##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarter Ended March 31, 2002

o   
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
(Issuers telephone number)



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

Shares of the Registrants Common Stock, par value $.01 per share, outstanding
as of May 10, 2002: 78,107,872.





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TABLE OF CONTENTS



|                                                                                              |                                                          |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  ITEM 1: FINANCIAL STATEMENTS                                                        
|                                                                                              | CONDENSED CONSOLIDATED BALANCE SHEETS                   
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS         
|                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                   
|                                                                                              | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 3: Quantitative and Qualitative Disclosures about Market Risk                           
|PART II  OTHER INFORMATION                                                                  
|Item 1. Legal Proceedings                                                                    
|Item 2. Changes in Securities                                                                
|Item 3. Defaults Upon Senior Securities                                                      
|Item 4. Submission of Matters to a Vote of Security Holders                                  
|Item 5. Other Information                                                                    
|Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   
|EXHIBIT INDEX                                                                                



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##### Table of Contents



VERSO TECHNOLOGIES, INC.
FORM 10-Q

INDEX

Part I. FINANCIAL INFORMATION

|                           |                                                                                               |                                                                                                    |  |          |   | 
|-------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- |  | -------- | - | 
|                           |                                                                                               |                                                                                                    |  | Page No.
|                           |                                                                                               |                                                                                                    |  |         
|                           | Item 1                                                                                        |                                                                                                    |  |          |  
|                           |                                                                                               | Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001                   |  |          | 2 | 
|                           |                                                                                               | Condensed Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001 |  |          | 3 | 
|                           |                                                                                               | Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2001 |  |          | 4 | 
|                           |                                                                                               | Notes to the Condensed Consolidated Financial Statements                                           |  |          | 6 | 
|                           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations |                                                                                                    |  | 15       |  
|                           | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                    |  | 22       |  
|PART II. OTHER INFORMATION |                                                                                               |                                                                                                    |  |         
|                           | Item 1. Legal Proceedings                                                                     |                                                                                                    |  | 23       |  
|                           | Item 2. Changes in Securities and Use of Proceeds                                             |                                                                                                    |  | 23       |  
|                           | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                    |  | 23       |  
|                           | Signature Page                                                                                |                                                                                                    |  | 25       |  
|                           | Exhibit Index                                                                                 |                                                                                                    |  | 26       |  





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##### Table of Contents






PART I  ITEM 1: FINANCIAL STATEMENTS

VERSO TECHNOLOGIES,
INC.




CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share data)
(Unaudited)


|                                                     |                                                                                                                      |                                            |        |           |        |              |        |          |        | 
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | --------- | ------ | ------------ | ------ | -------- | ------ | 
|                                                     |                                                                                                                      |                                            |        | March 31, |        | December 31,
|                                                     |                                                                                                                      |                                            |        | 2002      |        | 2001        
|                                                     |                                                                                                                      |                                            |        |           |        |             
|ASSETS:                                              |                                                                                                                      |                                            |        |           |        |              |        |         
|Current assets:                                      |                                                                                                                      |                                            |        |           |        |              |        |         
|                                                     | Cash and cash equivalents                                                                                            |                                            | $      | 5,721     |        |              | $      | 7,745    |       
|                                                     | Accounts receivable, net                                                                                             |                                            |        | 10,126    |        |              |        | 9,047    |       
|                                                     | Inventories, net                                                                                                     |                                            |        | 3,852     |        |              |        | 3,995    |       
|                                                     | Other current assets                                                                                                 |                                            |        | 856       |        |              |        | 1,104    |       
|                                                     | Assets of discontinued operations                                                                                    |                                            |        | 157       |        |              |        | 582      |       
|                                                     |                                                                                                                      |                                            |        |           |        |              |        |         
|                                                     |                                                                                                                      | Total current assets                       |        |           | 20,712 |              |        |          | 22,473 | 
|Property and equipment, net                          |                                                                                                                      |                                            | 6,828  |           |        |              | 7,337  |         
|Intangibles, net                                     |                                                                                                                      |                                            | 15,889 |           |        |              | 15,949 |         
|                                                     |                                                                                                                      |                                            |        |           |        |              |        |         
|                                                     |                                                                                                                      | Total assets                               |        | $         | 43,429 |              |        | $        | 45,759 | 
|                                                     |                                                                                                                      |                                            |        |           |        |              |        |         
|LIABILITIES AND SHAREHOLDERS EQUITY:                |                                                                                                                      |                                            |        |           |        |              |        |         
|Current liabilities:                                 |                                                                                                                      |                                            |        |           |        |              |        |         
|                                                     | Deferred payment due for the purchase of NACT                                                                        |                                            | $      | 5,340     |        |              | $      | 5,340    |       
|                                                     | Accounts payable                                                                                                     |                                            |        | 1,513     |        |              |        | 1,624    |       
|                                                     | Accrued compensation                                                                                                 |                                            |        | 2,202     |        |              |        | 3,130    |       
|                                                     | Accrued expenses                                                                                                     |                                            |        | 5,733     |        |              |        | 6,127    |       
|                                                     | Unearned revenue and customer deposits                                                                               |                                            |        | 5,794     |        |              |        | 5,904    |       
|                                                     | Liabilities of discontinued operations                                                                               |                                            |        | 4,678     |        |              |        | 4,900    |       
|                                                     |                                                                                                                      |                                            |        |           |        |              |        |         
|                                                     |                                                                                                                      | Total current liabilities                  |        |           | 25,260 |              |        |          | 27,025 | 
|Convertible subordinated debentures, net of discount |                                                                                                                      |                                            | 3,497  |           |        |              | 3,428  |         
|                                                     |                                                                                                                      |                                            |        |           |        |              |        |         
|                                                     |                                                                                                                      | Total liabilities                          |        |           | 28,757 |              |        |          | 30,453 | 
|                                                     |                                                                                                                      |                                            |        |           |        |              |        |         
|Shareholders equity:                                |                                                                                                                      |                                            |        |           |        |              |        |         
|                                                     | Common stock, $.01 par value, 200,000,000 shares authorized;
78,022,842 and 77,619,654 shares issued and outstanding |                                            |        | 780       |        |              |        | 776      |       
|                                                     | Additional paid-in capital                                                                                           |                                            |        | 271,706   |        |              |        | 271,462  |       
|                                                     | Notes receivable from shareholders                                                                                   |                                            |        | (1,633    | )      |              |        | (1,620   | )     
|                                                     | Accumulated deficit                                                                                                  |                                            |        | (253,321  | )      |              |        | (252,131 | )     
|                                                     | Deferred compensation                                                                                                |                                            |        | (2,842    | )      |              |        | (3,166   | )     
|                                                     | Accumulated other comprehensive loss  foreign
currency translation                                                  |                                            |        | (18       | )      |              |        | (15      | )     
|                                                     |                                                                                                                      |                                            |        |           |        |              |        |         
|                                                     |                                                                                                                      | Total shareholders equity                 |        |           | 14,672 |              |        |          | 15,306 | 
|                                                     |                                                                                                                      |                                            |        |           |        |              |        |         
|                                                     |                                                                                                                      | Total liabilities and shareholders equity |        | $         | 43,429 |              |        | $        | 45,759 | 
|                                                     |                                                                                                                      |                                            |        |           |        |              |        |         

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

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VERSO TECHNOLOGIES,
INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share data)
(Unaudited)


|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |         |        |       | 
|----------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | ------------------------ | ------ | ------------------------------------ | ------ | ---------- | ------- | ------ | ----- | 
|                                                                                                                                                |                                                            |                                           |                          |        | For the three months ended March 31,
|                                                                                                                                                |                                                            |                                           |                          |        |                                     
|                                                                                                                                                |                                                            |                                           |                          |        | 2002                                 |        | 2001      
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |           
|Revenue:                                                                                                                                        |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                |                                                            | Products                                  |                          | $      | 6,604                                |        |            | $       | 739    |      
|                                                                                                                                                |                                                            | Services                                  |                          |        | 5,222                                |        |            |         | 3,205  |      
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                |                                                            |                                           | Total revenue            |        |                                      | 11,826 |            |         |        | 3,944 | 
|                                                                                                                                               
|Cost of revenue:                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                |                                                            | Products                                  |                          |        | 2,331                                |        |            |         | 294    |      
|                                                                                                                                                |                                                            | Services                                  |                          |        | 2,450                                |        |            |         | 2,041  |      
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                |                                                            |                                           | Total cost of revenue    |        |                                      | 4,781  |            |         |        | 2,335 | 
|                                                                                                                                               
|Gross profit:                                                                                                                                   |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                |                                                            | Products                                  |                          |        | 4,273                                |        |            |         | 445    |      
|                                                                                                                                                |                                                            | Services                                  |                          |        | 2,772                                |        |            |         | 1,164  |      
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                |                                                            |                                           | Gross profit             |        |                                      | 7,045  |            |         |        | 1,609 | 
|                                                                                                                                               
|Operating expenses:                                                                                                                             |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                |                                                            | General and administrative                |                          |        | 3,112                                |        |            |         | 2,572  |      
|                                                                                                                                                |                                                            | Sales and marketing                       |                          |        | 1,765                                |        |            |         | 481    |      
|                                                                                                                                                |                                                            | Research and development                  |                          |        | 1,675                                |        |            |         | 219    |      
|                                                                                                                                                |                                                            | Depreciation                              |                          |        | 762                                  |        |            |         | 416    |      
|                                                                                                                                                |                                                            | Amortization of intangibles               |                          |        | 142                                  |        |            |         | 374    |      
|                                                                                                                                                |                                                            | Amortization of deferred compensation     |                          |        | 324                                  |        |            |         | 483    |      
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                |                                                            |                                           | Total operating expenses |        |                                      | 7,780  |            |         |        | 4,545 | 
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                |                                                            | Operating loss from continuing operations |                          |        | (735                                 | )      |            |         | (2,936 | )    
|Other income                                                                                                                                    |                                                            |                                           | 86                       |        |                                      |        |           |        
|Interest expense, net, including $95 and $237 of
amortization of loan fees and discount on convertible
subordinated debentures in 2002 and 2001 |                                                            |                                           | (210                     | )      |                                      |        | (242       | )      
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|Loss from continuing operations before income taxes
and extraordinary item                                                                      |                                                            |                                           | (859                     | )      |                                      |        | (3,178     | )      
|Income taxes                                                                                                                                    |                                                            |                                           |                         |        |                                      |        |           |        
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|Loss from continuing operations before extraordinary item                                                                                       |                                                            |                                           | (859                     | )      |                                      |        | (3,178     | )      
|Loss from discontinued operations, net of income taxes                                                                                          |                                                            |                                           | (331                     | )      |                                      |        | (13,190    | )      
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|Loss before extraordinary item                                                                                                                  |                                                            |                                           | (1,190                   | )      |                                      |        | (16,368    | )      
|Extraordinary item  loss from debt conversion                                                                                                  |                                                            |                                           |                         |        |                                      |        | 1,640      |        
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                | Net loss                                                   |                                           | $                        | (1,190 | )                                    |        | $          | (18,008 | )     
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|Net loss per common share  basic and diluted:                                                                                                  |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                | Loss before discontinued operations and extraordinary item |                                           | $                        | (0.01  | )                                    |        | $          | (0.07   | )     
|                                                                                                                                                | Loss from discontinued operations                          |                                           |                          | (0.01  | )                                    |        |            | (0.26   | )     
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|                                                                                                                                                | Loss before extraordinary item                             |                                           |                          | (0.02  | )                                    |        |            | (0.33   | )     
|                                                                                                                                                | Extraordinary item  loss from debt conversion             |                                           |                          |       |                                      |        |            | (0.03   | )     
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|Net
loss per common share  basic and diluted                                                                                                   |                                                            | $                                         | (0.02                    | )      |                                      | $      | (0.36      | )      
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        
|Weighted average shares outstanding  basic and diluted                                                                                         |                                                            |                                           | 77,882,051               |        |                                      |        | 50,522,369 |        
|                                                                                                                                                |                                                            |                                           |                          |        |                                      |        |            |        

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

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VERSO TECHNOLOGIES,
INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands, except share data)
(Unaudited)


|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |      |        |         |        |  
|--------------------- | ------------------------ | ----------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ---- | ------------------------------------ | ------ | ---- | ------ | ------- | ------ | -
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      | For the three months ended March 31,
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                     
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      | 2002                                 |        | 2001
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|Operating Activities: |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|                      | Continuing operations:   |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |      |       
|                      |                          | Net loss from continuing operations                                                                               |                                                                                                                 | $                                                                                  | (859 | )                                    |        | $    | (4,818 | )      
|                      |                          | Adjustments to reconcile net loss
from continuing operations to net
cash used in continuing operating
activities: |                                                                                                                 |                                                                                    |      |                                      |        |      |        |        
|                      |                          |                                                                                                                   | Extraordinary item  loss on debt conversion                                                                    |                                                                                    |      |                                     |        |      |        | 1,640   |       
|                      |                          |                                                                                                                   | Amortization of intangibles                                                                                     |                                                                                    |      | 142                                  |        |      |        | 374     |       
|                      |                          |                                                                                                                   | Depreciation                                                                                                    |                                                                                    |      | 762                                  |        |      |        | 416     |       
|                      |                          |                                                                                                                   | Amortization of deferred compensation                                                                           |                                                                                    |      | 324                                  |        |      |        | 483     |       
|                      |                          |                                                                                                                   | Provision for doubtful accounts                                                                                 |                                                                                    |      | 351                                  |        |      |        | 63      |       
|                      |                          |                                                                                                                   | Amortization of loan fees and discount on convertible
subordinated debentures                                   |                                                                                    |      | 95                                   |        |      |        | 237     |       
|                      |                          |                                                                                                                   | Other                                                                                                           |                                                                                    |      | (30                                  | )      |      |        | (2      | )     
|                      |                          |                                                                                                                   | Changes in current operating items:                                                                             |                                                                                    |      |                                      |        |      |        |         |       
|                      |                          |                                                                                                                   |                                                                                                                 | Accounts receivable, net                                                           |      |                                      | (1,430 | )    |        |         | 104    |  
|                      |                          |                                                                                                                   |                                                                                                                 | Inventories, net                                                                   |      |                                      | 126    |      |        |         |       |  
|                      |                          |                                                                                                                   |                                                                                                                 | Other current assets                                                               |      |                                      | 222    |      |        |         | 130    |  
|                      |                          |                                                                                                                   |                                                                                                                 | Accounts payable                                                                   |      |                                      | (111   | )    |        |         | (963   | )
|                      |                          |                                                                                                                   |                                                                                                                 | Accrued compensation                                                               |      |                                      | (928   | )    |        |         | (315   | )
|                      |                          |                                                                                                                   |                                                                                                                 | Accrued expenses                                                                   |      |                                      | (244   | )    |        |         | (1,602 | )
|                      |                          |                                                                                                                   |                                                                                                                 | Unearned revenue and customer deposits                                             |      |                                      | (110   | )    |        |         | (344   | )
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|                      |                          |                                                                                                                   | Net cash used in continuing operating activities                                                                |                                                                                    |      | (1,690                               | )      |      |        | (4,597  | )     
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|                      |                          | Discontinued operations:                                                                                          |                                                                                                                 |                                                                                    |      |                                      |        |      |        |        
|                      |                          |                                                                                                                   | Loss from discontinued operations                                                                               |                                                                                    |      | (331                                 | )      |      |        | (13,190 | )     
|                      |                          |                                                                                                                   | Adjustment to reconcile loss from discontinued operations
to net cash used in discontinued operating activities |                                                                                    |      | 118                                  |        |      |        | 12,041  |       
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|                      |                          |                                                                                                                   |                                                                                                                 | Net cash used in discontinued operating activities                                 |      |                                      | (213   | )    |        |         | (1,149 | )
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|                      |                          |                                                                                                                   |                                                                                                                 | Net cash used in operating activities                                              |      |                                      | (1,903 | )    |        |         | (5,746 | )
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|Investing Activities: |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|                      | Continuing operations:   |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |      |       
|                      |                          | Software development costs capitalized                                                                            |                                                                                                                 |                                                                                    | (82  | )                                    |        |      |       |        
|                      |                          | Purchases of property and equipment, net                                                                          |                                                                                                                 |                                                                                    | (222 | )                                    |        |      | (767   | )      
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|                      |                          |                                                                                                                   | Net cash used in investing activities for continuing operations                                                 |                                                                                    |      | (304                                 | )      |      |        | (767    | )     
|                      | Discontinued operations: |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |      |       
|                      |                          | Net proceeds from sale of discontinued operations                                                                 |                                                                                                                 |                                                                                    |     |                                      |        |      | 8,202  |        
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|                      |                          |                                                                                                                   | Net cash provided by investing activities for discontinued operations                                           |                                                                                    |      |                                     |        |      |        | 8,202   |       
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|                      |                          |                                                                                                                   | Net cash (used in) provided by investing activities                                                             |                                                                                    |      | (304                                 | )      |      |        | 7,435   |       
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     
|                      |                          |                                                                                                                   |                                                                                                                 | Net cash (used in) provided by operating
and investing activities, carried forward |      |                                      | (2,207 | )    |        |         | 1,689  |  
|                      |                          |                                                                                                                   |                                                                                                                 |                                                                                    |      |                                      |        |     

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VERSO TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued(in thousands, except share data)
(Unaudited)

|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |      |        |   |        |  
|---------------------------------------------------------------------------------- | ------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------- | --- | ------------------------------------ | ------ | ---- | ------ | - | ------ | -
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     | For the three months ended March 31,
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                     
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     | 2002                                 |        | 2001
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|Net cash (used in) provided by operating and
investing activities, carried forward |                                             |                                                                                                                                        | (2,207 | )                                                                             |     |                                      | 1,689  |     
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|Financing Activities:                                                              |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|                                                                                   | Continuing operations:                      |                                                                                                                                        |        |                                                                               |     |                                      |        |      |       
|                                                                                   |                                             | Payments on convertible subordinated debentures                                                                                        |        |                                                                               |    |                                      |        |      | (4,500 | )
|                                                                                   |                                             | Proceeds from issuances of common stock, net                                                                                           |        |                                                                               | 183 |                                      |        |      | 131    |  
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|                                                                                   |                                             |                                                                                                                                        |        | Net cash provided by (used in) financing activities
for continuing operations |     |                                      | 183    |      |        |   | (4,369 | )
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|                                                                                   |                                             |                                                                                                                                        |        | Net cash provided by (used in) financing activities                           |     |                                      | 183    |      |        |   | (4,369 | )
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|Effect of exchange rate changes on cash                                            |                                             |                                                                                                                                        |       |                                                                               |     |                                      |       |     
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|                                                                                   |                                             |                                                                                                                                        |        | Decrease in cash and cash equivalents                                         |     |                                      | (2,024 | )    |        |   | (2,680 | )
|Cash and Cash Equivalents:                                                         |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|Beginning of period                                                                |                                             |                                                                                                                                        | 7,745  |                                                                               |     |                                      | 11,155 |     
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|End of period                                                                      |                                             | $                                                                                                                                      | 5,721  |                                                                               |     | $                                    | 8,475  |     
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|Supplemental disclosure of cash flow information:                                  |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|                                                                                   | Cash payments during the period for:        |                                                                                                                                        |        |                                                                               |     |                                      |        |      |       
|                                                                                   |                                             | Interest                                                                                                                               |        | $                                                                             | 55  |                                      |        | $    | 5      |  
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|                                                                                   |                                             | Income taxes                                                                                                                           |        | $                                                                             | 33  |                                      |        | $    | 14     |  
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|                                                                                   | Non-cash investing and financing activities |                                                                                                                                        |        |                                                                               |     |                                      |        |      |       
|                                                                                   |                                             | Common stock and compensatory
options issued in reorganization                                                                         |        | $                                                                             | 65  |                                      |        | $    | 39     |  
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     
|                                                                                   |                                             | Conversion of subordinated debentures to
common stock  issuance of 1,074,854
shares of common stock and 945,378 common stock warrants |        | $                                                                             |    |                                      |        | $    | 2,412  |  
|                                                                                   |                                             |                                                                                                                                        |        |                                                                               |     |                                      |        |     

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

5



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##### Table of Contents



VERSO TECHNOLOGIES, INC.




NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  March 31, 2002


|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 consist of
two separate business segments, Gateway Solutions, which includes the
Companys subsidiary NACT Telecommunications, Inc. (NACT), and
Applications and Services, which includes its customer response center
operations and its subsidiary Telemate.Net Software, Inc.
(Telemate.Net). The Company acquired NACT in July 2001 and Telemate.Net
in November 2001. The Companys discontinued operations include its
value-added reseller (VAR) business and associated consulting practice
(legacy VAR business) and its hospitality services group, which
developed and marketed proprietary software and related integration and
maintenance services (HSG)                                                                                                                                                                                                                                                                                             
|  
|   |  | The consolidated financial statements include the accounts of Verso
Technologies, Inc. and its wholly-owned subsidiaries, including
Telemate.Net which was acquired by the Company on November 16, 2001, NACT
which was acquired by the Company on July 27, 2001 and MessageClick, Inc.
(MessageClick), which was acquired by the Company on November 22, 2000,
each in transactions accounted for as purchases (see Note 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | 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 year-end condensed consolidated balance sheet was derived from audited
consolidated financial statements, but does not include all disclosures
required by generally accepted accounting principles. 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, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|2. |  | MERGERS AND ACQUISITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Telemate.Net Software, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | On November 16, 2001, to increase capital and add patented communications
billing and reporting for next-generation converged Internet protocol and
public switched telephone networks to the Companys product offering, the
Company acquired all of the outstanding capital stock of Telemate.Net by
means of a subsidiary merger. The merger consideration was approximately
$4.1 million, consisting of 24,758,070 shares of the Companys common
stock with a fair value of $16.6 million, based on a $0.67 average of the
Companys common stock price for the ten days prior to the date of
acquisition, assumed options to acquire 5,420,206 shares of the Companys
common stock with exercise prices ranging from $.20 to $5.42 per share
(estimated fair value of $1.8 million, using the Black-Scholes option
pricing model based on the following weighted-average assumptions:
expected volatility  128%; expected life  one year; risk-free interest
rate  3.3%; and expected dividend yield  0%), deferred compensation of
$131,000 and acquisition costs of approximately $2.0 million, reduced by
retirement of Series B redeemable preferred stock (Series B Preferred
Stock) of $15.0 million and $438,000 of accrued interest thereon and
notes receivable from shareholders assumed of $947,000.
|  
|   |  | 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 excess of the purchase price over the
estimated fair value of net assets acquired totaled approximately $1.5
million and was allocated to goodwill. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets (SFAS 142), the Company is not amortizing this
goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | The Company has prepared an initial allocation of the purchase price based
on the estimated fair values of certain intangible assets, receivables and
contingent liabilities. The Company is continuing to obtain information
as to ultimate valuation, recoverability and realization with respect to
the fair values of these items and anticipates the allocation of purchase
price to be finalized prior to the fourth quarter of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

6



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##### Table of Contents



VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. |  | MERGERS AND ACQUISITIONS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | NACT Telecommunications, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | On July 27, 2001, the Company acquired all of the outstanding capital
stock of NACT to enter the next-generation networking and technology
market. The purchase consideration was approximately $20.6 million,
consisting of a cash payment of $14.2 million at closing funded primarily
by the Companys sale of $15 million of the Companys Series B Preferred
Stock to Telemate.Net, an additional amount payable on March 31, 2002 of
up to $5.3 million plus interest at prime, a grant to NACT employees of
in-the-money non-qualified options with a value of $625,000 and
acquisition costs of approximately $500,000.
|  
|   |  | According to the terms of the definitive stock purchase agreement with
Telemate.Net, on July 27, 2001, Telemate.Net purchased $15 million of
Series B Preferred Stock to fund the Companys acquisition of NACT.                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | 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 acquisition. The excess of the purchase price over the
estimated fair value of net assets acquired (including identified
intangible assets of $1.7 million, which are being amortized over a three
year life) totaled approximately $11.4 million and was allocated to
goodwill. In accordance with SFAS 142, the Company is not amortizing this
goodwill.                                                                                                     
|  
|   |  | The Company has prepared an initial allocation of the purchase price based
on the estimated fair values of certain intangible assets, receivables and
contingent liabilities, including a deferred payment (see Note 8). The
Company is continuing to obtain information as to ultimate valuation,
recoverability and realization with respect to the fair values of these
items and anticipates the allocation of purchase price to be finalized
prior to the third quarter of 2002.                                                                                                                                          
|  
|   |  | Prior to the purchase of NACT, the Company became an NACT reseller in the
first quarter of 2001. The Company resold NACT soft switching systems
with product revenues for the six months prior to acquisition totaling
$2.8 million and cost of product sales of $2.2 million.                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Allocation of Purchase Price                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                     |  |              |        |      |  |   |        |  
|------------------------------------ |  | ------------ | ------ | ---- |  | - | ------ | -
|                                     |  | Telemate.Net |        | NACT
|                                     |  |              |        |     
|Cash                                 |  | $            | 4,810  |      |  | $ | 2,538  |  
|Other current assets                 |  |              | 1,142  |      |  |   | 10,547 |  
|Property and equipment               |  |              | 563    |      |  |   | 2,505  |  
|Intangibles                          |  |              | 1,539  |      |  |   | 13,146 |  
|Current liabilities                  |  |              | (4,079 | )    |  |   | (2,819 | )
|Deferred payment on purchase of NACT |  |              |       |      |  |   | (5,340 | )
|Convertible subordinated debentures  |  |              |       |      |  |   |       |  
|Deferred compensation                |  |              | 131    |      |  |   |       |  
|                                     |  |              |        |      |  |   |        |  
|Purchase consideration               |  | $            | 4,106  |      |  | $ | 20,577 |  
|                                     |  |              |        |      |  |   |        |  

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##### Table of Contents



VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002

|   |  |                                                                                                                                                                                                                                                                                    
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. |  | MERGERS AND ACQUISITIONS, Continued                                                                                                                                                                                                                                                
|  
|   |  | Pro Forma Effect of Telemate.Net and NACT Transactions                                                                                                                                                                                                                             
|  
|   |  | The following unaudited pro forma information presents the results of
continuing operations of the Company for the three months ended March 31,
2001, as if the acquisitions of Telemate.Net and NACT had taken place on
January 1, 2001, (in thousands, except per share amounts):

|                                                                     |  |           |        |  
|-------------------------------------------------------------------- |  | --------- | ------ | -
|                                                                     |  | March 31,
|                                                                     |  | 2001     
|                                                                     |  |          
|Revenues                                                             |  | $         | 11,946 |  
|Loss from continuing operations                                      |  | $         | (5,673 | )
|Loss from continuing operations
per common share  basic and diluted |  | $         | (.08   | )
|Loss before extraordinary item
per common share  basic and diluted  |  | $         | (.25   | )
|Net loss per common share  basic and diluted                        |  | $         | (.27   | )
|Weighted
average shares outstanding  basic and diluted              |  |           | 75,280 |  

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. |  | 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 this
business. Accordingly, the Company elected to report its legacy VAR
business as discontinued operations by early adoption of SFAS No. 144,
Accounting for the Impairment of Disposal of Long-Lived Assets (SFAS
144) effective for the fourth quarter of 2001. These businesses are
included with HSG (which was reported as discontinued operations in 2001)
for a combined presentation of discontinued operations. The consolidated
financial statements have been reclassified to segregate the net assets
and operating results of these combined discontinued operations for all
periods presented.
|  
|   |  | During 2000, the Companys board of directors decided to dispose of HSG.
In December 2000, the Company completed the sale of its domestic lodging
business and international hospitality business for aggregate proceeds of
$10.0 million. The Company sold its restaurant solutions business for
aggregate proceeds of $8.5 million in January 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The loss on the sale of HSG totaled $11.5 million. A loss of $11.0
million was recorded in the third and fourth quarters of 2000 and an
additional $500,000 was recorded in the third quarter of 2001, the latter
related to winding up the Companys international hospitality operations,
the assets of which were sold in the fourth quarter of 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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##### Table of Contents



VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002

|   |  |                                                                                                                                            
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|3. |  | DISCONTINUED OPERATIONS, Continued                                                                                                         
|  
|   |  | Summary operating results of the discontinued operations for the three
months ended March 31, 2002 and 2001 (in thousands) were as follows:

|                                  |  |                              |      |      |  |   |         |  
|--------------------------------- |  | ---------------------------- | ---- | ---- |  | - | ------- | -
|                                  |  | Three months ended March 31,
|                                  |  |                             
|                                  |  | 2002                         |      | 2001
|                                  |  |                              |      |     
|Revenue                           |  | $                            | 223  |      |  | $ | 6,577   |  
|                                  |  |                              |      |      |  |   |         |  
|Gross profit                      |  | $                            | (331 | )    |  | $ | 729     |  
|                                  |  |                              |      |      |  |   |         |  
|Operating loss                    |  | $                            | (331 | )    |  | $ | (13,190 | )
|                                  |  |                              |      |      |  |   |         |  
|Loss from discontinued operations |  | $                            | (331 | )    |  | $ | (13,190 | )
|                                  |  |                              |      |      |  |   |         |  

| |  |                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The operating loss in the three months ended March 31, 2001 includes
depreciation of $273,000, amortization of intangibles of $10.7 million,
and amortization of deferred compensation of $125,000.
|
| |  | Assets and liabilities of discontinued operations (in thousands) are as
follows:                                                                                                                   

|                            |                                        |   |           |       |              |   |       |       | 
|--------------------------- | -------------------------------------- | - | --------- | ----- | ------------ | - | ----- | ----- | 
|                            |                                        |   | March 31, |       | December 31,
|                            |                                        |   | 2002      |       | 2001        
|                            |                                        |   |           |       |             
|Accounts receivable, net    |                                        | $ | 137       |       |              | $ | 501   |      
|Other current assets        |                                        |   | 20        |       |              |   | 81    |      
|                            |                                        |   |           |       |              |   |       |      
|                            | Assets of discontinued operations      |   | $         | 157   |              |   | $     | 582   | 
|                            |                                        |   |           |       |              |   |       |      
|Accrued restructuring costs |                                        | $ | 2,847     |       |              | $ | 2,730 |      
|Accrued compensation        |                                        |   | 189       |       |              |   | 210   |      
|Other current liabilities   |                                        |   | 1,642     |       |              |   | 1,960 |      
|                            |                                        |   |           |       |              |   |       |      
|                            | Liabilities of discontinued operations |   | $         | 4,678 |              |   | $     | 4,900 | 
|                            |                                        |   |           |       |              |   |       |      

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | The restructuring accrual relates to several leases for buildings and
equipment that are no longer being utilized in continuing operations. The
accrual is for all remaining payments due on these leases, less amounts to
be paid by any sublessors. The accrual for one lease with total payments
remaining of $2.8 million assumes that the building will be sub-leased for
50% of the lease value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|4. |  | LOAN FACILITY WITH SILICON VALLEY BANK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | In December 2001, the Company entered into a $5.0 million revolving credit
agreement (the Credit Agreement) with Silicon Valley Bank (the Bank).
The Credit Agreement is secured by substantially all of the assets of the
Company. The interest rate (6.75% at March 31, 2002) is computed at 2%
above the Banks Base Rate. The Credit Agreement provides for up to
$500,000 in letters of credit. Advances are limited by a formula based on
eligible receivables, inventory, certain cash balances, outstanding
letters of credit and certain subjective limitations. Interest payments
are due monthly, and the Credit Agreement expires December 2002. The
Credit Agreement includes a loan fee of $50,000 and a fee of .25% on
unused available borrowings. The Company paid certain loan fees and
attorneys fees totaling approximately $106,000 in connection with the
Credit Agreement, which fees are being amortized to interest expense over
the term of the Credit Agreement.

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VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4. |  | LOAN FACILITY WITH SILICON VALLEY BANK, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | The Company had no borrowings under the Credit Agreement as of March 31,
2002. The availability under the Credit Agreement at March 31, 2002 is
based on an analysis of available collateral based on an audit by the
Bank, which is currently being completed, and will be determined in
advance of any expected borrowing needs. Under the terms of the Credit
Agreement, the Company is required to maintain a minimum tangible net
worth, computed quarterly, and cannot declare dividends or incur any
additional indebtedness without the consent of the Bank, and must maintain
other financial covenants, as defined. The Company was in compliance with
these covenants as of March 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|5. |  | 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 1,000,000
shares of the Companys common stock at an exercise price of $7.39 per
share. The debentures are convertible into the Companys common stock at
a conversion price of $4.45. 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 $1.0 million at March
31, 2002. 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.                  
|  
|   |  | The Company issued $7.0 million of its 5% convertible subordinated
debentures during the year ended December 31, 2000. The convertible
subordinated debentures were issued with warrants to purchase 364,584
shares of the Companys common stock at an exercise price of $5.03 per
share. The debentures were discounted to reflect the fair value of the
warrants issued, totaling approximately $1.0 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%. In addition, the Company paid certain private placement fees
(including 88,712 shares of the Companys common stock with a fair value
at the date of issuance totaling $350,000) and attorneys fees in
connection with the sale of the debentures totaling $454,000. The fees
were amortized to interest expense over the term of the debentures until
the debentures were retired or converted into the Companys common stock.                                                                                      
|  
|   |  | In January 2001, the Company modified the terms of its 5% convertible
subordinated debentures. According to the modified terms of the
agreement, the Company repurchased $4.5 million of the outstanding $7.0
million of its 5% convertible subordinated debentures. Of the remaining
$2.5 million in outstanding 5% convertible subordinated debentures, $1.5
million were converted by the investors into the Companys common stock at
a price of $1.40 per share. The remaining $1.0 million of 5% convertible
subordinated debentures was converted at $1.19 per share. In connection
with this modification, the Company issued warrants to purchase 945,378
shares of the Companys common stock at an exercise price of $2.00 per
share. The fair value of the warrants issued, totaled approximately
$977,000, using the Black-Scholes option pricing method based on the
following weighted-average assumptions: expected volatility  91%;
expected life  five years; risk-free interest rate  5.5%; and expected
dividend yield  0%. The cost of conversion, including the warrants
issued, totaled $1.6 million in the quarter ended March 31,
2001.

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##### Table of Contents



VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002

|   |  |                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. |  | CONVERTIBLE SUBORDINATED DEBENTURES, Continued                                                                                                                                      
|  
|   |  | The cost of conversion is reflected as an extraordinary item in the
statement of operations for the three months ended March 31,
2001 and
consisted of the following (in thousands):

|                               |  |   |       | 
|------------------------------ |  | - | ----- | 
|Fair value of warrants issued  |  | $ | 977   | 
|Write off of related discount  |  |   | 365   | 
|Write off of related loan fees |  |   | 165   | 
|Beneficial conversion          |  |   | 107   | 
|Legal and other costs          |  |   | 26    | 
|                               |  |   |       | 
|                               |  | $ | 1,640 | 
|                               |  |   |       | 

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. |  | OTHER COMPREHENSIVE LOSS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The Company has adopted SFAS No. 130, Reporting Comprehensive Income
(SFAS 130). SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Companys net income or
shareholders equity. SFAS 130 requires that the Companys change in
foreign currency translation adjustments be included in other
comprehensive income. Comprehensive loss is shown in the following table
(in thousands):

|                          |                              |   |                    |    |      |   |         |   | 
|------------------------- | ---------------------------- | - | ------------------ | -- | ---- | - | ------- | - | 
|                          |                              |   | Three Months Ended
|                          |                              |   | March 31,         
|                          |                              |   |                   
|                          |                              |   | 2002               |    | 2001
|                          |                              |   |                    |    |     
|Net loss                  |                              | $ | (1,190             | )  |      | $ | (18,008 | )
|Other comprehensive loss: |                              |   |                    |    |      |   |         |  
|                          | Foreign currency translation |   |                    | (3 | )    |   |         |  | 
|                          |                              |   |                    |    |      |   |         |  
|Comprehensive loss        |                              | $ | (1,193             | )  |      | $ | (18,008 | )
|                          |                              |   |                    |    |      |   |         |  

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VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002

|   |  |                                                                                                                                                                                                                                       
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7. |  | SEGMENT INFORMATION                                                                                                                                                                                                                   
|  
|   |  | As a result of the Companys acquisition of NACT, the Company is now
reporting information for two segments, Gateway Solutions and Applications
and Services (which the Company formerly referred to as its Technology
Services Group)

|                           |  |                                                                                                                                                                                                                                                                                                                                                                    
|-------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Gateway
Solutions:         |  | The Companys Gateway Solutions segment consists of the
operations of the Companys switching subsidiary, NACT. The
Companys Gateway Solutions segment includes hardware and
software, integration, applications and technical training and
support. Prior to the Companys acquisition of NACT, the
Company became an NACT reseller in the first quarter of 2001.
|                          
|Applications
and Services: |  | The Companys Applications and Services segment
consists of the operations of the Companys customer response center
services as well as the operations of the Companys Telemate.Net
subsidiary. The Applications and Services segment offers network
management, support and maintenance, customer response center
services and application services.            

| |  |                                                                                                                                                              
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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):                                

|                                     |                                       |  |                         |        |       |  |   |       |  | 
|------------------------------------ | ------------------------------------- |  | ----------------------- | ------ | ----- |  | - | ----- |  | 
|                                     | GatewaySolutions(a)                   |  | ApplicationsServices(a) |        | Total
|                                     |                                       |  |                         |        |      
|For the Three Months Ended March 31, |                                      
|2002                                 |                                      
|                                     | Revenue                               |  | $                       | 7,525  |       |  | $ | 4,301 |  | 
|                                     | Contribution before unallocated items |  |                         | 1,350  |       |  |   | 1,472 |  | 
|                                     | Goodwill and other intangibles        |  |                         | 12,897 |       |  |   | 2,992 |  | 
|                                     | Total assets                          |  |                         | 28,283 |       |  |   |      |  | 
|                                     | Capital expenditures                  |  |                         | 222    |       |  |   |      |  | 
|2001                                 |                                      
|                                     | Revenue                               |  | $                       | 739    |       |  | $ | 3,205 |  | 
|                                     | Contribution before unallocated items |  |                         | 443    |       |  |   | 89    |  | 
|                                     | Goodwill and other intangibles        |  |                         |       |       |  |   | 2,353 |  | 
|                                     | Total assets                          |  |                         |       |       |  |   |      |  | 
|                                     | Capital expenditures                  |  |                         |       |       |  |   |      |  | 



| | (a) |  | Gateway Solutions includes costs associated with certain
corporate and administrative functions to support this business unit
which are located in Utah. Applications and Services includes no
allocation of corporate overhead costs, assets or capital
expenditures. See also (b) description.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002

|   |  |                                                                                                                                                                
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|7. |  | SEGMENT INFORMATION, Continued                                                                                                                                 
|  
|   |  | The following table reconciles the total contribution before unallocated
items to the loss from continuing operations before extraordinary item (in
thousands):

|                                                                    |  |                    |        |      |  |   |        |  
|------------------------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                                                    |  | Three Months Ended
|                                                                    |  | March 31,         
|                                                                    |  |                   
|                                                                    |  | 2002               |        | 2001
|                                                                    |  |                    |        |     
|Contribution before unallocated items, per above                    |  | $                  | 2,822  |      |  | $ | 532    |  
|Corporate and administrative expenses (b)                           |  |                    | (2,243 | )    |  |   | (2,195 | )
|Depreciation                                                        |  |                    | (762   | )    |  |   | (416   | )
|Amortization of intangibles                                         |  |                    | (142   | )    |  |   | (374   | )
|Amortization of deferred compensation                               |  |                    | (324   | )    |  |   | (483   | )
|Interest expense, net                                               |  |                    | (210   | )    |  |   | (242   | )
|                                                                    |  |                    |        |      |  |   |        |  
|Loss from continuing operations before
taxes and extraordinary item |  | $                  | (859   | )    |  | $ | (3,178 | )
|                                                                    |  |                    |        |      |  |   |        |  



| | (b) |  | All rent, utilities and other corporate office expenses,
corporate marketing expenses, corporate development costs and
corporate human resources, accounting and information technology
functions that support corporate, as well as, the Applications and
Services segment are reflected in unallocated corporate, sales,
general and administrative expenses. Office expenses, human
resources, accounting and information technology costs specifically
related to the Gateway Solutions segment are reflected in its
contribution before unallocated items.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8. |  | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Settlement with WA Telecom Products Co., Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | On March 29, 2002, the Company entered into a Settlement Agreement and
General Release (the WATP Settlement Agreement) with WA Telcom Products
Co., Inc. (WATP) which provided for a restructuring of the deferred
payment due by the Company to WATP pursuant to that certain Stock Purchase
Agreement, dated as of June 4, 2001, as amended (the Purchase
Agreement), between the Company and WATP, whereby the Company purchased
from WATP all of the issued and outstanding capital stock of NACT, and
NACT became a wholly-owned subsidiary of the Company. Pursuant to the
WATP Settlement Agreement, the Companys obligation to pay to WATP the
deferred payment (the Deferred Amount) on the date the Company filed its
Annual Report on Form 10-K for the year ended December 31, 2001, was
restructured pursuant to the terms and conditions of a Convertible Secured
Promissory Note dated April 25, 2002, made by the Company in favor of
WATP, in the aggregate principal amount of $4.25 million, together with
interest accrued thereon (the Note). Pursuant to the WATP Settlement
Agreement, the Company paid to WATP $1.5 million on April 1, 2002, which
payment was applied to the $1.5 million payment due on April 25, 2002, by
the Company to WATP pursuant to the Note. The remainder of the amount due
under the Note is payable by the Company to WATP as follows: (i) $500,000
on each of July 1, 2002; October 1, 2002; and January 1, 2003; and (ii)
$1.25 million plus all interest accrued under the Note since April 1,
2002, on April 1, 2003. The WATP Settlement Agreement has been approved
by the United States Bankruptcy Court for the Northern District of
Illinois, Eastern Division, which has jurisdiction over WATPs pending
bankruptcy proceeding.
|  
|   |  | Furthermore, pursuant to the WATP Settlement Agreement, the Company and
WATP released each other from claims against each other arising out of or
related to the Purchase Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2002

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8. |  | SUBSEQUENT EVENTS, Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | At WATPs option, WATP may, at any time within the thirty-day period
before a payment under the Note is due, convert some or all of the amount
due on such payment date into shares of the Companys common stock at a
conversion price of $1.36 per share. The Companys obligation to pay
amounts due under the Note is (i) secured by all the assets of the
Company, NACT and Telemate.Net and a pledge by the Company of all the
issued and outstanding common stock of NACT and Telemate.Net, and (ii)
guaranteed by NACT and Telemate.Net. The Note and security interests are
subordinate to the rights of the Bank arising under the Credit Agreement
and other documents executed in connection therewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Settlement with RSL Communications, Ltd. and Affiliates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|
|   |  | On or about July 6, 2000, RSL Communications, Ltd. (together with certain
of its affiliates (collectively, RSL)) filed with the American
Arbitration Association a demand for arbitration against NACT, which
became a wholly-owned subsidiary of the Company on July 27, 2001. In the
arbitration, RSL claimed that, pursuant to a Sales Agreement between RSL
and NACT, NACT breached its obligation to indemnify and defend RSL against
patent infringement claims made against RSL by Aerotel, Ltd. in an action
pending in the United States District Court for the Southern District of
New York. RSL sought to recover from NACT amounts paid by RSL to defend
itself in such patent infringement action, which RSL claimed was
approximately $2.0 million, together with other unspecified damages
resulting from NACTs alleged breach. On March 13, 2002, the Company
entered into a Settlement Agreement and General Release (the RSL
Settlement Agreement) with RSL, which provided that the Company issue to
RSL 523,430 shares of the Companys common stock (the Settlement Shares)
and deposit $200,000 in escrow. Pursuant to the terms of the RSL
Settlement Agreement, the Company has filed with the Securities and
Exchange Commission (the SEC) a Registration Statement on Form S-3
covering the resale of the Settlement Shares. If the market value of the
settlement shares on the effective date of the Form S-3 is less than
$700,000, then RSL will receive from escrow funds, up to the balance of
the escrow plus interest earned thereon, an amount when added to the
market value of the Settlement Shares does not exceed $700,000.
|  
|9. |  | LITIGATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Except as previously disclosed in the Companys Annual Report on Form 10-K
for the year ended December 31, 2001, the Company is involved in claims
and proceedings which are routine and which in the aggregate are not
deemed material to the Companys business or financial affairs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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##### Table of Contents






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 grow and manage the business until our operations are
cash flow positive and our ability to fund continuing operating losses and
capital requirements until operations are generating cash;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | our ability to successfully access the capital markets to fund the
growth of our business and continuous development of our proprietary
products;                                                         
| 
| |  | our ability to integrate our business with the business of Telemate.Net,
NACT and other entities we may subsequently acquire;                                                                             
| 
| |  | trends for the continued growth of our business;                                                                                                                                                          
| 
| |  | the effects of our accounting policies and general changes in generally
accepted accounting practices;                                                                                                    
| 
| |  | our ability to successfully market existing products and services, which may
be adversely impacted by competition;                                                                                        
| 
| |  | our ability to successfully develop and market new products and services; and                                                                                                                             
| 
| |  | other factors disclosed in our Form 10-K for the year ended December 31,
2001 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.

15



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##### Table of Contents



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, Gateway Solutions, which includes the
Companys subsidiary NACT and Applications and Services, which includes its
customer response center operations and its subsidiary Telemate.Net. The
Company acquired NACT in July 2001 and Telemate.Net in November 2001. 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
which the Company acquired on November 17, 2001, NACT which the Company
acquired on July 27, 2001 and MessageClick, which the Company acquired on
November 22, 2000, each in transactions accounted for as purchases.

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, 2001.

Results of Operations

Three Months Ended March 31, 2002, compared to Three Months Ended March 31,
2001

For the three months ended March 31, 2002, the Companys net loss totaled $1.2
million, or $.02 per share, compared with net loss of $18.0 million, or $.36
per share, for the same period in 2001. The 2002 results include a loss from
discontinued operations of $331,000. The 2001 results included a loss from
discontinued operations of $13.2 million and an extraordinary item  loss from
debt conversion totaling $1.6 million.

Continuing Operations

For the three months ended March 31, 2002, the Companys net loss from
continuing operations totaled $859,000, or $.01 per share, compared with a net
loss of $3.2 million, or $.07 per share, for the same period in 2001.

Total revenue was $11.8 million in the three months ended March 31, 2002,
reflecting a 200% increase from the same period in 2001. Products revenue was
$6.6 million in the three months ended March 31, 2002, and was primarily
related to the sale of NACT products. Services revenue was $5.2 million in the
three months ended March 31, 2002, reflecting a 63% increase from the same
period in 2001. Gross profit increased by $5.4 million in the three months
ended March 31, 2002, and was 60% of revenue in 2002, compared with 41% of
revenue in the same period of 2001. The increase in revenue, gross profit
percentage and gross profit dollars resulted primarily from the acquisition of
NACT in July 2001.

Total operating expenses incurred in continuing operations for the three months
ended March 31, 2002, were $7.8 million, an increase of $3.2 million compared
to the same period of 2001. The increase is primarily attributable to the
following items: $540,000 increase in general and administrative expenses, $1.3
million increase in sales and marketing expenses, $1.5 million increase in
research and development and $346,000 increase in depreciation expense offset
by decreases in intangible amortization of $232,000 and amortization of
deferred compensation of $159,000.

The increase in general and administrative expenses resulted from the addition
of personnel and related costs related to the acquisition of NACT offset by the
reduction of corporate general and administrative expenses. The decrease in
corporate general and administrative expenses resulted primarily from on-going
cost reduction initiatives affecting 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 acquisitions of NACT (July 2001) and
Telemate.Net (November 2001).

The increase in research and development is primarily related to the
acquisition of NACT in the third quarter of 2001.

The increase in depreciation expense is primarily related to the purchase of
furniture and equipment of approximately $1.4 million during 2001, as well as
the increased depreciation related to the assets acquired in the NACT and
Telemate.Net acquisitions. Capital expenditures are primarily depreciated on a
straight-line basis over an estimated useful life of three years.

16



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##### Table of Contents



The $232,000 decrease in intangible amortization is primarily related to the
adoption of SFAS 142, which eliminated amortization of goodwill beginning
January 1, 2002.

The $159,000 decrease in amortization of deferred compensation primarily
related to the full vesting of certain options outstanding since the Companys
acquisition of Cereus Technology Partners, Inc. in September 2001. The
deferred compensation represents the intrinsic value of the Cereus unvested options outstanding at the date of
the acquisition of Cereus and is amortized over the remaining vesting period of
the options.

As a percent of revenue, operating expenses from continuing operations were 62%
during the three months ended March 31, 2002 (excluding the amortization of
intangibles and deferred compensation), down from 94% for the same period in
2001 (excluding the amortization of intangibles and deferred compensation).

Business Unit Performance

|                                     |                                                           |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        |       |      |   |       |        |        |  
|------------------------------------ | --------------------------------------------------------- | ----------------- | ----- | ------------ |  | ------------ | --- | ---- |  | ---- | ----- | ------------ |  | - | ----- | -- |  | - | ------ | ----- | ---- | - | ----- | ------ | ------ | -
|                                     |                                                           |                   |       |              |  |              |     |      |  |      |       | Applications |  |   |       |    |  |   |        |      
|Dollars in thousands                 |                                                           | Gateway Solutions |       | and Services |  | Consolidated
|                                     |                                                           |                   |       |              |  |             
|For the Three Months Ended March 31, |                                                           | 2002              |       | 2001         |  | 2002         |     | 2001 |  | 2002 |       | 2001        
|                                     |                                                           |                   |       |              |  |              |     |      |  |      |       |             
|Revenue                              |                                                           | $                 | 7,525 |              |  | $            | 739 |      |  | $    | 4,301 |              |  | $ | 3,205 |    |  | $ | 11,826 |       |      | $ | 3,944 |       
|                                     |                                                           |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        |       |      |   |       |       
|Gross profit                         |                                                           |                   | 4,674 |              |  |              | 443 |      |  |      | 2,371 |              |  |   | 1,166 |    |  |   | 7,045  |       |      |   | 1,609 |       
|Gross margin                         |                                                           |                   | 62    | %            |  |              | 60  | %    |  |      | 55    | %            |  |   | 36    | %  |  |   | 60     | %     |      |   | 41    | %     
|General and administrative           |                                                           |                   | 975   |              |  |              |    |      |  |      | 206   |              |  |   | 544   |    |  |   | 1,181  |       |      |   | 544   |       
|Sales and marketing                  |                                                           |                   | 903   |              |  |              |    |      |  |      | 550   |              |  |   | 314   |    |  |   | 1,453  |       |      |   | 314   |       
|Research and development             |                                                           |                   | 1,532 |              |  |              |    |      |  |      | 143   |              |  |   | 219   |    |  |   | 1,675  |       |      |   | 219   |       
|Other income                         |                                                           |                   | (86   | )            |  |              |    |      |  |      |      |              |  |   |      |    |  |   | (86    | )     |      |   |      |       
|                                     |                                                           |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        |       |      |   |       |       
|                                     | Contribution before unallocated items(a)                  |                   | $     | 1,350        |  |              | $   | 443  |  |      | $     | 1,472        |  |   | $     | 89 |  |   |        | 2,822 |      |   |       | 532    |       
|                                     |                                                           |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        |       |      |   |       |       
|Unallocated items:                   |                                                           |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        |       |      |   |       |       
|                                     | Corporate, sales, general and
administrative expenses(b)  |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        | 2,243 |      |   |       | 2,195  |       
|                                     | Depreciation expense                                      |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        | 762   |      |   |       | 416    |       
|                                     | Amortization expense                                      |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        | 142   |      |   |       | 374    |       
|                                     | Amortization of deferred compensation                     |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        | 324   |      |   |       | 483    |       
|                                     |                                                           |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        |       |      |   |       |       
|                                     |                                                           | Operating loss    |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        |       | (649 | ) |       |        | (2,936 | )
|Interest expense, net                |                                                           |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   | 210    |       |      |   | 242   |       
|                                     |                                                           |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        |       |      |   |       |       
|                                     | Loss from continuing operations
before extraordinary item |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   | $      | (859  | )    |   | $     | (3,178 | )     
|                                     |                                                           |                   |       |              |  |              |     |      |  |      |       |              |  |   |       |    |  |   |        |       |      |   |       |       

(a)     Gateway Solutions includes costs associated with certain corporate and
administrative functions to support this business unit which are located in
Utah. Applications and Services includes no allocation of corporate overhead
costs, assets or capital expenditures. See also (b) description.

(b)     All rent, utilities and other corporate office expenses, corporate
marketing expenses, corporate development costs and corporate human resources,
accounting and information technology functions that support corporate, as well
as, the Applications and Services segment are reflected in unallocated
corporate, sales, general and administrative expenses. Office expenses, human
resources, accounting and information technology costs specifically related to
the Gateway Solutions segment are reflected in its contribution before
unallocated items.

17



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##### Table of Contents



Gateway Solutions

Gateway Solutions represents the sales of NACT products. Prior to the
acquisition of NACT on July 27, 2001, the Company became an NACT reseller in
the first quarter of 2001. The Company resold NACT gateway solutions totaling
$737,000 with cost of product sales of $294,000 during the first quarter of
2001.

Applications and Services

Total applications and services revenue was $4.3 million in the three months
ended March 31, 2002, a 34% increase from the same period in 2001. The
increase in revenue is primarily related to the Companys acquisition of
Telemate.Net in November 2001.

Gross profit increased by $1.2 million in the three months ended March 31,
2002, and was 55% percent of revenue, compared with 36% of revenue in the same
period in 2001. The improvement in gross profit dollars and margin was
primarily attributable to Telemate.Net operations.

Allocated operating expenses incurred in Applications and Services for the
three months ended March 31, 2002, were $899,000, a decrease of $178,000
compared to the same period in 2001. The decrease in general and
administrative expenses and research and development expenses relates to the
operations of MessageClick, which were substantially eliminated in the second
quarter of 2001. The increase in sales and marketing expenses relates to
Telemate.Net, which was acquired in November 2001. As a percent of revenue,
operating expenses for Applications and Services were 25% during the three
months ended March 31, 2002 down from 34% during the same period in 2001.

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 these businesses.
Accordingly, the Company elected to report its legacy VAR business as
discontinued operations by early adoption of SFAS 144. These businesses were
added to HSG (which was reported as discontinued operations in 2000) for a
combined presentation of discontinued operations, and the condensed
consolidated financial statements have been reclassified to segregate the net
assets and operating results of these business segments.

Summary operating results of the discontinued operations for the three months
ended March 31, 2002 and 2001 (in thousands) were as follows:

|                                  |  |                              |      |      |  |   |         |  
|--------------------------------- |  | ---------------------------- | ---- | ---- |  | - | ------- | -
|                                  |  | Three months ended March 31,
|                                  |  |                             
|                                  |  | 2002                         |      | 2001
|                                  |  |                              |      |     
|Revenue                           |  | $                            | 223  |      |  | $ | 6,577   |  
|                                  |  |                              |      |      |  |   |         |  
|Gross profit                      |  | $                            | (331 | )    |  | $ | 729     |  
|                                  |  |                              |      |      |  |   |         |  
|Operating loss                    |  | $                            | (331 | )    |  | $ | (13,190 | )
|                                  |  |                              |      |      |  |   |         |  
|Loss from discontinued operations |  | $                            | (331 | )    |  | $ | (13,190 | )
|                                  |  |                              |      |      |  |   |         |  

The operating loss in the three months ended March 31, 2001 includes
depreciation of $273,000, amortization of intangibles of $10.7 million, and
amortization of deferred compensation of $125,000.

Extraordinary Item

In January 2001, the Company modified the terms of the $7.0 million outstanding
balance of its 5% convertible subordinated debentures as follows: The Company
repurchased $4.5 million, converted $1.5 million into the Companys common
stock at a price of $1.40 per share, fixed the conversion rate at $1.19 per
share for the remaining $1.0 million and issued warrants to purchase 945,378
shares of the Companys common stock at an exercise price of $2.00 per share.
The cost of this conversion and early retirement of debt totaled $1.6 million.

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Critical and Significant Accounting Policies

The preparation of financial statements and related disclosures in conformity
with generally accepted accounting principles 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. Significant changes in required reserves have been recorded in
recent periods and may occur in the future due to the current market
environment.

Inventory Reserve

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 required reserves 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 required
inventory reserves may continue to occur in the future due to the current
market conditions.

Restructuring Accruals

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 lease with
total payments remaining of $2.8 million, assumes that the building will be
sub-leased for 50% of the lease value. As of March 31, 2002, the Company had
a remaining reserve balance of approximately $2.8 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.

Fair Value of Assets and Liabilities Acquired

During 2001, the Company acquired NACT and Telemate.Net (see further discussion
in Note 2 to the consolidated financial statements). In conjunction with the
acquisitions, The Company was required to estimate the fair value of assets
(including goodwill and other intangibles) and liabilities acquired based on
industry conditions, historical experience and future operational cash flow
projections, option valuation models and evaluation of events subsequent to the
acquisitions. The Company believes that the estimated purchased balances
approximate fair market value.

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 benefit recorded.

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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 after careful analysis of
each individual issue based upon the then current facts and circumstances. The
required reserves may change in the future due to new developments in each
matter or changes in approach such as a change in settlement strategy in
dealing with these matters.

Intangible Assets

The Company has significant intangible assets related to goodwill and other
acquired intangibles. The determination of related estimated useful lives and
whether or not these assets are impaired involves significant judgments.
Changes in strategy and/or market conditions could significantly impact these
judgments and require adjustments to recorded asset balances. The Company
assesses the recoverability of its intangible assets by determining whether the
value of goodwill and other acquired intangible assets over their remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Companys average cost of funds. Effective January 1, 2002, the
Company adopted SFAS 142, which stipulates an impairment test is to be
performed at each reporting date that requires a comparison of the fair value
of an intangible asset with its carrying amount. If the carrying amount of an
intangible asset exceeds its fair value, then an impairment loss shall be
recognized in an amount equal to that excess.

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 working
capital provided by debt from third party lenders, issuances of debt and equity
securities and sale of discontinued businesses.

At March 31, 2002, the Company had a negative working capital position (excess
of current liabilities over current assets) of $4.5 million compared to a
negative working capital position of $4.6 million at December 31, 2001. The
Companys cash and cash equivalents totaled $5.7 million at March 31, 2002, and
$7.7 million at December 31, 2001. Total long-term debt, including current
portion, net of discount, was $3.5 million at March 31, 2002 and $3.4 million
at December 31, 2001. At March 31, 2002, the Company had no borrowings under
its $5.0 million Credit Agreement with the Bank. The Credit Agreement is
secured by substantially all of the assets of the Company. The availability
under the Credit Agreement at March 31, 2002, is based on an analysis of
available collateral based on an audit by the Bank, which is currently being
completed and is expected to be determined in advance of any expected borrowing
needs.

Cash Flow

Cash used in the Companys continuing operations in the three months ended
March 31, 2002 totaled approximately $1.7 million compared with cash used in
continuing operations of $4.6 million in the same period in 2001. The
Companys use of cash in continuing operations during the three months ended
March 31, 2002 resulted primarily from cash used for changes in current
operating items of approximately $2.5 million and was offset by cash from
continuing operations (net loss from continuing operations of $859,000 reduced
by non-cash charges totaling $1.7 million, including depreciation and
amortization of $1.3 million and a provision for doubtful accounts of
$351,000).

Cash used in the Companys discontinued operations in the three months ended
March 31, 2002 totaled $213,000 compared with cash used in discontinued
operations of $1.1 million in the same period in 2001.

The Company used cash in investing activities for continuing operations in the
three months ended March 31, 2002 of approximately $304,000, compared to
$767,000 in the same period of 2001. Of these amounts, the Company spent
$222,000 and $767,000 on capital expenditures in the three months ended March
31, 2002 and 2001, respectively. The Company also invested $82,000 on
capitalized software costs in the three months ended March 31, 2002.

During the three months ended March 31, 2001, the Company received net proceeds
from sale of discontinued operations totaling $8.2 million for the sale of its
restaurant solutions business.

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Cash provided by financing activities from continuing operations totaled
approximately $183,000 in the three months ended March 31, 2002, compared to
$4.4 million used in financing activities in the same period of 2001. Proceeds
from the issuance of the Companys common stock totaled $183,000 in the first
quarter of 2002. Payments to repurchase convertible subordinated debentures
totaled $4.5 million and proceeds from the issuance of common stock totaled
$131,000 in the first quarter of 2001.

Contractual Obligations and Commercial Commitments

The following summarizes the Companys future contractual obligations at March
31, 2002 (in thousands):

|                                               |                         |       |                        |                 |  |           |       |           |  |              |       |       |  |   |       |       |  |   |       |       | 
|---------------------------------------------- | ----------------------- | ----- | ---------------------- | --------------- |  | --------- | ----- | --------- |  | ------------ | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                               |                         |       | Payments Due By Period
|                                               |                         |       |                       
|Contractual Obligations                        |                         | Total |                        | Less than1 year |  | 1-3 years |       | 4-5 years |  | After5 years
|                                               |                         |       |                        |                 |  |           |       |           |  |             
|Deferred payment due for the purchase of NACT* |                         | $     | 5,340                  |                 |  | $         | 5,340 |           |  | $            |      |       |  | $ |      |       |  | $ |      |      
|Convertible subordinated debentures            |                         |       | 4,500                  |                 |  |           |       |           |  |              |       |       |  |   | 4,500 |      
|Operating leases:                             
|                                               | Continuing operations   |       |                        | 16,399          |  |           |       | 2,072     |  |              |       | 4,021 |  |   |       | 3,963 |  |   |       | 6,343 | 
|                                               | Discontinued operations |       |                        | 3,449           |  |           |       | 621       |  |              |       | 902   |  |   |       | 738   |  |   |       | 1,188 | 
|                                               |                         |       |                        |                 |  |           |       |           |  |              |       |       |  |   |       |       |  |   |       |      
|Total contractual cash obligations             |                         | $     | 29,688                 |                 |  | $         | 8,033 |           |  | $            | 4,923 |       |  | $ | 9,201 |       |  | $ | 7,531 |      
|                                               |                         |       |                        |                 |  |           |       |           |  |              |       |       |  |   |       |       |  |   |       |      



|* |  | See Note 8 of the Notes to the Condensed Consolidated Financial Statements
included elsewhere in this Quarterly Report onForm 10-Q.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------

Sources of Cash

For 2002, the Company expects that its primary sources of cash will be from
cash on hand, working capital provided by operating activities, borrowings
under the Credit Agreement and other possible sources, including issuances of
equity or debt securities. The Company believes that, with its current
operations, which were cash flow positive for the last two quarters, and with
the restructuring of the Deferred Amount, it will have sufficient liquidity
from these sources to meet its current financial obligations through 2002.
However, the Credit Agreement contains certain financial covenants and
limitations on the Companys ability to access funds under the Credit
Agreement. If the Company is in violation of the 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 Credit
Agreement to the extent necessary. To the extent the Company does not have
borrowing availability under the Credit Agreement, the Company may be required
to obtain additional sources of capital, sell assets, obtain an amendment to
the Credit Agreement or otherwise restructure its outstanding indebtedness.

If the Company is unable to obtain additional capital, sell assets, obtain an
amendment to the Credit Agreement or otherwise restructure its outstanding
indebtedness, 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, the restructured
payments during 2002 for the NACT acquisition and payments related to
discontinued operations. At March 31, 2002, included in accrued compensation
and liabilities of discontinued operations is $277,000 for Telemate.Net related
severance costs and $4.7 million in payments related to discontinued
operations. The Company expects to pay out $930,000 related to Telemate.Net
severance costs and discontinued operations for the remainder of 2002.

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, and funding the restructured payments
for the acquisition of NACT. The Company expects to meet these cash needs
through cash from operations, if any, cash on hand, borrowings under the Credit
Agreement or other debt facilities, if available, as well as through possible
issuances of equity or debt securities. If the Company is unable to secure a
working capital line of credit with sufficient borrowing availability (or
restructure its existing line of credit), obtain additional capital or sell
assets, then the Company may not be able to meet its obligations and growth
plans.

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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. Market risk is the potential loss arising from adverse changes in
market rates and prices, such as interest 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. The Company may
enter into such transactions in the future.

Interest Rate Risks

The Companys debt at March 31, 2002, carries interest rates which are fixed.

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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 proceedings incidental to its business. The
Company does not expect these legal proceedings, either
individually or in the aggregate, to have a material adverse
effect on the Company.




Item 2. Changes in Securities

None.




Item 3. Defaults Upon Senior Securities

None.




Item 4. Submission of Matters to a Vote of Security Holders

None.




Item 5. Other Information

None.




Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits:

|     |  |                                                                                                                                                                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Convertible Secured Promissory Note dated April 25, 2002, executed by
the Company in favor of WATP in connection with the WATP Settlement
Agreement. (Incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K filed on April 30, 2002.)
|    
|99.1 |  | Settlement Agreement and General Release dated March 29, 2002,
between WATP and the Company (the WATP Settlement Agreement).
(Incorporated by reference to Exhibit 99.1 to the Companys
Current Report on Form 8-K filed on April 30, 2002.)                     
|    
|99.2 |  | Security Agreement dated April 25, 2002, between the Company and WATP
entered into in connection with the WATP Settlement Agreement.
(Incorporated by reference to Exhibit 99.2 to the Companys
Current Report on Form 8-K filed on April 30, 2002.)               
|    
|99.3 |  | Security Agreement dated April 25, 2002, among Telemate.Net, NACT and
WATP entered into in connection with the WATP Settlement Agreement.
(Incorporated by reference to Exhibit 99.3 to the Companys
Current Report on Form 8-K filed on April 30, 2002.)          
|    
|99.4 |  | Pledge Agreement dated April 25, 2002, between the Company and WATP
entered into in connection with the WATP Settlement Agreement.
(Incorporated by reference to Exhibit 99.4 to the Companys
Current Report on Form 8-K filed on April 30, 2002.)                 
|    
|99.5 |  | Guaranty dated April 25, 2002, among Telemate.Net, NACT and WATP
entered into in connection with the WATP Settlement Agreement.
(Incorporated by reference to Exhibit 99.5 to the Companys
Current Report on Form 8-K filed on April 30, 2002.)                    

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|     |  |                                                                                                                                                                                                                                                                                 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.6 |  | Subordination Agreement dated April 25, 2002, among the Company,
NACT, Telemate.Net and the Bank entered into in connection with the
WATP Settlement Agreement. (Incorporated by reference to Exhibit 99.6
to the Companys Current Report on Form 8-K filed on April 30, 2002.)
|    
|99.7 |  | Form of Deposit Account Control Agreement among the Company, the Bank
and WATP entered into in connection with the WATP Settlement
Agreement. (Incorporated by reference to Exhibit 99.7 to the
Companys Current Report on Form 8-K filed on April 30, 2002.)                  

(b)   Reports on Form 8-K.

None.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

|                   |  |                                                                                                                                
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------
|                   |  | VERSO TECHNOLOGIES, INC.                                                                                                       
|                  
|Date: May 10, 2002 |  | /s/ Juliet M. Reising                                                                                                          
|                   |  |                                                                                                                                
|                   |  | Executive Vice President and Chief Financial Officer
(duly authorized signatory and
Principal Financial and Accounting Officer)

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EXHIBIT INDEX

|     |  |                                                                                                                                                                                                                                                                                                                           
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Convertible Secured Promissory Note dated April 25, 2002, executed by
the Company in favor of WA Telcom Products Co., Inc. in connection
with the WATP Settlement Agreement, as defined below. (Incorporated
by reference to Exhibit 4.1 to the Companys Current Report on Form
8-K filed on April 30, 2002.)            
|    
|99.1 |  | WATP Settlement Agreement and General Release dated March 29, 2002,
between WA Telcom Products Co., Inc. and the Company (the WATP
Settlement Agreement). (Incorporated by reference to Exhibit 99.1 to
the Companys Current Report on Form 8-K filed on April 30, 2002.)                                              
|    
|99.2 |  | Security Agreement dated April 25, 2002, between the Company and WA
Telcom Products Co., Inc. entered into in connection with the WATP
Settlement Agreement. (Incorporated by reference to Exhibit 99.2 to
the Companys Current Report on Form 8-K filed on April 30, 2002.)                                             
|    
|99.3 |  | Security Agreement dated April 25, 2002, among Telemate.Net Software,
Inc., NACT Telecommunications, Inc. and WA Telcom Products Co., Inc.
entered into in connection with the WATP Settlement Agreement.
(Incorporated by reference to Exhibit 99.3 to the Companys Current
Report on Form 8-K filed on April 30, 2002.)
|    
|99.4 |  | Pledge Agreement dated April 25, 2002, between the Company and WA
Telcom Products Co., Inc. entered into in connection with the WATP
Settlement Agreement. (Incorporated by reference to Exhibit 99.4 to
the Companys Current Report on Form 8-K filed on April 30, 2002.)                                               
|    
|99.5 |  | Guaranty dated April 25, 2002, among Telemate.Net Software, Inc.,
NACT Telecommunications, Inc. and WA Telcom Products Co., Inc.
entered into in connection with the WATP Settlement Agreement.
(Incorporated by reference to Exhibit 99.5 to the Companys Current
Report on Form 8-K filed on April 30, 2002.)          
|    
|99.6 |  | Subordination Agreement dated April 25, 2002, among the Company,
NACT, Telemate.Net Software, Inc. and Silicon Valley Bank entered
into in connection with the WATP Settlement Agreement. (Incorporated
by reference to Exhibit 99.6 to the Companys Current Report on Form
8-K filed on April 30, 2002.)                
|    
|99.7 |  | Form of Deposit Account Control Agreement among the Company, Silicon
Valley Bank and WA Telcom Products Co., Inc. entered into in
connection with the WATP Settlement Agreement. (Incorporated by
reference to Exhibit 99.7 to the Companys Current Report on Form 8-K
filed on April 30, 2002.)                         

26