##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-22190
 VERSO TECHNOLOGIES, INC.
  Minnesota
    
    41-1484525(State of incorporation)
    
    (I.R.S. EmployerIdentification No.)
 
 678.589.3500
 þ o
  o o þ
 o þ




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##### 



VERSO TECHNOLOGIES, INC.
FORM 10-Q
INDEX
 Page No.Part I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of September, 30, 2006 (unaudited) and
December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2006 and 2005 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September
30, 2006 and 2005 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4.
    
    Controls and Procedures
    
    
    36PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    36Item 1A.
    
    Risk Factors
    
    
    37Item 4.
    
    Submission of Matters to a Vote of
Security Holders
    
    
    38Item 6.
    
    Exhibits
    
    
    39Signature Page
    
    
    40Exhibit Index
    
    
    E-1EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO




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##### Table of Contents



VERSO
TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETS:Current assets:Cash and cash equivalents
    
    $
    1,047
    
    
    $
    1,079Restricted cash
    
    
    1,254
    
    
    
    1,656Accounts receivable, net
    
    
    9,994
    
    
    
    7,336Inventories
    
    
    7,482
    
    
    
    4,259Prepaid loan origination costs
    
    
    2,415
    
    
    
    149Other current assets
    
    
    1,703
    
    
    
    1,805Current portion of note receivable from sale of discontinued operations
    
    
    97
    
    
    
    655Total current assets
    
    
    23,992
    
    
    
    16,939Property and equipment, net
    
    
    1,930
    
    
    
    2,305Investment
    
    
    617
    
    
    
    745Note receivable, net of current portion, from sale of discontinued operations
    
    
    2,007
    
    
    
    2,736Other intangibles, net
    
    
    3,027
    
    
    
    2,859Goodwill
    
    
    2,514
    
    
    
    2,514Total assets
    
    $
    34,087
    
    
    $
    28,098LIABILITIES AND SHAREHOLDERS EQUITY:Current liabilities:Line of credit
    
    $
    4,729
    
    
    $
    1,269Accounts payable
    
    
    2,703
    
    
    
    2,309Accrued compensation
    
    
    1,619
    
    
    
    1,111Accrued expenses
    
    
    3,527
    
    
    
    2,231Current portion of accrued loss on sublease
    
    
    528
    
    
    
    543Current portion of liabilities of discontinued operations
    
    
    854
    
    
    
    1,921Current portion of convertible debentures
    
    
    3,600
    
    
    
    3,262Unearned revenue and customer deposits
    
    
    2,780
    
    
    
    2,391Total current liabilities
    
    
    20,340
    
    
    
    15,037Accrued loss on sublease, net of current portion
    
    
    866
    
    
    
    1,150Liabilities of discontinued operations, net of current portion
    
    
    353
    
    
    
    610Other long-term liabilities
    
    
    
    
    
    
    50Notes payable
    
    
    2,843
    
    
    
    2,785Convertible subordinated debentures, net of discount
    
    
    4,915
    
    
    
    5,627Total liabilities
    
    
    29,317
    
    
    
    25,259Shareholders equity:Redeemable
preferred stock, no par value, 200,000 shares authorized; 164,766
shares issued and 8,766 outstanding
    
    
    2,784
    
    
    
    Common
stock, $.01 par value, 60,000,000 shares authorized; 37,007,147 and
27,180,146 shares issued and outstanding
    
    
    370
    
    
    
    273Additional paid-in capital
    
    
    347,322
    
    
    
    334,650Stock payable
    
    
    
    
    
    
    67Accumulated deficit
    
    
    (345,411
    )
    
    
    (331,991
    )Accumulated other comprehensive income (loss)  foreign currency translation
    
    
    (295
    )
    
    
    (160
    )Total shareholders equity
    
    
    4,770
    
    
    
    2,839Total liabilities and shareholders equity
    
    $
    34,087
    
    
    $
    28,098
  3




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VERSO TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
 For the three months ended September 30,
    
    
    For the nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Products
    
    $
    9,264
    
    
    $
    4,697
    
    
    $
    18,017
    
    
    $
    12,038Services
    
    
    4,088
    
    
    
    3,584
    
    
    
    10,504
    
    
    
    11,363Total revenue
    
    
    13,352
    
    
    
    8,281
    
    
    
    28,521
    
    
    
    23,401Cost of revenue:Products:Product costs
    
    
    5,134
    
    
    
    2,174
    
    
    
    9,463
    
    
    
    5,853Amortization of intangibles
    
    
    148
    
    
    
    170
    
    
    
    517
    
    
    
    385Total cost of product
    
    
    5,282
    
    
    
    2,344
    
    
    
    9,980
    
    
    
    6,238Services
    
    
    2,994
    
    
    
    2,261
    
    
    
    7,278
    
    
    
    6,951Total cost of revenue
    
    
    8,276
    
    
    
    4,605
    
    
    
    17,258
    
    
    
    13,189Gross profit:Products
    
    
    3,982
    
    
    
    2,353
    
    
    
    8,037
    
    
    
    5,800Services
    
    
    1,094
    
    
    
    1,323
    
    
    
    3,226
    
    
    
    4,412Total gross profit
    
    
    5,076
    
    
    
    3,676
    
    
    
    11,263
    
    
    
    10,212Operating expenses:General and administrative
    
    
    2,743
    
    
    
    2,490
    
    
    
    7,387
    
    
    
    7,344Sales and marketing
    
    
    2,430
    
    
    
    2,008
    
    
    
    6,004
    
    
    
    6,322Research and development
    
    
    1,850
    
    
    
    1,655
    
    
    
    5,623
    
    
    
    5,076Depreciation and amortization
    
    
    534
    
    
    
    527
    
    
    
    1,400
    
    
    
    1,768Reorganization costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464Reorganization costs  loss on sublease
    
    
    
    
    
    
    340
    
    
    
    
    
    
    
    2,550Total operating expenses
    
    
    7,557
    
    
    
    7,020
    
    
    
    20,414
    
    
    
    23,524Operating loss from continuing operations
    
    
    (2,481
    )
    
    
    (3,344
    )
    
    
    (9,151
    )
    
    
    (13,312
    )Other income (expense), net:Other expense
    
    
    (9
    )
    
    
    (41
    )
    
    
    (7
    )
    
    
    (58
    )Equity in (loss) income of investment
    
    
    (21
    )
    
    
    58
    
    
    
    (127
    )
    
    
    6Interest expense, net, including $1,228, $1,025, $3,064 and
$1,869 of amortization of loan fees and discount on
convertible debentures in each period, respectively
    
    
    (1,611
    )
    
    
    (1,272
    )
    
    
    (4,135
    )
    
    
    (2,569
    )(1,641
    )
    
    
    (1,255
    )
    
    
    (4,269
    )
    
    
    (2,621
    )Loss from continuing operations before income taxes
    
    
    (4,122
    )
    
    
    (4,599
    )
    
    
    (13,420
    )
    
    
    (15,933
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (4,122
    )
    
    
    (4,599
    )
    
    
    (13,420
    )
    
    
    (15,933
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (566
    )Net loss
    
    $
    (4,122
    )
    
    $
    (4,599
    )
    
    $
    (13,420
    )
    
    $
    (16,499
    )Net loss per common share  basic and diluted:Loss from continuing operations
    
    $
    (0.11
    )
    
    $
    (0.17
    )
    
    $
    (0.40
    )
    
    $
    (0.59
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net loss per common share  basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.17
    )
    
    $
    (0.40
    )
    
    $
    (0.61
    )Weighted average shares outstanding  basic and diluted
    
    
    36,712,902
    
    
    
    27,034,569
    
    
    
    33,426,267
    
    
    
    26,868,392
  4




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VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(Unaudited)
 For the nine months ended September 30,2006
    
    
    2005Operating Activities:Continuing operations:Net loss from continuing operations
    
    $
    (13,420
    )
    
    $
    (15,933
    )Adjustments to reconcile net loss from continuing operations to net
cash used in continuing operating activities:Equity in loss of investment
    
    
    127
    
    
    
    (6
    )Stock based compensation
    
    
    200
    
    
    
    Depreciation and amortization
    
    
    1,917
    
    
    
    2,153Provision for doubtful accounts
    
    
    478
    
    
    
    228Amortization of loan fees and discount on convertible subordinated debentures
    
    
    2,681
    
    
    
    1,869Reorganization costs  loss on sublease
    
    
    
    
    
    
    2,550Other
    
    
    (136
    )
    
    
    (27
    )Changes in current operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (3,028
    )
    
    
    (1,328
    )Inventories
    
    
    1,626
    
    
    
    933Other current assets
    
    
    (597
    )
    
    
    137Accounts payable
    
    
    394
    
    
    
    177Accrued compensation
    
    
    132
    
    
    
    (134
    )Accrued expenses
    
    
    1,292
    
    
    
    (867
    )Unearned revenue and customer deposits
    
    
    227
    
    
    
    (580
    )Net cash used in continuing operating activities
    
    
    (8,107
    )
    
    
    (10,828
    )Discontinued operations:Loss from discontinued operations
    
    
    
    
    
    
    (566
    )Adjustment to reconcile loss from discontinued operations
to net cash used in discontinued operating activities
    
    
    (1,457
    )
    
    
    (772
    )Net cash used in discontinued operating activities
    
    
    (1,457
    )
    
    
    (1,338
    )Net cash used in operating activities
    
    
    (9,564
    )
    
    
    (12,166
    )Investing Activities:Continuing operations:Net cash (used in) provided by investing activities for continuing operations:Purchases of property and equipment
    
    
    (286
    )
    
    
    (529
    )Purcase of Verilink
    

    
    (242
    )Purchase of WSECI
    
    
    
    
    
    
    (268
    )(Increase) decrease in restricted cash
    
    
    402
    
    
    
    (1,620
    )Net cash used in investing activities for continuing operations
    
    
    (126
    )
    
    
    (2,417
    )Discontinued operations:Proceeds from notes receivable
    
    
    1,420
    
    
    
    180Proceeds from sale of discontinued operations
    
    
    
    
    
    
    4,015Net cash provided by investing activities for discontinued operations
    
    
    1,420
    
    
    
    4,195Net cash provided by investing activities
    
    
    1,294
    
    
    
    1,778Financing Activities:Proceeds from the issuance of stock
    
    
    24
    
    
    
    39Borrowings on line of credit
    
    
    3,460
    
    
    
    Payments on long-term debt
    
    
    
    
    
    
    Proceeds from convertible debentures, net
    
    
    
    
    
    
    12,757Payments of convertible debentures
    
    
    (2,025
    )
    
    
    (1,575
    )Proceeds from private placement, net
    
    
    6,760
    
    
    
    Net cash provided by financing activities
    
    
    8,219
    
    
    
    11,221Effect of exchange rate changes on cash
    
    
    19
    
    
    
    (12
    )(Decrease) increase in cash and cash equivalents
    
    
    (32
    )
    
    
    821Cash and cash equivalents at beginning of period
    
    
    1,079
    
    
    
    4,234Cash and cash equivalents at end of period
    
    $
    1,047
    
    
    $
    5,055Supplemental disclosure of cash flow information:Cash payments during the periods for:Interest
    
    $
    366
    
    
    $
    578Income taxes
    
    $
    
    
    
    $
    (9
    )Non-cash investing and financing activitiesCommon stock consideration for acquisitions:WSECI  issuance of 103,129 and 190,000 shares of common stock
    
    $
    133
    
    
    $
    676Verilink  issuance of 2,900,000 shares of common stock
    
    
    2,784
    
    
    
    Verilink  issuance of 8,765.7122 shares of Class C preferred stock
    
    
    2,784
    
    
    
    Issuance of warrants in conjunction with credit facility
    
    
    1,644
    
    
    
    Issuance of common stock for retirement of debt and accrued interest
    
    
    1,012
    
    
    
    Issuance of note receivable in disposition of MCK
    
    
    
    
    
    
    3,500Issuance of warrants in conjunction with convertible debentures and
effect of beneficial conversion feature
    
    
    
    
    
    
    8,674Issuance of warrants in subordinated debenture restructuring
    
    
    
    
    
    
    877Issuance of common stock in exchange for services
    
    
    145
    
    
    
    794Assets acquired and liablities assumed in conjunction with business acquisitions:Fair value of assets acquired, excluding cash and restricted cash
    
    
    6,289
    
    
    
    1,084Liabilities assumed
    
    
    (1,193
    )
    
    
    
  5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
        6




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2. MERGERS AND ACQUISITIONS
 Business Assets of Verilink
   Value of common stock issued
    
    $
    2,784Value of Series C preferred stock issued
    
    
    2,784Direct transaction costs
    
    
    338Total purchase consideration
    
    $
    5,906
  7




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PurchasePriceAllocationTangible assets:Inventories
    
    $
    4,849Property & equipment, net
    
    
    499Collection fee receivable
    
    
    629Other assets
    
    
    312Intangible assets
    
    
    810Liabilities assumed
    
    
    (1,193
    )Total estimated purchase price allocation
    
    $
    5,906
 Pro
Forma Financial Information in thousands, except per share amounts
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net sales
    
    $
    13,352
    
    
    $
    19,249
    
    
    $
    39,924
    
    
    $
    62,110Net loss
    
    $
    (4,122
    )
    
    $
    (4,761
    )
    
    $
    (20,402
    )
    
    $
    (19,269
    )Earnings (loss) per share, basic
    
    $
    (0.11
    )
    
    $
    (0.16
    )
    
    $
    (0.58
    )
    
    $
    (0.65
    )Earnings (loss) per share, diluted
    
    $
    (0.11
    )
    
    $
    (0.16
    )
    
    $
    (0.58
    )
    
    $
    (0.65
    )
 WSECI, Inc.
   8




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WSECIProperty and equipment
    
    $
    52Accounts receivable
    
    
    93Other intangibles
    
    
    1,497Cost of acquisition
    
    $
    1,642
  3. EQUITY INVESTMENT
    Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating results:Revenues
    
    $
    206
    
    
    $
    1,092
    
    
    $
    914
    
    
    $
    1,756Operating loss
    
    $
    (39
    )
    
    $
    113
    
    
    $
    (249
    )
    
    $
    13Net loss
    
    $
    (39
    )
    
    $
    113
    
    
    $
    (249
    )
    
    $
    13
 4. DISCONTINUED OPERATIONS
  9




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Three months ended Sept. 30,
    
    
    Nine months ended Sept. 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    212Gross loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27
    )Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (566
    )Loss from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (566
    )
   September 30,
    
    
    December 31,2006
    
    
    2005Notes receivable
    
    $
    2,104
    
    
    $
    3,391Liabilities of discontinued operations:Accrued rent
    
    $
    647
    
    
    $
    1,707Other current liabilities
    
    
    560
    
    
    
    824Liabilities of discontinued operations
    
    $
    1,207
    
    
    $
    2,531
    10




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Three months ended Sept30,
    
    
    Nine months ended Sept 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance beginning of period
    
    $
    1,118
    
    
    $
    3,241
    
    
    $
    2,531
    
    
    $
    3,013Lease payments, net of sublease receipts
    
    
    220
    
    
    
    (165
    )
    
    
    (1,059
    )
    
    
    (508
    )Other payments
    
    
    (105
    )
    
    
    (72
    )
    
    
    (156
    )
    
    
    (192
    )Estimated costs of disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000Legal and other costs of disposal
    
    
    (26
    )
    
    
    (130
    )
    
    
    (109
    )
    
    
    (439
    )Balance end of period
    
    $
    1,207
    
    
    $
    2,874
    
    
    $
    1,207
    
    
    $
    2,874
 5. INVENTORIES
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    5,261
    
    
    $
    3,026Work in process
    
    
    216
    
    
    
    5Finished goods
    
    
    2,005
    
    
    
    1,228Total Inventories
    
    $
    7,482
    
    
    $
    4,259
  11




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6. GOODWILL AND OTHER INTANGIBLES
   Amortization
    
    
    September 30,
    
    
    December 31,Period in months
    
    
    2006
    
    
    2005Intangibles subject to amortization:Current technology
    
    36 months
    
    $
    2,318
    
    
    $
    2,185Customer relationship
    
    36 months
    
    
    810
    
    
    
    Customer relationship
    
    120 months
    
    
    2,403
    
    
    
    2,403Weighted average months
    
    80 months
    
    
    5,531
    
    
    
    4,588Accumulated amortization:Current technology
    
    
    
    
    
    
    (1,525
    )
    
    
    (1,008
    )Customer relationship
    
    
    
    
    
    
    (979
    )
    
    
    (721
    )Net intangibles subject to amortization
    
    
    
    
    
    
    3,027
    
    
    
    2,859Goodwill
    
    
    
    
    
    
    2,514
    
    
    
    2,514Total goodwill and other intangibles
    
    
    
    
    
    $
    5,541
    
    
    $
    5,373
 7. LOAN FACILITIES
     12




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8. CONVERTIBLE DEBENTURES
 Senior Unsecured Convertible Debentures
    Convertible Subordinated Debentures
   9. OTHER COMPREHENSIVE LOSS
  Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss
    
    $
    (4,122
    )
    
    $
    (4,599
    )
    
    $
    (13,420
    )
    
    $
    (16,499
    )Other comprehensive loss:Foreign currency translation
    
    
    (34
    )
    
    
    (42
    )
    
    
    (135
    )
    
    
    (269
    )Comprehensive loss
    
    $
    (4,156
    )
    
    $
    (4,641
    )
    
    $
    (13,555
    )
    
    $
    (16,768
    )
 14




---



##### Table of Contents



10. SEGMENT INFORMATION
  Technologies Group:
    
    Consists of the operations of the
Companys softswitch, I-Master and
NetPerformer divisions; and the
Companys Telemate.net and Verilink
subsidiaries. The Technologies
Group includes international and
domestic sales of hardware and
software, integration, applications
and technical training and support.
The Technologies Group offers
hardware and software based
solutions for companies seeking to
build private, packet-based voice
and data networks. Additionally, the
Technologies Group offers
software-based solutions for
Internet access and usage management
that include call accounting and
usage reporting for InterXCnet
protocol network devices. The
Technologies Group added the product
suite from the Verilink business
asset acquisition that provide
access, multiplexing and transport
of voice and data services that
extend legacy networks as well as
next-generation converged access
solutions, which deliver voice, data
and video to business customers.Advanced Applications
     Services Group:
    
    Consists of the Companys technical
applications support group, which
was previously included as part of
the Enterprise Solutions Group.
Includes outsourced technical
application services and application
installation and training services
to outside customers, as well as
customers of the Companys
Technologies Group.
  AdvancedTechnologies
    
    ApplicationGroup
    
    Services Group
    
    TotalFor the Three Months Ended September 30, 2006Revenue
    
    $
    11,470
    
    
    $
    1,882
    
    
    $
    13,352(Loss) contribution before unallocated items
    
    
    (484
    )
    
    
    76
    
    
    
    (408
    )At September 30, 2006Goodwill
    
    
    1,061
    
    
    
    1,453
    
    
    
    2,514Total assets
    
    
    20,565
    
    
    
    3,673
    
    
    
    24,238For the Three Months Ended September 30,
2005Revenue
    
    $
    6,139
    
    
    $
    2,142
    
    
    $
    8,281(Loss) contribution before unallocated items
    
    
    (970
    )
    
    
    335
    
    
    
    (635
    )At December 31, 2005Goodwill
    
    
    1,061
    
    
    
    1,453
    
    
    
    2,514Total assets
    
    
    14,437
    
    
    
    3,655
    
    
    
    18,092
 15




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##### Table of Contents



Three months ended September 30,2006
    
    
    2005Loss before unallocated items, per above
    
    $
    (408
    )
    
    $
    (635
    )Corporate general and administrative expenses
    
    
    (1,453
    )
    
    
    (1,747
    )Corporate research and development
    
    
    (85
    )
    
    
    (95
    )Depreciation and amortization
    
    
    (535
    )
    
    
    (527
    )Reorganization costs
    
    
    
    
    
    
    (340
    )Other
    
    
    (1,641
    )
    
    
    (1,255
    )Loss from continuing operations
    
    $
    (4,122
    )
    
    $
    (4,599
    )
  AdvancedTechnologies
    
    ApplicationGroup
    
    Services Group
    
    TotalFor the Nine Months Ended September 30, 2006Revenue
    
    $
    23,008
    
    
    $
    5,513
    
    
    $
    28,521(Loss) contribution before unallocated items
    
    
    (3,127
    )
    
    
    275
    
    
    
    (2,852
    )For the Nine Months Ended September 30, 2005Revenue
    
    $
    16,194
    
    
    $
    7,207
    
    
    $
    23,401(Loss) contribution before unallocated items
    
    
    (4,493
    )
    
    
    1,472
    
    
    
    (3,021
    )
  Nine months ended September 30,2006
    
    
    2005Loss before unallocated items, per above
    
    $
    (2,852
    )
    
    $
    (3,021
    )Corporate general and administrative expenses
    
    
    (4,702
    )
    
    
    (5,308
    )Corporate research and development
    
    
    (197
    )
    
    
    (201
    )Depreciation and amortization
    
    
    (1,400
    )
    
    
    (1,768
    )Reorganization costs
    
    
    
    
    
    
    (464
    )Reorganization costs  loss on sublease
    
    
    
    
    
    
    (2,550
    )Other
    
    
    (4,269
    )
    
    
    (2,621
    )Loss from continuing operations
    
    $
    (13,420
    )
    
    $
    (15,933
    )
 16




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##### Table of Contents



September 30,
    
    
    December 31,2006
    
    
    2005Total assets before unallocated items, per above
    
    $
    24,238
    
    
    $
    18,092Corporate assets:Cash and cash equivalents
    
    
    1,047
    
    
    
    706Restricted cash
    
    
    1,254
    
    
    
    1,656Current portion of notes receivable
    
    
    97
    
    
    
    655Other current assets
    
    
    3,578
    
    
    
    1,594Property and equipment, net
    
    
    1,249
    
    
    
    1,914Investment
    
    
    617
    
    
    
    745Notes receivable, net of current portion
    
    
    2,007
    
    
    
    2,736$
    34,087
    
    
    $
    28,098
  Canada
    
    United States
    
    TotalFor the Three Months ended September 30, 2006Revenue
    
    $
    
    
    
    $
    13,352
    
    
    $
    13,352(Loss) contribution before unallocated Items
    
    
    (1,146
    )
    
    
    738
    
    
    
    (408
    )For the Three Months ended September 30, 2005Revenue
    
    $
    
    
    
    $
    8,281
    
    
    $
    8,281Loss before unallocated Items
    
    
    (1,026
    )
    
    
    391
    
    
    
    (635
    )For the Nine Months ended September 30, 2006Revenue
    
    $
    
    
    
    $
    28,251
    
    
    $
    28,251(Loss) contribution before unallocated Items
    
    
    (3,720
    )
    
    
    868
    
    
    
    (2,852
    )For the Nine Months ended September 30, 2005Revenue
    
    $
    
    
    
    $
    23,401
    
    
    $
    23,401Loss before unallocated Items
    
    
    (3,378
    )
    
    
    357
    
    
    
    (3,021
    )At September 30, 2006Total Assets
    
    
    392
    
    
    
    33,695
    
    
    
    34,087At December 31, 2005Total Assets
    
    
    715
    
    
    
    27,383
    
    
    
    28,098
 11. REORGANIZATION COSTS
   17




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12. STOCK OPTIONS AND WARRANTS
  Options and Warrants Outstanding
    
    
    Options and Warrants ExercisableRange of
    
    Outstanding at
    
    
    Weighted Average
    
    
    Exercisable at
    
    
    Weighted AverageExercise Prices
    
    September 30, 2006
    
    
    Exercise Price
    
    
    September 30, 2006
    
    
    Exercise Price$0.95-$1.45
    
    
    513,475
    
    
    $
    1.40
    
    
    
    476,975
    
    
    $
    1.40$1.45-$2.50
    
    
    705,195
    
    
    $
    2.21
    
    
    
    641,945
    
    
    $
    2.22$2.51-$5.00
    
    
    122,933
    
    
    $
    3.26
    
    
    
    82,433
    
    
    $
    3.16$5.01-$7.50
    
    
    134,139
    
    
    $
    6.51
    
    
    
    84,139
    
    
    $
    6.67$7.51-$90.00
    
    
    1,053,058
    
    
    $
    13.79
    
    
    
    1,053,058
    
    
    $
    13.79Total
    
    
    2,528,800
    
    
    $
    7.15
    
    
    
    2,338,550
    
    
    $
    7.46
   Number ofShares of
    
    WeightedUnderlying
    
    AverageOptions
    
    Exercise PricesOutstanding at beginning of period
    
    
    3,201,096
    
    
    $
    8.23Granted
    
    
    110,000
    
    
    
    3.50Exercised
    
    
    (4,060
    )
    
    
    1.75Forfeited
    
    
    (778,236
    )
    
    
    11.10Expired
    
    
    
    
    
    
    Outstanding at end of period
    
    
    2,528,800
    
    
    $
    7.15Exercisable at end of period
    
    
    2,338,550
    
    
    $
    7.46
  18




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##### Table of Contents



Number of
    
    
    Weighted AverageExercise Price
    
    Outstanding Warrants
    
    
    Exercise Price
    
    
    Expiration Date$0.01
    
    
    600,000
    
    
    $
    0.01
    
    
    September 2011$0.05
    
    
    5,000
    
    
    $
    0.05
    
    
    October 2006$0.91
    
    
    1,321,877
    
    
    $
    0.91
    
    
    September 2011$1.25
    
    
    192,000
    
    
    $
    1.25
    
    
    September 2011$1.56
    
    
    5,614,692
    
    
    $
    1.56
    
    
    August 2011$2.01
    
    
    800,000
    
    
    $
    2.01
    
    
    July 2007-February 2011$2.67
    
    
    2,462,400
    
    
    $
    2.67
    
    
    February 2010$6.14
    
    
    491,505
    
    
    $
    6.13
    
    
    February 2011$26.25-$30.00
    
    
    50,000
    
    
    $
    28.50
    
    
    October 2006Total
    
    
    11,537,474
    
    
    $
    1.98
   Number ofShares of
    
    WeightedUnderlying
    
    AverageWarrants
    
    Exercise PricesOutstanding at beginning of period
    
    
    4,107,192
    
    
    $
    3.82Granted
    
    
    7,728,569
    
    
    
    1.32Exercised
    
    
    
    
    
    
    Expired
    
    
    (298,287
    )
    
    
    6.74Outstanding at end of period
    
    
    11,537,474
    
    
    $
    1.98Exercisable at end of period
    
    
    11,537,474
    
    
    $
    1.98
    19




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##### Table of Contents



Nine Months EndedSeptember 30, 2006Risk-free interest rate
    
    
    5.0
    %Expected life
    
    4 yearsExpected volatility
    
    
    106.00
    %Expected dividend yield
    
    
    0.0
    %
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net loss, as reported
    
    $
    (4,599
    )
    
    $
    (16,499
    )Add: Stock-based compensation expense included in net loss
    
    
    
    
    
    
    7Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (392
    )
    
    
    (301
    )Pro forma net loss
    
    $
    (4,991
    )
    
    $
    (16,793
    )Net loss per common shareAs reported
    
    $
    (0.17
    )
    
    $
    (0.61
    )Pro forma
    
    $
    (0.18
    )
    
    $
    (0.63
    )
 20




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##### Table of Contents



13. NET LOSS PER SHARE
  For the three months ended
    
    
    For the nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Shares issuable under conversion of preferred stock
    
    
    2,900,000
    
    
    
    
    
    
    
    1,136,630
    
    
    
    Shares issuable under stock options
    
    
    1,428
    
    
    
    18,618
    
    
    
    3,122
    
    
    
    11,146Shares issuable pursuant to warrants
to purchase common stock
    
    
    77,202
    
    
    
    1,257
    
    
    
    40,491
    
    
    
    1,3922,978,630
    
    
    
    19,875
    
    
    
    1,180,243
    
    
    
    12,538
 14. PRIVATE PLACEMENT
  15. PREFERRED AND COMMON STOCK ISSUED IN CONNECTION WITH ACQUISITION OF BUSINESS ASSETS OF
VERILINK
  16. LITIGATION
  17. RECENT ACCOUNTING PRONOUNCEMENTS
  21




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##### Table of Contents



Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
   -
    
    the volatility of the price of the Companys common stock;-
    
    the delisting of the Companys common stock from the Nasdaq Capital Market if the bid price
falls and remains below $1.00 per share for a specified period;-
    
    the Company may be unable to fund future growth;-
    
    the risks associated with acquisitions;-
    
    the Companys ability to be profitable;-
    
    the Companys ability to attract and retain qualified personnel;-
    
    general economic conditions of the telecommunications market;-
    
    the Companys research and development expenditures;-
    
    market demand for, and market acceptance of, the Companys products;-
    
    legal claims against the Company, including, but not limited to, claims of patent
infringement;-
    
    the Companys ability to protect the Companys intellectual property;-
    
    defects in the Companys products;-
    
    the Companys obligations to indemnify certain customers;-
    
    the Companys exposure to risks inherent in international operations and emerging markets;-
    
    the Companys dependence on contract manufacturers and suppliers;-
    
    general economic and business conditions; and-
    
    other risks and uncertainties disclosed in the Annual Report and in the Companys other
filings with the SEC.
  22




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Overview
       23




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##### Table of Contents



Results of Operations
 Three Months Ended September 30, 2006, Compared to Three Months Ended September 30, 2005
  Continuing Operations
        24




---



##### Table of Contents



Business Unit Performance
 Technologies
    
    
    Applications(Dollars in thousands)
    
    Group
    
    
    Services Group
    
    
    ConsolidatedFor the Three Months Ended September 30,
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    11,470
    
    
    $
    6,139
    
    
    $
    1,882
    
    
    $
    2,142
    
    
    $
    13,352
    
    
    $
    8,281Gross profit
    
    
    4,797
    
    
    
    3,142
    
    
    
    279
    
    
    
    534
    
    
    
    5,076
    
    
    
    3,676Gross margin
    
    
    42
    %
    
    
    51
    %
    
    
    15
    %
    
    
    25
    %
    
    
    38
    %
    
    
    44
    %General and administrative
    
    
    1,179
    
    
    
    628
    
    
    
    111
    
    
    
    114
    
    
    
    1,290
    
    
    
    742Sales and marketing
    
    
    2,338
    
    
    
    1,923
    
    
    
    92
    
    
    
    85
    
    
    
    2,430
    
    
    
    2,008Research and development
    
    
    1,764
    
    
    
    1,560
    
    
    
    
    
    
    
    
    
    
    
    1,764
    
    
    
    1,560(Loss) contribution before unallocated items
    
    $
    (484
    )
    
    $
    (969
    )
    
    $
    76
    
    
    $
    335
    
    
    
    (408
    )
    
    
    (634
    )Unallocated items:Corporate general and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,453
    
    
    
    1,748Corporate research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85
    
    
    
    95Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535
    
    
    
    527Reorganization costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    340Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,481
    )
    
    
    (3,344
    )Other
expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,641
    )
    
    
    (1,255
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (4,122
    )
    
    $
    (4,599
    )
 Technologies Group
   25




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Advanced Applications Services Group
    Discontinued Operations
  Nine Months Ended September 30, 2006, Compared to Nine Months Ended September 30, 2005
  Continuing Operations
    26




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##### Table of Contents



27




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##### Table of Contents



Business Unit Performance
 AdvancedTechnologies
    
    
    Applications(Dollars in thousands)
    
    Group
    
    
    Services Group
    
    
    ConsolidatedFor the Nine Months Ended September 30,
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    23,008
    
    
    $
    16,194
    
    
    $
    5,513
    
    
    $
    7,207
    
    
    $
    28,521
    
    
    $
    23,401Gross profit
    
    
    10,387
    
    
    
    8,073
    
    
    
    876
    
    
    
    2,139
    
    
    
    11,263
    
    
    
    10,212Gross margin
    
    
    45
    %
    
    
    50
    %
    
    
    16
    %
    
    
    30
    %
    
    
    39
    %
    
    
    44
    %General and administrative
    
    
    2,338
    
    
    
    1,621
    
    
    
    347
    
    
    
    415
    
    
    
    2,685
    
    
    
    2,036Sales and marketing
    
    
    5,750
    
    
    
    6,069
    
    
    
    254
    
    
    
    253
    
    
    
    6,004
    
    
    
    6,322Research and development
    
    
    5,426
    
    
    
    4,875
    
    
    
    
    
    
    
    
    
    
    
    5,426
    
    
    
    4,875(Loss) contribution before unallocated items
    
    $
    (3,127
    )
    
    $
    (4,492
    )
    
    $
    275
    
    
    $
    1,471
    
    
    
    (2,852
    )
    
    
    (3,021
    )Unallocated items:Corporate general and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,702
    
    
    
    5,308Corporate research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    201Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,400
    
    
    
    1,768Reorganization costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464Reorganization costs  loss on sublease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,550Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,151
    )
    
    
    (13,312
    )Other
expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,269
    )
    
    
    (2,621
    )Loss from continuing operations before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (13,420
    )
    
    $
    (15,933
    )
 Technologies Group
    28




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##### Table of Contents



Advanced Applications Services Group
    Discontinued Operations
   For the Nine Months ended September 30,2006
    
    
    2005Revenue
    
    $
    
    
    
    $
    212Gross loss
    
    
    
    
    
    
    (27
    )Operating loss
    
    
    
    
    
    
    (566
    )Loss from discontinued operations
    
    $
    
    
    
    $
    (566
    )
  Critical Accounting Policies
  29




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##### Table of Contents



Revenue Recognition
        Allowance for Doubtful Accounts
  30




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##### Table of Contents



Inventory Obsolescence
  Liabilities of Discontinued Operations
    Deferred Tax Asset Valuation Allowance
  Litigation and Related Contingencies
  Goodwill, Intangible Assets and Long-Lived Assets
  31




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##### Table of Contents



Liquidity and Capital Resources
 Summary
       32




---



##### Table of Contents



Cash Flow
   33




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Less than
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsLine of credit
    
    $
    4,729
    
    
    $
    4,729
    
    
    $
    
    
    
    $
    
    
    
    $
    Additional payments for the acquisition of
Encore Group
    
    
    82
    
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    Notes payable for the purchase of Clarent
    
    
    3,000
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    Convertible subordinated debentures
    
    
    225
    
    
    
    225
    
    
    
    
    
    
    
    
    
    
    
    Senior unsecured convertible debentures
    
    
    12,938
    
    
    
    3,375
    
    
    
    9,563
    
    
    
    
    
    
    
    Operating leases:Continuing operations
    
    
    5,956
    
    
    
    2,105
    
    
    
    3,365
    
    
    
    486
    
    
    
    Discontinued operations
    
    
    1,281
    
    
    
    376
    
    
    
    774
    
    
    
    131Total contractual cash obligations
    
    $
    28,211
    
    
    $
    10,892
    
    
    $
    16,702
    
    
    $
    617
    
    
    $
    
  Sources of Cash
  34




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##### Table of Contents



,
   
 35




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##### Table of Contents



Item 3: Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
  Interest Rate Risks
  Foreign Currency Risks
  
 Item 4: Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  36




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##### Table of Contents



Item 1A. Risk Factors
   A decline in the price of the Companys common stock could result in the delisting of the common
stock from The Nasdaq Capital Market.
    Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  37




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##### Table of Contents



.
 Item 4. Submission of Matters to a Vote of Security Holders
   VOTES TOWITHHOLDDIRECTOR NOMINEE
    
    VOTES FOR
    
    AUTHORITYMontgomery L. Bannerman
    
    
    32,135,313
    
    
    
    880,268Mark H. Dunaway
    
    
    32,391,805
    
    
    
    623,776Gary H. Heck
    
    
    31,607,277
    
    
    
    1,408,304James R. Kanely
    
    
    32,354,642
    
    
    
    660,939Amy L. Newmark
    
    
    32,116,665
    
    
    
    898,916Steven A. Odom
    
    
    31,603,066
    
    
    
    1,412,515James A. Verbrugge
    
    
    32,474,525
    
    
    
    541,056William J. West
    
    
    32,474,948
    
    
    
    540,633
   VOTES
    
    BROKER NON-PROPOSAL
    
    VOTES FOR
    
    VOTES AGAINST
    
    ABSTAINED
    
    VOTESProposal 2
    
    
    30,823,018
    
    
    
    1,738,508
    
    
    
    454,054
    
    
    
    Proposal 3
    
    
    10,944,975
    
    
    
    1,938,800
    
    
    
    391,735
    
    
    
    19,740,071Proposal 4
    
    
    10,718,900
    
    
    
    2,149,296
    
    
    
    407,314
    
    
    
    19,740,071Proposal 5
    
    
    32,371,953
    
    
    
    198,405
    
    
    
    445,222
    
    
    
    
 38




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##### Table of Contents



Item 6. Exhibits
  39




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##### Table of Contents



SIGNATURE
  VERSO TECHNOLOGIES, INC.Date: November 17, 2006
    By:
    /s/ Martin D. KidderChief Financial Officer (duly authorizedsignatory and Principal Financial and
Accounting Officer) 40




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Exhibit
    
    Method of Filing3.1
    
    Amended and Restated Articles of Incorporation of the
Company.
    
    Incorporated by reference
to Exhibit
3.1 to the Companys
Registration
Statement on Form S-18
(File No.
33-51456).3.2
    
    Amendment to the Amended and Restated Articles of
Incorporation of the Company, as amended.
    
    Incorporated by reference
to Exhibit
3.1 to the Companys Current
Report on Form 8-K filed
October 2, 2000.3.3
    
    Amendment to the Amended and Restated Articles of
Incorporation of the Company, as amended.
    
    Incorporated by reference
to Exhibit 4.1 to the
Companys Current Report on
Form 8-K filed November 19,
2001.3.4
    
    Amendment to the Amended and Restated Articles of
Incorporation of the Company, amended.
    
    Incorporated by reference
to Exhibit 3.4 to the
Companys Quarterly Report
on Form 10-Q for the
quarter ended June 30,
2005.3.5
    
    Articles of Amendment to the Companys Articles of
Incorporation, effective as of October 11, 2005.
    
    Incorporated by reference
to Exhibit 3.1 to the
Companys Current Report on
Form 8-K filed October 7,
2005.3.6
    
    Statement of Rights of Series C Preferred Stock of
the Company effective June 16, 2005.
    
    Incorporated by reference
to Exhibit 3.1 to the
Companys Current Report on
Form 8-K filed on June 21,
2006.3.7
    
    Articles of Amendment to the Companys Articles of
Incorporation, effective as of November 7, 2006.
    
    Incorporated by reference
to Exhibit 3.1 to the
Companys Current Report on
Form 8-K filed November 13,
2006.3.8
    
    The Companys Amended and Restated Bylaws, adopted
October 24, 2005.
    
    Incorporated by reference
to Exhibit 3.1 to the
Companys Current Report on
Form 8-K filed October 7,
2005.4.1
    
    Secured Non-Convertible Tranche A Revolving Note
issued by the Company to Laurus Master Fund, Ltd. on
September 20, 2006
    
    Incorporated by reference
to Exhibit 4.1 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).4.2
    
    Secured Non-Convertible Tranche B Revolving Note
issued by the Company to Laurus Master Fund, Ltd. on
September 20, 2006.
    
    Incorporated by reference
to Exhibit 4.2 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).
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##### Table of Contents



Exhibit No.
    
    Exhibit
    
    Method of Filing4.3
    
    Common Stock Purchase Warrant to purchase 1,321,877
shares of the Companys common stock issued to
Laurus Master Fund, Ltd. dated September 20, 2006.
    
    Incorporated by reference
to Exhibit 4.3 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).4.4
    
    Common Stock Purchase Warrant to purchase 600,000
shares of the Companys common stock issued to
Laurus Master Fund, Ltd. dated September 20, 2006.
    
    Incorporated by reference
to Exhibit 4.4 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).4.5
    
    Registration Rights Agreement between the Company
and Laurus Master Fund, Ltd. dated September 20,
2006.
    
    Incorporated by reference
to Exhibit 4.5 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).4.6
    
    Warrant to purchase 192,000 shares of the Companys
common stock issued to J. P. Turner Partners, LP
dated September 20, 2006.
    
    Incorporated by reference
to Exhibit 4.6 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).10.1
    
    Security Agreement between the Company, certain of
its subsidiaries and Laurus Master Fund, Ltd. dated
September 20, 2006.
    
    Incorporated by reference
to Exhibit 99.1 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).10.2
    
    Intellectual Property Security Agreement between the
Company, certain of its subsidiaries and Laurus
Master Fund, Ltd. dated September 20, 2006.
    
    Incorporated by reference
to Exhibit 99.2 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).10.3
    
    Stock Pledge Agreement among the Company, certain of
its subsidiaries and Laurus Master Fund, Ltd. dated
September 20, 2006.
    
    Incorporated by reference
to Exhibit 99.3 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).10.4
    
    Hypothecation of Movables between the Company and
Laurus Master Fund, Ltd. dated September 20, 2006.
    
    Incorporated by reference
to Exhibit 99.4 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).10.5
    
    Letter Agreement between the Company and Laurus
Master Fund, Ltd. dated September 20, 2006.
    
    Incorporated by reference
to Exhibit 99.5 to the
Companys Registration
Statement on Form S-3 filed
on November 11, 2006 (No.
333-138429).
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##### Table of Contents



Exhibit No.
    
    Exhibit
    
    Method of Filing10.6
    
    Verso Technologies, Inc. 1999 Stock Incentive Plan,
as amended November 7, 2006
    
    Incorporated by reference
to Exhibit 99.1 to the
Companys Current Report on
Form 8-K filed November 13,
2006.10.7
    
    Consulting and Separation Agreement between the
Company and Juliet M. Reising dated October 13,
2006.
    
    Incorporated by reference
to Exhibit 99.1 to the
Companys Current Report on
Form 8-K filed October 18,
2006.10.8
    
    Agreement between the Company and Martin D. Kidder
dated October 5, 2006
    
    Incorporated by reference
to Exhibit 99.2 to the
Companys Current Report on
Form 8-K filed October 18,
2006.10.9
    
    Contract entered into on July 17, 2006, among the
Company, Verso Verilink, LLC and CM Solutions, Inc.
    
    Incorporated by reference
to Exhibit 10.3 to the
Companys Quarterly Report
on Form 10-Q for the
quarter ended June 30,
2006, as amended by
Amendment No. 1 thereto.10.10
    
    Manufacturing Agreement dated as of July 12, 2006
between the Company and CM Solutions Corporation.
    
    Incorporated by reference
to Exhibit 10.4 to the
Companys Quarterly Report
on Form 10-Q for the
quarter ended June 30,
2006, as amended by
Amendment No. 1 thereto.10.11
    
    Agreement dated as of June 19, 2003 between
Telesector Resources Group, Inc., d/b/a Verizon
Services Group, and XEL Communications Inc., which
agreement has been assumed by Verso Verilink, LLC.
    
    Incorporated by reference
to Exhibit 10.6 to the
Companys Quarterly Report
on Form 10-Q for the
quarter ended June 30,
2006, as amended by
Amendment No. 1 thereto.10.12
    
    Amendment No. 1 to Agreement dated as of August 25,
2003 between Telesector Resources Group, Inc., d/b/a
Verizon Services Group and XEL Communications, Inc.,
which amendment has been assumed by Verso Verilink,
LLC.
    
    Incorporated by reference
to Exhibit10.7 to the
Companys Quarterly Report
on Form 10-Q for the
quarter ended June 30,
2006, as amended by
Amendment No. 1 thereto.10.13
    
    Amendment No. 2 to Product Purchase Agreement dated
as of December 12, 2003 between Telesector Resources
Group, Inc., d/b/a Verizon Services Group and XEL
Communications, Inc., which amendment has been
assumed by Verso Verilink, Inc. (Portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment filed with the Securities and
Exchange Commission.)
    
    Incorporated by reference
to Exhibit 10.8 to the
Companys Quarterly Report
on Form 10-Q for the
quarter ended June 30,
2006, as amended by
Amendment No. 1 thereto.
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##### Table of Contents



Exhibit No.
    
    Exhibit
    
    Method of Filing10.14
    
    Amendment No. 3 to Product Purchase Agreement dated
as of February 18, 2004 between Telesector Resources
Group, Inc., d/b/a Verizon Services Group and XEL
Communications, Inc., which amendment has been
assumed by Verso Verilink, Inc.
    
    Incorporated by reference
to Exhibit 10.9 to the
Companys Quarterly Report
on Form 10-Q for the
quarter ended June 30,
2006, as amended by
Amendment No. 1 thereto.10.15
    
    Amendment No. 4 to Contract No. C0302362 dated as of
November 10, 2004 between Telesector Resources
Group, Inc., d/b/a Verizon Services Group, and
Verilink Corporation, which amendment has been
assumed by Verso Verilink, Inc.
    
    Incorporated by reference
to Exhibit 10.10 to the
Companys Quarterly Report
on Form 10-Q for the
quarter ended June 30,
2006, as amended by
Amendment No. 1 thereto.10.16
    
    Amendment No. 5 to Product Purchase Agreement dated
as of March 4, 2005 between Telesector Resources
Group, Inc., d/b/a Verizon Services Group, and
Verilink Corporation, which amendment has been
assumed by Verso Verilink, Inc. (Portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment filed with the Securities and
Exchange Commission.)
    
    Incorporated by reference
to Exhibit 10.11 to the
Companys Quarterly Report
on Form 10-Q for the
quarter ended June 30,
2006, as amended by
Amendment No. 1 thereto.10.17
    
    Amendment No. 6 to Product Purchase Agreement dated
as of July 27, 2006, between Verso Verilink, LLC and
Verizon Services Corp.
    
    Incorporated by reference
to Exhibit 10.12 to the
Companys Quarterly Report
on Form 10-Q for the
quarter ended June 30,
2006, as amended by
Amendment No. 1 thereto.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification by the
Companys Chief Executive Officer.
    
    Filed herewith.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification by the
Companys Chief Financial Officer.
    
    Filed herewith.32.1
    
    Section 1350 Certification by the Companys Chief
Executive Officer.
    
    Filed herewith.32.2
    
    Section 1350 Certification by the Companys Chief
Financial Officer.
    
    Filed herewith.
 E-4