SFAS No. 150, which is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 establishes standards for the
Companys classification of liabilities in the financial statements that have
characteristics of both liabilities and equity. The application of SFAS
No. 150 is not expected to have a material adverse effect on the Companys
financial statements.

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

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

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

30



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##### 



ITEM 3: Quantitative and Qualitative Disclosures about Market Risk

Market Risk

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

Interest Rate Risks

The Companys notes payable and convertible subordinated debentures at June 30,
2003, carry interest rates, which are fixed. The Companys line of credit
pursuant to the Amended Credit Agreement carries interest rates, which vary
with the prime rate. Accordingly, any increases in Silicons prime rate will
reduce the Companys earnings. A 1% increase in the prime rate on the $2.8
million outstanding under the Companys line of credit at June 30, 2003 would
result in an annual interest expense increase of approximately $28,000.

Foreign Currency Risks

Products sold outside of the United States of America are transacted in U.S.
dollars and therefore the Company is not exposed to foreign currency exchange
risk. Transactions with Clarent Canada Ltd., the Companys Canadian subsidiary
present foreign currency exchange risk. The principal transactions are
personnel and related costs. The intercompany balance is denominated in U.S.
dollars and changes in foreign currency rates would result in foreign currency
gains and losses. Using the intercompany balance at June 30, 2003, a 10%
strengthening of the U.S. dollar against the Canadian dollar would result in a
foreign currency transaction loss of approximately $164,000. To date, foreign
exchange gains and losses have not been significant.

ITEM 4: Controls and Procedures

The Companys Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Companys disclosure controls and procedures
(as such term is defined in Rules 13a-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 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 report, the
Companys disclosure controls and procedures are effective in alerting them on
a timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Companys periodic
filings under the Exchange Act.

31



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##### 



PART II  OTHER INFORMATION

Item 1. Legal Proceedings



| |  | The Company is not a party to any material legal proceedings other than
ordinary routine claims and proceedings incidental to its business, and
the Company does not expect these claims and proceedings, either
individually or in the aggregate, to have a material adverse effect on the
Company. In addition, as previously disclosed in the Companys Annual
Report on Form 10-K for the year ended December 31, 2002, the proceeding
against the Company discussed below has been resolved.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On or about April 29, 2002, Omni and Dyer filed with the AAA a demand for
arbitration against the Company and Eltrax International. Omni and Dyer
claimed that the Company and Eltrax International breached the Assignment.
Pursuant to the Assignment, Omni and Dyer assigned and transferred to
Eltrax International all of their right, title and interest in and to a
certain computer software property management system in exchange for a
one-time payment. The Assignment also provided for an earn-out component
of the acquisition consisting of certain contingent monthly payments equal
to a percentage of the maintenance and licensing net revenues received by
Eltrax International with respect to a certain contract. Omni and Dyer
claimed that the Company and Eltrax International had not paid to Omni and
Dyer the contingent monthly payments owed to them pursuant to the
Assignment beginning in June 2002. Omni and Dyer sought recovery of over
$400,000 for contingent monthly payments allegedly owned for the period
from May 15, 2002 through January 2003, plus payments in like amounts
going forward, together with interest thereon, attorneys fees and
expenses. In January 2003, the matter was heard for six days by a
three-arbitrator panel of the AAA. On April 1, 2003, the Company received
notice that the AAA panel awarded to Omni and Dyer (i) payments and
interest thereon with respect to the Assignment in the aggregate amount of
approximately $506,000; and (ii) attorneys fees and expenses, excluding
expenses of the AAA, in the aggregate amount of approximately $199,000
(net attorneys fees and expenses awarded to the Company), which amounts
are to be paid by Eltrax International (and not the Company) no later than
April 30, 2003. Additionally, the AAA panel determined that Eltrax
International (and not the Company) will be liable for future payments as
they become due in accordance with the terms of the Assignment.

Item 2. Changes in Securities and Use of Proceeds



| |  | In the quarter ended June 30, 2003, the Company issued to two individuals
an aggregate of 1,676,517 shares of the Companys common stock upon
exercise by such individuals of warrants to purchase shares of the
Companys common stock issued in connection with the private placement of
securities conducted by the Company in October 2002. The shares issued to
the individuals were issued without registration under the Securities Act
of 1933, as amended (the Securities Act), in reliance upon the exemption
from registration set forth in Regulation D promulgated pursuant to
Section 4(2) of the Securities Act (Regulation D). The Company based
such reliance upon factual representations made to the Company by each
individual as to such individuals investment intent, sophistication, and
status as an accredited investor, as that term is defined in Rule 501 of
Regulation D, among other things.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------

| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 2.1  |  |  | Agreement and Plan of Merger dated as of April 21,
2003, among the Company, Mickey Acquiring Sub, Inc. and MCK.
(The schedules to the Agreement and Plan of Merger have been
omitted from this Report pursuant to Item 601(b)(2) of
Regulation S-K, and the Company agrees to furnish copies of
such omitted schedules supplementally to the SEC upon request.)
*
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | 2.2  |  |  | First Amendment to the Agreement and Plan of Merger
dated as of April 21, 2003, among the Company, Mickey Acquiring
Sub, Inc. and MCK. *                                                                                                                                                                                                                         
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | 2.3  |  |  | Second Amendment to the Agreement and Plan of
Merger dated as of June 13, 2003, among the Company, Mickey
Acquiring Sub, Inc. and MCK.**                                                                                                                                                                                                                         
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | 31.1 |  |  | Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Executive Officer.                                                                                                                                                                                                                                                                                 
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | 31.2 |  |  | Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Financial Officer.                                                                                                                                                                                                                                                                                 

32



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##### 



| |  |  |      |  |  |                                                                     
| |  |  | ---- |  |  | --------------------------------------------------------------------
| |  |  | 32.1 |  |  | Section 1350 Certification by the Companys Chief Executive Officer.
| |  |  |      |  |  |                                                                     
| |  |  | 32.2 |  |  | Section 1350 Certification by the Companys Chief Financial Officer.

---

|*  |  | Incorporated by reference to the Companys Current
Report on Form 8-K filed on April 23, 2003.
|-- |  | ----------------------------------------------------------------------------------------------
|  
|** |  | Incorporated by reference to the Companys Current Report on Form
8-K filed on June 17, 2003. 



| | (b) | Reports on Form 8-K.                                                                                             
| | --- | -----------------------------------------------------------------------------------------------------------------
|
| |     | During the quarter ended June 30, 2003, the Company filed with the
SEC the following Current Reports on Form 8-K:



| | (i)   |  | Current Report on Form 8-K filed on April 23, 2003,
reporting under Item 5 of such report that the Company had
entered into that certain Agreement and Plan of Merger dated as
of April 21, 2003, among the Company, Mickey Acquiring Sub,
Inc. and MCK, and that certain First Amendment to the Agreement
and Plan of Merger dated as of April 21, 2003, among the
Company, Mickey Acquiring Sub, Inc. and MCK;
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (ii)  |  | Current Report on Form 8-K filed on May 17, 2003,
reporting under Item 12 of such report information regarding
the Companys results of operations and financial condition for
the first quarter 2003; and                                                                                                                                                                                                      
|
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (iii) |  | Current Report on Form 8-K filed on June 13, 2003,
reporting under Item 5 of such report that the Company had
entered into that certain Second Amendment to Agreement and
Plan of Merger dated as of June 13, 2003, among the Company,
Mickey Acquiring Sub, Inc. and MCK.                                                                                                                                      

33



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##### 



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 13, 2003 |  | /s/ Juliet M. ReisingExecutive Vice President and Chief Financial Officer
(duly authorized signatory and
Principal Financial and Accounting Officer)

34



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##### 



EXHIBIT INDEX

|     |  |                                                                                                                                                                                                                                                                                                                                                                                      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Agreement and Plan of Merger dated as of April 21, 2003, among the
Company, Mickey Acquiring Sub, Inc. and MCK Communications, Inc. (The
schedules to the Agreement and Plan of Merger have been omitted from this
Report pursuant to Item 601(b)(2) of Regulation S-K, and the Company
agrees to furnish copies of such omitted schedules supplementally to the
SEC upon request.) *
|     |  |                                                                                                                                                                                                                                                                                                                                                                                      
|2.2  |  | First Amendment to the Agreement and Plan of Merger dated as of April 21,
2003, among the Company, Mickey Acquiring Sub, Inc. and MCK
Communications, Inc. *                                                                                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                      
|2.3  |  | Second Amendment to the Agreement and Plan of Merger dated as of June 13,
2003, among the Company, Mickey Acquiring Sub, Inc. and MCK
Communications, Inc.**                                                                                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                      
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Executive Officer.                                                                                                                                                                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                      
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Financial Officer.                                                                                                                                                                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                      
|32.1 |  | Section 1350 Certification by the Companys Chief Executive Officer.                                                                                                                                                                                                                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                      
|32.2 |  | Section 1350 Certification by the Companys Chief Financial Officer.                                                                                                                                                                                                                                                                                                                 



---

|*  |  | Incorporated by reference to the Companys Current Report on Form 8-K filed
on April 23, 2003.
|-- |  | ----------------------------------------------------------------------------------------------
|  
|** |  | Incorporated by reference to the Companys Current Report on Form 8-K filed
on June 17, 2003. 

35