UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
  Form
10-K
 
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
      THE SECURITIES EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2007o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
      THE SECURITIES EXCHANGE ACT OF 1934For
      the transition period
      from                      to
  Commission
File Number 0-22190
  
  Verso
Technologies, Inc.
 (Exact
Name of Registrant as Specified in Its Charter)
  Minnesota
              41-1484525(State
      or Other Jurisdiction of
              (I.R.S.
      EmployerIncorporation
      or Organization)
              Identification
      No.)
 
 400
Galleria Parkway
 Suite
200
 Atlanta,
GA 30339
 (Address
of Principal Executive Offices)
  678-589-3500
 (Registrant’s
Telephone Number, Including Area Code)
  Securities
registered pursuant to Section 12(b) of the Act: common stock, $0.01 par value
per share, registered on The Nasdaq Capital Market.
  Securities
registered pursuant to Section 12(g) of the Act: None.
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined by
Rule 405 of the Securities Act of 1933.  Yes  o    No 
x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934.    Yes  o    No 
x
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  x    No 
o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange
Act.  (Check one):
 
 Large
      Accelerated filer  o
              Accelerated
      Filer  o
              Non-accelerated
      Filer  o
              Smaller
      Reporting Company  x
  
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act). Yes  o    No 
x
 
 As of
June 30,
2007, the aggregate market value of the voting and non-voting common equity held
by non-affiliates, based upon the last reported sale price of such common equity
of the registrant as of such date as reported by the Nasdaq Stock Market, was
$38,462,368.
  As of
April  15, 2008,93,300,591shares of common stock of the registrant were
outstanding.
  DOCUMENTS
INCORPORATED BY REFERENCE: The information required by Part III of this
Annual Report on Form 10-K is incorporated by reference to the registrant's
definitive proxy statment to be filed with the Securities and Exchange
Commission pursuant to regulation 14A not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K.
 
 
 PART
I
 
 Note
Regarding Forward-Looking Statements
  Certain
statements contained in this Annual Report on Form 10-K (this “Annual Report”),
including, without limitation, in the sections herein titled “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” or incorporated herein by reference, that are not statements of
historical facts are “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,”
“anticipate,” “intend,” “will” and similar expressions are examples of words
that identify forward-looking statements. Forward-looking statements include,
without limitation, statements regarding our future financial position, business
strategy and expected cost savings. These forward-looking statements are based
on our current beliefs, as well as assumptions we have made based upon
information currently available to us.
  Each
forward-looking statement reflects our current view of future events and is
subject to risks, uncertainties and other factors that could cause actual
results to differ materially from any results expressed or implied by our
forward-looking statements. Important factors that could cause actual results to
differ materially from the results expressed or implied by any forward-looking
statements include: the volatility of the price of our common stock, par value
$0.01 per share (the “Common Stock”); our ability to fund future growth; our
ability to become profitable; our ability to maintain the listing of the Common
Stock on The Nasdaq Capital Market; our ability to attract and retain qualified
personnel; general economic conditions of the telecommunications market; market
demand for and market acceptance of our products; legal claims against us,
including, but not limited to, claims of patent infringement; our ability to
protect our intellectual property; defects in our products; our obligations to
indemnify our customers; our exposure to risks inherent in international
operations; our dependence on contract manufacturers and suppliers; general
economic and business conditions; other risks and uncertainties included in the
section of this Annual Report titled “Risk Factors”; and other factors disclosed
in our other filings made with the Securities and Exchange Commission (the
“SEC”).
  All
forward-looking statements relating to the matters described in this Annual
Report and attributable to us or to persons acting on our behalf are expressly
qualified in their entirety by such factors. We have no obligation to publicly
update or revise these forward-looking statements to reflect new information,
future events, or otherwise, except as required by applicable federal securities
laws, and we caution you not to place undue reliance on these forward-looking
statements.
 
 Item
1.                  Business
 
 General
  Verso
Technologies, Inc., a Minnesota corporation (the “Company” or “we”), is a global
technology provider of next generation network solutions offering a core-to-edge
product portfolio for telecommunications service providers and enterprise
organizations. We have an integrated portfolio of Internet Protocol (“IP”) based
products and other products that include the brands AccessGate®, Clarent®,
iMarc®, I-Master®, NetPerformer®, NetSpective®, Telemate.Net®, and Verilink® and
in late 2007 certain of our products were branded VCLEARTM to designate them as
“pure IP-based” next generation products. Our core focus, provided by our
Technologies Group, is on three market segments: (i) Mobile Backhaul – an
end-to-end cellular network bandwidth optimization solution that helps network
operators expand and migrate wireless services, improve reliability and control
operating costs; (ii) Softswitch/Gateway – a pure IP platform that enables
profitable end-to-end IP communications over wireline, wireless, terrestrial and
satellite links, which is also interoperable with legacy architectures to
deliver a seamless, profitable Voice over Internet Protocol (“VoIP”) migration
path; and (iii) Integrated Access Devices (“IAD”)– an ideal access platform that
provides integrated multi-service connectivity, aggregation and compression to
efficiently enable digital convergence, toll bypass, video and conferencing.
Also through our Technologies Group, we offer Network Monitoring and Security,
which minimizes communications costs and monitors and controls employee
productivity and computer usage through sophisticated software products that
provide monitoring, reporting, and filtering functions.
 
 We also
sell services, provided by our Outsourcing Group (formerly known as the Advanced
Applications Services Group), which enables our customers to reduce overhead and
operating expenses. These services include outsourced technical support,
application installation, and training to both customers of the Technologies
Group and outside customers.
 
 Our
customers include the following entities or certain of their affiliates:
AT&T Inc., Alcatel-Lucent, Avaya, Hughes Network Systems, Interlink
Communications, ND SatCom, Nortel Networks, Veraz Networks, Inc., Verizon
Communications, Inc., and ViaSat Inc. For our service provider customers, we
offer an end-to-end, convergence architecture that provides the technology
infrastructure as well as applications needed to accelerate a service provider's
time-to-revenue for new services over different access mediums. For enterprise
customers, we offer hardware and software solutions that help organizations
enhance productivity, reduce network costs and comply with regulatory
requirements. We have installations in more than 95 countries and our products
are sold either through our direct sales organization or through a well
established network of domestic and international partners. Our channel partners
include AT&T, Alcatel-Lucent, Avaya, Hughes Network Systems, Interlink
Communication Systems, Nortel, and ViaSat.
  1
  We are
located at 400 Galleria Parkway, Suite 200, Atlanta, Georgia 30339, and our
telephone number at that location is (678) 589-3500. We maintain a worldwide web
address at www.verso.com. Our annual, quarterly and current reports, and
amendments thereto, which we file with, or furnish to, the SEC, are available
free of charge in the investors section of our website at www.verso.com. Such
reports and amendments are available on our website as soon as reasonably
practical after we have filed such reports with, or furnished such reports to,
the SEC.
 
 Technologies
Group
 
 The
Technologies Group develops softswitch, software and hardware-based converged
packet solutions that use next generation protocols such as VoIP, VoIP based
access products, VoIP based applications and server devices that provide
multiplexing and transport of voice and data services, as well as other advanced
protocols for specialized applications such as a Global System for Mobile
Communication (“GSM”) and Code Division Multiple Access (“CDMA”) backhaul and
voice/data over satellite transmissions. The Technologies Group focuses on the
VoIP, GSM, pre-paid, post-paid, and integrated access device sectors of the
communications industry. The group’s solutions enable service providers to
rapidly deploy highly efficient converged communication networks which are more
cost-effective to operate and which enhance revenues by supporting innovative,
higher margin services. The Technologies Group differentiates its solutions
portfolio from those of our competitors by providing complete, end-to-end,
bundled solutions that range from the central core to the edge of the network,
as well as offering applications that generate and enhance revenues. The
Technologies group has four business units which comprise its total
business.
  Softswitch/Gateway
Business
  A
softswitch is used to control connections at the junction point between circuit
and packet networks and takes care of functions such as billing, call routing,
signaling, call services as well as connecting different types of digital media
streams together to create an end-to-end path for voice and data. Customers
deploy softswitches to replace legacy technology, to build out new networks, and
to increase capacity in existing markets. Traditional softswitching connects and
converts public switched telephone networks (“PSTN”) to VoIP networks. Verso’s
softswitching technology has been designed and built from inception to be a
pure, end-to-end, IP-based switching solution that we refer to as an “IP Pure
Switch.”
 In the
first quarter of 2003, we acquired substantially all of the operating assets of
Clarent Corporation (“Clarent”), a pioneer in packet-based technology. The
acquisition included Clarent’s softswitch and NetPerformer® network optimization
product lines. The Clarent softswitching technology became the core of our
Softswitch/Gateway business unit. Today, the former Clarent product line
supports a variety of diverse business applications from Voice over Broadband
(“VoBB”) enterprise managed services and retail calling cards to wholesale IP
telephony, IP network clearing services, international long distance and
residential dial tone services. The NetPerformer technology became the core of
our Backhaul business, discussed below. (See “Mobile Backhaul
Business”)
 
 On April
17, 2007, we acquired Sentito Networks, Inc. (“Sentito”), a provider of media
and signaling gateway equipment to the telecommunications market, by means of
the merger of SN Acquisition Corporation, a wholly-owned subsidiary, into
Sentito pursuant to an Agreement and Plan of Merger, dated as of April 4, 2007
(the “Sentito Acquisition”). The acquisition of this technology lowered our
product cost for our softswitch solution. As the Sentito gateway is fully
integrated into our softswitch, it will provide us with a proprietary integrated
gateway within our softswitch solution.
 
 Within
our softswitch/gateway business we provide an enhanced services solution under
the brand name I-Master. In August 2004, we began working with WSECI, Inc.,
formerly known as Jacksonville Technology Associates, Inc. (“WSECI”), to resell
WSECI’s open and next generation based pre-paid and post-paid I-Master®
solution. This solution is scalable to Tier I and Tier II carriers and is
compatible with other equipment provider’s technologies, including our
technologies, and as such, presents a larger market opportunity for us. In March
2005, we acquired substantially all the operating assets of WSECI. This
type of pre-paid and value-added application often represents the greatest
potential for immediate revenue to our customer. These applications are often
sold within the context of a softswitch solution; however, our applications are
compatible with all leading softswitches in the market. As the
telecommunications business becomes more and more software-centric, these kinds
of applications are leading the way as competitive realities drive wireless
vendors and software developers to create more cohesiveness among services,
service management, and operations.
 
 Mobile
Backhaul Business
  Mobile
backhaul, or compression technology, allows a service provider to optimize and
reduce the cost of existing bandwidth. This is desirable due to the high cost of
deploying new bandwidth. Products are utilized by operators in emerging markets
who desire to provide basic service to new subscribers, and by developed market
operators who desire bandwidth optimization to handle the growth in demand and
use of video, voice, and data over wireless networks. Customers deploy this
technology when they are expanding an existing network, building out a
next-generation network, or simply endeavoring to lower operating costs.
NetPerformer and AccessGate comprise our mobile backhaul product lines. There
are two primary market forces at work driving demand in this business: (1)
growth in wireless GSM subscribers worldwide, and (2) growth in bandwidth
requirements to service customers who are using more bandwidth intensive
services such as voice, video, and data. GSM is the most popular standard for
mobile phones in the world with an estimated 82% of the world market. It is used
by an estimated 2 billion people in 212 countries and territories according to
the GSM Association. Verso’s products are compatible with other standards;
however, the majority of the Company’s backhaul business to date has been to
GSM-oriented customers.
  2
  Our
Mobile Backhaul business was created with the acquisition of the NetPerformer
technology from Clarent Corporation in 2003. The NetPerformer’s network
optimization and compression devices enable multi-site enterprises to lower
communications costs, alleviate bandwidth constraints, reduce network complexity
and extend telecom services to remote locations with poor or nonexistent telecom
infrastructures. This versatile line of products enables information technology
managers to integrate mission critical networks and applications across their
enterprise. In addition, NetPerformer products enable enterprises to
dramatically reduce telecom costs by eliminating monthly fees associated with
tie lines that link remote offices to corporate headquarters and eliminating the
toll charges on inter-office long distance calls.
  On
December 21, 2007, our wholly-owned subsidiary, Verso Backhaul Solutions, Inc.
(“Verso Backhaul”) purchased the AccessGate® cellular backhaul optimization
product line (“AccessGate”) from NMS Communications Corp. (the “AccessGate
Acquisition”).  We believe that the AccessGate acquisition has
consolidated that market segment and made Verso a leading provider of mobile
backhaul solutions worldwide. In January of 2008, we combined management of the
AccessGate and Net Performer backhaul optimization operations into our
consolidated Mobile Backhaul product business unit.
  Integrated
Access Business
  An
Integrated Access Device (“IAD”) is a customer premises equipment device (“CPE”)
that provides access to wide area networks and the internet. Specifically, it
aggregates multiple channels of information including voice and data across a
single shared access link to a carrier or service provider Point of Presence, or
“PoP”. The access link may be a T-1 line, a Digital Subscriber Line (“DSL”)
connection, a cable network, a broadband wireless link, or a metro-Ethernet
connection.
 
 Our
Access products and product families under the Verilink and iMarc brand names
address issues and applications faced by both wireline and wireless
communications carriers and enterprises. The products utilized by wireline
carriers are typically deployed in either (i) the “last mile” of their networks
to enable the delivery of telecommunications services to end users, both
business and residential customers, or (ii) in their internal corporate networks
providing the communications connectivity within the corporation. The products
utilized by the enterprise customers typically are deployed as access devices
connecting the corporation’s offices to the telecommunications network. Our
primary products in this group are the Verilink 8000 Series, the WANsuite
family, the Shark family and the iMarc family.
  On June
16, 2006, we acquired the outstanding equity interests of Winslow Asset
Holdings, LLC (now known as Verso Verilink) from Winslow Asset Group, LLC (the
“Verilink Acquisition”). Winslow Asset Holdings, LLC had earlier acquired
substantially all of the business assets of Verilink Corporation and Larscom
Incorporated (together, the “Verilink Sellers”), other than the accounts
receivable and certain fixed assets of the Verilink Sellers which were
transferred to Winslow Asset Group, LLC.  As a result of our equity
purchase, we acquired the Verilink Sellers’ business of developing,
manufacturing, marketing and selling broadband access solutions for computer
networks.
  On
December 29, 2006, we purchased certain assets of Paradyne Networks, Inc.
related to the business of manufacturing, selling and supporting the iMarc
product line (the “iMarc Acquisition”).  The iMarc product line is a
family of asynchronous transfer mode (“ATM”) devices, IP service units, and
branch monitors that provides intelligent demarcation between carrier and
enterprise networks, allowing for easier management. The iMarc and Verilink
businesses are now combined into our Integrated Access Device products
group.
  Network
Monitoring and Security Business
  As
companies endeavor to drive productivity, it has become increasingly important
to minimize communications costs and monitor and control employee productivity
and computer usage through sophisticated software products which provide
monitoring, reporting, and filtering functions. We address this market demand
through our Telemate and NetSpective products, which provide call accounting,
content management, and web filtering technology to a wide array of primarily
North American enterprise customers.
  3
 
 In
November of 2001, we acquired Telemate.net, which consisted of the TeleMate call
accounting technology and the NetSpective content management and web filtering
technology. Our TeleMate® call accounting solution is a comprehensive,
easy-to-use reporting tool used to facilitate the migration to next generation
VoIP networks. The TeleMate product helps enterprises minimize voice
communications costs, simplify capacity planning, and monitor employee
productivity. Additionally, the TeleMate product measures resource utilization,
provides reports for internal departmental charge-back or client billing, and
handles dozens of other control reporting tasks. Our NetSpective® content
management and web filtering solution enables enterprises to monitor, filter,
and/or report on usage of critical IP network resources. With a comprehensive
set of feature functionality that tracks Internet activity and detects usage of
a variety of web-based applications, including peer-to-peer, instant messaging,
online chat and streaming media, the NetSpective product helps enterprises,
governments, schools and libraries maintain control of critical network
resources and facilitate compliance with filtering and communications tracking
regulations.
  For the
year ended December 31, 2007, revenue from the Technologies Group was $43.4
million, or 86%, of our consolidated revenue. Summarized financial information
for the Technologies Group is set forth in Note 17 to the consolidated financial
statements for the year ended December 31, 2007, which statements are contained
elsewhere in this Annual Report.
  Verso
Outsourcing
 
 Our second business segment is Verso
Outsourcing, which consists of our technical assistance center, providing
support for our technical applications and services to outside customers as well
as the customers of our Technologies Group.
 
 Verso Outsourcing delivers
full-service, custom technical support to customers that want to ensure
satisfaction with each end-user technology interaction, and supports all of our
product lines. This allows us to better leverage resources while ensuring the
highest level of customer support. It delivers 24 x 7 help desk support, Tier I,
II and III product support, “insourcing”, on-site deployment services, hardware
and software training, and project management resources.
  In 2007,
Verso Outsourcing completed a comprehensive business analysis covering all
business processes, procedures, and systems with the objective of identifying
and implementing the appropriate scalable platform in anticipation of rapid
growth. Further, in late 2007, the Verso Outsourcing business was provided with
its own distinct corporate identity and web presence, and was given the
resources to launch an aggressive business development campaign.
  For the year ended
December 31, 2007, revenue from the Verso Outsourcing Group was $7.3 million, or
14%, of our consolidated revenue summarized financial information for the Verso
Outsourcing Group is set forth in Note 17 to the consolidated financial
statements for the year ended December 31, 2007, which statements are contained
elsewhere in this Annual Report.
  Technologies
Group: Market
 
 General
 
 As the
global business environment becomes increasingly competitive, enterprises and
government entities of all kinds are driven by a common desire to lower
operational costs, enhance revenue from new service offerings, improve
productivity, increase customer retention, enhance service quality, and speed
time to market. Many enterprises depend on a robust technology infrastructure to
help them achieve these business goals. Burdened by the high costs of continuing
to build, manage and maintain separate voice, video, and data networks, service
providers have begun to combine voice, video, and data services onto converged
IP-based network infrastructures that leverage the low cost delivery of IP
networks while delivering the high reliability and voice quality standards of
the circuit-switched, PSTN. These infrastructures are enabling service providers
to launch new innovative services which provide important market share
opportunities and enhance their revenue potential. These new applications are
driving widespread adoption of converged packet-based technology among Tier I
service providers in developed markets like North America and Europe, as well as
in emerging market carriers in Asia-Pacific and elsewhere around the developing
world. Many emerging markets could not deploy a financially feasible network
without the efficiencies provided by advanced technology. As a result,
enterprises and other customers are migrating their legacy voice and data
systems into single converged networks that enable more efficient use of
resources and easier integration of distributed, disparate resources, including
applications, equipment, and people. Emerging market operators are utilizing the
technology as a primary communications infrastructure. Deregulation and
privatization of the global telecommunications industry continues to drive
demand for converged packet-based technology for small, emerging, international
service providers who are not encumbered by large, legacy time division
multiplexing networks. More flexible and more agile than larger carriers, these
emerging service providers are opening up large, previously untapped markets
such as Africa, the Middle East, and India, driving much of the worldwide VoIP
spending as they launch traditional voice services through a variety of
wholesale and retail business models. As this adoption of VoIP technology
continues, so does demand for new IP-centric tools that enable businesses to
manage and enhance the performance, utilization, and efficiency of evolving
communication infrastructures.
  4
  The
primary markets for the Technologies Group consists of carriers, operators,
government entities, and enterprises that need products and services in the
following four market segments: VoIP, GSM, IAD, and Internet usage applications.
The VoIP segment is characterized by operators and enterprises of all sizes and
is being driven by deregulation and service providers’ desire to lower operating
costs as well as deploy value-added applications over wireless broadband,
virtual private network (“VPN”), and Worldwide interoperability for Microwave
Access (“WiMAX”) networks. The market for wireless GSM technology is the largest
market for handsets, especially in foreign and developing countries (estimated
at 82% global market share). Our NetPerformer and AccessGate 2G/2.5G wireless
optimization backhaul technologies lower the cost for operators by increasing
the service provider’s bandwidth and increasing its efficiency. These solutions
also facilitate deployment of new voice and data services while minimizing
associated additions or changes to existing physical network infrastructure.
Pre-paid solutions include applications such as traditional telephony, pre-paid
data services over networks such as DSL, cable, and broadband wireless. The
pre-paid segment is ideal for emerging markets where credit is not readily
available to consumers but demand for communication products is growing rapidly
as cost efficiencies create demand by making communications affordable to the
end user and profitable for the operator. Sales in the VoIP, GSM, and pre-paid
segments are achieved through our network of distributors and Original Equipment
Manufacturer (“OEM”) partners in conjunction with our internal sales teams. The
market for IADs is characterized by small and medium sized enterprises that are
looking to optimize their voice and data networks. Sales of the Technologies
Group IAD products are achieved through resellers or carrier partners as part of
an integrated solution to their end customers. Demand is driven by end users
desire to lower telecommunications operating costs. Our IAD business falls into
three segments: bandwidth aggregation, service assurance, and converged access.
In the bandwidth aggregation segment, market demand is shifting towards
integrated solutions which incorporate Channel Service Units/Data Service Units
(“CSU/DSU”) functionality such as IADs, access routers and new generation
multiplexers. With this evolution in the market, the IAD product mix is
positioned to transition from legacy stand-alone CSU/DSU toward integrated,
next-generation access products. In the service assurance segment, we design,
manufacture, and sell products that compute quality of service metrics at
various levels of the network including the physical, network, and application
(e.g. VoIP) levels. This product is a passive device that resides in the network
as a probe or it is installed at an enterprise demarcation point and provides
the wide area network (“WAN”) interface connection to the service provider
network. In the converged access segment, we design, manufacture, and sell
products that connect to the WAN to provide high-speed connectivity to end user
businesses for the delivery of converged voice, video, and data applications.
These products are commonly deployed at enterprise locations including main
office, branch offices and remote offices, as well as the small office/home
office. Our Network Monitoring and Security business enjoys a broad client base
consisting of federal, state, and local governments, educational institutions,
and business enterprises. The market is primarily domestic.
 
 Technologies
Group: Products and Solutions
 
 Softswitch
Solutions
  Edge
C5 Softswitch Solution
 
 Our Edge
Class 5 (“C5”) Softswitch Solution enables traditional and alternative
telecommunications service providers to deliver residential and advanced
enterprise managed services over the “last mile” of
any IP communications network, opening the door to new business and
revenue opportunities. The solution supports IP connectivity via H.323
(packet-based multimedia communications systems), media gateway control protocol
(“MGCP”), and session initiation protocol (“SIP”) for interoperability with
a wide range of access gateways as well as customer premises gateways (“CPGs”),
 IP handsets, and carrier networks.  Additionally, our products
support VoIP over newer access technologies such as broadband cable, xDSL and
broadband wireless such as WiMAX technologies. The components of this
VCLEARTM-brand solution include: C5 Call Manager; C4 Call Manager; Command
Center; Element Management System; BHG Media Gateways; Border Agent; and VoIP
CPGs.
 
 In 2005,
we introduced the Edge C5 Call Manager versions 3.3 and 3.4, which further
expanded our opportunity at the network edge by providing key features such as
hotline, limiting simultaneous calls, private networking configurations,
distinctive music on hold, do not disturb, anonymous call rejection,
simultaneous ring, video edge device support, SIP and GR303 access gateways,
topology hiding, local number portability, E911, lawful intercept and a radius
interface to authentication, authorization and accounting servers such as
I-Master. These newly-introduced features expanded the opportunity to create new
revenue enhancing opportunities for customers as well as allowed them to comply
with the emerging VoIP regulatory requirements. These features are further
discussed in the section of this Annual Report titled “Business - Research and
Development.” In 2005, we deployed softswitch solutions in several emerging
markets, including Slovenia, Africa, and India.
 
 In 2006,
we enhanced the Edge C5 solution with the following: a Back Office component, IP
Centrex, a wholesale reporting module, enhanced software interactive voice
response (“IVR”) capabilities, and the introduction of IBM platform support. The
Back Office component offers customers integrated provisioning, management,
reporting and automated billing for VoBB as well as wholesale peering business
markets. An integrated wholesale reporting module enables our peering customers
to offer their wholesalers as well as virtual wholesalers the ability to monitor
and manage their traffic being offloaded and terminated into their networks. A
hosted IP Centrex optional component that is integrated with the Class 5 Call
Manager and Back Office components offers a feature set that meets the needs of
small office/home office (“SOHO”) users and small business customers. We also
enhanced our software based IVR and pre-paid application through support of dual
tone multi-frequency (“DTMF”) handling using named events as defined by Internet
Engineering Task Force (“IETF”) RFC 2833. This enabled us to offer a scalable
IVR system for the support of multiple services such as VoBB and pre-paid
calling. We signed a teaming agreement with IBM in 2006. As part of this
relationship, we obtained certification  for our C5 product for VoBB
overlay solutions as well as wholesale peering on the IBM BladeCenter platforms
running on Linux.
  5
  In 2007,
enhancements to Verso’s Edge C5 VoBB application, MetroNet, were focused on
improving customers’ return on investment through enhancements to both solution
turn-up and expansion. The MetroNet offering was restructured so that customer
expansions resulted in a zero down-time between 2,500 and 100,000 subscriber
solutions. In addition, in 2007, Verso developed a legal intercept solution with
Verint System, Inc.’s StarGate mediation solution within the scope of the
Communications Assistance for Law Enforcement Act (“CALEA”), an Act passed by
the US Congress to facilitate the wiretapping of digital telecommunications
switches.
  C4
Softswitch Solution
 
 Our Class
4 (“C4”) Softswitch Solution seamlessly facilitates migration to VoIP, allowing
carriers to preserve and leverage existing telecom investments to realize lower
operating costs and lower overall total cost of ownership. A significantly more
cost-effective and scalable alternative to traditional tandem circuit switches,
this Unix-based, software-centric, modular tandem trunking solution enables
wholesale transport and termination of voice traffic over global IP networks.
The components of this solution include: C4 Call Manager; Command Center;
Element Management System; SS7 Signaling; BHG Media Gateways; and
Connect.
  In 2005,
we introduced C4 Call Manager version 2.1, which further expanded our
opportunity in this market by providing key features such as local number
portability, E911, private networking configurations, a radius interface to
authentication, authorization and administration via the I-Master.
  In 2006,
we enhanced the C4 Call Manager with support of SIP and ISUP (integrated digital
service network user parts) transport within SIP or SIP-T (session initiation
protocol for telephones). These enhancements enable the C4 to interoperate as a
stand-alone component with any Class 5 softswitch or VoIP based feature server
enabling Signaling System 7 (“SS7”), Primary Rate Interface (“PRI”), and
CAS/MFCR2 Time Division Multiplex (“TDM”) connectivity. Like the edge solution,
the C4 solution was validated on the IBM BladeCenter solution on
Linux.
 
 In 2007,
we introduced CarrierNet, a next generation C4 media gateway offering.
CarrierNet is targeted to customers who require small to high density TDM to
VoIP (SIP, SIP-T, or H.323) solution either for legacy PSTN access for their
pure VoIP services (e.g. voice over broadband class 5 service, IP Centrex,
hosted Private Branch Exchange (“PBX”) services) or for a wholesale traffic
offering. The following capabilities were developed with CarrierNet: STM-1 and
DS-3 TDM media gateway interfaces for Verso’s BHG2500 media gateway product
line; a solution carefully packaged to minimize costly rack space requiring only
4 rack units for support of 4,032 DS0s of TDM to VoIP capacity; support for
remote SS7 signaling backhaul using standards based SIGTRAN technology; and
advanced routing features, including Telephone Number Mapping (“ENUM”), answer
seizure ratio (ASR) based routing, least-cost based routing, and source trunk
group based routing.
  I-Master
Pre-paid, Rating and Billing Platform
 
 Our
I-Master® Pre-paid, Rating and Billing Solution enables service providers and
carriers to launch multiple voice and next generation revenue generating
services while maintaining the revenue assurance associated with a pre-paid
model. This solution also enables a significant level of personalization to the
end user. Personal preferences are stored and used to enhance the end user’s
experience which increases customer retention for the service provider. This
pre-paid solution is based on open standards, meaning that it can integrate with
our softswitch products and also with many other next generation equipment
providers’ technologies, including the technologies of Cisco Systems, Inc.,
MetaSwitch (a division of Data Connection Ltd.), Nortel, and Veraz Networks,
Inc. The I-Master solution is compatible with the technologies of other
equipment providers and is scalable to Tier I and Tier II carriers. The solution
also offers real-time authentication for revenue enhancing voice and data
services, including calling, additional real-time authentication for Internet
and virtual private network access via Asymmetric DSL (“ADSL”) and dial-up,
and pre-paid broadband access.
 
 In 2006,
we added a number of rating features to I-Master to support the competitive
North American pre-paid market. These include disconnect rate plans and global
rate management tools. We executed a reseller agreement with one of the world’s
leading providers of telecommunication systems which enables the provider to
offer a product that provides real-time rating for cellular, data, VoBB, Wi-Fi,
WiMAX and calling cards.
  6
  In 2007,
we introduced market leading feature bundling capabilities to I-Master with
feature based account management. This capability allows our customers to
differentiate account attributes such as rate plans, service charges, and
“roll-over rules” by feature inside of a single customer account. Features
include black list, white list, friends and family plans, international calling,
and Internet based data. This capability enables our customers to create and
offer unique bundled service offerings using a revenue assurance method (i.e.
pre-paid). I-Master also introduced the following enhancements: friends and
family feature offering, black and white list support limiting an account to
only place calls to allowed phone numbers, advanced Internet data rating with
support for both directional and data volume, basic invoice generation and
management for post-paid, context sensitive on-line help, revenue prediction
tools advising our customers of the revenue impacts of a rating change (e.g.
rate plan modification, addition or deletion of  a service charge),
and overload protection and optimized application and batch job handling to
improve overall performance and reliability.
 
 Mobile
Backhaul Solutions
  NetPerformer®
Integrated Access VoIP Routers
 
 Our
NetPerformer® line of access compression devices enables multi-site enterprises
to lower communications costs, alleviate bandwidth constraints, reduce network
complexity and extend telecom services to remote locations with poor or
nonexistent telecom infrastructures. This versatile line of products enables
information technology managers to integrate mission critical networks and
applications across their enterprise. In addition, NetPerformer products enable
enterprises to dramatically reduce telecom costs by eliminating monthly fees
associated with tie lines that link remote offices to corporate headquarters and
eliminating the toll charges on inter-office long distance calls.
 
 In 2005,
we released our GSM A.bis/A.ter bandwidth optimization solution for the
NetPerformer platform offering cellular backhaul optimization. This solution
provides GSM network operators with a new way to reduce their operating costs by
providing bandwidth optimization for their entire GSM backhaul network,
including the data portion. The NetPerformer platform offers multiple
connectivity options, including IP, easily integrating with any existing network
infrastructure. NetPerformer’s GSM A.bis/A.ter option converts TDM voice and
data traffic channels to a more efficient packet-based format, which results in
better bandwidth utilization without any GSM transcoding that would impact the
voice quality. While optimizing the bandwidth required for GSM A.bis/A.ter up to
2:1 or greater, the NetPerformer product also provides a convergence path for
GSM 3G using a common network infrastructure. This reduces the cost of the
introduction of both technologies and reduces the recurring costs of the
facilities serving sites that are migrating to 3G.
 
 In 2006,
we continued to enhance the GSM backhaul solution.  We developed new
1U high equipment, SDM-9210 for interconnection into the base transceiver
station (“BTS”). It provides high reliability features like E1 bypass in
case of failure as well as 1:1 redundancy. Additional improvements include a
high precision clock compliant with the G.823 PDH standard which enables quality
handover in high density urban areas. We introduced a high density chassis
SDM-9600 with the SDM-9606 hot-swappable blades. The fully loaded chassis
supports up to 30 T1/E1s. A new set of digital signal processors (“DSPs”)
has been deployed that, in conjunction with several software enhancements, has
improved the performance in General Packet Radio Service/Enhanced Data Rates for
GSM Evolution (“GPRS/EDGE”) support and enabled a reduction of the overall
latency of the solution. Other software enhancements include SS7 call setup
detection and message transfer part – layer 2 (“MTP2”) spoofing for improved
compression efficiency in digital current multiplication equipment (“DCME”)
applications. We developed a number of features related to better operation over
satellite networks, including features developed in connection with partnerships
with particular satellite equipment vendors.
 
 In 2007,
we completed the launch of the SDM-9210 GSM backhaul product, a 1U remote site
unit with special features like Precision Clock, optional integrated GPS
Receiver, and a special E1/T1 bypass interface for improved reliability and
simplified redundancy. We also launched the SDM-9600 High Density Chassis with
the 9620 blade. This carrier class unit is based on the Advanced TCA chassis and
can support up to five hot swappable blades with a maximum capacity of 80 x
T1/E1s, 10 x 10/100/1000 Mbps Eth and five serial ports.  In order to
better support ATC applications, we developed a new PTT interface card that can
be installed in the SDM-9220 or SDM-9230.  In addition, we converted
all NetPerformer products to be compliant with the requirements of the European
Union’s Restriction on the Use of Certain Hazardous Substances in Electrical and
Electronic Equipment Directive (“RoHS”).
 
 In the
software area in 2007, we accomplished the following: support of all the new
hardware; V.22, V.22 bis and V.23 modem support in pass through mode (Digital
Circuit Multiplication Equipment, or “DCME”); BRI links establishment on demand
(NASA project); Ericsson WAP support (DCME); V.110 support for the A interface
(GSM Backhaul); GSM Quality of Service (“QoS”) improvements including
distinctive priorities between signaling, voice and GPRS/EDGE; and adding
Carrier Class Features such as troubleshooting tools, improved alarms, and
statistics. We also completed major lab interoperability tests were completed
with Alcatel-Lucent and ZTE.
  7
  AccessGate®
Integrated Access VoIP Routers
 
 Our
AccessGate® line of products is a wireless backhaul optimization system that
utilizes patented technology to improve the efficiency of wireless networks. The
technology allows mobile operator customers to carry up to twice as much voice
and data traffic over backhaul connections in GSM networks, thereby reducing
their backhaul expenses without compromising voice or data quality and freeing
up capacity for the delivery of new services. Mobile operators have deployed
AccessGate solutions to address business and technical challenges in their GSM
networks, facilitate a transition to 2G/3G converged networks and/or IP-based
Radio Access Network (“RAN”) backhaul. Key features of our AccessGate solution
include low-latency A.bis, A.ter, Gb,and Iub compression that reduces the amount
of bandwidth required to transport GSM voice and data traffic with less than 10
milliseconds of latency; low-latency statistical multiplexing that aggregates
GSM 2G, 2.5G, 3G, GSM, TDMA, CDMA and/or enhanced data GSM environment (EDGE)
voice and data traffic onto the same T1 or E1 line connection, eliminating the
need for multiple connections for the roll-out of advanced technologies; dynamic
adaptation to changing networks that simplifies management and reduces operating
costs by efficiently utilizing existing bandwidth as traffic patterns change on
hybrid 2G, 2.5G and 3G networks; and software upgrades that allow our customers
to utilize AccessGate in both traditional TDM-based backhaul networks and
next-generation IP and ATM based backhaul networks. As part of our Mobile
Backhaul business unit, AccessGate will augment and expand the capabilities of
the NetPerformer product line.
 
 The
AccessGate line is deployed worldwide in over 29 mobile operator networks and
has experienced solid revenue growth leading up to our acquisition of the
business from NMS Communications in December, 2007. The products are well
positioned in emerging markets such as CIS/Russia, Latin America, Africa, India
and Asia-Pacific and are particularly well suited for satellite connected
sites.
 
 In 2007,
the AccessGate 2516 platform was introduced. The AG2516 model is specifically
target to deployments that serve 16 T1/ET1 service ports for optimized delivery
over Ethernet IP backhaul. This density and configuration is well suited as a
hubbing platform or a switching center system for IP satellite systems. The
AccessGate 2516 is a carrier-class platform that optimizes backhaul connections
from multiple AccessGate cell site devices.
 
 In
addition, in 2007, expanded support for BSS systems, Gb interface, optimization
of CDMA backhaul, and expanded Key Performance Indicators ("KPI’s" ) were
released across all AccessGate platforms.
 
 Integrated
Access Devices
  Verso
Verilink® Integrated Access Devices
  In the
second quarter of 2006, we acquired the outstanding equity interests of Verso
Verilink which had previously acquired substantially all of the business assets
of Verilink Corporation and Larscom Incorporated. Verso Verilink provides
next-generation broadband access products and services which support the
delivery of voice, video, and data services over converged access networks and
enable the smooth migration from present TDM-based networks to IP-based
networking. Verso Verilink develops, manufactures, and markets IADs, optical
access products, and bandwidth aggregation solutions which are sold to service
providers, enterprise customers, and OEM partners.  The products are
deployed worldwide as targeted solutions for applications involving VoIP, voice
over ATM (“VoATM”), voice over DSL (“VoDSL”), wireless backhaul aggregation,
Frame Relay service transport, point-to-point broadband services, service
inter-working, and the migration of networks from traditional TDM-based access
to IP/Ethernet. Our customers for this business include Inter-exchange carriers
(“IXCs”), incumbent local exchange carriers (“ILECs”), independent operating
companies (“IOCs”), competitive local exchange carriers (“CLECs”), international
post, telephone, and telegraph companies, wireless service providers, equipment
vendors, Fortune 500 companies, small to mid-sized business customers, and
various local, state, and federal government agencies.
  8000
Series IAD Product Family
  The 8000
Series IAD product family enables carriers to deliver high quality voice and
data services to small and medium-sized businesses over any access technology
(T1/E1 or xDSL). We offer an industry leading software configurable device for
TDM, ATM, and IP transports which equips service providers with a “future proof”
solution and a solid migration path to VoIP. The devices can move from one
protocol application to another by changing the configuration of the
unit.
  In 2007,
the 8000 series IAD was enhanced to comply with the European Union’s RoHS
requirements. The product also completed interoperability certification with
Broadsoft and Metaswitch enabling a greater sales reach for this product from a
VoIP perspective. Lastly, this product was integrated with Occam’s Broadband
Loop Carrier offering a joint solution for the North American
market.
  8
  WANsuite®
Product Family
  The
WANsuite® product family is a suite of software programmable, intelligent
integrated access devices that target customer premises applications for last
mile or network edge communications. The WANsuite platform supports copper-based
transmission services for 56/64kbps, T1, E1 and SHDSL, and includes software
support for TDM, ATM, Frame Relay and IP services and applications. The WANsuite
product line combines integrated CSU/DSU, bridging and routing, probe and
network monitoring capabilities. WANsuite products also utilize an embedded web
server to provide an innovative user interface that aligns with the Internet for
ease-of-use by service providers and end users. Among the key WANsuite features
are a powerful web interface for simplified configuration, automatic protection
switching (“APS”), performance monitoring and diagnostics for all service
layers, and access routing, bridging, and switching for Frame Relay, ATM,
Ethernet and IP applications.
  In 2007,
the WANSuite introduced 4-wire G.SHDSL version that can serve as an E1
replacement technology for tier 1 international carriers.
  Shark®  Product
Family
  The XSP
100 Shark® product is the industry’s first OSMINE (Operations Systems
Modifications for the Integration of Network Elements) -compliant IAD,
terminating up to two T1 of bandwidth to deliver voice, high-speed data,
Internet access and networking connections to end customers over a single
network connection. The Shark is equipped with ports for up to 24 FXS lines,
includes DSX/CSU functionality, 10/100 Base-T and serial Ethernet interfaces,
Frame Relay Assembler/Disassembler and a digital cross connect system. The Shark
works with a variety of management systems, including HTTP, CLI, SNMP, or TL1,
and can be configured remotely or through a local craft port on the
chassis.
 
 In 2007,
enhancements the Shark introduced a voice wiretap offering that is used with
tier 1 carrier next generation broadband offerings
 
 iMarc®
IP Service Units
  The
iMarc® IP service unit
monitors provide intelligent demarcation between carrier and enterprise
networks, allowing service level management and end-to-end network monitoring.
This provides carriers the critical ability to monitor and manage compliance of
service level agreements to enterprise customers, which ensures that quality of
service is delivered. The iMarc provides monitoring capabilities at the
physical, network, and application levels. Metrics can be viewed either from the
device or through an element management system that interfaces to the iMarc
using Simple Network Management Protocol (“SNMP”). As a result, iMarc solutions
enable new services to be deployed faster, existing services to remain reliable,
and inactive services to be restored more quickly.
  In 2007,
VoIP application server level monitoring was developed in the product and tested
by a tier 1 carrier. Metrics measured and calculated by the device include call
quality parameters such as delay, jitter, packet loss, and voice quality. The
iMarc also maintains real-time and detailed information on all calls currently
being passed through the device. This product is targeted for North American as
well as International carriers offering them the ability to support strict
service level agreements (“SLAs”) as well providing them the ability to
pro-actively monitor and manage their VoIP based offerings.
  Network
Management and Security
 
 TeleMate®
Call Accounting Software
 
 Our
Network Monitoring and Security business includes the TeleMate® call accounting
solution. This application is a comprehensive, easy-to-use reporting tool used
to facilitate the migration to next generation VoIP networks. TeleMate helps
enterprises minimize voice communications costs, simplify capacity planning, and
monitor employee productivity. Additionally, TeleMate measures resource
utilization, provides reports for internal departmental charge-back or client
billing, and handles dozens of other control reporting tasks.
 
 NetSpective®
Content Management and Web Filtering Solution
 
 Our
NetSpective® content management and web filtering solution is a network security
application, enabling enterprises to monitor, filter, and/or report on usage of
critical IP network resources. With a comprehensive set of feature functionality
that tracks Internet activity and detects usage of a variety of web-based
applications, including peer-to-peer, instant messaging, online chat and
streaming media, NetSpective helps enterprises, governments, schools and
libraries maintain control of critical network resources and facilitate
compliance with filtering and communications tracking regulations.
  In 2004,
we launched our NetAuditor® product for reporting and analysis of our
NetSpective product in addition to analysis of log files from Cisco Systems,
Inc.’s PIX firewalls; Check Point Software Technologies Ltd.’s Firewall NG;
Novell, Inc.’s Boarder Manager; Symantec Corp.’s Enterprise Firewall; Juniper
Networks, Inc.’s NetScreen; and Microsoft Corp.’s ISA Proxy.
  9
  Professional
Services
  Our
Professional Services are tailored to help our customers launch and expand
networks more efficiently and rapidly within the areas of GSM optimization,
VoIP, Pre-paid and IADs. These services are unique to the access equipment
industry and serve as a differentiator compared to other access companies.
Customers consider the availability of the services to be a key enabler in the
deployment of managed bundled services. The Professional Services program
features a comprehensive set of support services geared to assist carriers in
the design, planning, deployment, and on-going support of their communications
service offerings. The Professional Services group partners with the carrier
from the initial design and planning stage through the equipment delivery,
installation, configuration, and service turn-up stages. From an on-going
support standpoint, the program’s key network operations activities include
maintenance services, returned material authorizations, and equipment inventory
management.
  Customers
 
 In 2007,
the primary base of customers for the Technologies Group consisted of large,
domestic, and international Tier I telecommunications carriers, emerging
international service providers, domestic rural carriers, federal, state, and
local governments, small, medium and large enterprises, educational
institutions, and Internet service providers (“ISPs”). In 2006, we made a
strategic decision to sell to larger customers and to close larger individual
carrier sales by bundling our products into packaged solutions, a strategy that
has resulted in agreements and sales with larger partners. We are in active
negotiations with additional partners to form similar relationships and expect
that these will drive sales and greater long-term opportunities. We are
attempting to leverage our distribution network and worldwide installed base of
customers towards sales of our newest solutions. In addition, we continue to
build a select, efficient network of larger distributors that include OEM
partners in a continued effort to grow the business.
  We
continue to seek to expand our largely indirect domestic and international
distribution channel. In 2007, OEM, marketing and sales agreements covering our
softswitch/gateway and mobile backhaul solutions were signed with Hughes Network
Systems, Nortel, and others after these customers completed interoperability and
other testing procedures to validate our products. Additionally, the acquisition
of the Verilink business and the iMarc product lines in 2007, which created our
Integrated Access Device business, delivered an installed base with two large
North American customers. We are pursuing additional revenue opportunities with
these customers as they continue to upgrade and expand their networks. Our IAD
products continued to generate demand from large domestic and international
carriers as well as smaller carriers and enterprises in 2007.  Most of
our sales to smaller carriers and enterprises are processed through several well
established distribution channels.
 
 Our
Network Monitoring and Security software solutions are used by several thousand
large to mid-size enterprises as well as federal, state, and local government
agencies and educational institutions to manage communication costs and network
efficiency, enforce network policy, and protect their networks.
 
 The
business focus of Verso Outsourcing is onsite installation and training, remote
upgrades, and 24x7 support for enterprises. Customers are primarily
organizations that install and support advanced software applications and
terminals that are connected via telecommunications networks.  The
business mix of Verso Outsourcing consists of 50% technical support, 40%
outsourced software installations and training, and 10% project
management.
 
 For each
of the years ended December 31, 2007 and 2006, we had one customer that
individually accounted for greater than 10% of our total revenue.
 
 Sales
and Marketing
 
 Our
overall marketing strategy is to achieve broader market penetration of our
solutions in three primary ways: expanding international and domestic
distribution; pursuing new markets and customers, including IP telephony service
providers and pre-paid service bureaus; and selling new, next generation
communication solutions to our current base of customers.
 
 In 2007,
we continued to focus our distribution strategy on select larger distributors
with a global footprint who have a strong presence in the specific product
markets corresponding to our respective products. Prior to the establishment of
our Integrated Access Device business through the acquisition of the Verilink
and iMarc product families, our sales were primarily international. With these
acquisitions, our technology product sales in 2007 were balanced between
international (43%) and domestic (57%) customers as depicted in the chart
below.
 
 10
 
 Our goal
in 2008 is to continue to build on our indirect distribution channel which
includes developing and securing additional OEM partnerships and developing key
distribution relationships centered on specific products and select, high growth
geographic regions. In order to further this goal in North America and
strengthen our position domestically, we formed the Global Accounts Team which
is focused on enhancing relationships with large domestic
customers.
 
 Our sales
and marketing organization is responsible for building sales distribution
channels, including OEM relationships, promoting brand awareness, product
marketing, identifying key markets, and developing innovative products and
services to meet the evolving demands of the marketplace. Another objective of
the marketing effort is to stimulate the demand for products and services
through a broad range of marketing, communications, and public relations
activities. Primary communication vehicles include channel promotions, marketing
communications, trade shows, media outreach efforts, trade analyst
relationships, corporate promotions, and websites.
 
 In the
Technologies Group, sales are accomplished primarily through an indirect
channel, and to a lesser degree, a direct sales force. There are
approximately 31 sales and sales support personnel located throughout the
United States, Canada, Mexico, the United Kingdom, India, Belgium, Italy, South
Africa, China, Singapore, and the United Arab Emirates. The sales force is
primarily responsible for cultivating strong relationships with systems
integrators and distributors throughout the world and supporting them in the
sales process. We have approximately 50 contracted resellers. In the Verso
Outsourcing group, sales are accomplished through direct sales
methods.
 
 Competition
 
 The
markets for our products are highly competitive. We believe that one of our
competitive strengths is our ability to offer an end-to-end solution with global
support that leverages the synergy of our product lines. Through both internal
development efforts and strategic acquisitions, we continue to add intellectual
property and innovative, patented technologies that deliver greater value to our
worldwide base of customers.
  Technologies
Group
 
 The
markets for our softswitch/gateway, mobile backhaul, integrated access device,
and network monitoring and security businesses, are intensely competitive. These
markets are subject to rapid technological change and are often significantly
impacted by new product introductions and/or market entrants.
 
 In the
market for our softswitch/gateway solutions, which includes the Clarent family,
our primary sources of competition include Class 4 and Class 5 solution
providers, vendors of networking and telecommunications equipment, and telephony
applications companies that bundle their offering with third-party equipment.
Some competitors, especially networking and telecommunications equipment
vendors, such as Alcatel-Lucent, Cisco Systems, Inc., Huawei Technologies,
Nortel Networks, and Siemens AG, have significantly greater financial resources
and broader customer relationships than we do. Other companies are focusing on
market opportunities similar to ours, including iSoftel Ltd, MERA Systems, Inc,
Sonus Networks, Veraz Networks, and Voiceware Systems Corporation.
  11
  Our
pre-paid product line competes with MIND CTI Ltd, Provo Pre-paid, Pactolus
Communications Software Corporation,  and Portal Software,
Inc.
 
 Our
Mobile Backhaul product lines, which include the AccessGate and NetPerformer
families, compete with the products of telecommunications equipment
manufacturers such as Alcatel-Lucent, Avaya, Celtro, Inc, Cisco Systems, Inc.,
ECI Telecom Ltd, Ericsson, Fujitsu Limited, Huawei, Memotec, NEC, Nortel, RAD
Data Communications, Siemens, Toshiba Corporation, and Turin
Networks.
 
 Our
Network Monitoring and Security products, which include the Telemate and
NetSpective brands, compete with a number of products from companies such as 8e6
Technologies, Cisco, ISI Telemanagement Solutions, Inc,  MicroTel
International, Inc., MTS IntegraTRAK , SurfControl PLC, St. Bernard Software,
Inc., Veramark Technologies, and WebTrends Corporation
 
 The
Company’s integrated access products, which include the Verilink and iMarc
families, compete with products from Alcatel-Lucent, ADTRAN, Cisco, Fluke
Systems, Huawei Technologies, and Turin Networks.
 
 Verso
Outsourcing
 
 Verso
Outsourcing is in a highly competitive market and competes with companies that
provide integrated, multi-channel customer contact centers, including APAC
Customer Services, Inc., ClientLogic Corporation, Convergys Corporation, and
CITEL Corporation. Certain companies do not use outsourced solutions, opting
instead to provide their solution with “in-house” personnel and systems, which
is a competitive factor for Verso Outsourcing and its competitors
alike.
 
 Intellectual
Property Rights
 
 We regard
our copyrights, trade secrets and other intellectual property as critical to our
success. Unauthorized use of our intellectual property by third parties may
damage our brands and our reputation. We rely on trademark and copyright law,
trade secret protection, and confidentiality, license and other agreements with
our employees, customers, partners and others to protect our intellectual
property rights. Despite precautions, it may be possible for third parties to
obtain and use our intellectual property without our authorization. Furthermore,
the validity, enforceability, and scope of protection of intellectual property
in Internet-related industries are still evolving. The laws of some foreign
countries do not protect intellectual property to the same extent as do the laws
of the United States.
 
 We cannot
be certain that our services and the finished products that we deliver do not or
will not infringe valid patents, copyrights, trademarks or other intellectual
property rights held by third parties. We may be subject to legal proceedings
and claims from time to time relating to our intellectual property other than in
the ordinary course of business. Successful infringement claims against us may
result in substantial monetary liability or may materially disrupt the conduct
of our business.
 
 On
September 18, 2001, U.S. Patent No. 6,292,801 was issued to Telemate.Net, which
we acquired in November 2001 by means of a merger. The patent covers technology
developed by Telemate.Net for tracking PBX, VoIP and IP traffic from a variety
of network sources and correlating communications activity with a database of
user accounts. The patented techniques are employed in several of Telemate.Net’s
products, including Telemate.Net’s call accounting and NetSpective Internet
access management solutions.
  On
February 12, 2003, pursuant to our acquisition of substantially all of the
operating assets of Clarent on such date, we acquired the following U.S.
Patents: Dynamic Forward Error Correction Algorithm for Internet Telephone, No.
6,167,060, issued on December 26, 2000;  System and Method for
Real-Time Data and Voice Transmission over an Internet Network, No. 6,477,164,
issued on November 5, 2002; Internet Telephone System with Dynamically Varying
Codec, No. 6,356,545, issued on March 12, 2002; and System and Method for
Roaming Billing, No. 6,453,030, issued on September 17, 2002. In addition,
Patent No. 6,982,985 was issued on January 3, 2006 for Interaction of VoIP Calls
and Cellular Networks. This patent was based on an application filed by Clarent
and obtained by us in connection with the acquisition of substantially all of
Clarent’s operating assets. We also have several patent applications pending
relating to our VoIP products and other product lines.
 
 In
connection with the Verilink Acquisition, Verso Verilink owns the rights to
twelve U.S. patents, six U.S. patent applications, and numerous registered U.S.
and international trademarks. In connection with the iMarc acquisition, we
acquired four U.S. patents and the registered U.S. trademark for iMarc. In our
acquisition of Sentito Networks, Inc. on April 17, 2007, we acquired the rights
to one U.S. patent, one U.S. patent application, and three registered U.S.
trademarks. Under the AccessGate Acquisition, we acquired the rights to one U.S.
patent, six U.S. patent applications, and the registered U.S. trademark for
AccessGate.
 
 On
January 24, 2008, Verso Verilink and Verso collectively entered into a Patent
Purchase Agreement, effective as of January 23, 2008 (the “Patent Agreement”),
with Vrs. Systems Mgmt. Limited Liability Company (“Vrs. Systems”), pursuant to
which Verso Verilink and Verso have agreed to sell to Vrs. Systems certain
patents and patent applications which are not necessary for the operation of our
business (the “Patents”) for a gross purchase price of $900,000.  The sale
of the Patents is subject to the consent of our lenders and the satisfaction or
waiver of certain other customary conditions.  Pursuant to the Patent
Agreement, Vrs. Systems shall grant to Verso and its subsidiaries upon the
closing of the sale a fully paid, non-exclusive, license to use the Patents
in the manufacture and sale of their products. As of the date of this filing,
the sale of the Patents has not been completed as all closing conditions have
not been met.
  12
  We may
explore other means of monetizing our patent resources, including entering into
cooperative agreements and license agreements with third parties.
 
 Research
and Development
 
 We
believe that one of our competitive strengths is synergy across our product
lines. This synergy enables us to accelerate the development and delivery of new
technologies and products and expand into new markets. Through both internal
development efforts and strategic acquisitions, we continue to add intellectual
property and innovative, patented technologies that deliver greater value to our
worldwide base of customers. Our research and development expenses totaled $7.9
million for the year ended December 31, 2007.
 
 In the
Technologies Group, the research and development initiatives have centered on
introducing product features targeted towards increasing our customer’s revenue
creation opportunities as well as extending the market reach and life of our
products through the introduction of additional applications.
  Softswitch/Gateway
  In 2005,
we introduced key enhancements to the C5 Call Manager based on market trends and
key customer requirements. The newly-introduced features expanded our
opportunity at the network edge with features such as hotline, distinctive music
on hold, limiting simultaneous calls from groups of edge devices, do not
disturb, anonymous call rejection, simultaneous ring, video edge device support,
SIP and GR303 access gateways integration, topology hiding, a radius interface
to authentication, authorization and accounting servers such as I-Master,
private networking configurations as well as producing features needed by its
customer base for regulatory compliance such as local number portability, E911,
and lawful intercept.
 
 In 2005,
we introduced key enhancements to our C4 Call Manager providing regulatory
compliance features such as local number portability and E911 as well as
features to support private networking configurations, a radius interface to
authentication, authorization and accounting servers such as I-Master and M2UA
SS7 tunneling over IP.
  In 2005,
we integrated the I-Master application into our Class 4 and Class 5 softswitch
and added multiple rating features to the I-Master solution. In 2006, we added a
number of rating features to I-Master to support the competitive North American
pre-paid market.  These include disconnect rate plans and global rate
management tools.
 
 In 2006,
we focused on enhancing our bundled solution through the addition of optional
components as well as features targeted towards the VoIP overlay market. We
enhanced the value proposition offered to our customers with the introduction of
a Back Office component and IP Centrex application. Our wholesale peering
solution was enhanced with the addition of a reporting module enabling the
service providers as well as their customers (e.g. wholesalers and virtual
wholesalers) web-based access to real time traffic statistics, call detail
records, as well as consumption reports. We also enhanced our software based IVR
and pre-paid application through support of DTMF handling using named events as
defined by the IETF RFC 2833. This enables us to offer a scalable IVR system
through software as opposed to hardware for the support of multiple services
such as VoBB and pre-paid calling. We signed a teaming agreement with IBM in
2006 which includes certification of its edge solution for VoBB overlay
solutions as well as wholesale peering on the IBM BladeCenter platforms running
on Linux.
 
 In 2006,
the C4 Call Manager was enhanced with support of SIP and ISUP transport within
SIP or SIP-T. These enhancements enable the C4 to interoperate as a standalone
component with any Class 5 softswitch or VoIP based feature server enabling
Signaling System 7 (“SS7”), PRI, CAS/MFCR2 TDM connectivity. Similar to the edge
solution, the PSTN access solution was validated on the IBM BladeCenter solution
on Linux.
  In 2007,
enhancements to our Edge C5 voice over Broadband (VoBB) application, which we
branded “MetroNet”, were focused on improving customers’ return on investment
through enhancements to both solution turn-up and expansion. The MetroNet
offering was restructured so that customer expansions resulted in a zero
down-time between 2,500 and 100,000 subscriber solutions. In addition, in 2007,
Verso developed a legal intercept/CALEA based solution with Verint System,
Inc.’s mediation solution, StarGate.
  13
  In 2007,
we introduced CarrierNet, a next generation C4 media gateway offering.
CarrierNet is targeted to customers who require small to high density TDM to
VoIP (SIP, SIP-T, or H.323) solution either for legacy PSTN access for their
pure VoIP services (e.g. voice over broadband class 5 service, IP Centrex,
hosted PBX services) or for a wholesale traffic offering.  The
following capabilities were developed with CarrierNet: STM-1 and DS-3 TDM media
gateway interfaces for Verso’s BHG2500 media gateway product line; a solution
carefully packaged to minimize costly rack space requiring only 4 rack units for
support of 4,032 DS0s of TDM to VoIP capacity; support for remote SS7 signaling
backhaul using standards based SIGTRAN technology; and advanced routing
features, including ENUM, answer seizure ratio (ASR) based routing, least-cost
based routing, and source trunk group based routing.
 
 These key
enhancements to the distributed softswitch, comprised of the Class 5 Call
Manager and Class 4 Call Manager, enable service providers to increase top line
consumer revenues through enhanced service offerings while simultaneously
increasing bottom line profitability by reducing operational expenses within the
service provider network.
 
 In 2007,
we enhanced our element management solution (“CEMS”) which is provided with all
softswitch solutions. The enhancements include historical and real-time traffic
monitoring from a system as well as total network perspective, alarm viewer and
e-mail notification support, and alarm generation based on user defined low call
processing (ASR).
 
 In 2007,
we introduced market leading feature bundling capabilities to I-Master with
feature based account management. This capability allows our customers to
differentiate account attributes such as rate plans, service charges, and
“roll-over rules” by feature inside of a single customer account. Features
include black list, white list, friends and family plans, international calling,
and Internet based data. This capability enables our customers to create and
offer unique bundled service offerings using a revenue assurance method (i.e.
pre-paid). I-Master also introduced the following enhancements: friends and
family feature offering, black and white list support limiting an account to
only place calls to allowed phone numbers, advanced Internet data rating with
support for both directional and data volume, basic invoice generation and
management for post-paid, context sensitive on-line help, revenue prediction
tools advising Verso’s customers of the revenue impacts of a rating change (e.g.
rate plan modification, addition or deletion of  a service charge),
and overload protection and optimized application and batch job handling to
improve overall performance and reliability.
  Mobile
Backhaul
 
 In 2006,
we launched two new products to be used mainly in GSM backhauling and DCME
solutions. The SDM-9210 is a compact, 1 rack mount unit high device used for
interconnection to the BTS. It provides high reliability features such as E1
bypass, 1:1 redundancy, and an optional high precision clock compliant with the
G.823 PDH standard which is necessary to enable quality handover in high density
urban areas.  The SDM-9600 is a high density chassis that has been
introduced with the SDM-9606 hot-swappable blade. The fully loaded chassis
supports up to 30 T1/E1s. A new set of DSPs has been deployed to improve the
performance in GPRS/EDGE support and enable a reduction of overall latency.
Other software enhancements include SS7 call setup detection for improved
compression efficiency in DCME applications and features related to better
operation over satellite networks, including specific features developed in
connection with partnerships with particular satellite equipment
vendors.
 
 In 2007,
we completed the launch of the SDM-9210 GSM backhaul product, a 1U remote site
unit with special features like Precision Clock, optional integrated GPS
Receiver, and a special E1/T1 bypass interface for improved reliability and
simplified redundancy. We also launched the SDM-9600 High Density Chassis with
the 9620 blade. This carrier class unit is based on the Advanced TCA chassis and
can support up to five hot swappable blades with a maximum capacity of 80 x
T1/E1s, 10 x 10/100/1000 Mbps Eth and five serial ports.  In order to
better support ATC applications, we developed a new PTT interface card that can
be installed in the SDM-9220 or SDM-9230.  In addition, we converted
all NetPerformer products to be RoHS compliant.
 
 In 2007
we enhanced the software of NetPerformer. We accomplished the following: support
of all the new hardware; V.22, V.22 bis and V.23 modem support in pass through
mode (DCME); BRI links establishment on demand (NASA project); Ericsson WAP
support (DCME); V.110 support for the A interface (GSM Backhaul); GSM QoS
improvements including distinctive priorities between signaling, voice and
GPRS/EDGE; and adding Carrier Class Features such as troubleshooting tools,
improved alarms, and statistics. We also completed major lab interoperability
tests were completed with Alcatel-Lucent and ZTE.
 
 In 2007,
the AccessGate 2516 platform was introduced.  The AG2516 model is
specifically targeted to deployments that serve 16 T1/ET1 service ports for
optimized delivery over Ethernet IP backhaul. This density and configuration is
well suited as a hubbing platform or a switching center system for IP satellite
systems.  The AccessGate 2516 is a carrier-class platform that
optimizes backhaul connections from multiple AccessGate cell site devices. In
addition, in 2007, expanded support for BSS systems, Gb interface, optimization
of CDMA backhaul, and expanded Key Performance Indicators (KPI’s) were released
across all AccessGate platforms.
 
 Integrated
Access Devices
 
 In 2006,
we began an integration strategy for the Verso Verilink VoIP IAD products and
the NetPerformer product family. To meet the European Union’s RoHS directive,
Verso Verilink also performed a redesign of its 8000 and WanSuite products. In
addition, 4 wire SHDSL was added to the WanSuite family for extended reach
capabilities.
  14
  In 2007,
the 8000 series IAD completed interoperability certification with Broadsoft and
Metaswitch enabling a greater sales reach for this product from a VoIP
perspective.  This product was also integrated with Occam’s Broadband
Loop Carrier offering a joint solution for the North American
market.  In 2007, the WANSuite introduced 4-wire G.SHDSL version that
can serve as an E1 replacement technology for Tier I international carriers and
the Shark introduced a voice wiretap offering that is used with Tier I carrier
next generation broadband offerings.
  In 2007,
VoIP application server level monitoring was developed in iMarc product and
tested by a tier 1 carrier. Metrics measured and calculated by the device
include call quality parameters such as delay, jitter, packet loss, and voice
quality. The iMarc also maintains real-time and detailed information on all
calls currently being handled passed through the device. This product is
targeted for North American as well as International carriers offering them the
ability to support strict service level agreements (SLAs) as well providing them
the ability to  pro-actively monitor and manage their VoIP based
offerings.
  Network
Monitoring and Security
 
 In 2005,
we launched our NetSpective C-Class and M-Class products targeting wireline
carriers as well as mobile carriers. These NEBS-3/ETSI compatible products
enable carriers to screen out web traffic such as SkypeTM, instant messaging and
other peer-to-peer applications that consume substantial bandwidth on carrier
networks.
 
 In 2007,
Telemate tailored a number of IP listening solutions, targeting who we believe
are the top four leading providers of next generation enterprise phone systems,
namely Avaya, Cisco, Nortel, and Seimens. Our solutions are designed to
interface with these systems and collect their call streams. This initiative is
intended to grow our market share with those leaders. Additionally, we extended
the reach of NetSpective beyond the internal network, to external remote users.
This additional capability allows the user to synchronize external users’
notebooks and outside systems with the policies of the home office for computer
and internet usage. Further, we developed a “micro-update” for signature
updates. This allows us to identify unknown content within minutes despite being
a passive device. This allows us to accomplish this task without putting
additional burden on the filtering technology which would otherwise require an
increase in the size of the customer’s hardware. By “offloading” to our hosted
environment, which involves an investment in hardware on our part, we make our
product more user-friendly and efficient for our customers and potential
customers.
 
 Employees
 
 As of
December 31, 2007, we had 261 domestic employees, including 98 employees located
at our headquarters in Atlanta, Georgia (56 of whom work in the Verso
Outsourcing group); 32 employees at the our facility in Littleton, Colorado; 47
employees at our facility in Madison, Alabama; 12 employees at our office in
Rockville, Maryland; 10 employees in Framingham, Massachusetts; 4 employees at
our office in Jacksonville, Florida; 37 employees of the Verso Outsourcing group
located throughout the country; and 21 other employees located throughout the
United States. As of December 31, 2007, we had 53 international employees, 41 of
whom are located at our NetPerformer/AccessGate facility in Montreal, Canada,
and 12 of whom conduct our sales efforts throughout the rest of the
world.
  Background
 
 We were
incorporated in Minnesota on March 20, 1984. Until 2001, we historically
operated a value-added reseller (“VAR”) business and an associated network
performance management consulting and integration practice. We also operated a
Hospitality Services Group (“HSG”), which provided technology solutions to
lodging, restaurant, and energy management customers. Over the years, our
operations moved away from these lines of business and now focus on the products
and services offered by the Technologies Group and the Outsourcing group. During
the last seven years, our business developed as described below.
 
 Early in
2000, our Board of Directors (the “Board”) decided to explore the sale of all or
a portion of HSG, which consisted of our lodging business, our restaurant
solutions business and our energy management business. Subsequently, the
operations of HSG were classified as discontinued operations, and each of the
operating units of HSG was sold between late 2000 and early 2001. The sale of
these operating units included all of the operations of (i) Sulcus Hospitality
Technologies Corp., which we acquired in 1999, and (ii) Encore Systems, Inc.,
Global Systems and Support, Inc. and Five Star Systems, Inc. (collectively, the
"Encore Group"), which we acquired in 1998, except for the customer response
center services.
 
 In
September 2000, we acquired Cereus Technology Partners, Inc. (“Cereus”) in a
merger transaction. Cereus provided end-to-end business and business-to-business
technology solutions, including e-business strategy, network consulting and
hosting and application integration. In connection with the acquisition of
Cereus, we changed our name to “Verso Technologies, Inc.”
 
 In
November 2000, we acquired MessageClick, Inc. (“MessageClick”) in a merger
transaction. The acquisition of MessageClick provided us with a proprietary
unified communications application delivered as an application service provider.
In the second quarter of 2001, we decided to discontinue offering the
MessageClick application and to refocus the development of the MessageClick
application to be offered as a licensed software product. We since focused our
overall strategy on pursuing the market for next generation communications and,
therefore, the development of the MessageClick application as a licensed product
is dormant.
  15
  In July
2001, we acquired all of the outstanding capital stock of NACT
Telecommunications, Inc., now known as Provo Pre-paid (Delaware) Corp. (“NACT”).
Our acquisition of NACT in July 2001 was our first significant investment in
proprietary communications products. The acquisition of NACT and its portfolio
of products and services allowed us to begin to offer proprietary, integrated,
switching solutions for communications service providers seeking turn-key,
pre-paid telecommunications solutions. The acquisition of NACT was funded by a
$15 million investment by Telemate.Net, as contemplated by our merger agreement
with Telemate.Net. On January 21, 2005, we sold substantially all of the
operating assets of the NACT business. In connection with the sale, “NACT
Telecommunications, Inc.” changed its name to “Provo Pre-paid (Delaware)
Corp.”
 
 On
November 16, 2001, we acquired Telemate.Net by means of a merger, pursuant to
which Telemate.Net became a wholly-owned subsidiary. Telemate.Net develops
proprietary Internet access, voice and IP network usage management, and
intelligence applications that enable businesses to monitor, analyze, and manage
the use of their internal network resources. As a result of the acquisition of
Telemate.Net, we added next generation applications and application development
competencies to our solutions portfolio.
 
 During
the quarter ended December 31, 2001, and in keeping with our focus on providing
next generation communications solutions, we determined that our VAR business
and associated network performance management consulting and integration
practice were not strategic to our ongoing objectives and, therefore, decided to
discontinue capital and human resource investment in these businesses.
Accordingly, we elected to report our VAR and associated consulting and
integration operations as discontinued operations by early adoption of Statement
of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“SFAS No. 144”), which is intended to
allow a company to more clearly communicate a change in its business that
results from a decision to dispose of non-strategic operations.
 
 On
October 1, 2002, we purchased a 51% interest in Shanghai BeTrue Infotech Co.,
Ltd. (“BeTrue”) for $100,000, with $50,000 paid at closing, $25,000 paid on
December 30, 2002, and $25,000 paid on March 30, 2003. Upon closing the
transaction, we contributed to the joint venture certain next generation
communication equipment and software valued at approximately $236,000 and
$50,000, respectively. Additionally, we contributed to BeTrue $25,000 on
December 30, 2002, and $25,000 on March 30, 2003. The remaining 49% interest in
BeTrue is owned by Shanghai Tangsheng Investments & Development Co. Ltd.
(“Shanghai Tangsheng”). BeTrue provides VoIP and satellite network solutions,
including systems integration, project implementation, technical support,
consulting and training to leading telecommunications companies in China and the
Asia-Pacific region.  The Company plans to leverage BeTrue’s sales
channels and support infrastructure capabilities, including pre- and post- sales
support. Due to shared decision-making between ourselves and Shanghai Tangsheng,
the results for BeTrue are reported as an equity investment rather than
consolidated in our results.
 
 On
February 12, 2003, we acquired substantially all operating assets and related
liabilities of Clarent Corporation. The assets purchased from Clarent
Corporation included the following key products: next generation switching and
call control software; high density media gateways; multi-service access
devices, signaling and announcement servers; network management systems; and
high demand telephony applications based on packet-switched technology.
Specifically, we acquired the Clarent Softswitch and NetPerformer products in
connection with this acquisition.
  On
September 26, 2003, we acquired MCK Communications, Inc., now known as Needham
(Delaware) Corp. (“MCK”), by means of a merger, pursuant to which MCK became a
wholly-owned subsidiary.  MCK provided products that deliver
distributed voice communications by enabling businesses to extend the
functionality and applications of their business telephone systems from the main
office to outlying offices, remote call centers, teleworkers and mobile
employees over public and private networks. On January 21, 2005, we sold
substantially all of the operating assets of the MCK business, including
(i) the assets which allow legacy digital business telephone handsets to be
used in a voice network using public/private IP-based, circuit-switched, frame
relay or wireless technology network, and (ii) the products that enable
call recording of legacy business telephone systems in non-packet environments.
In connection with the sale, “MCK Communications, Inc.” changed its name to
“Needham (Delaware) Corp.”
  On March
31, 2005, we acquired substantially all of the operating assets of WSECI, a
provider of an Internet protocol-based applications platform which enables the
deployment of multiple voice and next generation services to the carrier
market.
  On
October 11, 2005, we affected a 1-for-5 reverse stock split of the outstanding
Common Stock, pursuant to which every one share of Common Stock issued and
outstanding was automatically reclassified and converted into one-fifth of a
share of Common Stock (the “Reverse Split”).
 
 On
June 16, 2006, we acquired the outstanding equity interests of Winslow
Asset Holdings, LLC (now known as Verso Verilink, LLC) from Winslow Asset Group,
LLC (the “Verilink Acquisition”). Winslow Asset Holdings, LLC had earlier
acquired substantially all of the business assets of Verilink Corporation and
Larscom Incorporated (together, the “Verilink Sellers”), other than the accounts
receivable and certain fixed assets of the Verilink Sellers which were
transferred to Winslow Asset Group, LLC. As a result of our equity purchase, we
acquired the Verilink Sellers’ business of developing, manufacturing, marketing
and selling broadband access solutions for computer networks.
  16
  On December 29, 2006, we purchased
certain assets from, and assumed certain liabilities of Paradyne Networks, Inc.
relating to its business of manufacturing, selling and supporting the iMarc
product line, a family of ATM devices, IP service units, and branch monitors
that provides intelligent demarcation between carrier and enterprise networks,
allowing for easier management.
  On April
17, 2007, we acquired Sentito Networks, Inc. (“Sentito”), a provider of media
and signaling gateway equipment to the telecommunications market, by means of
merger between SN Acquisition Corporation, our wholly-owned subsidiary, into
Sentito, pursuant to an Agreement and Plan of Merger, dated as of April 4, 2007
(the “Sentito Acquisition”).
  On
December 21, 2007, Verso Backhaul acquired certain assets from and assumed
certain liabilities of NMS Communications Corp. relating to its business of
manufacturing, selling and supporting the AccessGate product line. AccessGate is
a cellular backhaul optimization product line. In January of 2008, we combined
management of the AccessGate and Net Performer backhaul optimization operations
into a single business unit.
  Item
1A.               Risk Factors
  Our
independent auditors have expressed doubt about our ability to continue as a
going concern.
  In
their report dated April 15, 2008, our independent auditors stated that our
financial statements for the years ended December 31, 2007 and 2006 were
prepared assuming that we would continue as a going concern. However, our
independent auditors raised substantial doubt about our ability to continue as a
going concern due to our recurring losses from operations, operating cash flow
deficiencies, significant debt obligations which become due and payable during
2008 and our limited capital resouces. Our future success and ability to
continue as a going concern is contingent upon, among other things, the ability
to achieve and mantain satisfactory levels of profitable operations, obtain and
maintain adequate levels of debt and equity financing for expansion and to meet
our obligations, and provide sufficient cash from operations to meet current and
future obligations.
  The
Common Stock may be delisted from The Nasdaq Capital Market.
 
 The
Common Stock is currently quoted on The Nasdaq Capital Market. We must satisfy
certain minimum listing maintenance requirements to maintain such quotation,
including a series of financial tests relating to shareholders equity or net
income or market value, public float, number of market makers and shareholders,
market capitalization, and maintaining a minimum bid price of $1.00 per share
for the Common Stock. In the past, we have experienced periods in which the
minimum bid price for the Common Stock fell below $1.00 per share.
 
 On June
26, 2007, The Nasdaq Stock Market, LLC notified us that for the last 30
consecutive business days the bid price for the Common Stock had closed below
the minimum $1.00 per share requirement for continued inclusion of the common
stock on The Nasdaq Capital Market as required by Marketplace
Rule 4310(c)(4) (the “Rule”). In accordance with Marketplace Rule
4310(c)(8)(D), we had 180 calendar days, or until December 24, 2007, to regain
compliance with the Rule. On December 27, 2007, The Nasdaq Stock Market, LLC
notified us that we did not regain compliance with the Rule by December 24, 2007
and that, on December 24, 2007, we met all initial inclusion criteria for The
Nasdaq Capital Market set forth in Rule, except for the bid price
requirement.  Accordingly, pursuant to Marketplace Rule 4310(c)(8)(D),
we have an additional 180 calendar days, or until June 24, 2008, to regain
compliance with the Rule. We may regain compliance with the Rule if the bid
price of the Common Stock closes at $1.00 per share or more for a minimum of ten
(10) consecutive business days. If we do not regain compliance with the Rule
prior to June 24, 2008, then The Nasdaq Stock Market, LLC will notify us that
the Common Stock will be delisted.
 
 If the
Common Stock is delisted from The Nasdaq Capital Market, then the Common Stock
may trade on the Over-the-Counter-Bulletin Board, which is viewed by most
investors as a less desirable and less liquid market place. Delisting from The
Nasdaq Capital Market could make trading the Common Stock more difficult for our
investors, leading to declines in share price. Delisting of the Common Stock
would also make it more difficult and expensive for us to raise additional
capital. Furthermore, delisting of the Common Stock is an event of default under
our credit facility with our primary lender, under our outstanding 6.75% senior
unsecured convertible debentures and, through certain cross default provisions,
the Loan and Security Agreement we entered into with Clarent Corporation in
connection with our acquisition of substantially all of the business assets, and
certain related liabilities, of Clarent Corporation on February 12,
2003.
 
 If
we do not repay our indebtedness to Clarent Corporation, we will be in default
under our Loan and Security Agreement with Clarent Corporation, and as a result
of cross-default provisions, certain of our other secured and unsecured
indebtedness.
  Our
approximately $3.7 million debt to Clarent Corporation pursuant to our Loan and
Security Agreement with Clarent Corporation was due and payable on February 15,
2008.  On that date, we entered into an amendment to such Loan and
Security Agreement with Clarent Corporation’s liquidating trustee that provided
that the outstanding principal amount and all accrued and unpaid interest
thereon was due and payable by March 3, 2008 unless we paid approximately
$730,000 in accrued unpaid capitalized interest by such date.  We paid
the $730,000 to Clarent Corporation on February 29, 2008.  As a
result, the $3.0 million principal amount remaining outstanding will be due and
payable within three (3) business days of August 12, 2008.  As part of
the amendment, we have agreed to pay interest monthly on the unpaid principal
amount at a rate of 8% per annum.    If we do not pay the
amounts due under the Loan and Security Agreement when they are due, then we
will be in default under the Loan and Security Agreement and, through certain
cross-default provisions, we will be in default under our outstanding unsecured
convertible debentures and our credit facility with our senior
lender.
  17
  We
have significant debt obligations which become due in 2008.
  We have
significant short-term debt obligations which become payable during the
remainder of 2008 in the aggregate amount of approximately $18.0 million. These
obligations include payments under our Loan and Security Agreement with Clarent
Corporation, our outstanding unsecured convertible debentures and our credit
facility with our senior lender.  Our ability to satisfy these debt
obligations depends on our financial and operating performance, which is subject
to prevailing economic and competitive industry conditions and to certain
financial, business and other factors beyond our control.  We may not
be able to generate cash flows from our operating activities sufficient to
permit us to satisfy these debt obligations.  If our cash flows are
insufficient to satisfy these debt obligations, then we may be forced to seek
additional capital, sell assets or restructure or refinance our
debt.  If our cash flows are insufficient to satisfy these debt
obligations and we are unable to raise sufficient funds from alternative
measures, then we will not be able to satisfy our short-term debt
obligations.
  The
price of the Common Stock has been volatile.
 
 The stock
market in general and the market for technology companies in particular, has
experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. From September 4, 2003 toApril
10,
2008, the per share closing price
ofourCommon Stock on The Nasdaq
Capital Market (formerly known as The Nasdaq SmallCap Market) fluctuated from a
high of $25.35 to a low of $0.10.We believe that the
volatility of the price of the Common Stock does not solely relate to our
performance and is broadly consistent with volatility experienced in our
industry. Fluctuations may result from, among other reasons, responses to
operating results, announcements by competitors, regulatory changes, economic
changes, market valuation of technology firms and general market
conditions.
  In
addition, in order to respond to competitive developments, we may from time to
time make pricing, service or marketing decisions that could harm our business.
Also, our operating results in one or more future quarters may fall below the
expectations of securities analysts and investors. In either case, the trading
price of the Common Stock would likely decline.
  The
trading price of the Common Stock could continue to be subject to wide
fluctuations in response to these or other factors, many of which are beyond our
control. If the market price of the Common Stock decreases, then shareholders
may not be able to sell their shares of Common Stock at a profit.
  We
may be unable to fund future growth.
 
 Our
business strategy calls for growth internally as well as through acquisitions.
We have invested substantial funds in our sales and marketing efforts in order
to grow revenues. This strategy to increase sales and marketing resources as
well as other strategies for growth internally which we may implement now or in
the future will require funding for additional personnel, capital expenditures
and other expenses, as well as for working capital purposes. Financing may not
be available to us on favorable terms or at all. If adequate funds are not
available on acceptable terms, then we may not be able to meet our business
objectives for expansion. This, in turn, could harm our business, results of
operations and financial condition. In addition, if we raise additional funds
through the issuance of equity or convertible debt securities, then the
percentage ownership of our shareholders will be reduced, and any new securities
could have rights, preferences and privileges senior to those of the Common
Stock. Furthermore, if we raise capital or acquire businesses by incurring
indebtedness, then we will become subject to the risks associated with
indebtedness, including interest rate fluctuations and any financial or other
covenants that our lender may require. Moreover, if our strategy to invest in
our sales and marketing efforts in order to grow revenues does not produce the
desired result, then we will have incurred significant expenses which we may or
may not have obtained adequate funding to cover.
  We
have a history of losses and may not be profitable in the future.
  We have a
history of net losses, including net losses of $27.0 million for the 2007 fiscal
year, $17.8 million for the 2006 fiscal year, $20.1 million for the 2005 fiscal
year, $38.8 million for the 2004 fiscal year, $18.3 million for the 2003 fiscal
year, $2.7 million for the 2002 fiscal year and $147.6 million for the 2001
fiscal year. As of December 31, 2007, we had an accumulated deficit of $376.8
million. Further, developing our business strategy and expanding our services
will require significant additional capital and other expenditures. Accordingly,
if we are not able to increase our revenue, then we may never generate
sufficient revenues to achieve or sustain profitability.
 
 We
have significant market overhang which could adversely affect the trading price
of the Common Stock.
  As of
April 15, 2008, we had (i) 93.3
millionshares of Common Stock outstanding, (ii) approximately 7.2million shares of Common Stock issuable upon exercise of outstanding
options, (iii) approximately 24.1million shares of Common Stock issuable upon exercise of outstanding
warrants and (iv) approximately 4.7million shares of Common Stock issuable upon conversion of the principal
amount of its outstanding convertible debentures. If all the outstanding
options, warrants, and convertible debentures were exercised or converted, as
applicable, by their holders, then approximately an additional 129.3million shares of Common Stock would be outstanding. This would represent
an approximate 45% increase in our outstanding Common Stock. The convertible
debentures are convertible, and a vast majority of the outstanding options and
warrants are exercisable, at prices currently above the public trading prices of
the Common Stock. However, in the event that even a portion of these outstanding
options and warrants were to be exercised, or a portion of the convertible
debentures were to be converted, the resulting dilution could depress the
trading price of the Common Stock. We have registered all of the potential
dilutive shares of Common Stock for resale pursuant to registration statements
filed with the SEC. If a significant portion of these shares are sold in the
public marketplace by the selling shareholders identified in these registration
statements, then such sales could also have a severe and adverse material affect
on the trading price of the Common Stock.
  18
  Our
growth could be limited if we are unable to attract and retain qualified
personnel.
  We
believe that our success depends largely on our ability to attract and retain
highly skilled and qualified technical, managerial, and marketing personnel.
Competition for highly skilled engineering, sales, marketing, and support
personnel is intense because there is a limited number of people available with
the necessary technical skills and an understanding of the markets which we
serve. Workforce reductions by us during recent years may adversely affect our
ability to retain our current employees and recruit new employees. The inability
to hire or retain qualified personnel could hinder our ability to implement our
business strategy and harm our business.
 
 We
are exposed to the general condition of the telecommunications
market.
  Our
business is subject to global economic conditions, and in particular, market
conditions in the telecommunications industry. Our operations could be adversely
affected if capital spending from telecommunications service providers does not
grow or declines. If global economic conditions worsen, or if the prolonged
slowdown in the telecommunications industry continues, then we may experience
adverse operating results.
 
 Our
need to invest in research and development could harm our operating
results.
  Our
industry is characterized by the need for continued investment in research and
development. If we fail to invest sufficiently in research and development, then
our products could become less attractive to potential customers, which could
have a material adverse effect on our results of operations and financial
condition. As a result of our need to maintain or increase its spending levels
in this area, our operating results could be materially harmed if our net sales
fall below expectations. In addition, as a result of the need for research and
development and technological innovation, our operating costs may increase in
the future.
 
 The
market for converged communications solutions is still in its infancy and
rapidly evolving. If this market does not develop and grow as expected, then it
could have a material adverse effect on our business.
  While we
believe there is a significant growth opportunity in providing converged
communications solutions to customers, there can be no assurances that this
technology will be widely accepted or that a viable market for our products will
fully develop or be sustainable. If this market does not develop, or develops
more slowly than expected, then we may not be able to sell our products in
significant volume, or at all. Due to the intense competition in this market and
the recent introduction of this technology, there can be no assurance that we
will succeed in this evolving marketplace.
 
 Intellectual
property infringement claims against us, even without merit, could require us to
enter into costly licensing agreements or deprive us of the technology we
need.
  Our
industry is technology intensive. As the number of competitors in our target
markets increases and the functionality of the products produced by such
competitors further overlaps, third parties may claim that the technology we
develop or license infringes their proprietary rights. Any claims against us or
any of our subsidiaries may affect our business, results of operations and
financial conditions. Any infringement claims, even those without merit, could
require us to pay damages or settlement amounts or could require us to develop
non-infringing technology or enter into costly royalty or licensing agreements
to avoid service implementation delays. Any litigation or potential litigation
could result in product delays, increased costs or both. In addition, the cost
of litigation and the resulting distraction of our management resources could
have a material adverse effect on our results of operations and financial
condition. If successful, a claim of product infringement could deprive us of
the technology we need altogether.
 
 Failure
to protect our intellectual property rights could have a material adverse effect
on our business.
 
 Our
success depends in part upon the protection of our proprietary application
software and hardware products. We have taken steps that we believe are adequate
to establish, protect, and enforce our intellectual property rights. We cannot
provide assurance that these efforts will be adequate. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain rights to use our products or technology.
  19
  We have
pending several patent applications related to our products. There can be no
assurance that these patents will be issued. Even if these patents are issued,
the limited legal protection afforded by patent, trademark, trade secret, and
copyright laws may not be sufficient to protect our proprietary rights to the
intellectual property covered by these patents.
  Furthermore,
the laws of many foreign countries in which we do business do not protect
intellectual property rights to the same extent or in the same manner as do the
laws of the United States. In addition, it is necessary to file for patent and
trademark protection in foreign countries in order to obtain legal protection in
those countries. We have made such filings only on a limited
basis.  These efforts may not be sufficient and additional filings may
be cost prohibitive. Additionally, even if our domestic and international
efforts are successful, our competitors may independently develop non-infringing
technologies that are substantially similar or superior to our
technologies.
  If
our products contain defects, then our sales are likely to suffer, and we may be
exposed to legal claims.
 
 Our
business strategy calls for the development of new products and product
enhancements which may from time to time contain defects or result in failures
that we did not detect or anticipate when introducing such products or
enhancements to the market. In addition, the markets in which our products are
used are characterized by a wide variety of standard and non-standard
configurations and by errors, failures, and bugs in third-party platforms that
can impede proper operation of our products. Despite product testing, defects
may still be discovered in some new products or enhancements after the products
or enhancements are delivered to customers. The occurrence of these defects
could result in product returns, adverse publicity, loss of or delays in market
acceptance of our products, delays or cessation of service to our customers or
legal claims by our customers against us.
 
 To the
extent that contractual provisions that limit the Company’s exposure to legal
claims are unenforceable or are not included in contracts or such claims are not
covered by insurance, a successful products liability claim could have a
material adverse effect on the Company’s business, results of operations and
financial condition.
  We
may be obligated to indemnify customers who purchase equipment from us against
claims of patent infringement.
  In the
course of our business, we may sell certain equipment and license software to
our customers, and in connection with such sale and license, may agree to
indemnify these customers from claims made against them by third parties for
patent infringement related to such equipment and software.  If we are
required to make any payments in respect of these indemnification obligations,
then it could have a material adverse effect on our business, results of
operations and financial condition.
 
 Our
focus on emerging markets could make achievement of our sales goals more
difficult.
 
 We focus
a large part of our sales efforts on emerging markets, including Africa, India,
Latin America, and the Middle East. These markets can be more volatile and less
predictable than more developed markets. In addition, there is limited history
and thus a level of uncertainty for demand for communications products in these
markets and both service providers and end users tend to have less capital to
spend on communications products.  These elements could impact our
ability to meet our sales objectives.
 
 Sales
to customers based outside the United States have accounted for a significant
portion of our revenues, which exposes us to risks inherent in international
operations.
 
 International
sales represented 43% of the revenues for the Technologies Group for the year
ended December 31, 2007 and 49% of the revenues for such group for the year
ended December 31, 2006. Furthermore, we expect sales to international markets
to increase as a percentage of revenues in the future. International sales are
subject to a number of risks, including changes in foreign government
regulations, laws, and communications standards; export license requirements;
currency fluctuations, tariffs and taxes; other trade barriers; difficulty in
collecting accounts receivable; longer accounts receivable collection cycles;
difficulty in managing across disparate geographic areas; difficulties in hiring
qualified local personnel; difficulties associated with enforcing agreements and
collecting receivables through foreign legal systems; expenses associated with
localizing products for foreign markets; and political and economic instability,
including disruptions of cash flow and normal business operations that may
result from terrorist attacks or armed conflict.
 
 If the
relative value of the U.S. dollar in comparison to the currency of our foreign
customers should increase, then the resulting effective price increase of our
products to these foreign customers could result in decreased sales. In
addition, to the extent that general economic downturns in particular countries
or regions impact our customers, the ability of these customers to purchase our
products could be adversely affected especially for some of the more significant
projects. Payment cycles for international customers can be longer than those
for customers in the United States. The foreign markets for our products may
develop more slowly than currently anticipated. Also, our ability to expand the
sale of certain of our products internationally is limited by the necessity of
obtaining regulatory approval in new countries. We anticipate that our
non-Canadian, foreign sales will generally be invoiced in U.S. dollars, and do
not currently plan to engage in foreign currency hedging transactions. As we
expand our international operations, however, we may allow payment in foreign
currencies, and exposure to losses in foreign currency transactions may
increase. We may choose to limit any currency exposure through the purchase of
forward foreign exchange contracts or other hedging strategies. Our future
currency hedging strategies if employed may not be successful.
  20
  Our
dependence on contract manufacturers and suppliers could result in product
delivery delays.
 
 We
currently use contract manufacturers to manufacture a significant portion of our
NetPerformer, AccessGate, and Verilink hardware products. Our reliance on
contract manufacturers involves a number of risks, including the absence of
adequate capacity, the unavailability of, or interruptions in access to
necessary manufacturing processes and reduced control over delivery schedules.
If our contract manufacturers are unable or unwilling to continue manufacturing
our products and components in required volumes on the required time schedule,
then we will have to identify one or more acceptable alternatives. The use of
new manufacturers may cause significant interruptions in supply if the new
manufacturers have difficulty manufacturing products to our specifications.
Further, the introduction of new manufacturers may increase the variance in the
quality of our products. In addition, we rely upon third-party suppliers of
specialty components and intellectual property used in our products. It is
possible that a component needed to complete the manufacture of our products may
not be available at acceptable prices or on a timely basis, if at all.
Inadequate supplies of components, or the loss of intellectual property rights,
could affect our ability to deliver products to our customers. Any significant
interruption in the supply of our products would result in the reduction of
product sales to customers, which in turn could permanently harm our reputation
in the industry.
 
 We
may be subject to litigation.
 
 We may be
subject to claims involving how we conduct our business or the market for or
issuance of the Common Stock or other securities. Any such claims against us may
affect our business, results of operations and financial conditions. Such
claims, including those without merit, could require us to pay damages or
settlement amounts and would require a substantial amount of time and attention
from our senior management as well as considerable legal expenses. Although we
do not anticipate that our activities would warrant such claims, there can be no
assurances that such claims will not be made.
 
 We
derive a substantial amount of our revenues from channel distribution partners
and such revenues may decline significantly if any major partner cancels or
delays a purchase of our products.
 
 We use an
indirect sales model to derive a substantial portion of our revenue. Failure to
generate revenue as expected from this channel could have a material adverse
effect on our results of operations and financial condition.
 
 No
channel partner or distributor is obligated to purchase additional products or
services from us. Accordingly, present and future partners may terminate their
purchasing arrangements with us or significantly reduce or delay their orders.
Any termination, change, reduction, or delay in orders could have a material
adverse effect on our results of operations and financial condition. In
addition, we currently have varying distribution, marketing and development
arrangements with our partners. There is no assurance that we will continue to
enjoy the support and cooperation that we have historically experienced from
these parties or their associated distribution channels. Also, there is no
certainty that these parties will continue to offer our products in their sales
portfolio. It is possible that these vendors may seek to offer broader product
lines and solutions that are competitive with our products. In addition, they
may change their distribution models which could negatively impact our revenues.
Furthermore, we must correctly anticipate the price, performance and
functionality requirements of these partners and must successfully develop
products that meet end user requirements and make these products available on a
timely basis and in sufficient quantities in order to sustain and grow our
business.
 
 Our
inability to develop and maintain relationships with key technology suppliers
could harm our ability to sustain and grow our business.
  Our
success depends to a significant degree upon our continued relationships with
leading technology suppliers. The standards for telephony equipment and data
networks are evolving, and our products may not be compatible with new
technology standards that may emerge. If we are unable to provide our customers
with interoperable solutions, then they may make purchases from vendors who
provide the requisite product interoperability. This could have a material
adverse effect on our results of operations and financial
condition.
 
 Compliance
or the failure to comply with current and future environmental regulations could
cause us significant expense.
 
 We are
subject to a variety of federal, state, local, and foreign environmental
regulations. If we fail to comply with any present and future regulations, we
could be subject to future liabilities, the suspension of production or a
prohibition on the sale of our products. In addition, such regulations could
require us to incur other significant expenses to comply with environmental
regulations, including expenses associated with the redesign of any
non-compliant product. From time to time new regulations are enacted, and it is
difficult to anticipate how such regulations will be implemented and enforced.
For example, in 2003 the European Union enacted the Restriction on the Use of
Certain Hazardous Substances in Electrical and Electronic Equipment Directive
(“RoHS”) and the Waste Electrica and Electronic Equipment Directive (“WEEE”),
for implementation in European Union member states. Similar legislation is
currently in force or is being considered in the United States, as well as other
countries, such as Japan and China. The failure to comply with any of such
regulatory requirements or contractual obligations could result in the Company
being liable for costs, fines, penalties and third-party claims, and could
jeopardize our ability to conduct business in the jurisdictions where these
regulations apply.
  21
  We
may be required to pay liquidated damages to certain of our investors under
certain circumstances.
 
 Pursuant
to the registration rights agreements we have entered into with the investors
who purchased our securities in a private placement transaction conducted in
January and February 2007, we agreed to pay to such investors certain liquidated
damages in the event we do not meet certain of our obligations under such
registration rights agreements. The registration statement filed on behalf of
the investors was declared effective by the SEC on June 14, 2007. If this
registration statement ceases to remain continuously effective or the investors
are not permitted to use the prospectus of which such registration statement is
a part as required by the registration rights agreements for more than fifteen
(15) consecutive calendar days or more than an aggregate of twenty (20) calendar
days during any twelve (12)–month period, then on the date of such event and
each monthly anniversary of such date until we are able to cure such event, we
will be required to pay to the investors a cash payment equal to 1.5% of the
aggregate purchase price paid by such investors for the securities purchased by
them in the private placement; however, the maximum aggregate liquidated damages
we may be obligated to pay may not exceed $1,200,000. If we are unable to
satisfy our obligations under such registration rights agreements and we are
obligated to pay liquidated damages, it may have a materially adverse effect on
our cash flow and results of operations.
 
 Item
2.                  Properties
 
 We are
headquartered in Atlanta, Georgia, where we lease 49,000 square feet of space,
24,600 of which is used for our corporate offices, the Telemate.Net operations,
and our Outsourcing group. We are obligated to pay rent on this space of
approximately $116,000 per month, plus a share of operating expenses, through
January 2010.  We have subleased 24,400 square feet of space in the
Atlanta facility for $18,613 per month from January 2006 through July 2006,
$33,224 per month from August 2006 through July 2007, $33,896 per month from
August 2007 through July 2008, $34,568 per month from August 2008 through July
2009, and $35,260 from August 2009 though the end of the lease on January 31,
2010. Further, we are also obligated through January 2010 to pay rent of $30,000
per month with respect to an additional 13,000 square feet of space in the
Atlanta facility, the cost of which is included in discontinued operations. We
have subleased 13,000 square feet of this space for $20,000 per month through
January 2010.
 
 Verso
Verilink leases 43,750 square feet of office, manufacturing, and warehouse space
in Madison, Alabama.  We use this space for manufacturing and shipping
functions related to the Verilink, NetPerformer, and iMarc product lines. We are
obligated to pay $17,038 in monthly rent under this lease through June 30, 2006
and $17,552 in monthly rent from July 1, 2006 through the expiration of the
lease term on June 30, 2010.
 
 In
connection with our disposition of the NACT business, NACT assigned to the
purchaser thereof all of NACT’s interest in a lease for approximately 40,000
square feet of office space in Provo, Utah, which had been used to operate the
NACT business, formerly a component of our Technologies Group.  The
purchaser has agreed to pay all amounts owed under the lease; however, NACT’s
payment obligations under the lease have not been terminated and our guaranty of
such obligations remains in place. The lease expires in December 2009, and the
rent there under is $51,600 per month.
 
 Verso
Canada leases approximately 18,400 square feet of office and laboratory space in
Brossard, Quebec, Canada for research and development operations related to the
NetPerformer products. Verso Canada entered into a Lease Amending and Extension
Agreement on November 29, 2006 extending the lease term from December 1, 2006
through November 30, 2009 at a base rent of 17,665 Canadian dollars per month
plus a proportionate share of operating expenses and taxes for the
building.
 
 We lease
23,000 square feet of space in Littleton, Colorado which is used primarily for
research and development for our softswitch products and technical and
administrative support for the softswitch and Verilink products. Pursuant to
this lease, we are obligated to pay rent of $27,135 per month plus a share of
operating expenses through January 2009.
 
 We lease
1,623 square feet of space in Jacksonville, Florida for research and development
in connection with the I-Master application.  The monthly rent under
this lease is $2,055 plus operating expenses from April 2008 through March
2009.
 
 We lease 4,557 square feet of space in
Rockville, Maryland for research and development of products.  The
monthly base rent under this lease is $8,924.13 during 2008, $9,191.82 during
2009, and $9,467.57 during 2010.
  22
  We lease 4,342 square feet of space in
Southborough, Massachusetts for research and development of our AccessGate
products.  The monthly base rent under this lease is $7,598.50 from
April 2008 through March 2009, $7,960.33 from April 2009 through March 2010, and
$8,322.17 from April 2010 through March 2011.
 
 We
believe that our leased facilities are adequate to meet our current needs and
that additional facilities are available to us to meet our expansion needs for
the foreseeable future.
 
 Item
3.                 Legal
Proceedings
 
 From time
to time, we are involved in litigation with customers, vendors, suppliers and
others in the ordinary course of business, and a number of such claims may exist
at any given time. All such existing proceedings are not expected to have a
material adverse impact on our results of operations or financial condition. In
addition, we or our subsidiaries are a party to the proceedings discussed
below.
 
 In
December 2001, a complaint was filed in the Southern District of New York
seeking an unspecified amount of damages on behalf of an alleged class of
persons who purchased shares of MCK’s common stock between the date of MCK’s
initial public offering and December 6, 2000. The complaint named as defendants
MCK and certain of its former officers and other parties as underwriters of its
initial public offering (the “MCK defendants”). The plaintiffs allege, among
other things, that MCK’s prospectus, contained in the Registration Statement on
Form S-1 filed with the SEC, was materially false and misleading because it
failed to disclose that the investment banks which underwrote MCK’s initial
public offering of securities and others received undisclosed and excessive
brokerage commissions, and required investors to agree to buy shares of
securities after the initial public offering was completed at predetermined
prices as a precondition to obtaining initial public offering allocations. The
plaintiffs further allege that these actions artificially inflated the price of
MCK’s common stock after the initial public offering. This case is one of many
with substantially similar allegations known as the “Laddering Cases” filed
before the Southern District of New York against a variety of unrelated issuers
(the “Issuers”), directors and officers (the “Laddering Directors and Officers”)
and underwriters (the “Underwriters”), and have been consolidated for pre-trial
purposes before one judge to assist with administration. A motion to dismiss
addressing issues common to the companies and individuals who have been sued in
these actions was filed in July 2002. After a hearing on the motion to dismiss,
the court, on February 19, 2003, denied dismissal of the claims against MCK as
well as other Issuers. Although MCK believes that the claims asserted are
without merit, MCK and other Issuers have negotiated a tentative settlement with
the plaintiffs. The terms of the tentative settlement agreement provide, among
other things, that (i) the insurers of the Issuers will deliver a surety
undertaking in the amount of $1 billion payable to the plaintiffs to settle the
actions against all Issuers and the Laddering Directors and Officers; (ii) each
Issuer will assign to a litigation trust, for the benefit of the plaintiffs, any
claims it may have against its Underwriters in the initial public offering for
excess compensation in the form of fees or commissions paid to such Underwriters
by their customers for allocation of initial public offering shares; (iii) the
plaintiffs will release all claims against the Issuers and the Laddering
Directors and Officers asserted or which could have been asserted in the actions
arising out of the factual allegations of the amended complaints; and (iv)
appropriate releases and bar orders and, if necessary, judgment reductions, will
be entered to preclude the Underwriters and any non-settling defendants from
recovering any amounts from the settling Issuers or the Laddering Directors and
Officers by way of contribution or indemnification. Prior to the Company’s
acquisition of MCK, MCK’s board of directors voted to approve the tentative
settlement.  On February 15, 2005, the judge presiding over the
Laddering Cases granted preliminary approval of the proposed settlement, subject
to some changes, which were subsequently submitted.  The judge issued
an order on August 31, 2005, further approving modifications to the settlement
and certifying the class.  Notice of the settlement has been
distributed to the settlement class members.  The deadline for filing
objections to the settlement was March 24, 2006, and a fairness hearing was held
April 26, 2006.  On December 5, 2006, the U.S. Court of Appeals for
the Second Circuit issued a ruling reversing class certification for purposes of
the litigation.  The plaintiffs petitioned for rehearing and rehearing
en banc, and the Second Circuit Court denied the request on April 9, 2007.
Because the settlement as agreed was not viable without the class certification,
the parties stipulated to its termination without prejudicing their ability to
apply to the court regarding a future settlement.  The plaintiffs
filed Second Amended Complaints in six issuer “focus” cases on August 14, 2007,
and have moved for class certification in those cases. The six issuer focus
defendants have moved to dismiss the Second Amended Complaints, which motion the
court granted in part and denied in part on March 26, 2008.  All other
cases, including the MCK case, have been stayed until further order of the
court.  No provision was recorded for this matter in the financial
statements of MCK prepared prior to our acquisition of MCK because MCK believed
that its portion of the proposed settlement would be paid by its insurance
carrier. We agree with MCK’s treatment of this matter.
 
 Needham
(Nevada) Corp., a direct subsidiary of MCK and, hence, an indirect subsidiary of
the Company (“MCK Nevada”) was named a defendant in a lawsuit filed in Norfolk
County, Massachusetts by Entrata Communications, Inc. (“Entrata”) in 2002 (the
“Entrata Litigation”). The case arose out of a dispute between Entrata and one
of its largest shareholders, Superwire.com, Inc. (“Superwire”). Pursuant to a
contract with Entrata, MCK Nevada was obligated to pay Entrata $750,000 in early
2002. In order to take advantage of a $100,000 discount offered for early
payment, MCK Nevada paid $650,000 in November 2001 in full satisfaction of its
contractual obligations. The funds were placed in escrow with Superwire’s
California law firm, Jeffers, Shaff & Falk, LLP (“JSF”) which agreed not to
disburse the funds until the dispute between Entrata and Superwire had been
resolved. Nevertheless, Entrata contends that it never received the funds from
MCK Nevada and that the funds were diverted to Superwire and JSF.  In
the Entrata Litigation, Entrata sought to recover from both MCK Nevada and
Superwire the $750,000 that MCK Nevada would have owed in 2002. MCK Nevada
asserted counterclaims against Entrata and cross-claims against Superwire for
fraud and breach of contract. MCK Nevada added JSF and two of its partners,
Barry D. Falk and Mark R. Ziebell, as third-party defendants.
  23
  On August
18, 2003, Entrata entered Chapter 7 bankruptcy proceedings pursuant to the
United States Bankruptcy Code. Entrata did not pursue the Entrata Litigation
after entering bankruptcy and the court dismissed the lawsuit for failure to
prosecute on September 7, 2005.  On October 18, 2006, Entrata filed a
motion for relief from dismissal.  The court granted the motion which
revived the case.
 
 On May
25, 2007, Entrata filed a motion for partial summary judgment asking the court
to award damages against MCK Nevada of $750,000 plus 12% prejudgment interest
since February 1, 2002, and approximately $79,000 in attorneys’
fees.  The court allowed the motion on August 6, 2007. On March 20,
2008, the court granted Entrata’s motion for final judgment against MCK Nevada
for the judgment amount.
 
 On
February 22, 2008, Michael Daly, the Chapter 7 bankruptcy trustee for Entrata
(the “Trustee”), filed a complaint in Norfolk County, Massachusetts (the
“Trustee Litigation”) against the Company and Citel Technologies, Inc. (“Citel”)
claiming that Citel and the Company were liable to Entrata for monies owed by
MCK Nevada in the Entrata Litigation because Citel and the Company allegedly
assumed the liability of MCK and because of a fraudulent transfer of the assets
of MCK Nevada by the Company to Citel. On January 21, 2005, Citel purchased a
substantial portion of the assets of MCK Nevada, MCK and certain related
subsidiaries from the Company and its related subsidiaries under an Asset
Purchase Agreement (the “Citel APA”).  The Trustee also filed a motion
for a temporary restraining order against the Company and Citel asking the court
to enjoin each such entity from transferring or disposing of any of its property
of any kind other than in the ordinary course of business.  At a
hearing held on March 7, 2008, the court ruled against the Trustee on the motion
for injunction as it related to Citel.  The court delayed deciding on
the motion for injunction as it related to the Company so that the Company and
Entrata could first engage in discussions to settle the dispute.
 
 On March
12, 2008, the Company received notice of claim for indemnification from Citel
alleging that the Company and the other sellers were obligated under the Citel
APA to indemnify Citel against the claims asserted against it in the Trustee
Litigation.
 
 On March
25, 2008 (the “Agreement Date”), the Company, MCK Nevada, the Trustee and Citel
entered into a Settlement and Release (the “Settlement Agreement”) covering both
the Entrata Litigation and the Trustee Litigation.  Under the
Settlement Agreement, the Company agreed to pay the Trustee $100,000 in cash by
May 1, 2008 and to issue to the Trustee shares of Common Stock having an
aggregate value of $250,000 based on the mean average closing price of the
Common Stock for the ten consecutive trading days prior to the Agreement Date
(the “Trustee Shares”).  In addition, MCK Nevada agreed to assign to
the Trustee MCK Nevada’s claims in the Entrata Litigation against Superwire,
JSF, Barry D. Falk, and Mark R. Zeibel (the “Assigned Claims”).  In
the Settlement Agreement, the Trustee granted to the Company and MCK Nevada and
MCK Nevada and the Company granted to the Trustee mutual general releases. In
addition, Citel, the Company, MCK Nevada, and the Trustee each granted mutual
limited releases to the other parties relating to the claims of the releasing
parties arising from the Entrata Litigation and the Trustee Litigation. The
Settlement Agreement specifies that certain conditions subsequent must be
satisfied in order for the releases to remain effective. The conditions
subsequent include (i) approval of the Settlement Agreement by the bankruptcy
court in the Entrata bankruptcy; (ii) the Company paying Entrata the $100,000
cash settlement amount by May 1, 2008; (iii) the Company not entering
bankruptcy, ceasing operations, or becoming subject to liquidation, receivership
or a proceeding to restructure its debt during the period beginning on the
Agreement Date until the later of 91 days after the payment of the $100,000 or
the date that is 30 days after the Trustee Shares may be sold under a
registration statement or under Rule 144 of the Securities Act; and (iv) the
Trustee Shares being sellable under an effective registration statement or under
Rule 144 of the Securities Act on or before Oct. 31, 2008.  If the
condition requiring approval by the bankruptcy court fails, the Settlement
Agreement becomes null and void and the releases are revoked.  If any
of the other conditions fail, the Trustee can elect to revoke the
releases.  If the Trustee makes this election, the Company becomes
indebted to Entrata in the amount of $750,000 plus 12% interest on such amount
from the Agreement Date less (i) the amount of the cash payment if the payment
was made, (ii) a credit for the Trustee Shares not returned by the Trustee to
the Company, and (iii) the amount recovered by Entrata from the Assigned Claims
net of costs and expenses incurred by Entrata in the Entrata Litigation, the
Trustee Litigation, and the pursuit of the Assigned Claims.  The
Company, the Trustee, and Citel agreed in the Settlement Agreement to file a
stipulation for dismissal without prejudice with regard to the Trustee
Action.  Entrata and MCK Nevada agreed to file a motion in the Entrata
Litigation to vacate the judgment against MCK Nevada and to dismiss without
prejudice the claims between MCK Nevada and Entrata in the action.  If
the conditions precedent noted above are not met, the parties have the ability
to reinstate the dismissed claims at their option.
 
 Item
4.                  Submission of Matters to a Vote of
Security Holders
 
 Our
Annual Meeting of Shareholders was held on December 18, 2007 in Atlanta, Georgia
(the “Meeting”).  At the Meeting, our shareholders voted on the
following proposals:
  24
  (1)
              to
      elect a board of eight directors to serve until our next annual meeting of
      shareholders and until their successors are elected and qualified or until
      their earlier death, resignation, removal or
    disqualification;
 
 (2)
              to
      approve an amendment to our amended and restated articles of
      incorporation, as amended, to increase the number of authorized shares of
      the Common Stock from 120,000,000 shares to 200,000,000
      shares;
 
 (3)
              to
      approve the Verso Technologies, Inc. 2007 Stock Incentive
      Plan;
 
 (4)
              to
      approve the potential issuance of more than 20% of the outstanding shares
      of Common Stock for the purposes of complying with the rules governing The
      Nasdaq Stock Market LLC;
 
 (5)
              to
      approve an amendment to the option exchange program previously approved by
      our shareholders at the Company’s 2006 Annual Meeting of Shareholders;
      and
 
 (6)
              to
      ratify the appointment of Tauber & Balser, P.C. as our independent
      registered public accountants for the year ending December 31,
      2007.
  Each of
the foregoing proposals was approved by the shareholders at the
Meeting.
 
 The
results of the vote on Proposal 1 were as follows:
 
 Director
      Nominee
              
              For
              
              
              Withheld
      AuthorityMark
      H. Dunaway
              
              
              44,349,576
              
              
              
              1,374,907E.
      Kenneth Greenwald
              
              
              44,534,809
              
              
              
              1,189,674Gary
      H. Heck
              
              
              38,225,281
              
              
              
              7,499,202James
      R. Kanely
              
              
              44,310,831
              
              
              
              1,413,652Amy
      L. Newmark
              
              
              32,932,865
              
              
              
              12,791,618Steven
      A. Odom
              
              
              44,106,899
              
              
              
              1,617,584James
      A. Verbrugge
              
              
              44,529,912
              
              
              
              1,194,571William
      J. West
              
              
              44,538,958
              
              
              
              1,185,525
 
 There
were no abstentions or broker non-votes with respect to the election of any of
the director nominees listed above.
 
 The
results of the votes on Proposals 2 through 7 were as follows:
 
 Proposal
              
              Votes
      For
              
              
              Votes
                Against
              
              
              Votes
                Abstained
              
              
              Broker
                Non-VotesProposal
      2
              
              
              32,168,174
              
              
              
              12,715,856
              
              
              
              841,310
              
              
              
              0Proposal
      3
              
              
              24,020,298
              
              
              
              2,347,918
              
              
              
              175,738
              
              
              
              19,181,391Proposal
      4
              
              
              17,411,008
              
              
              
              8,862,031
              
              
              
              270,915
              
              
              
              19,181,391Proposal
      5
              
              
              24,142,357
              
              
              
              1,999,391
              
              
              
              402,207
              
              
              
              19,181,390Proposal
      6
              
              
              44,884,463
              
              
              
              691,900
              
              
              
              148,978
              
              
              
              0
 
 The
foregoing proposals were set forth and described in our Notice of Annual Meeting
of Shareholders and Proxy Statement dated November 9, 2007.
 
 Item
4.5               Executive
Officers
 
 The
following table sets forth the name of each executive officer of the Company,
the office held by such officer and the age, as of March 31,
2008, of such officer.
  Name
              Age
              
              PositionMark
      H. Dunaway
              62
              
              Chief
      Executive Officer, President and Chief Operating
OfficerMartin
      D. Kidder
              44
              
              Chief
      Financial Officer and Secretary
  25
  Certain
additional information concerning the individuals named above is set forth
below:
  Mark H. Dunawayhas served as
a Chief Executive Officer since April 14, 2008, as a director of the Company
since June 1, 2005 and as President and Chief Operating Officer of the Company
since July 1, 2007.  Mr. Dunaway also served as a member of the Audit
Committee from June 1, 2005 until July 1, 2007 and as a member of the Governance
and Nominating Committee and the Customer Relations Committee from February 14,
2007 until July 1, 2007.  From October 2004 to June 2007, he served as
Chairman and Chief Executive Officer of Composite Materials Technology, LLC, a
provider of engineering products.  From July 2001 to September 2004,
he was a partner in Criterion Partners, LLC, a private investment
company.  From July 1993 to June 2001, he served as Chairman and Chief
Executive Officer for PNI Technologies, a wireless network
company.  From March 1986 to June 1993, he served as owner of Dunaway
Enterprises investing in start-up companies, as President of North American
Operations for British Telecom and as a consultant to Cable and
Wireless.  From September 1981 to February 1986, he served as Chairman
and Chief Executive Officer for A Beeper/A Cellular Company, a national wireless
company.  From July 1979 to August 1981, he served as President of
Answer Page.
  Martin D. Kidderhas served as
Chief Financial Officer of the Company since November 1, 2006. From June 2004 to
October 2006, he served as Corporate Controller of CipherTrust, Inc., a global
provider of messaging security products that merged in August 2006 with Secure
Computing Corporation. From August 2003 to June 2004, Mr. Kidder served as
Controller of GE Energy Company’s Network Reliability Products and Services and
Rentals businesses. From October 2001 to August 2003, he served as Controller of
Glenayre Technologies, Inc., a global provider of next generation messaging
solutions and enhanced services for wireless and wireline carriers and MSO/cable
operators. From May 1992 to April 2001, Mr. Kidder served as Vice President and
Controller of World Access.
 
 There are
no family relationships among any of the executive officers or directors of the
Company. No arrangement or understanding exists between any director and any
other person pursuant to which any director was selected to serve as a director.
To the best of the Company’s knowledge, (i) there are no material proceedings to
which any director of the Company is a party, or has a material interest,
adverse to the Company; and (ii) there have been no events under any bankruptcy
act, no criminal proceedings and no judgments or injunctions that are material
to the evaluation of the ability or integrity of any of the directors during the
past five years.
  26
  PART
II
 
 Item
      5.
              Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities
 
 Market
Information
 
 The
Common Stock is currently traded on The Nasdaq Capital Market under the symbol
“VRSO.” Prior to September 13, 2002, the Common Stock was traded on the Nasdaq
National Market under the same symbol, and from February 17, 2000 to October 1,
2000, the Common Stock was traded on The Nasdaq National Market under the symbol
“ELTX.” Prior to February 17, 2000, the Common Stock was traded on The Nasdaq
Capital Market under the same symbol. The following table sets forth the
quarterly high and low bid prices for the Common Stock for the periods indicated
below, as reported by The Nasdaq Capital Market. The stock prices set forth
below do not include adjustments for retail mark-ups, markdowns or commissions,
and represent inter-dealer prices and do not necessarily represent actual
transactions.
 
 The Board
amended the Company’s Articles of Incorporation effective October 11, 2005 to
provide for the conversion of, every one share of Common Stock issued and
outstanding into one-fifth of a share of Common Stock (the “Reverse
Split”).   All per share information in this document has been
adjusted to reflect the Reverse Split.
 
 Year
      ended December 31, 2007:
              
              High
              
              
              LowFirst
      Quarter
              
              $
              1.43
              
              
              $
              0.86Second
      Quarter
              
              
              1.08
              
              
              
              0.78Third
      Quarter
              
              
              0.99
              
              
              
              0.60Fourth
      Quarter
              
              
              0.70
              
              
              
              0.27
 
 
 Year
      ended December 31, 2006:
              
              High
              
              
              LowFirst
      Quarter
              
              $
              1.89
              
              
              $
              0.85Second
      Quarter
              
              
              1.69
              
              
              
              0.89Third
      Quarter
              
              
              1.15
              
              
              
              0.80Fourth
      Quarter
              
              
              1.52
              
              
              
              0.85
 
 As of
April  14, 2008, there were approximately 648 holders of record
of the Common Stock.
 
 We have
never declared or paid cash dividends on the Common Stock. We currently intend
to retain any earnings for use in our operations and do not anticipate paying
cash dividends on the Common Stock in the foreseeable future. In addition, our
credit facility with Laurus Master Fund, Ltd. (“Laurus”), our primary lender,
and the terms of our outstanding 6.75% senior unsecured convertible debentures
prohibit the payment of cash dividends on the Common Stock.
  27
  Item
6.                  Selected Financial
Data
 
 The
following selected financial data should be read in conjunction with our
financial statements and related notes thereto, set forth in Item 15 hereof, and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” set forth in Item 7 hereof. The statement of operations data and
the balance sheet data have been derived from our audited consolidated financial
statements. The historical results are not necessarily indicative of future
results. All amounts are in thousands except per share data.
 
 Years
      Ended December 31,2007(2)
              
              
              2006(3)
              
              
              2005(4)
              
              
              2004(5)
              
              
              2003(6)Statement of Operations
      Data (1):Revenue
              
              $
              50,635
              
              
              $
              42,530
              
              
              $
              32,873
              
              
              $
              32,263
              
              
              $
              38,139Loss
      from continuing operations
              
              
              (26,699
              )
              
              
              (17,776
              )
              
              
              (19,494
              )
              
              
              (18,770
              )
              
              
              (4,215
              )Loss
      from continuing operations percommon
      share -- basic and diluted
              
              
              (0.47
              )
              
              
              (0.51
              )
              
              
              (0.72
              )
              
              
              (0.70
              )
              
              
              (0.20
              )Balance
      Sheet Data:Total
      assets (7)
              
              
              34,263
              
              
              
              36,849
              
              
              
              28,098
              
              
              
              33,429
              
              
              
              63,252Long-term
      liabilities, net ofcurrent
      portion
              
              $
              3,527
              
              
              $
              12,634
              
              
              $
              10,222
              
              
              $
              4,401
              
              
              $
              9,102
 
 (1)
              Includes
      the continuing operations of assets acquired by the Company from Clarent
      Corporation since its acquisition on February 12, 2003, the continuing
      operations of substantially all the operating assets of WSECI beginning
      October 1, 2004, the continuing operations of substantially all of the
      operating assets of Verilink Corporation since its acquisition on June 16,
      2006, the continuing operations of Sentito Corporation since its
      acquisition on April 17, 2007 and the continuing operations of the
      AccessGate division assets acquired from MNS Communications Corp. on
      December 21, 2007(2)
              The
      fiscal year 2007 loss from continuing operations includes $2.0 million of
      intangibles amortization, a $2.3 million impairment charge for acquired
      technology, a $2.9 million write-down of goodwill and $4.1 million in
      non-cash interest related to the amortization of the discount on notes
      payable and convertible subordinated debentures and loan
    fees.(3)
              The
      fiscal year 2006 loss from continuing operations includes $1.1 million of
      intangibles amortization and $3.9 million in non-cash interest related to
      the amortization of the discount on notes payable and convertible
      subordinated debentures and loan fees.(4)
              The
      fiscal year 2005 loss from continuing operations includes $809,000 of
      intangibles amortization, $7,000 in amortization of deferred compensation,
      $2.9 million in non-cash interest related to the amortization of the
      discount on notes payable and convertible subordinated debentures and loan
      fees and $2.6 million of reorganization costs – loss on
      sublease.(5)
              The
      fiscal year 2004 loss from continuing operations includes $514,000 of
      intangibles amortization, $435,000 in amortization of deferred
      compensation and $517,000 in non-cash interest related to the amortization
      of the discount on notes payable and convertible subordinated debentures
      and loan fees.(6)
              The
      fiscal year 2003 loss from continuing operations includes $407,000 of
      intangibles amortization, $780,000 in amortization of deferred
      compensation and $561,000 in non-cash interest related to the amortization
      of the discount on notes payable and convertible subordinated debentures
      and loan fees.(7)
              Includes
      $2.1 million and $3.4 million of notes receivable as of December 31, 2006
      and 2005, respectively, related to the sale of assets of discontinued
      operations.  Includes $9.0 million and $33.4 million of assets
      of discontinued operations, as of December 31, 2004 and 2003,
      respectively.  The assets of discontinued operations as of
      December 31, 2004 were reduced by the loss on disposal of discontinued
      operations totaling $14.8 million.
 28
 Item
      7.
              Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
 
 Overview
 
 We are a
global technology company providing next generation communications network
solutions offering a core-to-edge product portfolio to service providers and
enterprises. Our product offerings include WiMAX, cellular backhaul, VoBB, VoIP,
IAD, and internet usage solutions which are enabled by our hardware and
software. These products enable customers to reduce communication costs,
generate additional revenue, secure and optimize network bandwidth. We
manufacture, deliver, and support these hardware, software, and service
solutions primarily to wireline, cellular, wireless and satellite carriers and
other customers. Our solutions are used by companies in several industries,
government and government related businesses, including mission critical
satellite and wireless communications of all kinds. Our technologies optimize
bandwidth for customers using proprietary and other technology utilizing the
latest industry protocols such as internet protocol multimedia subsystem
(“IMS”), VoIP, VoBB as well as other advanced protocols.  We own open
and scalable solutions that are compatible with industry standards.
 
 Our
operations include two separate business segments: (i) the Technologies Group,
which includes our softswitching, I-Master, NetPerformer, Telemate.Net, Verso
Verilink, Sentito and AccessGate divisions; and (ii) the Verso Outsourcing
Group, which includes our technical applications support group and customer care
center. The Technologies Group includes domestic and international sales of
hardware and software, integration, applications and technical training and
support.  The Technologies Group offers software-based solutions
(which include hardware) for customers seeking to build converged packet-based
voice and data networks.  In addition, the Technologies Group offers
software-based solutions for internet access and usage management that include
call accounting and usage reporting for internet protocol network
devices.  In 2006, the Technologies Group added the product suites
from the Verilink Acquisition and the iMarc Acquisition (each defined below).
These products provide access, multiplexing and transport of voice and data
services and enhanced the Company’s technology offerings, and delivered two Tier
1 North American customers. The Verso Outsourcing Group includes outsourced
technical application services and application installation and training
services to both customers of the Technologies Group and outside
customers.
 
 Since
2001, the Company has been selling products to the carrier market and focusing
its strategic direction on developing and marketing next generation
communications products.  Our current business was built on
acquisitions made by us by leveraging the economic downturn in the
telecommunications area.  In the first quarter of 2003, we acquired
substantially all of the operating assets of Clarent Corporation, which provided
us with VoIP technologies primarily serving international markets and
significantly increased our market share in the worldwide softswitch
market.
 
 Our
strategy through 2003 was to add next generation communications products to our
suite of products through strategic acquisitions and to leverage these
operations through cost reductions to enhance cash flow.  With the
acquisition of substantially all of the operating assets of Clarent Corporation,
we moved our growth strategy toward international
markets.  International revenue increased from 0% of our consolidated
revenues in 2002 to 53% of our consolidated revenues for 2005.  As the
acquisition of substantially all of the operating assets of Clarent Corporation
was funded primarily by short-term seller financing, generating cash flow from
operations during 2003 was required to meet the debt repayment
obligations.  As such, we leveraged our combined operations, reducing
sales, general and administrative costs (as compared to costs prior to the
acquisition), while preserving the research and development expenditures which
are vital to our long-term growth and viability.
 
 In 2004,
we began moving toward an open standards platform.  In 2004 and 2005,
we significantly increased our expenditures for research and development and
sales and marketing to focus on long-term sustainable revenue
growth.  In the first quarter of 2004, we completed a private
placement raising approximately $16.5 million, net of expenses, to fund the
increased research and development efforts and expanded sales and marketing
programs.  In the first quarter of 2005, we completed a private
placement of senior unsecured convertible debentures raising an additional $12.8
million.  As expected, these additional expenditures significantly
increased the operating loss from continuing operations in 2005 and 2004 as
compared to 2003.
 
 In
January 2005, we sold substantially all of the operating assets of our NACT and
MCK businesses to better focus our capital and management resources on areas
which we believe have greater potential given our strategy to focus on next
generation network and solutions.  In addition, we disposed of our
NACT business because we wanted to move toward an open-standards, pre-paid next
generation solution that could better address growing market opportunities and
enable us to offer a competitive product for Tier 1 and Tier 2
carriers.  We believe that the I-Master platform, which we acquired in
March 2005 after forming a strategic partnership with WSECI in the latter half
of 2004, permits us to offer a more robust next generation
solution.  Further, we disposed of our MCK business because we intend
to focus on next generation solutions for service providers and the products of
the MCK business did not fit that profile.  The operations of the NACT
and MCK businesses have been reclassified as discontinued operations in our
consolidated financial statements.
  29
  On June
16, 2006, we acquired all of the outstanding equity interests (the “Verilink
Acquisition”) of Winslow Asset Holdings, LLC (“Holdings”), now known as Verso
Verilink, LLC from Winslow Asset Group, LLC (“Group”) pursuant to that certain
Securities Purchase Agreement dated as of June 15, 2006 among Verso, Holdings
and Group. At the time of the Acquisition, Holdings’ assets  consisted
of substantially all of the business assets of Verilink Corporation and Larscom
Incorporated (together, the “Verilink Sellers”), other than the accounts
receivable and certain fixed assets of the Verilink Sellers which were
transferred to Group prior to the Acquisition. Holdings’ assets were used by the
Verilink Sellers in their business of developing, manufacturing, marketing and
selling broadband access solutions for computer networks.
  On
December 29, 2006, we,purchased certain assets of Paradyne Networks, Inc.
related to the business of manufacturing, selling and supporting the iMarc
product line (the “iMarc Acquisition”).  The iMarc product line is a
family of ATM devices, IP service units, and branch monitors that provides
intelligent demarcation between carrier and enterprise networks, allowing for
easier management. The iMarc product line is complementary to the Verilink
product line and is being integrated into the Verilink business.
  On April
17, 2007, we acquired Sentito Networks, Inc. (“Sentito”), a provider of media
and signaling gateway equipment to the telecommunications market, by means of
the merger of SN Acquisition Corporation, a wholly-owned subsidiary, into
Sentito pursuant to an Agreement and Plan of Merger, dated as of April 4, 2007
(the “Sentito Acquisition”). The acquisition of this technology lowered our
product cost for our softswitch solution. As the Sentito gateway is fully
integrated into our softswitch, it will provide us with a proprietary integrated
gateway within our softswitch solution.
  On
December 21, 2007, we purchased the AccessGate® cellular backhaul optimization
product line (“AccessGate”) from NMS Communications Corp. (the “AccessGate
Acquisition”), which we believe has consolidated that market segment and made
Verso a leading provider of mobile backhaul solutions worldwide. We transferred
the assets and liabilities acquired in the AccessGate Acquisition to our Mobile
Backhaul subsidiary and in January of 2008, we combined management of the
AccessGate and Net Performer backhaul optimization operations into the
consolidated Mobile Backhaul product business unit.
  On
October 11, 2005, we affected the Reverse Split of the outstanding Common Stock,
pursuant to which every five (5) shares of common stock outstanding on such date
were converted into one (1) share of common stock.  The Reverse Split
enabled us to regain compliance with the minimum bid price requirement for
continued inclusion on the Nasdaq Capital Market.
 
 The
consolidated financial statements include the accounts of the Company and our
wholly-owned subsidiaries. We do not engage in off-balance sheet activities and
therefore none are disclosed in the financial statements.  We believe
that the foregoing events significantly affect the comparability of our results
of operations from year to year.  You should read the following
discussion of our results of operations and financial condition in conjunction
with our consolidated financial statements and related notes thereto included in
Item 15 of this Annual Report.
  Explanatory Paragraph in Report of Our
Independent Registered Public Accounting Firm




Our independent auditors
have included an explanatory paragraph in their most recent report dated April
15, 2008, stating that our audited financial statements for the year ending
December 31, 2007 were prepared assuming that we will continue as a going
concern. However, they note that we have recurring losses from operations, past
history of operating cash flow deficiencies, significant debt obligations which
are due and payable during 2008 and limited capital resources which raise
substantial doubt about our ability to continue as a going concern.
  
  30
  Results
of Operations
 
 Fiscal
Year 2007 Compared with Fiscal Year 2006
 
 For the
year ended December 31, 2007, our net loss totaled $27.0 million, or $0.47 per
share, compared with a net loss of $17.8 million, or $0.51 per share, for the
same period in 2006. The 2007 results included $751,000 in reorganization costs,
a $350,000 accrual for a legal settlement, an impairment charge of acquired
technologies of $2.3 million and a write-down of goodwill of $2.9
million.  The 2006 results included $674,000 in reorganization
costs.
 
 Continuing
Operations
 
 For the
year ended December 31, 2007, our net loss from continuing operations totaled
$26.7 million, or $0.47 per share, compared with a net loss of $17.8 million, or
$0.51 per share, for 2006. The 2007 results included $751,000 in reorganization
costs, an impairment charge of acquired technologies of $2.3 million and a
write-down of goodwill of $2.9 million and the 2006 results included $674,000 in
reorganization costs.
  Total
revenue was $50.6 million for the year ended December 31, 2007, reflecting a 19%
increase from 2006. Product revenue increased $8.0 million, or 29%, from $27.9
million in 2006 to $35.9 million in 2007.  The increase in product
revenue for the Technologies Group was attributable to a full year’s worth of
product revenue from the Verilink and iMarc product lines in 2007 and an
increase in revenue associated with the I-Master product.  These
increases were partially offset by declines in the sales of our other
products.
 
 Services
revenue was $14.7 million for the each of the years ended December 31, 2007 and
2006.  An increase in services revenue for the Technologies Group of
$112,000 was due to a full year of professional services from the Verilink
professional services group.  The increase was offset by declines in
revenue for other Technologies Group services.  Services revenue for
Verso Outsourcing declined $65,000 or 1%, for the year ended December 31,
2007.
 
 Gross
profit decreased by $978,000 for the year ended December 31, 2007, and was 32%
of revenue in 2007, compared with 40% of revenue for 2006. The decline in gross
margin percentage was primarily attributable to a write-down of intangible
assets from the Sentito acquisition of $2.3 million and decreased margins in
certain Technologies Group product lines.  Excluding the write-down of
intangible assets, gross margin percentage would have been 36% of revenue in
2007. The lower margin in the Technologies Group is primarily a result of the
lower margins from the hardware-based Verilink product suite.  The
decline in the margin for the Technologies Group was offset by an increase in
margins for Verso Outsourcing which increased from 16% in 2006 to 22% in
2007.  The increase in Verso Outsourcing Group’s gross margin is due
to a change in revenue mix.
 
 Total
operating expenses incurred in continuing operations for the year ended December
31, 2007 were $36.3 million, an increase of $7.0 million, or 24%, compared to
the same period in 2006.  As a percentage of revenue, operating
expenses from continuing operations were 72% during the year ended December 31,
2007, up from 69% for the same period in 2006.  The increase is
primarily attributable to the following items: increases due to the write-down
of goodwill of $2.9 million, $2.3 million in general and administrative
expenses, $824,000 in depreciation and amortization expense and $695,000 in
sales and marketing expenses.
 
 The
increase in general and administrative expenses for the year ended December 31,
2007 is due mainly to increases in salaries, wages and employee benefits expense
of $713,000, bad debt expense of $631,000, stock based compensation of $498,000,
and rent expense of $292,000.  Most of these increases are due to a
full-year of expenses in 2007 from the Verilink acquisition.
 
 The
increase in depreciation and amortization expense is comprised of an increase in
amortization of $1.1 million offset by a decrease in depreciation expense of
$218,000.  The increase in amortization is related to the amortization
of Verilink and Sentito intangibles. The decrease in depreciation expense is
related to lower capital expenditures during 2007 as well as fully-depreciated
assets.
  The
increase in sales and marketing expense in 2007 is due to increases in salaries,
wages and other employee related costs of $1.0 million and travel expenses of
$254,000.  These increases were primarily due to the increase in
headcount from the Verilink and Sentito acquisitions.  The increases
were offset by decreases in general offices expenses of $312,000, contract labor
of $175,000 and professional fees of $75,000.
 
 In the
third quarter of 2007, the Company initiated certain restructuring plans to
improve operational efficiencies and financial performance and eliminated nine
positions held by employees. As a result of these actions we recorded
reorganization costs of $362,000 during the quarter ended September 30, 2007,
which included severance and compensation costs of $275,000 and $87,000 related
to the closing of an office location in Acton, Massachusetts.  In the
second quarter of 2007, the Company terminated a senior executive. As a result
of this action, we recorded reorganization costs of $389,000 representing our
severance obligation. In the fourth quarter of 2006, the Company terminated a
senior executive.  As a result of this action, the Company recorded
reorganization costs of $674,000 during the year ended December 31,
2006.
  31
  In the
second quarter of 2005, the Company entered into a sublease agreement with an
unrelated party to sublease excess office space at the Company’s facility in
Atlanta, Georgia.  The excess space arose primarily due to reductions
in corporate staffing over the prior year.  As a result of the
sublease, the Company recorded an accrual of $1.7 million, equaling the
difference between the remaining payments due on this lease ($3.3 million) and
the amounts to be paid by the sublessor ($1.6 million).  The Company
recorded reorganization costs of $2.6 million during the year ended December 31,
2005, which included the $1.7 million difference between the lease and the
sublease for the entire remaining term, as well as write-offs for furniture and
leasehold improvements. The Company expects to save approximately $1.6 million
over the remaining term of the original lease, which expires January 31,
2010.
 
 Other
expense was $305,000 during the year ended December 31, 2007, compared with
$22,000 for the same period in 2006.  The increase in expense is
primarily due to loss on extinguishment of debt of $283,000.
 
 Equity in
loss of investment was $139,000 during the year ended December 31, 2007,
compared to equity in loss of investment of $1,000 in 2006.  These
amounts represent the Company’s portion of BeTrue’s income for each of these
years.  Due to the shared decision-making between the Company and its
equity partner, the results of BeTrue are treated as an equity investment rather
than being consolidated.
 
 Net
interest expense was $6.1 million during the year ended December 31, 2007, an
increase of $522,000 compared to the same period in 2006.  Included in
net interest expenses was amortization of loan fees and discount on convertible
debentures which were $4.1
million for the year ended December 31, 2007 as compared to $3.9 million
for the year ended December 31, 2006.  The increase in the interest
expenses was primarily attributable to interest and amortization of the loan
costs and fees associated with the new credit facility with Laurus (see Note 6 –
Financing Arrangements in the Notes to the Consolidated Financial
Statements).
  32
  Business
Unit Performance
 
 Technologies
                
                
                Verso(Dollars
      in thousands)
                
                Group
                
                
                Outsourcing
      Group
                
                
                ConsolidatedFor
      the Year EndedDecember
      31,
                
                2007
                
                
                2006
                
                
                2007
                
                
                2006
                
                
                2007
                
                
                2006Revenue
                
                $
                43,352
                
                
                $
                35,182
                
                
                $
                7,283
                
                
                $
                7,348
                
                
                $
                50,635
                
                
                $
                42,530Gross
      profit
                
                
                14,614
                
                
                
                16,023
                
                
                
                1,575
                
                
                
                1,144
                
                
                
                16,189
                
                
                
                17,167Gross
      margin
                
                
                34
                %
                
                
                46
                %
                
                
                22
                %
                
                
                16
                %
                
                
                32
                %
                
                
                40
                %General
      and administrative
                
                
                4,395
                
                
                
                3,107
                
                
                
                111
                
                
                
                452
                
                
                
                4,506
                
                
                
                3,559Sales
      and marketing
                
                
                8,482
                
                
                
                7,905
                
                
                
                403
                
                
                
                329
                
                
                
                8,885
                
                
                
                8,234Research
      and development
                
                
                7,814
                
                
                
                7,507
                
                
                
                -
                
                
                
                -
                
                
                
                7,814
                
                
                
                7,507(Loss)
      contributionbefore
      unallocated items
                
                $
                (6,077
                )
                
                $
                (2,496
                )
                
                $
                1,061
                
                
                $
                363
                
                
                
                (5,016
                )
                
                
                (2,133
                )Unallocated
      items:Corporate
      general and administrative
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8,511
                
                
                
                7,094Corporate
      research and development
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                132
                
                
                
                298Depreciation
      and amortization
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,754
                
                
                
                1,930Write
      down of goodwill
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,945
                
                
                
                -Reorganization
      costs
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                751
                
                
                
                674Operating
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (20,109
                )
                
                
                (12,129
                )Other
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,590
                )
                
                
                (5,647
                )Loss
      from continuing operations before income taxes
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                (26,699
                )
                
                $
                (17,776
                )
 
 Technologies
Group
 
 Total
revenue from the Company’s Technologies Group was $43.3 million in the year
ended December 31, 2007, a 23% increase from the same period in
2006.   The increase in product revenue in the Technologies Group
was primarily attributable to a full year of operational results in 2007 from
the Verilink acquisition which occurred on June 16, 2006, and an increase in
revenue associated with the I-Master products partially offset by declines in
the sales of the Company’s other products.
 
 Gross
profit decreased by $1.4 million in the year ended December 31, 2007, and was
34% of revenue, a decrease from 46% of revenue in the same period in
2006.  The decrease in gross profit dollars is primarily attributable
to the $2.3 million impairment of technology from the Sentito acquisition and
also to lower margins from the largely hardware-based Verilink
product.
 
 Allocated
operating expenses incurred by the Technologies Group for the year ended
December 31, 2007 were $20.7 million, an increase of $2.2 million, or 12%,
compared to the same period in 2006. As a percent of revenue, operating expenses
for the Technologies Group were 48% during the year ended December 31, 2007,
down from 53% during the same period in 2006.  The decrease in the
percentage is primarily attributable to the higher revenue.
 
 The
increase in general and administrative expenses is due primarily to the
inclusion of Verilink operations for a full fiscal year in 2007.  The
increase in research and development costs is primarily attributable to the
inclusion of Verilink engineering in 2007, the addition of the Sentito
engineering team as well as ongoing development costs for the NetPerformer
product.
 
 33
  Verso
Outsourcing Group
 
 Total revenue for the Company’s Verso
Outsourcing Group was $7.3 million for each of the years ended December 31, 2007
and 2006.
  Gross
profit increased by $431,000, or 37%, in the year ended December 31, 2007, and
was 22% of revenue, compared with 16% of revenue in the same period in
2006.  The increase in gross profit dollars and gross margin
percentage are due to changes in customer/service mix.
  Allocated
operating expenses incurred in the Verso Outsourcing Group for the year ended
December 31, 2007 were $514,000, a decrease of $267,000, or 34%, compared to the
same period in 2006.  The decrease in general and administrative
expenses primarily relates to a decrease in personnel and related costs
..
 
 Discontinued
Operations
 
 In 2007,
we recognized an operating loss in discontinued operations of $350,000 relating
to settlement of the Entrata Litigation  (see Item 3 – Legal
Proceedings).
 
 Summary
operating results of the discontinued operations (in thousands) are as
follows:
  For
      the year ended December 31,2007
                
                
                2006Revenue
                
                $
                -
                
                
                $
                -Gross
      (loss) profit
                
                
                -
                
                
                
                -Operating
      loss
                
                
                (350
                )
                
                
                -Loss
      from discontinued operations
                
                $
                (350
                )
                
                $
                -
 
 Critical
Accounting Policies
 
 The
preparation of financial statements and related disclosures in conformity with
U.S. generally accepted accounting principles requires management to make
judgments, assumptions and estimates that affect the amounts reported in the
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, an inability to successfully integrate acquisitions and 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 accounting policies follows:
 
 Revenue
Recognition
  The
Company recognizes revenue when persuasive evidence of an agreement exists,
delivery has occurred, the fee is fixed and determinable, and collection of the
resulting receivable is reasonably assured.  The determination of
whether the collectibility is reasonably assured is based upon an assessment of
the creditworthiness of the customers. In instances where the collection of a
receivable is not reasonably assured, the revenue and related costs are
deferred.
  Deferred
revenue generally represents amounts collected for which revenue has not yet
been recognized. It is principally comprised of deferred maintenance
revenue.
  The Company recognizes revenue in
accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition
in Financial Statements” as updated by SAB No. 104 and in accordance with
Emerging Issues Task Force (“EITF”) 00-21, “Revenue Arrangements with Multiple
Deliverables”, Statement of Position (“SOP”) No. 97-2, “Software Revenue
Recognition” (“SOP No. 97-2”) and SOP No. 98-9, “Software Revenue Recognition
with Respect to Certain Transactions” (“SOP No. 98-9”).
  SOP No.
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
values of the elements. The fair value of an element must be based on the
evidence that is specific to the vendor. License revenue allocated to software
products generally is recognized upon delivery of the products or deferred and
recognized in future periods to the extent that an arrangement includes one or
more elements to be delivered at a future date and for which fair values have
not been established. Revenue allocated to maintenance is recognized ratably
over the maintenance term which is typically twelve months and revenue allocated
to training and other service elements, such as implementation and training, are
recognized as the services are performed.
  34
  Under SOP No. 98-9 if evidence of fair
value of all undelivered elements exists but evidence does not exist for one or
more delivered elements, then revenue is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is allocated to the
delivered element and recognized as revenue.
 
 As a
consequence of the acquisition of the business assets of the Verilink Sellers on
June 16, 2006, the Company now has certain distributors who have the right to
return product for stock rotation purposes. Every quarter, stock rotation rights
are limited to a percentage of invoiced sales to the distributor in the prior
quarter. The percentage of sales used to determine the stock rotation right is
based upon the terms of the executed distributor agreements with the Company.
The Company reduces revenue and maintains a reserve for an estimate of potential
stock rotation returns related to the current period product revenue. Management
analyzes historical returns, channel inventory levels, current economic trends
and changes in customer demand for the Company’s products when evaluating the
adequacy of the reserve for stock rotation returns.
 
 The Company routinely
analyzes and establishes, as necessary, reserves at the time of shipment for
product returns and allowances and warranty costs.
 
 Allowance
for Doubtful Accounts
 
 The
Company is required to estimate the collectibility of its trade
receivables.  Considerable judgment is required in assessing the
ultimate realization of these receivables, including the creditworthiness of
each customer. The evaluation is based on credit information and collection
history concerning the customer up and through the determination
date.  The Company determines the allowance for doubtful accounts
based on a specific review of outstanding customer balances and a general
reserve based upon aging of customer accounts and write-off
history.
 
 Inventory
Obsolescence
  The
Company is required to state its inventories at the lower of cost or market. In
assessing the ultimate realization of inventories, the Company makes judgments
as to future demand requirements and compares that with the current and
committed inventory levels. The Company has recorded changes in net realizable
values in recent periods due to the impact of current and future technology
trends and changes in strategic direction, such as discontinuances of product
lines, as well as, changes in market conditions due to changes in demand
requirements. Estimates of the future demand for inventory are based on
historical usage for different products, as well as estimates of inventory
required to fulfill maintenance requirements for products previously sold. It is
possible that changes in the net realizable value of inventory may continue to
occur in the future due to the current market conditions.
 
 Liabilities
of Discontinued Operations
 
 In
January 2005, the Company disposed of substantially all of the operating assets
of its NACT and MCK businesses.  As a result of these sales, certain
liabilities of MCK are now classified as discontinued
operations.  Offsetting these liabilities is a receivable of $359,000
related to a sublease for which all the lease payments have been made by the
company.
 
 During
2001, the Company initiated certain restructuring plans and discontinued
operations of its VAR business.  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 other business 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
subleases.  The accrual for one of the leases with total payments
remaining through January 31, 2010 of $1.2 million is offset by sublease
receipts totaling $722,000 through the end of the lease term and assumes an
amount of $240,000 for the extension of one of the subleases through the end of
the lease term.
 
 As of
December 31, 2007, the Company had a remaining balance of approximately $1.7
million in liabilities of discontinued operations. The Company currently
believes that this remaining balance is sufficient to cover estimated future
obligations associated with the restructurings; however, changes in these
estimates could occur based on changes in the financial condition of the
subleases.
 
 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 of the deferred tax assets, the Company has
established an offsetting provision.
  35
  Litigation
and Related Contingencies
 
 The
Company is subject to proceedings, lawsuits and other claims related to labor,
product and other matters.  The Company is required to assess the
likelihood of any adverse judgments or outcomes to these matters, as well as,
potential ranges of probable losses.  A determination of the amount of
reserves required, if any, for these contingencies is made by the Company with
assistance of its legal counsel after careful analysis of each individual issue
based upon the then-current facts and circumstances and discussions with legal
counsel.  The required reserves may change in the future due to new
developments in each matter or changes in approach such as a change in
settlement strategy in dealing with these matters.
 
 Goodwill,
Intangible Assets and Long-Lived Assets
 
 Goodwill
represents the excess of costs over fair value of assets of businesses
acquired.  Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are not
amortized, but instead are tested for impairment at least annually in accordance
with provisions of SFAS No. 142.  Significant estimates are made with
respect to the impairment testing.  SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144.
 
 In
accordance with SFAS No. 144, long-lived assets, such as property, plant and
equipment and purchased assets subject to amortization are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable.  Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset to estimated undiscounted future cash flows expected to be generated
by the asset.  If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the
asset.  Significant estimates are made with respect to recoverability
and fair value assessments.
 
 Liquidity
and Capital Resources
 
 Summary
  Liquidity
is the measurement of the Company’s ability to have adequate cash or access to
cash at all times in order to meet financial obligations when due, as well as to
fund corporate expansion and other activities.  Historically, the
Company has met its liquidity requirements through a combination of cash
provided by debt from third party lenders, issuances of debt and equity
securities, purchases of other businesses and the sale of discontinued
businesses.
 
 At
December 31, 2007, the Company had a negative working capital position (excess
of current liabilities over current assets) of $12,200,000 compared to negative
working capital position of $38,000 at December 31, 2006. The Company’s cash and
restricted cash totaled $3,002,000 at December 31, 2007, and $2,175,000 at
December 31, 2006. Total long-term debt, net of discount and current-portion,
was $2,858,000 at December 31, 2007 and $11,500,000 at December 31,
2006.
  On
September 20, 2006, the Company entered into a Security Agreement (the
“Security Agreement”) with Laurus which provides for a three-year,
$14.0 million revolving credit facility (the “Credit Facility”). The Credit
Facility with Laurus replaced the Company’s prior $10.0 million credit
facility (the “Silicon Credit Agreement”) with Silicon Valley Bank
(“Silicon”).  When the Company entered into the Security Agreement,
the Silicon Credit Agreement was terminated.
 
 Our
Credit Facility with Laurus consists of two tranches: (i) an
$8.0 million tranche, the availability of which is subject to a borrowing
base (“Tranche A”) and (ii) a $6.0 million tranche (“Tranche B”),
which is not subject to a borrowing base.  Borrowings under the credit
facility shall be made first under Tranche B to the extent of availability there
under and then under Tranche A to the extent of availability there under.
Borrowing ability under Tranche A is determined pursuant to a formula which is
based on the value of our eligible accounts receivables and inventory.
Borrowings under Tranche A accrue interest at a rate of prime rate plus 2%,
provided that the interest rate shall not be less than 9%. The interest rates
were 9.25% and 10.25% at December 31, 2007 and 2006, respectively.  As
of December 31, 2007, maximum borrowings under Tranche B were limited to
$3.9 million due to scheduled availability reductions of $187,500 per month
beginning in February 2007.  Borrowings under Tranche B accrue
interest at a fixed rate of 15%.
  As of
December 31, 2007 and 2006, the Company had outstanding borrowings under Tranche
A of $6,189,000 and $2,883,000, respectively, and under Tranche B of $3,937,000
and $5,000,000, respectively. The remaining borrowing availability under the
credit facility at December 31, 2007 was $561,000 under Tranche A and there were
no amounts available under Tranche B.
 
 On
February 12, 2003, the Company acquired substantially all the business assets
and assumed certain related liabilities of Clarent Corporation for $9,800,000 in
notes. At December 31, 2007, a $3,000,000 secured note due February 12, 2008
remains outstanding which bears interest at 5% per annum. The assets the Company
purchased from Clarent Corporation secure the note.
  36
  On
February 15, 2008, the note was amended.  The amendment extends the
initial date on which the principal amount of the loan, and all accrued and
unpaid interest thereon, was due from February 12, 2008 to March 3,
2008.  However, the Amendment provides that if $728,558 of the
outstanding principal amount of such loan, which represents all of the unpaid
capitalized interest as of February 15, 2008, is paid on or before March 3,
2008, then the outstanding principal amount of the loan and all accrued and
unpaid interest thereon shall be due and payable within three business days of
August 12, 2008 rather than on March 3, 2008. The Company made the payment of
the $728,558 prior to March 3, 2008, thus extending the due date to within 3
business days of August 12, 2008.
  The
Amendment requires that the Company pay interest on a monthly basis on the
outstanding principal amount of the loan at a rate of 8% per annum or the
maximum rate permissible by law, whichever is less, until such time as the loan
is paid in full.  In connection with the Amendment, the Company was
required to pay Clarent an amendment fee of $50,000.
  On
February 4, 2005, the Company completed a private placement of senior unsecured
convertible debentures and warrants pursuant to a securities purchase agreement
with certain institutional investors. The Company issued $13,500,000 of senior
unsecured convertible debentures, Series A warrants exercisable for 2,200,000
shares of the Company’s common stock and Series B warrants exercisable for
2,000,000 shares of the Company’s common stock. The senior unsecured convertible
debentures bear interest at 6.75% per annum and are due February 2009 and are
convertible into approximately 5,400,000 shares of the Company’s common stock at
an initial conversion price of $2.50 per share, subject to anti-dilution
adjustments and certain limitations. Interest is payable on a quarterly basis
and principal became payable on a quarterly basis beginning August 2006. The
Series A warrants issued in connection with the private placement are
exercisable for a period of five years commencing on February 4, 2005 and at an
exercise price of $3.60 per share. The Series B warrants issued in connection
with the private placement were exercisable for a period of 90 days, commencing
on June 16, 2005 and had an exercise price of $3.90 per share. The Series B
warrants expired in September 2005. The Company received net proceeds of
approximately $12,500,000, including $1,600,000 in restricted cash, net of
expenses.
  On
February 17, 2006, the Company issued, in a private placement, 5,400,000 shares
of its common stock and warrants to purchase 5,400,000 shares of its common
stock for an aggregate purchase price of approximately $7,100,000, or $1.30 per
share. The warrants issued in connection with the private placement are
exercisable, after six months, for a period of five years and at an exercise
price of $1.56 per share. The Company received proceeds from the private
placement of approximately $6,800,000, net of expenses.
 
 On
January 30, February 2, February 5, and February 9, 2007, we issued 2,000,000,
2,000,000, 250,000, and 750,000 shares of our common stock, respectively, and
warrants to purchase 1,080,000, 1,080,000, 135,000, and 405,000 shares of our
common stock, respectively, in a private placement transaction for an aggregate
purchase price of approximately $5,000,000, or $1.00 per share. The warrants
issued in connection with the private placement are exercisable for a period of
five years at an exercise price of $1.25 per share. We received proceeds from
the private placement of these securities of approximately $4,297,000, net of
expenses.
 
 On
September 5, September 6, and September 10, 2007, we issued 4,417,640, 2,608,692
and 71,428 shares of our common stock, respectively, and warrants to purchase
3,313,230, 2,104,954, and 53,571 shares of our common stock, respectively, in a
private placement transaction for an aggregate purchase price of approximately
$4,850,000, or $0.68 per share. The warrants issued in connection with the
private placement are exercisable beginning March 6, 2008 for a period of five
years at an exercise price of $0.90 per share. We received proceeds from the
private placement of approximately $4,547,000, net of expenses.
 
 On
February 19, and February 21, 2008, we issued 1,381,200 and 2,114,000 shares of
our common stock, respectively, and warrants to purchase 1,381,200 and 2,114,000
shares of our common stock, respectively, in a private placement transaction for
an aggregate purchase price of approximately $802,000, or an average price of
$0.23 per share. The warrants issued in connection with the private placement
are exercisable for a period of five years at an average exercise price of $0.28
per share. We received proceeds from the private placement of approximately
$750,000, net of expenses.
 
 On June
30, 2006 in connection with the completion of the admission of Citel U.K.’s
entire issued share capital to AIM, the Company and Citel amended the original
$3.0 million note receivable such that the principal balance of the note became
due and payable as follows: $870,000 to be paid within one business day of such
admission; followed by 6 monthly installments of $75,000 commencing 12 months
from the date of Admission; and all remaining outstanding principal and accrued
interest under this note will be due from Citel on January 21, 2008. In July
2006, the Company received the $870,000 as contemplated by the amendment to the
note.
  On May
25, 2007, we entered into an agreement with CITEL and Citel PLC pursuant to
which CITEL prepaid the Note, by making an immediate cash payment to us of
approximately $1.9 million. In addition, Citel PLC was required to issue to us
62,424 shares of Citel PLC’s capital stock (the “Citel Shares”), which Citel
Shares had a market value of approximately $70,000 as of May 24, 2007 and, based
upon representations made by CITEL to us, are fully tradable on the AIM market
of the London Stock Exchange. We agreed not to sell or transfer the Citel Shares
prior to January 21, 2008, the original maturity date of the Note. Upon receipt
of the prepayment and the Citel Shares, we canceled the Note and released our
security interest in the collateral securing the Note. Prior to entering into
this agreement, approximately $2.2 million of principal and interest was
outstanding under the Note. We recognized a loss of approximately $231,000
associated with the write-off of interest arising from the prepayment
transaction. As of December 31, 2007, the Citel Shares had an approximate market
value of $13,300.  We recognized an additional loss of $56,700 due to
this decline in value.
  37
 
 On July
18, 2006, the Company entered into an agreement (the “CM Agreement”) with CM
Solutions, Inc. (“CM”), the Company’s contract manufacturer of its Verilink and
iMarc product lines. Pursuant to the CM Agreement, CM has purchased certain
electrical components valued at $2.0 million from the Company for use in the
manufacture of finished goods to be purchased by the Company.  In
addition, the Company has agreed to assign to CM an additional amount of unused
electrical components valued at $2.0 million for which title will remain with
the Company.  The Company has an obligation under the CM Agreement to
purchase during the first two years, products assembled by CM using electrical
components valued at $2.0 million (the “Assembled
Products”).  Furthermore, the Company has agreed to submit purchase
orders to CM in a minimum amount of $2.0 million per quarter for the three years
subsequent to the execution of the CM Agreement or until the obligation to
purchase the Assembled Products has been satisfied. Should the Company not meet
this minimum purchase commitment it could be subject to, in any quarter, up to
$25,000 in penalties. To date, the Company has not incurred any such
penalties.
 
 In
connection with executing the CM Agreement, the Company and CM entered into a
three-year Manufacturing Agreement which sets forth the terms and conditions
under which CM shall manufacture the Assembled Products.  As of
December 31, 2007, CM had used $1,792,000 of electrical components in the
manufacture of the Assembled Products, reducing the outstanding commitment to
utilize $2.0 million of electrical components in the first two years of the
agreements to approximately $208,000 which reduced the inventory currently
assigned to CM to approximately $208,000.  The remaining assigned
inventory is reflected as inventory on the balance sheet as of December 31,
2007. The assigned inventory is not eligible for inclusion in the borrowing base
under our Credit Facility with Laurus.
  38
  Cash
Flow
 
 Cash used
in the Company’s continuing operations in the year ended December 31, 2007
totaled approximately $9.9 million compared with cash used by continuing
operations of $9.0 million for 2006.  Cash used in continuing
operations in 2007 is comprised of net loss of $26.7 million reduced by non-cash
charges totaling $16.6 million and changes in current operating assets and
liabilities of $244,000. Non-cash adjustments consist of depreciation and
amortization of $6.0 million, amortization of loan fees and discount on
convertible subordinated debentures of $4.1 million, goodwill write-down of $2.9
million, stock-based compensation expense of $1.3 million, and provision for
doubtful accounts of $1.1 million. Cash used in continuing operations in 2006
was comprised of net loss of $17.8 million reduced by non-cash charges totaling
$8.7 million and changes in current operating assets and liabilities of $76,000.
Non-cash adjustments consisted of depreciation and amortization of $2.6 million,
amortization of loan fees and discount on convertible subordinated debentures of
$3.9 million, stock-based compensation expense of $930,000, provision for
doubtful accounts of $513,000 and non-cash interest expense of
$675,000.
 
 Cash used
in the Company’s discontinued operations in the years ended December 31, 2007,
totaled $158,000 compared with $1.3 million for 2006.
 
 Cash used
in investing activities for continuing operations totaled approximately $726,000
in the year ended December 31, 2007, compared to cash provided by investing
activities for continuing operations of $1.1 million in the year ended December
31, 2006.  During the year ended December 31, 2007 restricted cash
decreased by $697,000 compared to a decrease of $615,000 for
2006.  The Company spent $312,000 and $351,000 on capital expenditures
in the years ended December 31, 2007 and 2006, respectively.  In 2007,
the Company received cash of $1.6 million in the Sentito acquisition and
expended cash of $1.8 million in the iMarc acquisition and $850,000 in the
AccessGate acquisition.  In 2006, the Company spent $338,000 related
to the acquisition of Verilink and $1.0 million on the iMarc
acquisition.
 
 Cash
provided by investing activities for discontinued operations totaled
approximately $1.9 million and $1.4 million in the years ended December 31, 2007
and 2006, respectively. The Company received $1.9 million and $1.4 million from
payments on notes receivable during the years ended December 31, 2007 and 2006,
respectively.
 
 Cash
provided by financing activities totaled approximately $10.4 million in the year
ended December 31, 2007, compared to $10.0 million for 2006.  In 2007
net proceeds from private placements of $8.8 million and net borrowings under
the Company’s line of credit  of $2.2 million, were offset by payments
of $844,000 on notes payable. In 2006 net proceeds from a private placement of
$6.7 million and net borrowings under the Company’s line of credit  of
$6.6 million were offset by payments of $2.3 million  on the Company’s
7.5% convertible debentures and debt issuance costs of $1.1
million.
  39
 Contractual
Obligations and Commercial Commitments
 
 The
following summarizes the Company’s future contractual obligations at December
31, 2007 (in thousands):
 
 Payments
      Due By PeriodContractual
      Obligations
              
              Total
              
              
              Less
                than
      1
                year
              
              
              1-3
      years
              
              
              4-5
                years
              
              
              After 5
                yearsCredit
      facility
              
              $
              10,128
              
              
              $
              8,440
              
              
              $
              1,688
              
              
              $
              -
              
              
              $
              -Notes
      payable
              
              
              3,000
              
              
              
              3,000
              
              
              
              -
              
              
              
              -
              
              
              
              -Senior
      unsecured convertible debentures
              
              
              8,719
              
              
              
              5,906
              
              
              
              2,813
              
              
              
              
              
              
              
              -Operating
      Leases:Continuing
      operations
              
              
              4,697
              
              
              
              2,340
              
              
              
              2,357
              
              
              
              -
              
              
              
              -Discontinued
      operations
              
              
              811
              
              
              
              385
              
              
              
              426
              
              
              
              -
              
              
              
              -Total
      contractual cash obligations
              
              $
              27,355
              
              
              $
              20,071
              
              
              $
              7,284
              
              
              $
              -
              
              
              $
              -
  The
foregoing table excludes interest expense and sublease rentals and assumes that
leases are not renewed.  The Company remains a guarantor on a lease
through December 2009 used in the operations of the NACT business, which the
Company sold in January 2005.  The total commitment related to this
lease is approximately $1.3 million.
  Sources
of Cash
  For 2008,
the Company expects that its primary sources of cash will be from issuances of
equity or debt securities, cash on hand, borrowings under its credit facility
with Laurus and other sources.  The Company expects that its current
operations will not generate positive income from operations before interest,
taxes, depreciation and amortization (EBITDA) for the first six months of 2008
but should generate positive EBITDA during the last six months of 2008. The
Company is currently working on several initiatives to reduce the cash used in
continuing operations and to ensure that it has sufficient liquidity to cover
its needs for the next twelve months. However, there is no guarantee that the
Company will be successful in obtaining the financing required to fund its
capital needs.
 
 On
February 19, and February 21, 2008, we issued 1,381,200 and 2,114,000 shares of
our common stock, respectively, and warrants to purchase 1,381,200 and 2,114,000
shares of our common stock, respectively, in a private placement transaction for
an aggregate purchase price of approximately $802,000, or an average price of
$0.23 per share. The warrants issued in connection with the private placement
are exercisable for a period of five years at an average exercise price of $0.28
per share. We received proceeds from the private placement of approximately
$750,000, net of expenses.
 
 On
September 5, September 6, and September 10, 2007, we issued 4,417,640, 2,608,692
and 71,428 shares of our common stock, respectively, and warrants to purchase
3,313,230, 2,104,954, and 53,571 shares of our common stock, respectively, in a
private placement transaction for an aggregate purchase price of approximately
$4,850,000, or $0.68 per share. The warrants issued in connection with the
private placement are exercisable beginning March 6, 2008 for a period of five
years at an exercise price of $0.90 per share. We received proceeds from the
private placement of approximately $4,547,000, net of expenses.
 
 On
January 30, February 2, February 5, and February 9, 2007, we issued 2,000,000,
2,000,000, 250,000, and 750,000 shares of our common stock, respectively, and
warrants to purchase 1,080,000, 1,080,000, 135,000, and 405,000 shares of our
common stock, respectively, in a private placement transaction for an aggregate
purchase price of approximately $5,000,000, or $1.00 per share. The warrants
issued in connection with the private placement are exercisable for a period of
five years at an exercise price of $1.25 per share. We received proceeds from
the private placement of these securities of approximately $4,297,000, net of
expenses.
 
 As
previously mentioned, on September 20, 2006, the Company entered into a
credit facility with Laurus which provides for a three-year, $14.0 million
revolving credit facility. As of December 31, 2007, the Company had outstanding
borrowings under Tranche A and Tranche B of $6,189,000 and $3,937,000,
respectively. The remaining borrowing availability under the credit facility at
December 31, 2007 was $561,000 under Tranche A and none under Tranche
B.
 
 Availability
for borrowings under Tranche A of the Company’s credit facility with Laurus is
subject to limitations as determined pursuant to a formula which is based on the
value of the Company’s eligible accounts receivables and
inventories.  If the Company does not have sufficient eligible
accounts receivable and inventories to support the level of borrowings it may
need, then the Company may be unable to draw on the credit facility to the
extent necessary. To the extent the Company does not have borrowing availability
under the credit facility, the Company may be required to obtain additional
sources of capital, sell assets, obtain an amendment to the Security Agreement
or otherwise restructure its outstanding indebtedness.
  40
  All
borrowings must be approved by Laurus and may have to be approved by the holders
of the secured note issued by the Company in connection with the acquisition of
substantially all of the operating assets of Clarent Corporation, which note is
due in 2008, and the holders of the $13,500,000 senior unsecured convertible
debentures. If the Company is unable to obtain additional capital, sell assets,
obtain an amendment to the Security Agreement or otherwise restructure its
outstanding indebtedness, then the Company may not be able to meet its
obligations.
   The
Company’s short-term cash needs are for working capital, including operating
cash, capital expenditures, payments on the 6.75% senior unsecured convertible
debentures of $5.9 million in the next twelve months (to the extent that the
Company does not elect to make these payments in stock), payment on the secured
note payable to Clarent Corporation of $3.0 million plus related interest,
interest payments on debt outstanding, and payments related to discontinued
operations as well as payments related to prospective businesses to be acquired,
if any.  The Company expects to pay out approximately $2.9 million
related to lease payments, net of sublease rental in the next twelve
months.  In addition the Company has scheduled payments of
approximately $2.3 million on Tranche B of the credit facility to be made in
2008.   Substantially all operating cash received by the Company
is automatically applied to the outstanding balance of the Credit Facility as
per the terms of our agreement with Laurus. The Company can borrow against the
Credit Facility subject to maintenance of sufficient borrowing base as defined
in the Credit Facility.
  Based on the Company's
financial plan for 2008, including the significant debt obligations which become
due and payable during 2008, we will need to obtain additional equity or debt
financing, or to be required to sell assets, to meet our debt obligations and
fund our operational plans. There is no guarantee that the Company will be
successful in obtaining the financing required to fund its capital
needs.
  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. In addition, the Company will make required
payments on its senior unsecured convertible debentures, to the extent that the
Company does not elect to make these payments in stock, payments on Tranche B of
its credit facility, and liabilities of discontinued operations. The Company
expects to meet these cash needs through cash from operations, if any, cash on
hand, borrowings under the credit facility or other debt facilities, if
available, as well as through possible issuances of equity or debt securities.
If sufficient borrowing capacity under a working capital line of credit is
unavailable (or if the Company is unable to restructure its existing credit
facility in the event that the Company requires additional borrowing capacity),
or if the Company is otherwise unable to obtain additional capital or sell
assets, then the Company may not be able to meet its obligations and growth
plans.
 
 41
  Item
8.                  Financial Statements and
Supplementary Data
 
 The
financial statements required to be filed with this Annual Report are filed
under Item 15 hereof and are listed on the “Index to Consolidated Financial
Statements” on page F-1 hereof.
 
 Quarterly
Financial Data (Unaudited)
 
 The
following table presents unaudited quarterly statements of operations data for
each quarter of our last two completed fiscal years. The unaudited quarterly
financial statements have been prepared on substantially the same basis as the
audited financial statements contained elsewhere in this Annual Report. In the
opinion of our management, the unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments that management
considers to be necessary to fairly present this information when read in
conjunction with our consolidated financial statements and related notes
appearing elsewhere in this Annual Report. The results of operations for any
quarter are not necessarily indicative of the results to be expected for any
future period.
 
 First
                    Quarter
                  
                  
                  Second
                    Quarter
                  
                  
                  Third
                    Quarter
                  
                  
                  Fourth
                    Quarter
                  
                  
                  Total
      Year(In
      thousands, except per share amounts)2007Revenue
                  
                  $
                  12,485
                  
                  
                  $
                  12,570
                  
                  
                  $
                  13,136
                  
                  
                  $
                  12,444
                  
                  
                  $
                  50,635Gross
      profit
                  
                  
                  4,538
                  
                  
                  
                  4,386
                  
                  
                  
                  5,021
                  
                  
                  
                  2,244
                  
                  
                  
                  16,189General
      and administrative
                  
                  
                  2,952
                  
                  
                  
                  3,062
                  
                  
                  
                  3,442
                  
                  
                  
                  3,561
                  
                  
                  
                  13,017Sales
      and marketing
                  
                  
                  2,345
                  
                  
                  
                  2,448
                  
                  
                  
                  2,062
                  
                  
                  
                  2,031
                  
                  
                  
                  8,886Research
      and development
                  
                  
                  2,042
                  
                  
                  
                  2,421
                  
                  
                  
                  1,871
                  
                  
                  
                  1,611
                  
                  
                  
                  7,945Operating
      income (loss) from continuing operations
                  
                  
                  (3,452
                  )
                  
                  
                  (4,645
                  )
                  
                  
                  (3,424
                  )
                  
                  
                  (8,588
                  )
                  
                  
                  (20,109
                  )Income
      (loss) from continuing operations
                  
                  
                  (5,019
                  )
                  
                  
                  (6,458
                  )
                  
                  
                  (5,007
                  )
                  
                  
                  (10,215
                  )
                  
                  
                  (26,699
                  )Income
      (loss) from discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (350
                  )
                  
                  
                  (350
                  )Net
      loss
                  
                  $
                  (5,019
                  )
                  
                  $
                  (6,458
                  )
                  
                  $
                  (5,007
                  )
                  
                  $
                  (10,565
                  )
                  
                  $
                  (27,049
                  )Net
      loss per common share - basic and diluted: (1)Loss
      from continuing operations
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.19
                  )
                  
                  $
                  (0.47
                  )Loss
      from discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      loss per common share
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.19
                  )
                  
                  $
                  (0.47
                  )2006Revenue
                  
                  $
                  6,788
                  
                  
                  $
                  8,381
                  
                  
                  $
                  13,352
                  
                  
                  $
                  14,009
                  
                  
                  $
                  42,530Gross
      profit
                  
                  
                  2,841
                  
                  
                  
                  3,347
                  
                  
                  
                  5,076
                  
                  
                  
                  5,903
                  
                  
                  
                  17,167General
      and administrative
                  
                  
                  2,433
                  
                  
                  
                  2,211
                  
                  
                  
                  2,743
                  
                  
                  
                  3,266
                  
                  
                  
                  10,653Sales
      and marketing
                  
                  
                  1,774
                  
                  
                  
                  1,801
                  
                  
                  
                  2,430
                  
                  
                  
                  2,229
                  
                  
                  
                  8,234Research
      and development
                  
                  
                  1,779
                  
                  
                  
                  1,994
                  
                  
                  
                  1,850
                  
                  
                  
                  2,182
                  
                  
                  
                  7,805Operating
      income (loss) from continuing operations
                  
                  
                  (3,608
                  )
                  
                  
                  (3,061
                  )
                  
                  
                  (2,481
                  )
                  
                  
                  (2,979
                  )
                  
                  
                  (12,129
                  )Income
      (loss) from continuing operations
                  
                  
                  (4,940
                  )
                  
                  
                  (4,359
                  )
                  
                  
                  (4,122
                  )
                  
                  
                  (4,355
                  )
                  
                  
                  (17,776
                  )Income
      (loss) from discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      loss
                  
                  $
                  (4,940
                  )
                  
                  $
                  (4,359
                  )
                  
                  $
                  (4,122
                  )
                  
                  $
                  (4,355
                  )
                  
                  $
                  (17,776
                  )Net
      loss per common share - basic and diluted: (1)Loss
      from continuing operations
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.13
                  )
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.51
                  )Loss
      from discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      loss per common share
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.13
                  )
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.51
                  )
 
 (1)
              Per
      common share amounts for the quarters and full years have been calculated
      separately.  Accordingly, quarterly amounts may not add to the
      annual amounts because of differences in the weighted average common
      shares outstanding during each
period.
 
 42
 
 Item
9.                  Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure
 
 None.
 
 Item
9A(T).          Controls and
Procedures
 
 Evaluation
of Controls and Procedures
 
 Our Chief
Executive Officer and Chief Financial Officer have evaluated our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e)
of the Exchange Act), as of the end of the period covered by this Annual Report,
as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act.
Based on such evaluation, such officers have concluded that, as of the end of
the period covered by this Annual Report, our disclosure controls and procedures
are effective.
 
 Management’s
Annual Report on Internal Control Over Financial Reporting
 
 The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act.  The Company’s internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
 
 All internal control systems, no matter
how well designed, have inherent limitations.  Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
 
 Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
 
 Management assessed the effectiveness
of the Company’s internal control over financial reporting as of December 31,
2007.  In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
 
 Based on
management’s assessment and those criteria, we identified certain deficiencies,
none of which constituted a material weakness, that the Company has remediated,
or is in the process of remediating.  Management believes that the Company
maintained effective internal control over financial reporting as of December
31, 2007.
 
 This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management’s report in this Annual
Report.
 
 Changes
in Internal Control Over Financial Reporting
 
 During
the quarter ended December 31, 2007, there was not any change in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has
materially affected, or is reasonably likely to materially affect, our control
over financial reporting.
 Item
9B.               Other
Information
 
 On March
7, 2006, the Canada Revenue Agency (the “CRA”) notified 38098 Yukon Inc.
(formerly known as MCK Telecommunications Inc.), a corporation organized under
the laws of the Yukon Territory (“MCK Canada”') and an indirect wholly owned
subsidiary of the Company, that the CRA had completed its international income
tax audit of MCK Canada for the period from May 1, 1998 to April 30, 2000 (the
“Audit”').  As a result of the Audit, the CRA has issued income tax
reassessments to MCK Canada.  In addition, the Alberta Tax and Revenue
Administration (the “ATR”') has issued reassessments for each year of the
Audit.
 
 The key
issue under dispute in the audit is the valuation of certain intellectual
property that was transferred from MCK Canada to its U.S. parent company, MCK
Communications, Inc. (“MCK US”') in fiscal 1998.  MCK US consulted
with outside valuation advisors to establish the value of the intellectual
property transferred. The CRA and the ATR disagree with such value. The Company
and its advisors disagree with the reassessments, and the Company has filed
notices of objection with respect thereto with the CRA and the ATR and intends,
if necessary, to exhaust all of its rights of appeal in connection
therewith.
 
 The
Company estimates that, as of March 14, 2008, (i) the amount of taxes allegedly
due in respect of the CRA reassessments was approximately U.S. $9.1 million
(plus penalties and interest thereon of approximately U.S. $12.5 million); and
(ii) the amount of taxes allegedly due in respect of the ATR reassessments was
approximately U.S. $4.1 million (plus penalties and interest thereon of
approximately U.S. $5.2 million). The Company has been advised by its Canadian
and U.S. counsel that no such amounts should be collectible by the CRA or the
ATR against the Company or any of its other subsidiaries (other than MCK Canada)
and that the ability of the CRA and the ATR to collect such amounts should be
limited to the assets of MCK Canada, which have little or no value. Accordingly,
no provision for this matter has been recorded in the Company’s financial
statements because the Company believes that it will not have a financial
statement impact.
  On March
20, 2008 we issued a warrant (the “Laurus Warrant”) to purchase 339,469 shares
of our common stock to Laurus pursuant to the terms of our Credit Facility with
Laurus.  The Laurus Warrant has a 5-year term and an exercise price of
$0.91 per share.  The shares issuable upon exercise of the Laurus
Warrant will be issued without registration under the Securities Act in reliance
upon the exemption from registration set forth in Section 4(2) of the Securities
Act and Regulation D promulgated thereunder (“Regulation D”).  We
based such reliance upon representations made by Laurus regarding its investment
intent, sophistication and status as an “accredited investor,” as defined in
rule 501 of Regulation D, among other things.
 On
February 28, 2008, the Company received a letter from Mack Technologies, Inc. of
Westford, MA ("Mack") asserting that Sentito Networks ("Sentito") owes Mack: (a)
$149,000 for inventory puchased by Mack to manufacture products for Sentito that
were never purchased by Sentito, and (b) $18,500 of accounts receiable for goods
delievered by Mack to Sentito. These claims arise from the activities of Sentito
prior to the Company's acquisition of Sentito in 2007. Mack threatened to take
legal action if the accounts were not paid by March 15, 2008.
  On
November 19, 2007, the Company received a letter from Lydian Lawyers on behalf
of Desco NV ("Desco") and Yves Desmet, a former officer of the Company. The
letter demands payment to Desco of commissions in the amount of .67% of all of
the Company's revenues (excluding certain amounts) for the third quarter of 2007
and October 2007 and of a termination fee of up to one year of salary and one
year of commissions which Desco asserts are owed to it under certain management
services agreements it alleges were assumed by the Company in connection with
the Company's acquisition of substantially all of the assets of Clarent
Corporation in 2003.
  43
  PART
III
 
 Item
10.                      Directors, Executive Officers and
Corporate Governance
 
 The
information required by Item 10 of Form 10-K will be set forth in the Company’s
Proxy Statement for the Annual Meeting of Shareholders to be held in 2007 (the
“Proxy Statement”) under the captions titled “Proposal I: Election of
Directors,” “Audit Committee Report,” “Corporate Governance” and “Section 16(a)
Beneficial Ownership Reporting Compliance” and such information is incorporated
herein by reference.
 
 Item
11.                      Executive
Compensation
 
 The
information required by Item 11 of Form 10-K will be set forth in the Proxy
Statement under the caption titled “Executive Compensation” and such information
is incorporated herein by reference.
 
 Item
12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
 
 The
information required by Item 12 of Form 10-K will be set forth in the Proxy
Statement under the captions titled “Security Ownership of Certain Beneficial
Owners and Management” and “Executive Compensation - Equity Compensation Plans”
and such information is incorporated herein by reference.
 
 Item
13.                      Certain Relationships and Related
Transactions, and Director Independence
 
 The
information required by Item 13 of Form 10-K will be set forth in the Proxy
Statement under the captions titled “Certain Relationships and Related
Transactions” and “Proposal 1: Election of Directors” and such information is
incorporated herein by reference.
 
 Item
14.                      Principal Accountant Fees and
Services
 
 The
information required by Item 14 of Form 10-K will be set forth in the Proxy
Statement under the captions titled “Proposal 2: Ratification of Independent
Public Accountants” and such information is incorporated herein by
reference.
 
 Item
15.                Exhibits and Financial Statement
Schedules
 
 Lists of
certain documents filed herewith as part of this Annual Report may be found as
follows:
 
 (i)           A
list of the consolidated financial statements required to be filed as a part of
this Annual Report is shown in the “Index to Consolidated Financial Statements
and Related Reports” on page F-1.
 
 (ii)          Except
for Financial Statement Schedule II, “Valuation and Qualifying Accounts,” which
is filed herewith, the financial statement schedules required to be filed as a
part of this Annual Report are omitted from this Annual Report because the
information required by such schedules is either not applicable or is included
in the consolidated financial statements and notes thereto, which statements and
notes are listed on the “Index to Consolidated Financial Statements” on page F-1
and filed herewith.
 
 (iii)         A
list of the exhibits required by Item 601 of Regulation S-K to be filed as a
part of this Annual Report is shown on the “Exhibit Index” filed
herewith.
  44
  INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED REPORTS
   The
following consolidated financial statements, financial statement schedule and
report of independent registered public accounting firm are included herein on
the pages indicated:
 Page
  Report
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets as of December 31, 2007 and 2006
                F-3Consolidated
      Statements of Operations for the years ended December 31, 2007 and
      2006
                F-4Consolidated
      Statements of Shareholders' Equity (Deficit)  for the years
      ended December 31, 2007 and 2006
                F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2007 and
      2006
                F-6Notes
      to Consolidated Financial Statements
                F-8Schedule
      II – Valuation and Qualifying Accounts
                F-49
 
 
 
 F-1
  Report
of Independent Registered Public Accounting Firm
 
 To the
Board of Directors and Shareholders
 Verso
Technologies, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Verso Technologies, Inc.
and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the
related consolidated statements of operations, shareholders’ equity (deficit)
and cash flows for the years then ended.  Our audit also included the
financial statement schedule listed in the index appearing under Item 15. These
financial statements and the financial statement schedule are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of their internal control over financial
reporting.  Our audits included consideration of internal controls
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements.  An audit also
includes assessing the accounting principles used and significant estimates made
by management as well as evaluating the overall presentation of the consolidated
financial statements.  We believe that our audits provide a reasonable
basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Verso Technologies, Inc. and
subsidiaries at December 31, 2007 and 2006, and the results
of their operations and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.  Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has other indicators that raise substantial doubt about its ability to
continue as a going concern.   Management’s plans in regard to
these matters are also described in Note 2.   The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
  
 /s/
Tauber & Balser, P.C.
 Atlanta,
GA
 April 15,
2008
 
 F-2
  VERSO
      TECHNOLOGIES, INC.CONSOLIDATED
      BALANCE SHEETSDecember
      31,
                
                December
      31,2007
                
                
                2006(In
      thousands,except
      share data)ASSETS:Current
      assets:Cash
      and cash equivalents
                
                $
                2,658
                
                
                $
                1,134Restricted
      cash
                
                
                344
                
                
                
                1,041Accounts
      receivable, net of allowance for doubtful accounts of $1,937 and
      $1,266,respectively
                
                
                8,817
                
                
                
                10,058Inventories
                
                
                6,615
                
                
                
                7,184Other
      current assets
                
                
                2,496
                
                
                
                1,757Current
      portion of note receivable
                
                
                -
                
                
                
                324Total
      current assets
                
                
                20,930
                
                
                
                21,498Property
      and equipment, net of accumulated depreciation and amortization of $4,900
      and$5,025,
      respectively
                
                
                1,524
                
                
                
                1,807Loan
      issuance costs, net
                
                
                972
                
                
                
                2,697Investment
                
                
                606
                
                
                
                745Note
      receivable, net of current portion
                
                
                -
                
                
                
                1,810Other
      intangibles, net of accumulated amortization of $4,848 and $2,821,
      respectively
                
                
                6,490
                
                
                
                5,068Goodwill
                
                
                3,741
                
                
                
                3,224Total
      assets
                
                $
                34,263
                
                
                $
                36,849LIABILITIES
      AND SHAREHOLDERS' EQUITY (DEFICIT):Current
      liabilities:Current
      portion of credit facility
                
                $
                8,440
                
                
                $
                3,945Current
      portion of notes payable
                
                
                2,985
                
                
                
                -Accounts
      payable
                
                
                3,993
                
                
                
                2,665Accrued
      compensation
                
                
                1,995
                
                
                
                2,268Accrued
      expenses
                
                
                4,215
                
                
                
                3,592Purchase
      price payable for acquisition
                
                
                -
                
                
                
                1,500Current
      portion of accrued loss on sublease
                
                
                483
                
                
                
                465Current
      portion of liabilities of discontinued operations
                
                
                1,464
                
                
                
                1,081Current
      portion of convertible subordinated debentures
                
                
                5,906
                
                
                
                3,375Unearned
      revenue and customer deposits
                
                
                3,649
                
                
                
                2,645Total
      current liabilities
                
                
                33,130
                
                
                
                21,536Accrued
      loss on sublease, net of current portion
                
                
                456
                
                
                
                773Credit
      facility, net of current portion
                
                
                1,688
                
                
                
                3,938Liabilities
      of discontinued operations, net of current portion
                
                
                213
                
                
                
                361Notes
      payable, net of current portion
                
                
                -
                
                
                
                2,862Convertible
      subordinated debentures, net of current portion
                
                
                1,170
                
                
                
                4,700Total
      liabilities
                
                
                36,657
                
                
                
                34,170Commitments
      and ContingenciesShareholders'
      equity (deficit):Preferred
      stock, no par value, 210,000 shares authorized and undesignated 164,766
      sharesissued
      and none outstanding
                
                
                -
                
                
                
                -Common
      stock, $.01 par value, authorized shares of 200,000,000 and
      120,000,000;72,820,515
      and 41,691,911 shares issued and outstanding
                
                
                728
                
                
                
                417Additional
      paid-in capital
                
                
                374,145
                
                
                
                352,303Deferred
      compensation
                
                
                (245
                )
                
                
                -Accumulated
      deficit
                
                
                (376,816
                )
                
                
                (349,767
                )Accumulated
      other comprehensive loss - foreign currency translation
                
                
                (206
                )
                
                
                (274
                )Total
      shareholders' equity (deficit)
                
                
                (2,394
                )
                
                
                2,679Total
      liabilities and shareholders' equity (deficit)
                
                $
                34,263
                
                
                $
                36,849
   The accompanying notes are
an integral part of these consolidated financial statements. F-3
  VERSO
      TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONSFor
      the Years Ended December 31,2007
                  
                  
                  2006(In
      thousands, except share data)Revenue:Products
                  
                  $
                  35,938
                  
                  
                  $
                  27,880Services
                  
                  
                  14,697
                  
                  
                  
                  14,650Total
      revenue
                  
                  
                  50,635
                  
                  
                  
                  42,530Cost
      of revenue:Products:Product
      costs
                  
                  
                  20,099
                  
                  
                  
                  14,367Impairment
      charge for acquired technology
                  
                  
                  2,250
                  
                  
                  
                  -Amortization
      of intangibles
                  
                  
                  1,021
                  
                  
                  
                  677Total
      cost of products
                  
                  
                  23,370
                  
                  
                  
                  15,044Services
                  
                  
                  11,076
                  
                  
                  
                  10,319Total
      cost of revenue
                  
                  
                  34,446
                  
                  
                  
                  25,363Gross
      profit:Products
                  
                  
                  12,568
                  
                  
                  
                  12,836Services
                  
                  
                  3,621
                  
                  
                  
                  4,331Total
      gross profit
                  
                  
                  16,189
                  
                  
                  
                  17,167Operating
      expenses:General
      and administrative
                  
                  
                  13,017
                  
                  
                  
                  10,653Sales
      and marketing
                  
                  
                  8,886
                  
                  
                  
                  8,234Research
      and development
                  
                  
                  7,945
                  
                  
                  
                  7,805Depreciation
      and amortization
                  
                  
                  2,754
                  
                  
                  
                  1,930Reorganization
      costs
                  
                  
                  751
                  
                  
                  
                  674Write-down
      of goodwill
                  
                  
                  2,945
                  
                  
                  
                  -Total
      operating expenses
                  
                  
                  36,298
                  
                  
                  
                  29,296Operating
      loss from continuing operations
                  
                  
                  (20,109
                  )
                  
                  
                  (12,129
                  )Other
      expense, net:Other
      expense
                  
                  
                  (305
                  )
                  
                  
                  (22
                  )Equity
      in loss of investment
                  
                  
                  (139
                  )
                  
                  
                  (1
                  )Interest
      expense, net, including $4,115 and $3,897 of
    amortizationof
      loan fees and discount on convertible debentures in each
      period,respectively
                  
                  
                  (6,146
                  )
                  
                  
                  (5,624
                  )Other
      expense
                  
                  
                  (6,590
                  )
                  
                  
                  (5,647
                  )Loss
      from continuing operations before income taxes
                  
                  
                  (26,699
                  )
                  
                  
                  (17,776
                  )Income
      taxes
                  
                  
                  -
                  
                  
                  
                  -Loss
      from continuing operations
                  
                  
                  (26,699
                  )
                  
                  
                  (17,776
                  )Discontinued
      Operations:Loss
      from discontinued operations
                  
                  
                  (350
                  )
                  
                  
                  -Net
      loss
                  
                  $
                  (27,049
                  )
                  
                  $
                  (17,776
                  )Net
      loss per common share - basic and diluted:Loss
      from continuing operations
                  
                  $
                  (0.47
                  )
                  
                  $
                  (0.51
                  )Loss
      from discontinued operations
                  
                  
                  -
                  
                  
                  
                  -Net
      loss per common share - basic and diluted:
                  
                  $
                  (0.47
                  )
                  
                  $
                  (0.51
                  )Weighted
      average shares outstanding - basic and diluted
                  
                  
                  57,022,761
                  
                  
                  
                  35,092,598
    F-4
  VERSO
      TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006Additional
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  ForeignPreferred
      Stock
                  
                  Common Stock
                  
                  
                  Paid-in
                  
                  
                  Stock
                  
                  
                  Accumulated
                  
                  
                  Deferred
                  
                  
                  CurrencyShares
                  
                  Amount
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Payable
                  
                  
                  Deficit
                  
                  
                  Compensation
                  
                  
                  Translation
                  
                  
                  Total(In
      thousands, except share data)BALANCES,January
      1, 2006
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  27,310,524
                  
                  
                  $
                  273
                  
                  
                  $
                  334,650
                  
                  
                  $
                  67
                  
                  
                  $
                  (331,991
                  )
                  
                  $
                  -
                  
                  
                  $
                  (160
                  )
                  
                  $
                  2,839Comprehensive
      loss:Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (17,776
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (17,776
                  )Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (114
                  )
                  
                  
                  (114
                  )Comprehensive
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (17,890
                  )Issuance
      of shares in connection withacquisition
      of Verilink
                  
                  
                  8,766
                  
                  
                  
                  2,784
                  
                  
                  
                  2,900,000
                  
                  
                  
                  29
                  
                  
                  
                  2,755
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,568Exercise
      of stock options and warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,060
                  
                  
                  
                  -
                  
                  
                  
                  5
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5Issuance
      of contingent shares in WSECI acquisition
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  113,997
                  
                  
                  
                  1
                  
                  
                  
                  142
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  143Shares
      issued in private placement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,441,154
                  
                  
                  
                  55
                  
                  
                  
                  6,833
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,888Stock
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  486,936
                  
                  
                  
                  5
                  
                  
                  
                  726
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  731Warrants
      issued in conjunction with creditfacility
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,000
                  
                  
                  
                  -
                  
                  
                  
                  2,121
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,121Shares
      issued in employee stockpurchase
      plan
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  17,916
                  
                  
                  
                  -
                  
                  
                  
                  18
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18Conversion
      of preferred shares to common
                  
                  
                  (8,766
                  )
                  
                  
                  (2,784
                  )
                  
                  
                  2,900,000
                  
                  
                  
                  29
                  
                  
                  
                  2,755
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Shares
      issued in lieu of interest & principal
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,326,139
                  
                  
                  
                  23
                  
                  
                  
                  2,059
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,082Shares
      issued in exchange for services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  186,185
                  
                  
                  
                  2
                  
                  
                  
                  239
                  
                  
                  
                  (67
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  174BALANCES,December
      31, 2006
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  41,691,911
                  
                  
                  
                  417
                  
                  
                  
                  352,303
                  
                  
                  
                  -
                  
                  
                  
                  (349,767
                  )
                  
                  
                  -
                  
                  
                  
                  (274
                  )
                  
                  
                  2,679Comprehensive
      loss:Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (27,049
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (27,049
                  )Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  68
                  
                  
                  
                  68Comprehensive
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (26,981
                  )Exercise
      of stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  524
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of contingent shares in WSECI acquisition
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  62,950
                  
                  
                  
                  1
                  
                  
                  
                  70
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  71Issuance
      of shares in Sentito acquisition
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,288,451
                  
                  
                  
                  73
                  
                  
                  
                  6,161
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,234Issuance
      of shares in AccessGateacquisition
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,374,033
                  
                  
                  
                  54
                  
                  
                  
                  1,890
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,944Shares
      issued in conjunctionwith
      credit facility
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,041,667
                  
                  
                  
                  10
                  
                  
                  
                  354
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  364Shares
      issued in private placement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,097,760
                  
                  
                  
                  121
                  
                  
                  
                  8,708
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,829Stock
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,108,079
                  
                  
                  
                  11
                  
                  
                  
                  1,584
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (245
                  )
                  
                  
                  -
                  
                  
                  
                  1,350Warrants
      issued
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  739,339
                  
                  
                  
                  7
                  
                  
                  
                  (7
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Shares
      issued in employee stockpurchase
      plan
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,268
                  
                  
                  
                  -
                  
                  
                  
                  9
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9Shares
      issued in lieu of interest & principal
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,407,533
                  
                  
                  
                  34
                  
                  
                  
                  3,073
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,107BALANCES,December
      31, 2007
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  72,820,515
                  
                  
                  $
                  728
                  
                  
                  $
                  374,145
                  
                  
                  $
                  -
                  
                  
                  $
                  (376,816
                  )
                  
                  $
                  (245
                  )
                  
                  $
                  (206
                  )
                  
                  $
                  (2,394
                  )
    F-5
  VERSO
      TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFor
      the Years Ended December 31,2007
                  
                  
                  2006(In
      thousands, except share data)Operating
      Activities:Net
      loss
                  
                  $
                  (27,049
                  )
                  
                  $
                  (17,776
                  )Loss
      from discontinued operations
                  
                  
                  350
                  
                  
                  
                  -Adjustments
      to reconcile net loss from continuing operations to netcash
      used in operating activities:Equity
      in loss of investment
                  
                  
                  139
                  
                  
                  
                  1Stock
      based compensation
                  
                  
                  1,350
                  
                  
                  
                  930Non-cash
      interest expense
                  
                  
                  576
                  
                  
                  
                  675Stock
      issued for services
                  
                  
                  -
                  
                  
                  
                  174Depreciation
      and amortization
                  
                  
                  3,774
                  
                  
                  
                  2,607Intangible
      impairment
                  
                  
                  2,250
                  
                  
                  
                  -Write-down
      of goodwill
                  
                  
                  2,945
                  
                  
                  
                  -Provision
      for doubtful accounts
                  
                  
                  1,144
                  
                  
                  
                  513Loss
      on repayment of notes receivable
                  
                  
                  284
                  
                  
                  
                  -Amortization
      of loan fees and discount on convertible subordinated
      debentures
                  
                  
                  4,115
                  
                  
                  
                  3,897Other
                  
                  
                  8
                  
                  
                  
                  (98
                  )Changes
      in current operating assets and liabilities, net of effects of
      acquisitions:Accounts
      receivable
                  
                  
                  117
                  
                  
                  
                  (3,127
                  )Inventories
                  
                  
                  237
                  
                  
                  
                  1,521Other
      current assets
                  
                  
                  (73
                  )
                  
                  
                  32Accounts
      payable
                  
                  
                  674
                  
                  
                  
                  244Accrued
      compensation
                  
                  
                  (273
                  )
                  
                  
                  734Accrued
      expenses
                  
                  
                  (1,156
                  )
                  
                  
                  667Unearned
      revenue and customer deposits
                  
                  
                  718
                  
                  
                  
                  4Net
      cash used in operating activities
                  
                  
                  (9,870
                  )
                  
                  
                  (9,002
                  )Discontinued
      operations:Adjustment
      to reconcile loss from discontinued operationsto
      net cash used in discontinued operating activities, rental
      payments:Rental
      payments
                  
                  
                  (158
                  )
                  
                  
                  (1,252
                  )Net
      cash used in discontinued operating activities
                  
                  
                  (158
                  )
                  
                  
                  (1,252
                  )Net
      cash used in operating activities
                  
                  
                  (10,028
                  )
                  
                  
                  (10,254
                  )Investing
      Activities:Continuing
      operations:Net
      cash used in investing activities for continuing
    operations:Decrease
      in restricted cash
                  
                  
                  697
                  
                  
                  
                  615Purchases
      of property and equipment
                  
                  
                  (312
                  )
                  
                  
                  (351
                  )Purchase
      of Verilink
                  
                  
                  -
                  
                  
                  
                  (338
                  )Purchase
      of iMarc
                  
                  
                  (1,815
                  )
                  
                  
                  (1,036
                  )Purchase
      of SentitO
                  
                  
                  1,554
                  
                  
                  
                  -Purchase
      of Gate Access
                  
                  
                  (850
                  )
                  
                  
                  -Net
      cash used in investing activities for continuing
operations
                  
                  
                  (726
                  )
                  
                  
                  (1,110
                  )Discontinued
      operations:Proceeds
      from notes receivable
                  
                  
                  1,880
                  
                  
                  
                  1,420Net
      cash provided by investing activities for discontinued
      operations
                  
                  
                  1,880
                  
                  
                  
                  1,420Net
      cash provided by investing activities
                  
                  
                  1,154
                  
                  
                  
                  310Net
      cash used in operating and investing activities, carried
      forward
                  
                  
                  (8,874
                  )
                  
                  
                  (9,944
                  )
    F-6
  VERSO
      TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS - (Continued)For
      the Years Ended December 31,2007
                  
                  
                  2006(In
      thousands, except share data)Net
      cash used in operating and investing activities, carried
      forward
                  
                  $
                  (8,874
                  )
                  
                  $
                  (9,944
                  )Financing
      Activities:Net
      borrowings on line of credit
                  
                  
                  2,245
                  
                  
                  
                  6,614Payments
      of notes payable
                  
                  
                  (844
                  )
                  
                  
                  -Payments
      of convertible debentures
                  
                  
                  -
                  
                  
                  
                  (2,250
                  )Proceeds
      from private placement, net
                  
                  
                  8,829
                  
                  
                  
                  6,688Debt
      issue costs
                  
                  
                  125
                  
                  
                  
                  (1,089
                  )Proceeds
      from issuances of common stock in connection with theexercise
      of options and warrants, net
                  
                  
                  9
                  
                  
                  
                  24Net
      cash provided by financing activities
                  
                  
                  10,364
                  
                  
                  
                  9,987Effect
      of exchange rate changes on cash
                  
                  
                  34
                  
                  
                  
                  12Increase
      in cash and cash equivalents
                  
                  
                  1,524
                  
                  
                  
                  55Cash
      and cash equivalents at beginning of period
                  
                  
                  1,134
                  
                  
                  
                  1,079Cash
      and cash equivalents at end of period
                  
                  $
                  2,658
                  
                  
                  $
                  1,134Supplemental
      disclosure of cash flow information:Interest
                  
                  $
                  1,501
                  
                  
                  $
                  756Income
      taxes
                  
                  $
                  -
                  
                  
                  $
                  6Non-cash
      investing and financing activitiesCommon
      stock consideration for acquisitions:WSECI
      - issuance of  62,950 and 113,997 shares of common stock,
      respectively
                  
                  $
                  71
                  
                  
                  $
                  143Verilink
      - issuance of 5,800,000 shares of common stock
                  
                  
                  -
                  
                  
                  
                  5,568Sentito
      - issuance of 7,288,451 shares of common stock and 841,121 warrants to
      purchase common stock
                  
                  
                  6,234
                  
                  
                  
                  -AccessGate
      - issuance of 5,374,033 shares of common stock
                  
                  
                  1,944
                  
                  
                  
                  -Issuance
      of common stock and warrants in conjunction with credit
      facility
                  
                  
                  364
                  
                  
                  
                  2,121Issuance
      of common stock in lieu of principal
                  
                  
                  2,531
                  
                  
                  
                  1,407Receipt
      of stock in partial repayment of note receivable
                  
                  
                  70
                  
                  
                  
                  -Assets
      acquired and liabilities assumed in conjunction with business
      acquisitions:Fair
      value of assets acquired, excluding cash and restricted
    cash
                  
                  
                  1,643
                  
                  
                  
                  5,434Goodwill
      and intangibles
                  
                  
                  8,166
                  
                  
                  
                  3,868Liabilities
      assumed
                  
                  
                  (1,369
                  )
                  
                  
                  (821
                  )Equity
      issued
                  
                  
                  (8,178
                  )
                  
                  
                  (5,568
                  )Payable
      issued
                  
                  
                  -
                  
                  
                  
                  (1,539
                  )
   F-7
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 1. Business
and Basis of Presentation
 
 Verso
Technologies, Inc., a Minnesota corporation (the “Company”, “we” or “our”), is a
global technology company providing next generation communications network
solutions offering a core-to-edge product portfolio to service providers and
enterprises. Our operations include two separate business segments: (i) the
Technologies Group, which includes our softswitching, I-Master, and NetPerformer
divisions, as well as our subsidiaries; Telemate.Net Software, Inc.
(“Telemate.Net”), Verso Verilink, LLC (“Verso Verilink” or “Verilink”), Sentito
Networks, Inc. (“Sentito”), and Verso Backhaul Solutions (“Verso Backhaul”); and
(ii) the Verso Outsourcing Group (formerly known as Advanced Applications
Services Group), which includes our technical applications support team and
customer care center .
 
 We have
an integrated portfolio of Internet Protocol (“IP”) based and other products
that include the brands AccessGate, Clarent, iMarc, I-Master, NetPerformer,
NetSpective, Telemate.Net, and Verilink and in late 2007 certain of our products
were branded VCLEARTM to designate them as “pure IP-based” next generation
products. Our core focus, provided by our Technologies Group, is on three market
segments: (i) Mobile Backhaul – an end-to-end cellular network bandwidth
optimization solution that helps network operators expand and migrate wireless
services, improve reliability and control operating costs; (ii)
Softswitch/Gateway – a pure IP platform that enables profitable end-to-end IP
communications over wireline, wireless, terrestrial and satellite links, which
is also interoperable with legacy architectures to deliver a seamless,
profitable VoIP migration path; and (iii) Integrated Access Devices – an ideal
access platform that provides integrated multi-service connectivity, aggregation
and compression to efficiently enable digital convergence, toll bypass, video
and conferencing. Also through our Technologies Group, we offer Network
Monitoring and Security, which minimizes communications costs and monitors and
controls employee productivity and computer usage through sophisticated software
products that provide monitoring, reporting, and filtering
functions.
 
 On
October 11, 2005, the Company effected a 1-for-5 reverse stock split of the
Company’s outstanding common stock, pursuant to which every five (5) shares of
the Company’s common stock outstanding on such date were converted into one (1)
share of the Company’s common stock (the “Reverse Split”).  This
Reverse Split has been reflected retroactively throughout the Company’s Form
10-K.
 
 The
consolidated financial statements include the accounts of Verso Technologies,
Inc. and its wholly-owned subsidiaries.
 
 Certain
prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.  These
reclassifications had no effect on previously reported net loss.
  2. Summary
of Significant Accounting Policies and Practices
 
 Principles
of Consolidation
 
 The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries.  Investments in joint ventures, where the
Company does not exercise control, are accounted for on the equity
method.  All significant intercompany accounts and transactions have
been eliminated in consolidation.
 
 Use
of Estimates
 
 The
preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management of the Company to
make judgments, assumptions and estimates that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ from those estimates.
  F-8
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2.  Summary
of Significant Accounting Policies and Practices – (Continued)
 
 Revenue
Recognition
 
 The
Company recognizes revenue when persuasive evidence of an agreement exists,
delivery has occurred, the fee is fixed and determinable, and collection of the
resulting receivable is reasonably assured.  The determination of
whether the collectibility is reasonably assured is based upon an assessment of
the creditworthiness of the customers. In instances where the collection of a
receivable is not reasonably assured, the revenue and related costs are
deferred.
 
 The
Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”)
No. 101, “Revenue Recognition in Financial Statements” as updated by SAB No. 104
and in accordance with Emerging Issues Task Force (“EITF”) 00-21, “Revenue
Arrangements with Multiple Deliverables”, Statement of Position (“SOP”) No.
97-2, “Software Revenue Recognition” (“SOP No. 97-2”) and SOP No. 98-9,
“Software Revenue Recognition with Respect to Certain Transactions” (“SOP No.
98-9”).
 
 SOP No.
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
values of the elements. The fair value of an element must be based on the
evidence that is specific to the vendor. License revenue allocated to software
products generally is recognized upon delivery of the products or deferred and
recognized in future periods to the extent that an arrangement includes one or
more elements to be delivered at a future date and for which fair values have
not been established. Revenue allocated to maintenance is recognized ratably
over the maintenance term which is typically twelve months and revenue allocated
to training and other service elements, such as implementation and training, are
recognized as the services are performed.
 
 Under SOP
No. 98-9 if evidence of fair value of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the
arrangement fee is allocated to the delivered element and recognized as
revenue.
 
 The
Company routinely analyzes and establishes, as necessary, reserves at the time
of shipment for product returns and allowances and warranty costs.
 
 Deferred
Revenue
 
 Deferred
revenue represents fixed or determinable amounts billed to or collected from
customers for which the related revenue has not been recognized because one or
more of the revenue recognition criteria have not been met.
 
 Cash
Equivalents
 
 The
Company considers all investments purchased with a maturity of three months or
less at the date of purchase to be cash equivalents.  Included in cash
equivalents at December 31, 2007 and 2006 are approximately $2,138,000 and
$676,000, respectively, of money market investments, recorded at cost, which
approximates market value.
 
 The
Company had $344,000 and $1.0 million of restricted cash as December 31, 2007
and 2006, respectively. At December 31, 2007, the restricted cash is equal to
the aggregate amount of the interest originally scheduled to accrue through the
two year anniversary date of the senior unsecured convertible subordinated
debentures less amounts paid through December 31, 2007 and the restricted cash
is being released as quarterly interest payments are made, which began April
2006.
  F-9
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2.  Summary
of Significant Accounting Policies and Practices – (Continued)
 
 Accounts
Receivable and Allowance for Doubtful Accounts
 
 Accounts
receivable are stated at the amounts that management expects to collect. 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
telecommunications and general economic environments.  The Company
determines the allowance for doubtful accounts based on a specific review of
outstanding customer balances plus a general reserve based on the aging of
customer accounts and write-off history.  An account is written off
once all reasonable collection efforts have been exhausted.
 
 Credit,
Customer and Vendor Concentrations
 
 The
Company’s accounts receivable potentially subjects the Company to credit
risk.  While the Company has purchase-money-security-interests in its
equipment sold on credit terms, the Company does not seek to perfect or claim a
security interest in international or small dollar value equipment sales and
services.
 
 As of
December 31, 2007, the Company’s Technologies Group had two customers that
accounted for 21% and 11%, respectively, of the Company’s gross accounts
receivable.  During the year ended December 31, 2007, one of the
Company’s customers accounted for greater than 10% of the Company’s
revenue.
 
 As of
December 31, 2006, the Company’s Technologies Group had two customers that
accounted for 13% and 12%, respectively, of the Company’s gross accounts
receivable.  During the year ended December 31, 2006, one of the
Company’s customers accounted for greater than 10% of the Company’s
revenue.
 
 Inventories
 
 Inventories
consist primarily of purchased electronic components and are stated at the lower
of cost or market.  Cost is determined by using average
cost.
 
 Inventories
as of December 31, 2007 and 2006 are comprised of the following (in
thousands):
  December
      31,2007
                  
                  
                  2006Raw
      materials
                  
                  $
                  4,338
                  
                  
                  $
                  5,157Work
      in process
                  
                  
                  50
                  
                  
                  
                  78Finished
      goods
                  
                  
                  2,227
                  
                  
                  
                  1,949Total
      inventories
                  
                  $
                  6,615
                  
                  
                  $
                  7,184
  The inventory amounts noted are net of
excess and obsolete allowances of $3.0 million and $1.7 million for the years
ended December 31, 2007 and 2006, respectively.
  F-10
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2.  Summary
of Significant Accounting Policies and Practices – (Continued)
 
 Inventories
– (Continued)
 
 On July
18, 2006, the Company entered into an agreement (the “CM Agreement”) with CM
Solutions, Inc. (“CM”), the Company’s contract manufacturer of its Verilink and
iMarc product lines. Pursuant to the CM Agreement, CM has purchased certain
electrical components valued at $2.0 million from the Company for use in the
manufacture of finished goods to be purchased by the Company.  In
addition, the Company agreed to assign to CM an additional amount of unused
electrical components valued at $2.0 million for which title will remain with
the Company.  The Company has an obligation under the CM Agreement to
purchase during the first two years, products assembled by CM using electrical
components valued at $2.0 million (the “Assembled
Products”).  Furthermore, the Company has agreed to submit purchase
orders to CM in a minimum amount of $2.0 million per quarter for the three years
subsequent to the execution of the CM Agreement or until the obligation to
purchase the Assembled Products has been satisfied. Should the Company not meet
this minimum purchase commitment, it could be subject, in any quarter, of up to
$25,000 in penalties. To date, the company has not incurred any such
penalties.
 
 In
connection with executing the CM Agreement, the Company and CM entered into a
three-year Manufacturing Agreement which sets forth the terms and conditions
under which CM shall manufacture the Assembled Products.  As of
December 31, 2007, CM had used $1,792,000 of electrical components in the
manufacture of the Assembled Products, reducing the outstanding commitment to
utilize $2.0 million of electrical components in the first two years of the
agreements to approximately $208,000 which reduced the inventory currently
assigned to CM to approximately $208,000.  The remaining assigned
inventory is reflected as inventory on the balance sheet as of December 31,
2007. The assigned inventory is not eligible for inclusion in the borrowing base
under our credit agreement with Laurus Master Fund, Ltd. (“Laurus”), our primary
lender .
 
 Property
and Equipment
 
 Property
and equipment, consisting principally of computer equipment, are stated at cost
or, if acquired through a business acquisition, at fair
value.  Depreciation is computed using the straight-line method over
estimated useful lives, ranging from two to ten years.  Upon
retirement or disposal of property and equipment, the cost and accumulated
depreciation are removed from the accounts, and any gain or loss is included in
operating loss from continuing operations.  Maintenance and repairs
are charged to expense as incurred.
 
 Property
and equipment are summarized as follows (in thousands):
  December
      31,2007
                  
                  
                  2006Computers
      and equipment
                  
                  $
                  3,885
                  
                  
                  $
                  4,985Purchased
      software
                  
                  
                  1,087
                  
                  
                  
                  1,263Furniture
      and fixtures
                  
                  
                  228
                  
                  
                  
                  270Leasehold
      improvements
                  
                  
                  180
                  
                  
                  
                  3145,380
                  
                  
                  
                  6,832Less
      accumulated depreciation and amortization
                  
                  
                  (3,856
                  )
                  
                  
                  (5,025
                  )Net
      property and equipment
                  
                  $
                  1,524
                  
                  
                  $
                  1,807
 Depreciation
expense for the years ended December 31, 2007 and 2006 was $1.3 million and $1.5
million, respectively.
  F-11
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2.  Summary
of Significant Accounting Policies and Practices – (Continued)
 
 Property
and Equipment – (Continued)
 
 Purchased
software represents the cost of purchased integration software tools and the
cost of internal use software acquired in connection with business
combinations.  It also includes the cost of licenses to use, embed and
sell software tools developed by others.  These costs are being
amortized ratably based on the projected revenue associated with these purchased
or licensed tools and products or based on the straight-line method over three
years, whichever method results in a higher level of annual
amortization.  Amortization expense related to purchased software
amounted to approximately $225,000 and $304,000 in 2007 and 2006,
respectively.  Accumulated amortization related to purchased software
totaled approximately $813,000 and $1.1 million at December 31, 2007 and 2006,
respectively.
 
 Goodwill
and Other Intangibles
 
 Goodwill
represents the excess of cost over the fair value of net assets acquired and
identified other intangible assets which consist of current technology and
customer relationships.  The current technology is amortized on a
straight-line basis over its estimated useful life of three to four
years.  The customer relationships are amortized on a straight-line
basis over their estimated useful life of three to ten
years.  Goodwill associated with acquisitions is not being amortized
in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
Goodwill and Other Intangible
Assets (“SFAS No. 142”).
 
 Goodwill
and other intangible assets consist of the following (in
thousands):
  December
      31,2007
                  
                  
                  2006Intangibles
      subject to amortization:
                  AmortizationPeriod
      in monthsCurrent
      technology
                  36-48
      months
                  
                  
                  $
                  3,698
                  
                  
                  $
                  2,328Customer
      relationship
                  36-120
      months
                  
                  
                  
                  7,640
                  
                  
                  
                  5,561Weighted
      average months
                  49 months
                  
                  
                  
                  11,338
                  
                  
                  
                  7,889Accumulated
      amortization:Current
      technology
                  
                  
                  
                  
                  (2,256
                  )
                  
                  
                  (1,685
                  )Customer
      relationship
                  
                  
                  
                  
                  (2,592
                  )
                  
                  
                  (1,136
                  )Net
      intangibles subject to amortization
                  
                  
                  
                  
                  6,490
                  
                  
                  
                  5,068Goodwill
                  
                  
                  
                  
                  3,741
                  
                  
                  
                  3,224Total
      goodwill and other intangibles
                  
                  
                  
                  $
                  10,231
                  
                  
                  $
                  8,292
  F-12
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
   2.  Summary
of Significant Accounting Policies and Practices – (Continued)
 
 Goodwill
and Other Intangibles – (Continued)
 
 Other
intangibles - current technology increased in 2007 by $2.7 million and $1.3
million related to the acquisitions of Sentito and AccessGate completed in 2007,
and $71,000 and $143,000 attributable to additional contingent consideration per
the Asset Purchase Agreement for the WSECI acquisition during the years ended
December 31, 2007 and December 31, 2006, respectively. Other intangibles -
customer relationship increased by $1.2 million for the AccessGate acquisition
completed in December 2007, and by $782,000 and $1,258,000 for the Verilink
acquisition and by $96,000 and $1,900,000 for the iMarc acquisition during the
years ended December 31, 2007 and December 31, 2006, respectively. The current
technology intangible asset associated with Sentito was deemed impaired at
December 31, 2007 (see “Impairment of Long-Lived Assets” below).
 
 Goodwill
increased by $2.9 million and $517,000 attributable to the Sentito and
AccessGate acquisitions during the year ended December 31, 2007 and by $710,000
attributable to the iMarc acquisition during the year ended December 31, 2006.
Under the provisions of SFAS No. 142, goodwill is no longer subject to
amortization. The goodwill associated with Sentito was deemed impaired at
December 31, 2007 (see “Impairment of Long-Lived Assets” below).
 
 Estimated
annual amortization expense is as follows (in thousands):
 
 Amortization2008
                  
                  $
                  2,3852009
                  
                  
                  1,5062010
                  
                  
                  1,3132011
                  
                  
                  8052012
                  
                  
                  481Thereafter
                  
                  
                  -$
                  6,490
 
 Impairment
of Long-Lived Assets
 
 SFAS
No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”),
provides a single accounting model for long-lived assets to be disposed of. SFAS
No. 144 also changed the criteria for classifying an asset as held for
sale, broadened the scope of businesses to be disposed of that qualify for
reporting as discontinued operations, and changed the timing of recognizing
losses on such operations.
 
 In
accordance with SFAS No. 144, long-lived assets, such as property, plant,
and equipment, and purchased intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized for the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
  F-13
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2.  Summary
of Significant Accounting Policies and Practices – (Continued)
 
 Impairment
of Long-Lived Assets – (Continued)
 
 Goodwill,
not subject to amortization, is tested annually for impairment, and is tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired.  An impairment loss is recognized to the
extent that the carrying amount exceeds the asset’s fair value.  The
annual impairment test was conducted as of December 31, 2007 and 2006 and
impairment charges of $2.3 million and $2.9 million was recorded for the
intangible asset associated with acquired current technology and goodwill,
respectively, related to the Sentito acquisition in the year ended December 31,
2007.  No impairment was indicated at December 31, 2006.
 
 Warranties
 
 The
Company provides a basic limited warranty for its products for one year except
for certain product families which provide a warranty period of 3 years, 5 years
or as required by specific contract.  The Company estimates the costs
that may be incurred under its basic limited warranty and for extension thereof
and records a liability in the amount of such costs at the time product revenue
is recognized.  Factors that affect the Company’s warranty liability
include the number of installed units, historical and anticipated rates of
warranty claims and cost per claim.  The Company periodically assesses
the adequacy of its recorded warranty liabilities and adjusts the amounts as
necessary.
 
 Warranty liability (included in accrued
expenses) activity for the years ended December 31, 2007 and 2006 is as follows
(in thousands):
  2007
                  
                  
                  2006Balance
      beginning of year
                  
                  $
                  652
                  
                  
                  $
                  268Warranty
      liability from acquisitions
                  
                  
                  -
                  
                  
                  
                  546Provision
      for warranty costs
                  
                  
                  548
                  
                  
                  
                  138Warranty
      expenditures
                  
                  
                  (430
                  )
                  
                  
                  (300
                  )Balance
      end of year
                  
                  $
                  770
                  
                  
                  $
                  652
  Fair
Value of Financial Instruments
  Estimates
of fair value of financial instruments are made at a specific point in time,
based on relevant market prices and information about the financial
instrument.  The estimated fair values of financial instruments are
not necessarily indicative of the amounts the Company might realize in actual
market transactions.  The following methods and assumptions were used
by the Company in estimating its fair value disclosures for financial
instruments:
 
 Cash and
cash equivalents, restricted cash, accounts receivable, accrued expenses,
accounts payable:  The carrying amounts reported in the consolidated
balance sheets approximate their fair value.
  Short and
long-term debt:  The carrying amount of the Company’s borrowings under
floating rate debt approximates its fair value.  It is not currently
practicable to estimate the fair value of the Company's investments, notes
receivable, notes payable and convertible subordinated debentures since there
are no readily determinable similar instruments on which to base an estimate of
fair value of each item.
  F-14
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2.  Summary
of Significant Accounting Policies and Practices – (Continued)
 
 Research
and development costs
 
 Research
and development costs are expensed as incurred.
 
 Legal
costs
 
 Legal
costs associated with litigation and loss contingencies other than those
associated with discontinued operations are charged to expense as services are
rendered.
 
 Stock-Based
Compensation Plan
 
 On
October 5, 2007, the Board of Directors adopted the 2007 Restricted Stock and
Option Incentive Program.  The program is intended to represent a
formulae award program under the Company’s 1999 Stock Incentive Plan, and does
not constitute a separate compensatory plan.  Pursuant to the program,
employees of the Company may elect to forego up to 50% of salaries owed to them
during the period from October 16, 2007 through March 31, 2008 and receive in
lieu thereof restricted shares of the Company’s common stock and non-qualified
stock options to purchase shares of Common Stock under the 1999
Plan.  For each dollar of salary foregone, a participating employee
will receive (i) a dollar’s worth of restricted shares, with each such share
valued at the fair market value (as defined in the 1999 Plan – see Note 11) of
the Common Stock on the date of grant, and (ii) an option to purchase an equal
number of shares of Common Stock at an exercise price equal to the fair market
value of the Common Stock on the date of grant.  Eligible employees
could elect to participate in the program any time up to and including October
15, 2007, and all restricted shares and options were issued to participating
employees on October 16, 2007. The restricted shares vest ratably at the end of
each month during the participation period commencing on November 30, 2007, and
the options will vest based on the Company achieving certain performance
benchmarks.  On October 16, 2007, 423,000 shares of restricted stock,
and the same amount of options, were granted to employees at a price of $0.63,
which was the closing price of the Company’s Common Stock on the grant
date.  As of December 31, 2007, 191,827 restricted stock shares were
vested, and there has been no vesting of the options.
  On
December 31, 2005, the Board of Directors approved the accelerated vesting of
unvested stock options granted to substantially all employees.  The
Board of Directors did not accelerate the vesting of unvested options for
certain officers and directors.  Accordingly, options to purchase
approximately 637,000 shares became fully-vested immediately.  The
closing price of the Company’s stock on December 31, 2005 was
$1.00.  The accelerated options, which were considered fully-vested as
of December 31, 2005, have exercise prices ranging from $1.03 to $23.45 and
therefore there was no expense associated with any intrinsic value for these
options.  The accelerated vesting of these options has enabled the
Company to avoid recognizing compensation expense in its statements of
operations in subsequent periods.
  Effective
January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (“SFAS”) No. 123 (Revised 2004) (“SFAS 123(R)”), Share-based Payment,
requiring use of the modified prospective method of recognizing expense on
stock-based compensation and, therefore, reflect compensation expense in
accordance with the SFAS 123(R) transition provisions. Under the modified
prospective method, prior periods are not restated to reflect the impact of
adopting the new standard at earlier dates.
  F-15
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2.  Summary
of Significant Accounting Policies and Practices – (Continued)
 
 Stock-Based
Compensation Plan – (Continued)
  As a result of the adoption of
Statement 123(R), the Company recorded $647,000 and $352,000 of stock-based
compensation expense for the year ended December 31, 2007 and 2006,
respectively, related to our employee stock options.  Had the Company
continued to account for these options under Accounting Principles Board (“APB”)
Opinion No. 25 (“APB 25”) the Company would have recorded no such expenses.
After recording the expense through December 31, 2007, there remained
approximately $999,000 of unrecognized compensation cost related to unvested
employee stock options to be recognized over 2.6 years. After recording the
expense through December 31, 2006, there remained approximately $2,421,000
of unrecognized compensation cost related to unvested employee stock options to
be recognized over 2.8 years.
  The
Company used the Black-Scholes method (which models the value over time of
financial instruments) to estimate the fair value at grant date of the options.
The Black-Scholes method uses several assumptions to value an option. The
Company used the following assumptions:
  •
                Expected
      Dividend Yield—because we do not currently pay dividends, our expected
      dividend yield is zero.•
                Expected
      Volatility in Stock Price—reflects the historical change in our stock
      price over the expected term of the stock option.•
                Risk-free
      Interest Rate—reflects the average rate on a United States Treasury bond
      with maturity equal to the expected term of the option.•
                Expected
      Life of Stock Option—reflects the simplified method to calculate an
      expected life based on the midpoint between the vesting date and the end
      of the contractual term of the stock
award.
  The
weighted-average assumptions used in the option pricing model for stock option
grants were as follows:
  Year
      Ended December 31,
                  
                  2007
                  
                  
                  2006Expected
      Dividend Yield
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %Expected
      Volatility in Stock Price
                  
                  
                  89.00
                  %
                  
                  
                  112.00
                  %Risk-Free
      Interest Rate
                  
                  
                  3.26
                  %
                  
                  
                  4.43
                  %Expected
      Life of Stock Option —Years
                  
                  
                  4.0
                  
                  
                  
                  9.8Weighted
      Average Fair Value at Grant Date
                  
                  $
                  0.51
                  
                  
                  $
                  1.07
 
 F-16
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2.  Summary
of Significant Accounting Policies and Practices– (Continued)
 
 Income
Taxes
 
 Income
taxes are accounted for under the asset and liability
method.  Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards.  Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences and carryforwards are expected to be recovered or
settled.
 
 Net
Loss Per Share
 
 Basic and
diluted net loss per share are computed in accordance with SFAS No. 128, Earnings Per Share, using the
weighted average number of common shares outstanding. The diluted net loss per
share for the twelve-month periods ended December 31, 2007 and 2006 does not
include the effect of the common stock equivalents, calculated by the treasury
stock method, as their impact would be anti-dilutive.  Using the
treasury stock method, excluded common stock equivalents are as
follows:
  2007
                  
                  
                  2006Shares
      issuable under conversion of preferred stock
                  
                  
                  -
                  
                  
                  
                  1,152,055Shares
      issuable under stock options
                  
                  
                  37,111
                  
                  
                  
                  3,488Shares
      issuable pursuant to warrants to purchase common stock
                  
                  
                  861,927
                  
                  
                  
                  253,831899,038
                  
                  
                  
                  1,409,374
 See Notes
6, 7, 10 and 11 for disclosure of all warrants to purchase common stock and
shares issuable under stock options.
 
 Going
Concern
  The
Company has historically incurred losses and as a result has not been able to
generate positive cash flow from operations. In addition, the Company has
significant indebtedness requiring repayment during 2008 (See Notes 6, 7 and 8
describing these debt obligations).  These factors have raised
substantial doubt about the Company’s ability to continue as a going concern.
The future success of the Company is contingent upon, among other things, the
ability to: achieve and maintain satisfactory levels of profitable operations;
obtain and maintain adequate levels of debt and/or equity financing; and provide
sufficient cash flow from operations to meet current and future obligations. The
Company is actively seeking new sources of financing to expand its revenue
opportunities, however there is no guarantee that the Company will be successful
in obtaining the financing required to fund its capital needs.
  The
Company has taken certain steps to control its cost levels and reduce operating
expenses in an effort to enable it to continue as a going concern until such
time that revenues are sufficient to cover expenses, including expanding its
revenue opportunities through the acquisition of AccessGate in December 2007 and
through restructuring activities initiated in August 2007 in which the workforce
was reduced by approximately 12% as well as other cost reduction activities.
Despite these actions, the Company has not yet generated quarterly profits
or positive cash flows from operations and is delinquent with several of
its vendors and other service providers.
  The
Company has prepared financial forecasts which indicate that, based on its
current business plans and strategies, it anticipates that it will achieve
profitable operations and generate positive cash flows in the future. However,
the ultimate timing and ability of the Company to achieve these forecasts and to
meet the objectives discussed in the preceding paragraph cannot be determined at
this time. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 F-17
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  2.  Summary
of Significant Accounting Policies and Practices – (Continued)
 
 Comprehensive
Income (Loss)
 
 SFAS No.
130, Reporting Comprehensive
Income,establishes standards for reporting and presentation of
comprehensive income (loss) and its components in a full set of financial
statements.  The statement requires additional disclosures in the
consolidated financial statements; it does not affect the Company’s financial
position or results of operations.  Comprehensive loss has been
included in the Consolidated Statements of Shareholders’ Equity for the two-year
period ended December 31, 2007.
 
 Segment
and Geographic Information
  In
accordance with the provisions of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, the Company has two reportable
operating segments, the Technologies Group and the Verso Outsourcing
Group.  Following the acquisition of substantially all the operating
assets of Clarent in February 2003, the Company began conducting research and
development in Canada.  International sales of the Company’s products
and services continue to originate only from the United States.
 
 Recent
Accounting Pronouncements
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, which will become effective in 2009.
SFAS No. 160 will require noncontrolling interests (previously
referred to as minority interests) to be treated as a separate component of
equity, not as a liability or other item outside of permanent equity. The
provisions of SFAS No. 160 will be applied prospectively and are not
expected to have a material effect on the Company’s consolidated financial
statements.
  In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations.
SFAS No. 141(R) will significantly change the accounting for business
combinations. Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions.
SFAS No. 141(R) also includes a substantial number of new disclosure
requirements. SFAS No. 141(R) must be applied prospectively to
business combinations for which the acquisition date is on or after
January 1, 2009. The impact of adopting SFAS No. 141(R) will be
dependent on the future business combinations that the Company may pursue after
its effective date.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment of FASB Statement
No. 115 , which will become effective in 2008.
SFAS No. 159 permits entities to measure eligible financial assets,
financial liabilities and firm commitments at fair value, on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted
for at fair value under other generally accepted accounting principles. The fair
value measurement election is irrevocable and subsequent changes in fair value
must be recorded in earnings. The Company will adopt this Statement in fiscal
year 2008 and is currently evaluating if it will elect the fair value option for
any of its eligible financial instruments and other items.
  In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements .
SFAS No. 157 defines fair value, establishes a framework for measuring
fair value, and expands the required disclosure for fair value measurements;
however, it does not require any new fair value measurements. The provisions of
SFAS No. 157 are effective for the Company beginning with its 2008
fiscal year, at which time it will be applied prospectively. In February 2008,
the FASB agreed to partially defer the effective date of SFAS No. 157
for one year, for non-financial assets and liabilities, except those that are
recognized or disclosed at fair value in the consolidated financial statements
on a recurring basis. We are currently assessing the import of adoption of SFAS
No. 157.
 F-18
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  3.  Mergers
and Acquisitions
 
 Acquisition
of AccessGate
 
 On
December 21, 2007, we entered into an Asset Purchase Agreement, dated as of
December 20, 2007 (the “Asset Purchase Agreement”), with NMS Communications
Corp., a Delaware corporation (“NMS”), under which we secured the right to
acquire certain assets and liabilities of the AccessGate division (“AccessGate”)
of NMS (the “AccessGate Purchase”) for an aggregate purchase price of $3.4
million payable at closing of the AccessGate Purchase as follows: (i) $850,000
payable in cash and (ii) $2.5 million payable in shares of our common stock,
with each such share valued at $0.4652, which is the volume weighted arithmetic
average of the daily closing price per share of our common stock for each of the
twenty (20) consecutive trading days ending (and including) the trading day that
occurred one trading day prior to (and not including) the date of the Asset
Purchase Agreement. AccessGate is a wireless backhaul optimization system that
utilizes patented technology designed to improve the efficiency of wireless
networks.  The AccessGate technology allows mobile operator customers
to carry up to twice as much voice and data traffic over backhaul connections in
GSM networks, thereby reducing their backhaul expenses without compromising
voice or data quality and freeing up capacity for the delivery of new services.
Simultaneously with the execution of the Asset Purchase Agreement, the Company
and Verso Backhaul Solutions, Inc., a Georgia corporation and a newly formed,
wholly-owed subsidiary of the Company (“Backhaul”), executed an Assignment of
Asset Purchase Agreement whereby the Company assigned to Backhaul, subject to
the provisions of the Asset Purchase Agreement, all of the Company’s rights and
obligations under the Asset Purchase Agreement.
  On
December 21, 2007, the Company, Backhaul and NMS completed the AccessGate
Purchase and, in connection therewith, (i) the Company paid to NMS $850,000 in
cash and issued to NMS 5,374,033 shares of Common Stock (the “NMS Shares”), (ii)
NMS conveyed the assets of the AccessGate Division to Backhaul as contemplated
by the Asset Purchase Agreement and the Assignment of Asset Purchase Agreement
and (iii) Backhaul assumed the liabilities relating to such assets as
contemplated by the Asset Purchase Agreement and the Assignment of Asset
Purchase Agreement.
 
 In
connection with completion of the AccessGate Purchase, on December 21, 2007, (i)
the Company and Backhaul entered into a Joinder and Amendment Agreement (the
“Joinder Agreement”) with Laurus pursuant to which Backhaul was joined as a
party to, and became an obligor under, the Company’s Security Agreement with
Laurus, dated as of September 20, 2006 (the “Security Agreement”) and (ii)
Laurus executed an Assignment of Loans, Liens and Documents Agreement (the
“Assignment of Loans”) in favor of Valens US SPV I, LLC, (“Valens US”), and
Valens Offshore SPV II, Corp., (“Valens Offshore”) and, together with Valens US,
“Valens”), which was agreed to by the Company and certain of its subsidiaries,
whereby Laurus assigned to Valens all of Laurus’s rights and interests to up to
$1,250,000 of the loans made to the Company under the Security Agreement (the
“Valens Loans”).  We utilized $1,250,000 from borrowings under the Valens
Loans to fund the $850,000 paid on such date.
 
 The
AccessGate Purchase was recorded under the purchase method of accounting.
The total purchase price of $3.1 million consisted of (i) 5,374,033 shares of
our common stock, (ii) cash of $850,000; and (iii) direct transaction costs of
approximately $281,000. A summary of the total purchase consideration is as
follows (in thousands):
 
 Value
      of common stock issued
                
                $
                1,944Cash
                
                
                850Direct
      transaction costs
                
                
                281Total
      purchase consideration
                
                $
                3,075
 
 F-19
 
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 3.
 Mergers and Acquisitions – (Continued)
 
 Acquisition
of AccessGate – (Continued)
 
 Under the
purchase method of accounting, the total estimated purchase price is allocated
to the net tangible and intangible assets based on their estimated fair values
as of the date of acquisition. Based on management’s estimate of fair values,
the estimated purchase price was allocated as follows (in
thousands):
 
 Amortization

                    Life
                    (in
      months)
                
                
                Purchase
                  Price
                  AllocationTangible
      assets:Inventories
                
                
                
                
                
                $
                223Property
      and equipment
                
                
                
                
                
                
                167Intangible
      assets:Current
      technology
                
                
                48
                
                
                
                1,300Customer
      relationships
                
                
                60
                
                
                
                1,200Goodwill
                
                
                
                
                
                
                516Liabilities
      assumed
                
                
                
                
                
                
                (331
                )Total
      estimated purchase price allocation
                
                
                
                
                
                $
                3,075
 
 Acquisition
of Sentito
 
 On April
17, 2007, we acquired Sentito, a provider of media and signaling gateway
equipment to the telecommunications market, by means of merger of SN Acquisition
Corporation, a wholly-owned subsidiary of ours, into Sentito, pursuant to that
certain Agreement and Plan of Merger, dated as of April 4, 2007, among us,
Sentito, SN Acquisition Corporation and Brett Hauser as the Stockholders’ Agent.
As consideration for this merger, we became obligated to issue to the
stockholders of Sentito immediately prior to this merger: (i) an aggregate of
7,631,465 restricted shares of our common stock, par value $.01 per share, of
which 984,721 shares were held in escrow to satisfy indemnification claims which
we may make pursuant to the Merger Agreement and 1,230,902 shares were held in
escrow and will be released upon the completion of certain in-progress Sentito
customer activity; and (ii) five-year warrants to purchase an aggregate of
841,121 shares of common stock with an exercise price of $1.25 per share (the
“Sentito Warrants”). Furthermore, we may become obligated to issue to the former
stockholders of Sentito a number of shares of common stock with an aggregate
value of $3.0 million, to be valued at the time of such issuance, if we
recognize revenue of $12.0 million during the twelve-month period following the
closing of this merger attributable to the Sentito business or customers (the
“Contingent Consideration”). Based on revenue performance of Sentito, through
the date of this filing, it is unlikely that any Contingent Consideration will
be paid to the former shareholders of Sentito.
 
 In July
2007, the Company reviewed certain balance sheet criteria as of the acquisition
date and as a result of this review determined that Sentito was deficient with
respect to such criteria.  As a result, Sentito was required to
release 343,014 shares from the 984,721 shares held in escrow for the
indemnification claims.  The value of the 343,014 shares returned was
$346,000 and was recorded as a reduction to goodwill and stockholder’s equity in
the Company’s consolidated balance sheet at December  31,
2007.  As a result of this requirement to release shares, the net
number of shares issed in the acquisition was adjusted to
7,288,451.  This adjustment is reflected in the revised purchase
accounting.
 
 In
addition, in October 2007, as a result of the lack of completion of certain
in-progress customer activity the Company is entitled to the release of
1,230,902 shares held in escrow associated therewith and has requested the
escrow agent to release such shares.
 
 F-20
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  3.Mergers and Acquisitions –
(Continued)
 
 Acquisition
of Sentito – (Continued)
 
 The
Sentito Acquisition was recorded under the purchase method of accounting. The
total purchase price of $7.1 million consisted of (i) 7,288,451 shares of our
common stock, (ii) 841,121 warrants to purchase shares of our common stock with
an exercise price of $1.25 per share; and (iii) direct transaction costs of
approximately $837,000. A summary of the total purchase consideration is as
follows (in thousands):
 
 Value
      of common stock issued
                
                $
                5,652Value
      of warrants issued
                
                
                582Direct
      transaction costs
                
                
                837Total purchase
      consideration
                
                $
                7,071
 
 Under the
purchase method of accounting, the total estimated purchase price is allocated
to the net tangible and intangible assets based on their estimated fair values
as of the date of acquisition. Based on management’s estimate of fair values,
the estimated purchase price was allocated as follows (in
thousands):
 
 Purchase
                  Price
                  AllocationTangible
      assets:Cash
                
                $
                1,706Accounts
    receivable
                
                
                484Inventories
                
                
                40Other assets
                
                
                220Property and
      equipment
                
                
                509Intangible
      assets
                
                
                5,150Liabilities
      assumed
                
                
                (1,038
                )Total estimated purchase price
      allocation
                
                $
                7,071
 
 Acquisition
of iMarc product line business
 
 On
December 29, 2006, we entered into an Asset Purchase Agreement (the “Purchase
Agreement”) with Paradyne and, for certain limited purposes, Zhone Technologies,
Inc., Paradyne’s parent (“Zhone”), pursuant to which we (i) purchased certain
assets from, and assumed certain liabilities of, Paradyne relating to its
business (the “iMarc Business”) of manufacturing, selling and supporting the
iMarc product line for an aggregate purchase price of $2.5 million and (ii)
agreed to purchase certain other remaining assets relating to the iMarc Business
as provided in the Purchase Agreement. Since July 1, 2006, Verso Verilink has
served pursuant to a Reseller Agreement (the “Reseller Agreement”) as a
non-exclusive reseller within the United States for certain Zhone products. The
amount of consideration paid by us pursuant to the Purchase Agreement was
determined as a result of arm’s length negotiations between us, Zhone and
Paradyne.
  The iMarc
product line is closely aligned with our portfolio and distribution model, which
we expanded as a result of the Verilink Acquisition. In particular, the iMarc
product line strengthens our integrated access device offerings, substantially
expands our Tier-1 customer base, and is complementary to the Verso Verilink
WanSuite® product line. Prior to the iMarc Acquisition, we served as a reseller
of Zhone products and therefore have a strong existing knowledge of the products
and market, as well as long-term relationships with relevant senior
management.
 
 F-21
 
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 3.
 Mergers and Acquisitions – (Continued)
 
 Acquisition
of iMarc product line business – (Continued)
 
 Pursuant
to the Purchase Agreement, on December 29, 2006, we acquired from Paradyne
certain engineering equipment and service contracts relating to the iMarc
Business, assumed from Paradyne certain liabilities
relating to the iMarc Business as specified in the Purchase Agreement and paid
to Paradyne $1.0 million in cash in connection with the foregoing. We
utilized our borrowing availability under our existing credit facility with
Laurus to fund the $1.0 million paid on such date.
  On
December 29, 2006, the Company and Paradyne also entered into (i) a license
agreement pursuant to which Paradyne licensed to us rights to certain
intellectual property relating to the iMarc Business on an exclusive basis (the
“Transferred IP”) through January 19, 2007, and rights to certain other
intellectual property relating to the iMarc Business on a non-exclusive basis
for perpetuity (provided that we completed the purchase of the Transferred IP
from Paradyne as provided in the Purchase Agreement) and (ii) an Adaptation
of Reseller Agreement which modifies and supplements the Reseller Agreement to
provide that Paradyne shall provide certain contract manufacturing services to
us with respect to the iMarc products through June 30, 2007.
 
 After the
closing date, the Company, Zhone and Paradyne amended the Purchase Agreement by
entering into Amendment No. 1 and Amendment No. 2 thereto on January 25, 2007
and February 7, 2007, respectively.  Pursuant to the Purchase
Agreement, as amended, we agreed to pay Paradyne $1,250,000 in exchange for the
assignment to us of the Transferred IP, of which $1.0 million was payable, and
was paid, on January 31, 2007 and $250,000 was payable, and was paid, on
March 31, 2007.  Upon receiving the payment on March 30, 2007,
Paradyne assigned the Transferred IP to us. In accordance with the terms of
Amendment No. 2 to the Purchase Agreement, we paid to Paradyne $250,000 on
June 28, 2007 in exchange for Paradyne’s sale to us of certain manufacturing
equipment previously required to be sold in connection with the payment for the
Transferred IP. In addition, on June 28, 2007, we purchased inventory related to
the iMarc business totaling $315,000. Amendment No. 2 to the Purchase
Agreement also amended the terms of the covenant not to compete to which Zhone
and Paradyne (and their respective controlled affiliates) are bound in light of
the amended payment terms described above.
 
 The iMarc Acquisition was recorded
under the purchase method of accounting, and the estimated purchase price was
allocated based on the fair value of the assets acquired and liabilities
assumed. The total purchase price of $2,575,000 consisted of (i) $1.0 million in
cash at closing; (ii) three installments totaling $1.5 million comprised of one
$1.0 million payment made on January 31, 2007 and two $250,000
payments made on March 31, 2007 and June 28, 2007, respectively; and (iii)
direct transaction costs of approximately $75,000. A summary of the total
purchase consideration is as follows (in thousands):
 
 Cash
      paid
                
                $
                2,500Direct
      transaction costs
                
                
                75Total purchase
      consideration
                
                $
                2,575
  F-22
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  3.
 Mergers and Acquisitions – (Continued)
 
 Acquisition
of iMarc product line business – (Continued)
 
 Under the
purchase method of accounting, the total estimated purchase price is allocated
to the net tangible and intangible assets based on their estimated fair values
as of the date of acquisition. Based on management’s estimate of fair values,
the estimated purchase price was allocated as follows (in
thousands):
 
 Purchase
                  Price
                  AllocationTangible
      assets:Property & equipment,
      net
                
                $
                180Other assets
                
                
                15Goodwill
                
                
                710Other
      intangible assets- customer relationship
                
                
                1,996Liabilities
      assumed
                
                
                (326
                )Total estimated purchase price
      allocation
                
                $
                2,575
 
 Acquisition
of Business Assets of Verilink
 
 On June
16, 2006, as a result of the Verilink Acquisition, we acquired substantially all
of the business assets of the Verilink Sellers other than accounts receivable
and certain fixed assets, and assumed certain liabilities, and issued (i)
2,900,000 shares of our common stock, and (ii) 8,766 shares of our
newly-designated Series C preferred stock, which were subsequently converted in
November 2006 into 2,900,000 shares of common stock. The Verilink Acquisition
bolstered our product offerings and added several domestic Tier-1
relationships. The Verilink product suite includes products that provide access,
multiplexing, and transport of voice and data services that extend legacy
networks as well as next generation converged access solutions that deliver
voice, data and video to business customers.
 
 The
Verilink Acquisition was recorded under the purchase method of accounting, and
the estimated purchase price was allocated based on the fair value of the assets
acquired and liabilities assumed. The total purchase price of $5,906,000
consisted of (i) 2,900,000 shares of our common stock issued upon consummation
of the Verilink Acquisition and valued at approximately $2,784,000, using a fair
value per share of $0.96; (ii) 8,766 shares of our Series C preferred stock
issued upon consummation of the Verilink Acquisition and valued at approximately
$2,784,000, which equaled the fair value of the common stock because the
preferred shares were automatically convertible into 2,900,000 common shares
upon the effectiveness of an amendment to our Articles of Incorporation to
increase the number of our authorized shares of common stock to 120,000,000; and
(iii) direct transaction costs of approximately $338,000. The fair value of our
common stock issued was determined using the eleven-trading-day average price
surrounding the date the assets were sold by the Verilink Sellers (June 15,
2006). A summary of the total purchase consideration is as follows (in
thousands):
 
 Value
      of common stock issued
                
                $
                2,784Value
      of Series C preferred stock issued
                
                
                2,784Direct
      transaction costs
                
                
                338Total purchase
      consideration
                
                $
                5,906
 
 We
acquired the Verilink business assets as a result of the acquisition of
Holdings, which acquired the business assets directly from the Verilink Sellers
on June 15, 2006. In connection with the acquisition, Group appointed us as sole
collection agent for the Verilink receivables that Group retained. In connection
with this collection arrangement, we receive a collection fee equal to 50% of
the initial $750,000 of Verilink receivables we collect and 25% of the remaining
Verilink receivables that we collect. As of December 31, 2007, we had earned
approximately $629,000 in collection fees upon collection of Verilink
receivables. Such collection fees have been recorded as part of the net assets
acquired.
  F-23
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  3.
 Mergers and Acquisitions – (Continued)
 
 Acquisition
of Business Assets of Verilink – (Continued)
 
 Under the
purchase method of accounting, the total estimated purchase price is allocated
to the net tangible and intangible assets based on their estimated fair values
as of the date of acquisition. Based on management’s estimate of fair values,
the estimated purchase price was allocated as follows (in
thousands):
 
 Purchase
                  Price
                  AllocationTangible
      assets:Inventories
                
                $
                3,664Property & equipment,
      net
                
                
                499Other assets
                
                
                294Intangible
      assets
                
                
                2,041Liabilities
      assumed
                
                
                (592
                )Total estimated purchase price
      allocation
                
                $
                5,906
 
 Unaudited
Pro-forma Information
 
 The
following unaudited pro-forma information presents the results of operations of
the Company as if the Verilink Acquisition, iMarc Acquisition, Sentito
Acquisition and AccessGate Acquistion had taken place on January 1, 2006 (in
thousands, except per share amounts).  Certain adjustments have been
made to reflect the impact of the purchase transaction. These pro forma results
have been prepared for comparative purposes only and are not indicative of what
would have occurred had the acquisitions been made at the beginning of the
respective periods, or of the results which may occur in the future (in thousands, except per share
amounts):
  2007
                  
                  
                  2006Net
      sales
                  
                  $
                  56,302
                  
                  
                  $
                  66,033Net
      loss
                  
                  
                  (32,903
                  )
                  
                  
                  (41,498
                  )Net
      loss per common share - basic and diluted
                  
                  $
                  (0.53
                  )
                  
                  $
                  (0.78
                  )Weighted
      average shares outstanding-basic
      and diluted
                  
                  
                  61,897,965
                  
                  
                  
                  52,945,517
 
 4.  Unconsolidated
Affiliates
 
 On
October 1, 2002, the Company acquired a 51% ownership interest but a minority
voting interest in Shanghai BeTrue Infotech Co., Ltd. (“BeTrue”).  The
remaining 49% interest in BeTrue is owned by Shanghai Tangsheng Investments
& Development Co. Ltd (“Shanghai Tangsheng”).  The joint venture
provides the Company with a distribution channel in the China and Asia-Pacific
region for the Company’s application-based Voice over Internet Protocol gateway
solutions, billing systems, value-added applications and web filtering
solutions.  Due to the shared decision making between the Company and
its equity partner, the results of BeTrue are treated as an equity investment
rather than being consolidated.  The Company determined that since
BeTrue was a business, BeTrue did not fall under the scope of the Financial
Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest
Entities and there was no impact on the Company’s financial position or
results of operations.
 
 The
Company purchased the 51% interest in BeTrue for $100,000 from NeTrue
Communications, Inc., Shanghai Tangsheng’s former joint venture
partner.  The Company also contributed to the joint venture certain
next-generation communication equipment and software valued at approximately
$236,000 and cash in the amount of $100,000.
 
 F-24
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  4.
Unconsolidated Affiliates – (Continued)
 
 Summarized
financial information reported by this affiliate for the years ended December
31, 2007 and  2006 (in thousands) are as follows:
  2007
                  
                  
                  2006Operating
      results:Revenues
                  
                  $
                  770
                  
                  
                  $
                  3,558Operating
      (loss) income
                  
                  $
                  654
                  
                  
                  $
                  196Net
      income (loss)
                  
                  $
                  (273
                  )
                  
                  $
                  (2
                  )
 5.  Discontinued
Operations and Note Receivable
 
 In
January 2005, the Company sold substantially all of the operating assets of its
NACT and MCK businesses to better focus the Company’s capital and management
resources on areas which the Company believes have greater potential given its
strategy to focus on next-generation network and solutions to improve cash
utilization.   In addition, the Company disposed of its NACT
business because the Company wanted to move toward an open-standards, pre-paid
next-generation solution that could better address growing market opportunities
and enable the Company to offer a competitive product for Tier 1 and Tier 2
carriers.
 
 The
Company believes that the I-Master platform which the Company acquired from
WSECI in March 2005, after forming a strategic partnership with WSECI in the
latter half of 2004, permits the Company to offer a better
solution.  Further, the Company disposed of its MCK business because
the Company intends to focus on next-generation solutions for service providers
and the products of MCK business did not fit that profile.  The
operations of NACT and MCK businesses have been reclassified as discontinued
operations in the Company’s consolidated financial statements.
  Summary
operating results of the discontinued operations (in thousands) are as
follows:
  For
      the year ended December 31,2007
                  
                  
                  2006Revenue
                  
                  $
                  -
                  
                  
                  $
                  -Gross
      (loss) profit
                  
                  
                  -
                  
                  
                  
                  -Operating
      loss
                  
                  
                  -
                  
                  
                  
                  -Loss
      on disposal of discontinued operations
                  
                  
                  (350
                  )
                  
                  
                  -Loss
      from discontinued operations
                  
                  $
                  (350
                  )
                  
                  $
                  -
 The loss
on disposal of discontinued operations for 2007 relates to a provision for a
litigation settlement reached in March 2008.  This settlement requires
a $100,000 cash payment on May 1, 2008 and the issuance of $250,000 in common
stock. See Note 18 “Litigation.”
  F-25
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  5.  Discontinued
Operations and Note Receivable – (Continued)
 
 Assets
and liabilities of discontinued operations (in thousands) are as
follows:
 
 December
      31,2007
                  
                  
                  2006Assets
      of discontinued operations:Notes
      receivable
                  
                  $
                  -
                  
                  
                  $
                  2,134Liabilities
      of discontinued operations:Accrued
      rent, net of sublease income
                  
                  $
                  760
                  
                  
                  $
                  792Other
      liabilities
                  
                  
                  917
                  
                  
                  
                  650Liabilities
      of discontinued operations
                  
                  $
                  1,677
                  
                  
                  $
                  1,442
 In
connection with the disposition of the MCK business, CITEL Technologies Limited
(“Citel U.K.”) and CITEL Technologies, Inc. (“Citel U.S.” and together with
CITEL U.K., “CITEL”) issued to the Company a convertible secured promissory note
in principal amount of $3.5 million (the “Note”).  The
outstanding principal under the Note accrued interest at an annual rate of 6%.
Under certain circumstances described in the Note, all or any portion of the
principal outstanding under the Note could be converted at the Company’s option
into shares of the capital stock of Citel U.K. Citel U.K.’s and Citel U.S.’s
obligations under the Note were secured by a security interest in certain assets
sold to CITEL.
 
 On June
30, 2006, in connection with the completion of the admission (“Admission”) of
Citel U.K.’s entire issued share capital to the AIM market of the London Stock
Exchange plc (“AIM”), the Company and Citel amended the Note such that the
principal balance of the Note became due and payable as follows: $870,000 to be
paid within one business day of Admission, followed by six monthly installments
of $75,000 commencing 12 months from the date of Admission, and all remaining
outstanding principal and accrued interest under the Note being due and payable
on January 21, 2008. The $870,000 was received in July 2006. The Company agreed
to irrevocably waive its rights to be prepaid in accordance with the terms of
the Note as a result of (and limited to the transactions associated with) the
Admission; however  the waiver given by the Company does not waive any
subsequent right to be prepaid under the Note in accordance with its
terms.
 
 On May
25, 2007, we entered into an agreement with CITEL and Citel PLC pursuant to
which CITEL prepaid the Note, by making an immediate cash payment to us of
approximately $1.9 million. In addition, Citel PLC was required to issue to us
62,424 shares of Citel PLC’s capital stock (the “Citel Shares”), which Citel
Shares had a market value of approximately $70,000 as of May 24, 2007 and, based
upon representations made by CITEL to us, are fully tradable on the AIM market
of the London Stock Exchange. We agreed not to sell or transfer the Citel Shares
prior to January 21, 2008, the original maturity date of the Note. Upon receipt
of the prepayment and the Citel Shares, we canceled the Note and released our
security interest in the collateral securing the Note. Prior to entering into
this agreement, approximately $2.2 million of principal and interest was
outstanding under the Note. We recognized a loss of approximately $231,000
associated with the write-off of interest arising from the prepayment
transaction. As of December 31, 2007, the Citel Shares had an approximate market
value of $13,300.  We recognized an additional loss of $56,700 due to
this decline in value.
 
 Accrued
rent relates primarily to several leases for buildings and equipment that are no
longer being utilized in continuing operations. The accrual is for all remaining
payments due on these leases less estimated amounts to be paid by any
sublessors. The accrual contains one lease with total payments remaining through
January 31, 2010 of $881,000 and assumes that the building will be sub-leased
for approximately 56% of the total lease liability over the remaining term of
the lease.
 
 F-26
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 5.  Discontinued
Operations and Note Receivable – (Continued)
 
 The
activity in the liabilities of discontinued operations (in thousands) was as
follows:
  2007
                  
                  
                  2006Balance,
      beginning of year
                  
                  $
                  1,442
                  
                  
                  $
                  2,531Lease
      payments, net of sublease receipts
                  
                  
                  (153
                  )
                  
                  
                  (914
                  )Other
      payments
                  
                  
                  -
                  
                  
                  
                  (56
                  )Litigation
      settlement accrual
                  
                  
                  350
                  
                  
                  
                  -Legal
      and other costs of disposal
                  
                  
                  38
                  
                  
                  
                  (119
                  )Balance,
      end of year
                  
                  $
                  1,677
                  
                  
                  $
                  1,442
 6.  Financing
Arrangements
 
 On
September 20, 2006, the Company entered into a Security Agreement (the
“Security Agreement”) with Laurus which provides for a three-year revolving
credit facility (the “Credit Facility”) in the original amount of $14.0 million.
The Credit Facility with Laurus replaced the Company’s prior $10.0 million
credit facility (the “Silicon Credit Agreement”) with Silicon Valley Bank
(“Silicon”).  When the Company entered into the Security Agreement,
the Silicon Credit Agreement was terminated.
 
 Our
Credit Facility with Laurus consists of two tranches: (i) an
$8.0 million tranche, the availability of which is subject to a borrowing
base (“Tranche A”) and (ii) a $6.0 million tranche (“Tranche B”),
which is not subject to a borrowing base.  Borrowings under the credit
facility shall be made first under Tranche B to the extent of availability there
under and then under Tranche A to the extent of availability there under.
Borrowing ability under Tranche A is determined pursuant to a formula which is
based on the value of our eligible accounts receivables and inventory.
Borrowings under Tranche A accrue interest at a rate of prime rate plus 2%,
provided that the interest rate shall not be less than 9%. The interest rates
were 9.25% and 10.25% at December 31, 2007 and 2006, respectively.  As
of December 31, 2007, maximum borrowings under Tranche B were limited to
$3.9 million due to scheduled availability reductions of $187,500 per month
beginning in February 2007.  Borrowings under Tranche B accrue
interest at a fixed rate of 15%.   As a result of the scheduled
reductions, our total availability under the Credit Facility is $11.9 million at
December 31, 2007.
 
 Our
obligations under the Credit Facility are secured by a first priority security
interest in all of the Company’s assets and a pledge of all of the outstanding
equity interests of Telemate.net and Verilink. Under the terms of the Security
Agreement, we may not declare dividends or incur any additional indebtedness
without the consent of Laurus.
 
 In
connection with the Credit Facility, the Company issued to Laurus (i) a
perpetual warrant to purchase 600,000 shares of the Company’s common stock, at
an exercise price of $.01 per share; and (ii) a five-year warrant to
purchase 1,321,877 shares of the Company’s common stock at an exercise price of
$0.91 per share, which was the average closing price of the common stock for the
ten-trading day period immediately prior to the closing of the Credit Facility.
The exercise price of the warrants and the number of shares of common stock
issuable upon exercise of the warrants are subject to adjustment for stock
splits, stock dividends, recapitalizations and similar corporate events but not
for any other dilutive events.
  F-27
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  6.  Financing
Arrangements – (Continued)
 
 The value
of the warrants issued to Laurus to purchase 600,000 shares and 1,321,877 shares
of common stock was $554,000 and $958,000, respectively, and such amounts plus
fees and expenses of $548,000 have been recorded as loan issuance costs. In
connection with the Credit Facility, on September 20, 2006, the Company
issued to a placement agent (“Agent”) a five-year warrant to purchase 192,000
shares of common stock at an exercise price of $1.25 per share as partial
consideration for business advisory services rendered to the Company (the
“Placement Agent Warrant”). The value of the Placement Agent Warrant issued was
$132,000 and was recorded as loan origination fees and is being amortized over
the term of the Credit Facility. Pursuant to the Security Agreement, the Company
paid Laurus Capital Management, LLC, an affiliate of Laurus, a fee of 3.5% of
the total facility amount, or $490,000, plus expenses. The fees were recorded as
loan origination fees and are being amortized over the term of the Credit
Facility.
 
 The
Company has also agreed to issue to Laurus a five-year warrant to purchase
660,939 shares of common stock at an exercise price of $0.91 per share (the
“Additional Warrant”) upon the earlier of (i) the date which is
18 months after the date of the closing of the Credit Facility and
(ii) the date upon which the borrowing availability under Tranche B equals
$6.0 million (without regard to the monthly deductions thereto commencing
on February 1, 2007). The Additional Warrant is on substantially the same
terms as the warrant to purchase 1,321,877 shares of common stock.
 
 In
connection with the iMarc Acquisition, the Company obtained from Laurus its
consent to the iMarc Acquisition and its waiver of certain conditions under the
Credit Facility which the Company would otherwise have been required to satisfy
before having access to additional borrowing availability under the Credit
Facility. In exchange for such consent and waiver, the Company issued to Laurus
on December 29, 2006 a perpetual warrant to purchase 150,000 shares of the
Company’s common stock (the “Common Stock”) at an exercise price of $0.01 per
share (the “Penny Warrants”). In addition, the Company issued to Laurus a
five-year warrant to purchase 330,470 shares of Common Stock at an exercise
price of $0.91 per share, which warrant the Company was obligated to issue under
the Credit Facility upon the increase in borrowing availability thereunder (the
“Additional Warrant” and, together with the Penny Warrants, the “Warrants”). On
March 20, 2008, 18 months after the date of the closing of the Credit
Facility, the Company issued Laurus a five-year warrant to purchase 330,469
shares of Common Stock at an exercise price of $0.91 per share, the remaining
Additional Warrant. The Warrants are subject to adjustment for stock splits,
stock dividends, recapitalizations and similar corporate events but not for any
other dilutive events.  Laurus exercised all Penny Warrants during
2007.
 
 In
connection with completion of the AccessGate Purchase and the Assignment of
Loans to Valens in the amount of $1,250,000, the Company issued to Valens US
385,417 shares of Common Stock and to Valens Offshore 656,250 shares of Common
Stock (collectively, the “Valens Shares”). The value of the Valens Shares issued
was $364,583 and together with other loan origination fees and expenses of
$85,000 were recorded as loan origination fees and are being amortized over the
term of the Valens Loans. Interest on the Valens Loans accrues at an annual rate
of 16.0% and is payable monthly and all principal and unpaid interest with
respect to the Valens Loans is due and payable on April 30, 2008.
 
 The total
loan issuance costs for the Laurus Credit Facility were $3.7 million and $3.0
million in 2007 and 2006, respectively, including $2.1 million as the value of
the warrants issued to Laurus and to the Agent in 2006 and $645,000 in expenses
associated with the AccessGate Purchase in December 2007.  Loan
issuance costs are recognized in accordance with APB 21, Interest on Receivable and
Payables, and are recorded as a deferred charge and are included in
prepaid loan issuance costs on our balance sheet.  The Company
amortizes these costs over the original term of the notes. Amortization is
calculated based on the interest method for Tranche B and the straight line
method for Tranche A based on an allocation of the costs over the relative fair
values of the line of credit and term debt.
  F-28
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  6.  Financing
Arrangements – (Continued)
 
 During
the years ended December 31, 2007 and 2006, the Company recorded interest
expense from the amortization of the loan issuances costs of approximately
$1,176,000 and $528,000, respectively. In 2006, in connection with the
termination of the Silicon Credit Agreement, the Company expensed the
unamortized portion of the loan origination fees of approximately $101,000. The
unamortized loan origination fees associated with the Credit Facility totaled
approximately $2.2 million at December 31, 2007.
 
 In
connection with the Credit Facility and to evidence the transactions
contemplated thereby, the Company also entered into an Intellectual Property
Security Agreement, a Stock Pledge Agreement, a Secured Non-Convertible Tranche
A Revolving Note and a Secured Non-Convertible Tranche B Revolving Note, as well
as a Registration Rights Agreement.
 
 As of
December 31, 2007, the Company had outstanding borrowings under Tranche A and
Tranche B of the Laurus credit facility of $6,190,000 and $3,937,500,
respectively.  The remaining borrowing availability under the credit
facility at December 31, 2007 was $560,000 under Tranche A and $0 under Tranche
B.  The Tranche B balance of $3.9 million will be amortized as
follows: $2,250,000 in 2008 and $1,687,500 in 2009.
 
 7.  Convertible
Debentures
 
 Senior
Unsecured Convertible Debentures
 
 On
February 4, 2005, the Company completed a private placement of senior unsecured
convertible debentures and warrants pursuant to a securities purchase agreement
with certain institutional investors.  The Company issued $13.5
million of senior unsecured convertible debentures, Series A warrants
exercisable for 2.2 million shares of the Company’s common stock and Series B
warrants exercisable for 2.0 million shares of the Company’s common
stock.  The debentures have been discounted to reflect the fair value
of the warrants issued, totaling approximately $4.5 million.  In
addition, after allocation of the fair value of the warrants issued, the
remaining fair value of the debentures resulted in a computed beneficial
conversion feature with a fair value of $3.6 million.  The amount was
recorded as a discount in the third quarter of 2005 as a result of additional
analysis of the calculation of the beneficial conversion feature.
  The
discount is being amortized to interest expense over the life of the senior
unsecured convertible debentures.  The unamortized discount at
December 31, 2007 and 2006 totaled approximately $1.6 million and $4.0 million,
respectively.  The senior unsecured convertible debentures bear
interest at a rate of 6% per annum increasing to 6.75% at February 4, 2006, and
are due February 2009 and are convertible into approximately 5.4 million shares
of the Company’s common stock at an initial conversion price of $2.50 per share,
subject to anti-dilution adjustments and certain limitations. Interest is
payable on a quarterly basis beginning April 2005 and principal is payable on a
quarterly basis beginning August 2006.  The Series A warrants issued
in connection with the private placement are exercisable for a period of five
years commencing on February 4, 2005 and at an initial exercise price, subject
to anti-dilution adjustments of $3.60 per share.
  The
Series B warrants issued in connection with the private placement were
exercisable for a period of 90 days, commencing on June 16, 2005, and had an
exercise price of $3.90 per share.  The Series B warrants expired in
September 2005.  The Company paid certain private placement fees and
attorney’s fees totaling $993,000 and issued Series A warrants, on the same
terms as disclosed above, exercisable for 302,400 shares of the Company’s stock
with a value of $561,000, in connection with the private placement. The fees
were recorded as loan origination fees and are being amortized to interest
expense over the term of the debentures.  The unamortized fees totaled
approximately $290,000 at December 31, 2007.
  F-29
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  7.  Convertible
Debentures – (Continued)
 
 Convertible
Subordinated Debentures
 
 On July
25, 2005, the Company announced that it had restructured its outstanding 7.5%
convertible debenture with an aggregate principal amount of $4,500,000 due
November 22, 2005. Pursuant to the restructuring, the entire aggregate principal
amount outstanding has been paid as of October, 2006.
 
 In
connection with the restructuring, the Company issued warrants to purchase an
aggregate of 800,000 shares of the Company’s common stock at an initial exercise
price of $2.50 per share exercisable beginning on November 22, 2005. Of these
warrants, 600,000 expired in July 2007. The remaining 200,000 expire in February
2011. The fair value of the warrants issued totaled approximately $877,000 and
was recorded as additional discount on the debentures. As of December 31, 2006,
the discount was fully amortized to interest expense.
 
 8.  Notes
Payable
 
 On
February 12, 2003, the Company acquired substantially all the operating assets
and certain related liabilities of Clarent.   At the closing of the
acquisition, the Company issued a $3.0 million secured note due February 12,
2008, which bears interest at 5% per annum, discounted at 7.5% per annum. 
The unamortized discount totaled approximately $15,000 at December 31,
2007.  The assets the Company purchased from Clarent secure the secured
notes; however, this note payable is subordinate to the Laurus debt.
 
 On
February 15, 2008, the note was amended.  The amendment extends the
initial date on which the principal amount of the loan, and all accrued and
unpaid interest thereon, was due from February 12, 2008 to March 3,
2008.  However, the Amendment provides that if $728,558 of the
outstanding  accrued interest on such loan, which represents all of
the unpaid accrued interest as of February 15, 2008, is paid on or before March
3, 2008, then the outstanding principal amount of the loan and all accrued and
unpaid interest thereon shall be due and payable within three business days of
August 12, 2008 rather than on March 3, 2008. The Company made the payment of
the $728,558 prior to March 3, 2008, thus extending the due date to within 3
business days of August 12, 2008.
  The
Amendment requires that the Company pay interest on a monthly basis on the
outstanding principal amount of the loan at a rate of 8% per annum or the
maximum rate permissible by law, whichever is less, until such time as the loan
is paid in full.  In connection with the Amendment, the Company was
required to pay Clarent an amendment fee of $50,000.
  The
Amendment is subject to the approval of the Bankruptcy Court having jurisdiction
over Clarent and Clarent has agreed to use its commercially reasonable efforts
to obtain an order to that effect.  If the Bankruptcy Court refuses to
issue an order approving the Amendment, then the Amendment terminates, the terms
of the Loan Agreement and Note revert back to their original terms and Clarent
can exercise all of its rights and remedies thereunder upon the return to the
Company of all amounts paid to Clarent pursuant to the Amendment, other than the
amendment fee.
 
 9.  Reorganization
Costs
 
 In the
third quarter of 2007, the Company initiated certain restructuring plans to
improve operational efficiencies and financial performance and eliminated nine
positions held by employees. As a result of these actions we recorded
reorganization costs of $362,000 during the quarter ended September 30, 2007,
which included severance and compensation costs of $275,000 and $87,000 related
to the closing of an office location in Acton, Massachusetts.
  F-30
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  9.  Reorganization
Costs – (Continued)
 
 In the
second quarter of 2007, the Company terminated a senior executive. As a result
of this action, we recorded reorganization costs of $389,000 representing our
severance obligation.
 
 In the
fourth quarter of 2006, the Company terminated a senior
executive.   As a result of this action, the Company recorded
reorganization costs of $674,000, consisting of severance costs of $596,000 and
non-cash stock compensation expense of $78,000.
 
 In the
second quarter of 2005, we entered into a sublease agreement with an unrelated
party to sublease excess office space at our facility in Atlanta,
Georgia.  The excess space was primarily due to reductions in the
corporate staffing in prior years.  As a result of these actions, we
recorded an accrual of approximately $2,600,000 for all remaining payments due
on this lease, less amounts to be paid by the sublessor, as well as write-offs
for furniture and leasehold improvements. We expect to save approximately $1.6
million over the term of the sublease, which expires January 31,
2010.  The balance of the accrued loss on sublease is approximately
$939,000 at December 31, 2007.
 
 10.  Shareholders’ Equity
(Deficit)
 
 Preferred
Stock
 
 The
Company has 210,000 shares of undesignated, authorized preferred stock. As
described in Note 3– Mergers and Acquisitions: Acquisition of Business Assets of
Verilink, as part of the purchase price, the Company issued 8,766 shares of its
newly-designated Series C preferred stock. The shares of preferred stock
automatically converted into 2,900,000 shares of common stock upon the effective
date of approval to an amendment to the Company’s Articles of Incorporation
increasing the number of authorized shares of common stock as specified in the
Statement of Rights of the Series C Preferred Stock. Such amendment was
effective on November 7, 2006, and the shares of preferred stock were converted
into 2,900,000 shares of common stock.
 
 Private
Placements
 
 On
September 5, September 6, and September 10, 2007, we issued 4,417,640, 2,608,692
and 71,428 shares of our common stock, respectively, and warrants to purchase
3,313,230, 2,104,954, and 53,571 shares of our common stock, respectively, in a
private placement transaction for an aggregate purchase price of approximately
$4,850,000, or $0.68 per share. The warrants issued in connection with the
private placement are exercisable beginning March 6, 2008 for a period of five
years at an exercise price of $0.90 per share. We received proceeds from the
private placement of approximately $4,547,000, net of expenses.
 
 On
January 30, February 2, February 5, and February 9, 2007, we issued 2,000,000,
2,000,000, 250,000, and 750,000 shares of our common stock, respectively, and
warrants to purchase 1,080,000, 1,080,000, 135,000, and 405,000 shares of our
common stock, respectively, in a private placement transaction for an aggregate
purchase price of approximately $5,000,000, or $1.00 per share. The warrants
issued in connection with the private placement are exercisable for a period of
five years at an exercise price of $1.25 per share. We received proceeds from
the private placement of these securities of approximately $4,297,000, net of
expenses.
  F-31
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  10.  Shareholders’
Equity (Deficit) – (Continued)
 
 Private
Placements – (Continued)
 
 On
February 17, 2006, the Company issued, in a private placement, 5,400,000 shares
of its common stock and warrants to purchase 5,400,000 shares of its common
stock for an aggregate purchase price of approximately $7,100,000, or $1.30 per
share.  The warrants issued in connection with the private placement
are exercisable, after six months, for a period of five years and at an exercise
price of $1.56 per share.  The Company received approximately
$6,800,000, net of expenses.
 
 On
February 24, 2004, the Company completed a private placement of securities
pursuant to which it issued 2,000,000 shares of its common stock and warrants to
purchase 491,505 shares of its common stock for an aggregate purchase price of
approximately $17,700,000, or $9.00 per share.  The warrants issued in
connection with the private placement are exercisable for a period of seven
years at an exercise price of $11.50 per share.  The Company received
approximately $16,500,000, net of expenses.
  Stock
Warrants
 
 In
connection with various financing and acquisition transactions, and related
services provided to the Company, the Company has issued warrants to purchase
the Company’s common stock.  Unless otherwise noted, the fair value of
each common stock warrant issued is estimated on the date of grant using the
Black-Scholes option valuation model (see assumptions under Stock-Based
Compensation in Note 2).
 
 On
September 5,
September 6, and September 10, 2007,
we issued 4,417,640, 2,608,692, and 71,428 shares of our common stock,
respectively, and warrants to purchase 3,313,230, 2,104,954, and 53,571 shares
of our common stock, respectively, in a private placement transaction for an
aggregate purchase price of approximately $4,850,000, or $0.68per share.
The warrants issued in connection with the private placement are exercisable
beginning March 6, 2008 for a period of five years at an exercise price of $0.90
per share.
 
 On April
17, 2007, as consideration for the merger, the Company issued to the
stockholders of Sentito, five-year warrants to purchase an aggregate of 841,121
shares of common stock, exercisable upon issue, with an exercise price of $1.25
per share.
 
 On
January30, February
2, February 5, and February 9, 2007, we issued 2,000,000, 2,000,000, 250,000,
and 750,000 shares of our common stock, respectively, and warrants to purchase
1,080,000, 1,080,000, 135,000, and 405,000 shares of our common stock,
respectively, in a private placement transaction for an aggregate purchase price
of approximately $5,000,000, or $1.00 per share. The warrants issued in
connection with the private placement are exercisable for a period of five years
at an exercise price of $1.25 per share.
 
 On
September 20, 2006, the Company entered into a Security Agreement (the
“Security Agreement”) with Laurus which provides for a three-year revolving
credit facility (the “Credit Facility”) in the original amount of $14.0 million.
The Credit Facility with Laurus replaces the Company’s prior $10.0 million
credit facility with Silicon. In connection with the Credit Facility, the
Company issued to Laurus (i) a perpetual warrant to purchase 600,000 shares
of the Company’s common stock, at an exercise price of $.01 per share; and
(ii) a five-year warrant to purchase 1,321,877 shares of the Company’s
common stock at an exercise price of $0.91 per share, which was the average
closing price of the common stock for the ten-trading day period immediately
prior to the closing of the Credit Facility. The exercise price of the warrants
and the number of shares of common stock issuable upon exercise of the warrants
are subject to adjustment for stock splits, stock dividends, recapitalizations
and similar corporate events but not for any other dilutive events.
  F-32
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  10.  Shareholders’
Equity (Deficit) – (Continued)
 
 Stock
Warrants – (Continued)
 
 The value
of the warrants issued to Laurus to purchase 600,000 shares and 1,321,877 shares
of common stock was $554,000 and $958,000, respectively, and such amounts plus
fees and expenses of $548,000 have been recorded as loan issuance costs. In
connection with the Credit Facility, on September 20, 2006, the Company
issued a placement agent (“Agent”) a five-year warrant to purchase 192,000
shares of common stock at an exercise price of $1.25 per share as partial
consideration for business advisory services rendered to the Company (the
“Placement Agent Warrant”). The value of the Placement Agent Warrant issued was
$132,000 and was recorded as loan issuance costs and is being amortized over the
term of the Credit Facility. Pursuant to the Security Agreement, the Company
paid Laurus Capital Management, LLC, an affiliate of Laurus, a fee of 3.5% of
the total facility amount, or $490,000, plus expenses. The fee was recorded as
loan issuance costs and is being amortized over the term of the Credit
Facility.
 
 The
Company has also agreed to issue to Laurus a five-year warrant to purchase
660,939 shares of common stock at an exercise price of $0.91 per share (the
“Additional Warrant”) upon the earlier of (i) the date which is
18 months after the date of the closing of the Credit Facility and
(ii) the date upon which the borrowing availability under Tranche B equals
$6.0 million (without regard to the monthly deductions thereto commencing
on February 1, 2007). When issued, the Additional Warrant shall be on
substantially the same terms as the warrant to purchase 1,321,877 shares of
common stock.
 
 In
connection with the iMarc acquisition, the Company obtained from Laurus its
consent to the acquisition and its waiver of certain conditions under the Credit
Facility which the Company would otherwise have been required to satisfy before
having access to additional borrowing availability under the Credit Facility. In
exchange for such consent and waiver, the Company issued to Laurus on
December 29, 2006 a perpetual warrant to purchase 150,000 shares of the
Company’s common stock (the “Common Stock”) at an exercise price of $.01 per
share (the “Penny Warrant”). In addition, the Company issued to Laurus a
five-year warrant to purchase 330,470 shares of Common Stock at an exercise
price of $0.91 per share, which warrant the Company was obligated to issue under
the Credit Facility upon the increase in borrowing availability thereunder (the
“Additional Warrant” and, together with the Penny Warrant, the “Warrants”). On
March 20, 2008, 18 months after the date of the closing of the Credit
Facility, the Company issued Laurus a five-year warrant to purchase 330,469
shares of Common Stock at an exercise price of $0.91 per share, the remaining
Additional Warrant. The Warrants are subject to adjustment for stock splits,
stock dividends, recapitalizations and similar corporate events but not for any
other dilutive events.  The value of the Penny Warrants and Additional
Warrant issued to Laurus was $173,000 and $304,000, respectively and the amounts
have been recorded as loan issuance costs and are being amortized over the
remaining term of the Credit Facility.  All Penny Warrants were
exercised by Laurus during 2007.
  On
February 17, 2006, the Company issued, in a private placement, 5.4 million
shares of its common stock and warrants to purchase 5.4 million shares of its
common stock for an aggregate purchase price of approximately $7.1 million, or
$1.30 per share.  The warrants issued in connection with the private
placement are exercisable, after six months, for a period of five years and at
an exercise price of $1.56 per share.
  In
February 2005, the Company issued 2.2 million Series A warrants with an exercise
price of $3.60 and 2.0 million Series B warrants with an exercise price of $3.90
in connection with the Company’s private placement of senior unsecured
convertible debentures on February 4, 2005 (see Note 7).  The Series B
warrants issued in connection with the private placement were exercisable for a
period of 90 days after the effective date of a registration statement and
expired in September 2005.The Company also issued
302,400 Series A warrants with an exercise price of $3.60 to pay certain private
placement fees.
  In July
2005, the Company issued 800,000 warrants with an exercise price of $2.50 in
connection with the restructuring of its outstanding 7.5% convertible debenture
with an aggregate principal amount of $4.5 million due November 22, 2005 (see
Note 7).  Of these warrants, 600,000 expired July 1, 2007 and the
remaining 200,000 have a five year term.
  F-33
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  10.  Shareholders’
Equity (Deficit) – (Continued)
 
 Stock
Warrants – (Continued)
  A summary
of the status of the Company's warrants issued as of December 31, 2007 and 2006,
respectively, and the changes during the years ended on these dates is presented
below:
  2007
                  
                  
                  2006Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
                  
                  
                  Average
                  
                  
                  Number
                  
                  
                  Averageof
                  
                  
                  Exercise
                  
                  
                  of
                  
                  
                  ExerciseWarrants
                  
                  
                  Prices
                  
                  
                  Warrants
                  
                  
                  PricesOutstanding
      atbeginning
      of the year
                  
                  
                  11,962,944
                  
                  
                  $
                  1.81
                  
                  
                  
                  4,107,192
                  
                  
                  $
                  3.56Granted
                  
                  
                  9,012,876
                  
                  
                  
                  0.87
                  
                  
                  
                  8,209,039
                  
                  
                  
                  1.28Exercised
                  
                  
                  750,000
                  
                  
                  
                  0.01
                  
                  
                  
                  5,000
                  
                  
                  
                  0.05Forfeited
      & Expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  348,287
                  
                  
                  
                  9.87Outstanding
      at end of year
                  
                  
                  20,225,820
                  
                  
                  
                  1.33
                  
                  
                  
                  11,962,944
                  
                  
                  
                  1.81Exercisable
      at end of the year
                  
                  
                  14,754,065
                  
                  
                  
                  1.49
                  
                  
                  
                  11,962,944
                  
                  
                  
                  1.81Weighted-averageremaining
      contractual life ofoutstanding
      warrants (in years)
                  
                  
                  
                  
                  
                  
                  4.00
                  
                  
                  
                  
                  
                  
                  
                  4.22
  A summary
of warrants outstanding as of December 31, 2007, is as follows:
 
 Number
      of
                  
                  
                  Weighted
      AverageExercise
      Price
                  
                  
                  Outstanding
      Warrants
                  
                  
                  Exercise
      Price
                  
                  Expiration
      Date$0.68
      - $1.25
                  
                  
                  
                  10,857,223
                  
                  
                  $
                  0.88
                  
                  September
      2011 and beyond$1.56
                  
                  
                  
                  5,614,692
                  
                  
                  $
                  1.56
                  
                  August
      2011$2.01
      - $2.67
                  
                  
                  
                  3,262,400
                  
                  
                  $
                  2.00
                  
                  February
      2010 - February 2015$6.13
                  
                  
                  
                  491,505
                  
                  
                  $
                  6.13
                  
                  February
      2011Total
                  
                  
                  
                  20,225,820
                  
                  
                  $
                  1.33
 As of
December 31, 2007, 14,754,065 of the warrants are exercisable.  In
March 2008, the remaining 5,471,755 become exercisable.
  The
exercise price and number of outstanding warrants for certain warrants
previously issued have been adjusted according to their anti-dilution
provisions.
 F-34
 
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  11.
Stock Incentive Plan
 
 On
December 18, 2007, the shareholders of the Company approved the 2007 Stock
Incentive Plan (the “2007 Incentive Plan”) at the annual meeting of the
Company’s shareholders held on such date. The 2007 Plan authorizes the Board or
a committee of the Board to provide equity-based compensation in the form of
option rights, restricted stock, restricted stock units, performance shares and
performance units for the purpose of providing the Company’s directors,
officers, employees, consultants and advisors incentives and rewards for
performance. The Board of Directors delegates administration of the 2007 Plan to
the Compensation Committee. The 2007 Plan replaced the 1999 Plan and no further
awards will be made under the 1999 Plan after the effective date of the 2007
Plan. Awards outstanding as of the effective date of the 2007 Plan and granted
under the 1999 Plan or under any of the Company’s 1995 Stock Incentive Plan,
1997 Stock Incentive Plan or 1998 Stock Incentive Plan (collectively, the “Prior
Stock Incentive Plans”) shall remain subject to the terms of the Prior Stock
Incentive Plan under which they were granted, except that the Board may elect to
extend one or more of the features of the 2007 Plan, if approved by the
Company’s shareholders at the Meeting, to such awards.
 
 Total
awards under the 2007 Plan are limited to 10,000,000 shares of Common Stock,
plus any shares of Common Stock remaining available for issuance under the 1999
Plan as of the effective date of the 2007 Plan and any shares of Common Stock
subject to outstanding awards granted under any Prior Stock Incentive Plan which
subsequently expire or are forfeited or cancelled after the effective date of
the 2007 Plan. Furthermore, the 2007 Plan provides that no more than 10,000,000
shares of Common Stock may be issued in the form of awards other than stock
options (after taking into account forfeitures, expirations and cancellations).
The 2007 Plan also limits the aggregate number of stock options that may be
granted to any one participant in a calendar year to 2,000,000. The aggregate
number of restricted shares and restricted stock units that specify management
objectives and performance shares that may be granted to any one participant in
a calendar year is limited to 2,000,000. In addition, no participant may receive
performance units in any calendar year having a value in excess of
$2,000,000.
 
 The 2007
Plan and Prior Stock Incentive Plans provide for stock purchase authorizations,
stock bonus awards and issuance of restricted stock. Restricted stock awards
totaling 1,108,079 and 486,936 have been granted under the Prior Stock Incentive
Plans for the years ended December 31, 2007and 2006,
respectively.  The restricted stock awards for 2007 include 450,000
shares granted the Company’s board of directors for their board services during
2007.  The shares vested 25% at the end of each calendar quarter
during 2007 that each director served, and the Company recorded $503,600 of
stock-based compensation during 2007.  Total awards remaining
available for grant under the 2007 Plan as of December 31, 2007 were
10,739,019.
 
 On
October 5, 2007, the Board of Directors adopted the 2007 Restricted Stock and
Option Incentive Program.  The program is intended to represent a
formulae award program under the Company’s 1999 Stock Incentive Plan, and does
not constitute a separate compensatory plan.  Pursuant to the program,
employees of the Company may elect to forego up to 50% of salaries owed to them
during the period from October 16, 2007 through March 31, 2008 and receive in
lieu thereof restricted shares of the Company’s common stock and non-qualified
stock options to purchase shares of Common Stock under the 1999
Plan.  For each dollar of salary foregone, a participating employee
will receive (i) a dollar’s worth of restricted shares, with each such share
valued at the fair market value (as defined in the 1999 Plan described below) of
the Common Stock on the date of grant, and (ii) an option to purchase an equal
number of shares of Common Stock at an exercise price equal to the fair market
value of the Common Stock on the date of grant.  Eligible employees
could elect to participate in the program any time up to and including October
15, 2007, and all restricted shares and options were issued to participating
employees on October 16, 2007. The restricted shares vest ratably at the end of
each month during the participation period commencing on November 30, 2007, and
the options will vest based on the Company achieving certain performance
benchmarks.  On October 16, 2007, 423,000 shares of restricted stock,
and the same amount of options, were granted to employees at a price of $0.63,
which was the closing price of the Company’s Common Stock on the grant
date.  As of December 31, 2007, 191,827 restricted stock shares were
vested, and there has been no vesting of the options.
  F-35
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  11.
Stock Incentive Plan – (Continued)
 
 The
Company has a stock incentive plan for employees, consultants, and other
individual contributors to the Company which enables the Company to grant up to
17.0 million qualified and nonqualified incentive stock options as well as other
stock-based awards (the “1999 Plan”).  In 2004, the 1999 Plan was
amended to increase the number of shares of the Company’s stock underlying the
1999 Plan from 3.0 million to 3.5 million and in 2007 the 1999 Plan was amended
to increase the number of shares of the Company’s stock underlying the 1999 Plan
from 3.5 million to 17.0 million. The Company adopted the 1999 Plan which
aggregates the Company’s prior stock option plans, in the second quarter of
1999.  The qualified options granted under the 1999 Plan must be
granted at an exercise price not less than the fair market value at the date of
grant.  The compensation committee of the Company’s board of directors
determines the period within which options may be exercised, but no option may
be exercised more than ten years from the date of grant.
 
 The 1999
Plan also provides for stock purchase authorizations, stock bonus awards and
issuance of restricted stock. Stock awards totaling 1,108,079, 486,936, and
39,521 have been granted under the 1999 Plan for the years ended December 31,
2007, 2006 and 2005, respectively.  The stock awards for 2007 include
450,000 shares granted to the Company’s board of directors for their board
services during 2007.  The shares were immediately vested upon
issuance, and the Company recorded $503,600 of stock-based
compensation.  Total awards remaining available for grant under the
1999 Plan as of December 31, 2007 were 10,739,019.
 F-36
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  11.
Stock Incentive Plan – (Continued)
 
 A summary
of the status of the Company’s stock options granted to employees as of December
31, 2007, and December 31, 2006 and the changes during the years ended on these
dates is presented below:
  2007
                    
                    
                    2006Number
      of
                    
                    
                    Weighted
                    
                    
                    Number
      of
                    
                    
                    WeightedShares
      of
                    
                    
                    Average
                    
                    
                    Shares
      of
                    
                    
                    AverageUnderlying
                    
                    
                    Exercise
                    
                    
                    Underlying
                    
                    
                    ExerciseOptions
                    
                    
                    Prices
                    
                    
                    Options
                    
                    
                    PricesOutstanding
      atbeginning
      of the year
                    
                    
                    4,653,843
                    
                    
                    $
                    4.28
                    
                    
                    
                    3,201,096
                    
                    
                    $
                    8.23Granted
                    
                    
                    1,156,929
                    
                    
                    
                    0.75
                    
                    
                    
                    2,360,000
                    
                    
                    
                    1.24Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,584
                    
                    
                    
                    1.16Forfeited
      & Expired
                    
                    
                    1,660,585
                    
                    
                    
                    3.22
                    
                    
                    
                    902,669
                    
                    
                    
                    10.32Outstanding
      at end of year
                    
                    
                    4,150,187
                    
                    
                    
                    3.71
                    
                    
                    
                    4,653,843
                    
                    
                    
                    4.28Exercisable
      at end of the year
                    
                    
                    2,240,338
                    
                    
                    
                    6.05
                    
                    
                    
                    2,215,743
                    
                    
                    
                    7.52
  The Company defines in-the-money stock
options at December 31, 2007 as options that had exercise prices that were lower
than the $0.34 market price of our common stock at that date. As of December 31,
2007, there were no stock options outstanding that were in-the-
money.
  The
following table summarizes information about employee stock options outstanding
at December 31, 2007:
  AverageNumber
                  
                  
                  Remaining
                  
                  
                  Weighted
                  
                  
                  Number
                  
                  
                  WeightedRange
      of Exercise
                  
                  
                  Outstanding
                  
                  
                  Contractual
                  
                  
                  Average
                  
                  
                  Exercisable
                  
                  
                  AveragePrices
                  
                  
                  at
      12/31/07
                  
                  
                  Life
      (In years)
                  
                  
                  Exercise
      Price
                  
                  
                  at
      12/31/07
                  
                  
                  Exercise
      Price$
                  0.63
      to $ 1.45
                  
                  
                  
                  2,772,236
                  
                  
                  
                  8.50
                  
                  
                  $
                  1.02
                  
                  
                  
                  865,387
                  
                  
                  $
                  1.13$
                  1.46
      to $ 2.50
                  
                  
                  
                  475,770
                  
                  
                  
                  5.11
                  
                  
                  $
                  2.20
                  
                  
                  
                  472,770
                  
                  
                  $
                  2.20$
                  2.51
      to $ 5.30
                  
                  
                  
                  45,041
                  
                  
                  
                  5.60
                  
                  
                  $
                  2.87
                  
                  
                  
                  45,041
                  
                  
                  $
                  2.87$
                  5.31
      to $ 7.50
                  
                  
                  
                  62,862
                  
                  
                  
                  3.58
                  
                  
                  $
                  6.86
                  
                  
                  
                  62,862
                  
                  
                  $
                  6.86$
                  7.51
      to $90.00
                  
                  
                  
                  794,278
                  
                  
                  
                  2.69
                  
                  
                  $
                  13.82
                  
                  
                  
                  794,278
                  
                  
                  $
                  13.82$
                  0.63
      to $90.00
                  
                  
                  
                  4,150,187
                  
                  
                  
                  6.89
                  
                  
                  $
                  3.71
                  
                  
                  
                  2,240,338
                  
                  
                  $
                  6.05
 F-37
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  11.
Stock Incentive Plan – (Continued)
 
 The
following table summarizes the activity associated with the unvested stock
options for the years ended December 31, 2007and 2006:
 
 Year
      Ended December 31,2007
                    
                    
                    2006Weighted
                    
                    
                    
                    
                    
                    WeightedAverage
                    
                    
                    
                    
                    
                    AverageStock
                    
                    
                    Exercise
                    
                    
                    Stock
                    
                    
                    ExerciseOptions
                    
                    
                    Price
                    
                    
                    Options
                    
                    
                    PriceNonvested
      stock options at beginning of period
                    
                    
                    2,422,753
                    
                    
                    $
                    1.31
                    
                    
                    
                    237,128
                    
                    
                    $
                    2.40Granted
                    
                    
                    1,156,929
                    
                    
                    
                    0.75
                    
                    
                    
                    2,360,000
                    
                    
                    
                    1.26Vested
                    
                    
                    (514,182
                    )
                    
                    
                    1.08
                    
                    
                    
                    (174,375
                    )
                    
                    
                    2.10Forfeited
                    
                    
                    (1,155,651
                    )
                    
                    
                    1.42
                    
                    
                    
                    -
                    
                    
                    
                    -Nonvested
      stock options at end of period
                    
                    
                    1,909,849
                    
                    
                    $
                    0.97
                    
                    
                    
                    2,422,753
                    
                    
                    $
                    1.31
 
 12.
Stock Option Exchange Program
 
 Effective
November 7, 2006, the shareholders and board of directors approved a voluntary
exchange of options for shares of restricted common stock “Exchange Program”
that, if and when implemented, will permit the current officers, non-employee
directors and employees of the Company and its subsidiaries, (“Eligible
Holders”), to exchange all outstanding options to purchase shares of Common
Stock held by them (“Eligible Options”) for a lesser number of shares of Common
Stock to be granted as a restricted stock award under, and subject to the terms
of, the Exchange Program. For every Eligible Option to purchase four shares of
Common Stock surrendered by an Eligible Holder in the Exchange Program, the
Company will grant to such holder one share of restricted Common Stock pursuant
to the Exhange Program (the “Exchange Ratio”). The Exchange Ratio is intended to
result in the grant of restricted Common Stock awards or restricted stock units
having an aggregate value much lower than the aggregate value of the Eligible
Options surrendered, determined using the Black-Scholes option valuation model.
Each award of restricted Common Stock granted in the Exchange Program to any
Eligible Holder other than a non-employee director of the Company will vest in
two equal installments on each of the four-month anniversary and the 12-month
anniversary of the date of grant of such award. Each award of restricted Common
Stock granted in the Exchange Program to any non-employee director of the
Company will be vested in its entirety on the date of grant. Notwithstanding the
foregoing, an award of restricted Common Stock or restricted stock unit will
terminate and will not vest if the grantee of such award is not an employee or
director of the Company or one of its subsidiaries as of the date such award is
granted and on each date on which it vests.
 
 The Board
of Directors will retain the authority, in its discretion, to terminate or
postpone the Exchange Program at any time prior to the expiration of the
election period under the Exchange Program (provided, however, in no event will
the Exchange Program permit the issuance of restricted Common Stock awards
having a greater aggregate value than the aggregate value of the stock options
surrendered, as estimated using the Black-Scholes option valuation
model).
  F-38
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  13.
Income Taxes
 
 The components of loss from continuing
operations, before income taxes were (in thousands):
  Years
      Ended December 31,2007
                    
                    
                    2006Domestic
                    
                    $
                    (22,082
                    )
                    
                    $
                    (12,781
                    )Foreign
                    
                    
                    (4,617
                    )
                    
                    
                    (4,995
                    )$
                    (26,699
                    )
                    
                    $
                    (17,776
                    )
  A
reconciliation of the statutory U.S. federal income tax rate to the Company’s
effective tax was as follows:
  Years
      Ended December 31,2007
                    
                    
                    2006Statutory
      U.S. rate
                    
                    
                    (34.0
                    )
      %
                    
                    
                    (34.0
                    )
      %Foreign
      effect
                    
                    
                    0.4
                    
                    
                    
                    0.0State
      income taxes, net of federal benefit
                    
                    
                    (2.2
                    )
                    
                    
                    (2.9
                    )Non-deductible
      charges for intangibles
                    
                    
                    1.2
                    
                    
                    
                    2.0Effect
      of valuation allowance
                    
                    
                    (122.2
                    )
                    
                    
                    34.9Effect
      of expiring net operating loss
                    
                    
                    156.8
                    
                    
                    
                    0.0Total
      income tax expense (benefit)
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %
 
 Deferred
income taxes are recognized to reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and for income
tax carryforwards.  Significant components of the Company’s net
deferred tax assets are as follows (in thousands):
 
 December
      31,2007
                    
                    
                    2006Deferred
      tax assets:Net
      operating loss carryforwards
                    
                    $
                    17,063
                    
                    
                    $
                    64,149Foreign
      net operating loss carryforwards
                    
                    
                    298
                    
                    
                    
                    -Research
      and development credits
                    
                    
                    2,362
                    
                    
                    
                    1,248Foreign
      research and development credits
                    
                    
                    1,601
                    
                    
                    
                    1,601Foreign
      investment tax credits
                    
                    
                    729
                    
                    
                    
                    729Unearned
      revenue
                    
                    
                    1,258
                    
                    
                    
                    691Reserves
                    
                    
                    2,711
                    
                    
                    
                    2,006Compensation
      accruals
                    
                    
                    597
                    
                    
                    
                    66Intangible
      assets
                    
                    
                    3,696
                    
                    
                    
                    2,335Depreciable
      assets
                    
                    
                    1,571
                    
                    
                    
                    1,782Foreign
      depreciable assets
                    
                    
                    277
                    
                    
                    
                    -Other
                    
                    
                    97
                    
                    
                    
                    66Valuation
      allowance
                    
                    
                    (32,260
                    )
                    
                    
                    (74,673
                    )Net
      deferred tax asset
                    
                    $
                    -
                    
                    
                    $
                    -
  F-39
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 13.
Income Taxes – (Continued)
 
 The
valuation allowance for deferred tax assets as of December 31, 2007, was
approximately $32.2 million.  The decrease of $42.4 million and the
decrease of $10.1 million in the total valuation allowance for 2007and 2006,
respectively, are due to changes in the above described temporary differences on
which a valuation allowance was provided.
 
 A portion
of the Company’s deferred tax assets are attributable to acquisitions accounted
for as purchase transactions.  The valuation allowances associated
with these deferred assets will be credited to goodwill if and when
realized.  Based on the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, the Company’s management believes it is more likely than
not that the Company will not realize the benefits of the deferred tax assets as
of December 31, 2007 and 2006.
 
 At
December 31, 2007, the Company had net operating loss (“NOL”) carry-forwards of
approximately $46.4 million and other business tax credits of approximately $2.3
million, a substantial portion of which are subject to certain limitations under
the Internal Revenue Code Section 382. If not utilized, the NOLs will continue
to expire through the year 2027.  In addition, the Company had foreign
NOL carryforwards of approximately $944,000 and foreign investment tax credits
and foreign research and development credits totaling approximately $2.3 million
which begin expiring in years 2014 through 2027.
 
 On
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement 109 (“FIN 48”), with no impact
on beginning accumulated deficit. This statement clarifies the criteria that an
individual tax position must satisfy for some or all of the benefits of that
position to be recognized in a company’s financial statements. FIN 48 prescribes
a recognition threshold of more-likely-than-not, and a measurement attribute for
all tax positions taken or expected to be taken on a tax return, in order for
those tax positions to be recognized in financial statements. As of December 31,
2007, we had no unrecognized tax benefits.
  We
believe it is possible that a portion of our net operating losses may not be
utilizable due to the operation of Internal Revenue Code section 382. We have
not completed a full analysis to determine all limitations. Accordingly, upon
completion of such an analysis, it may be necessary to record additional
unrecognized tax benefits associated with our inability to fully utilize our net
operating losses as a result of a section 382 limitation.
  We
recognize potential accrued interest and penalties related to unrecognized tax
benefits within our income tax expense. Due to our net operating loss
carryforward position, we recognized no interest and penalties at December 31,
2007 associated with our uncertain tax positions.
  Tax years
2003, 2004, 2005, and 2006 remain subject to examination by federal and state
taxing authorities. Our primary state tax jurisdictions are Alabama, California,
Colorado, Georgia, Minnesota, Pennsylvania, and Utah and our international
jurisdictions are the United Kingdom and Canada. Open tax years for all
jurisdictions are for the tax years 2003 to 2006 with the exception of the
United Kingdom, for which the open tax years are 2004 to 2006.
  F-40
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  14.
Savings and Retirement Plan
 
 The
Company sponsors a 401(k) savings and retirement plan which is available to all
eligible employees. Under the plan, the Company may make discretionary matching
contributions.  Discretionary matching contributions less forfeitures
from continuing operations were approximately $129,100 and $157,000 for the
years ended December 31, 2007 and 2006, respectively.
 
 15.
Employee Stock Purchase Plan
 
 On
November 16, 1999, the Company adopted the Verso Technologies, Inc. 1999
Employee Stock Purchase Plan (the “Stock Purchase Plan”). Under the Stock
Purchase Plan, full-time or part-time employees, except persons owning 5% or
more of the Company’s common stock, who have worked for the Company for at least
15 consecutive days before the beginning of the offering period are eligible to
participate in the Stock Purchase Plan.   Employees may elect to
have withheld up to 10% of their annual salary up to a maximum of $25,000 per
year to be applied to the purchase of the Company’s unissued common
stock.  The purchase price was generally equal to 85% of the lesser of
the market price on the beginning or ending date of the offering periods up
until December 31, 2005 at which time the Stock Purchase Plan was
amended.  The amended plan called for the purchase price to be 95% of
the market price on the ending date of the offering period.  In 2004,
the Stock Purchase Plan was amended to increase the amount of shares of the
Company’s common stock underlying the plan from 200,000 to
300,000.  Shares of the Company’s common stock issued under the Stock
Purchase Plan were 8,268, and 17,916 for the years ended December 31,
2007 and 2006, respectively.
 
 16.
Other Commitments and Contingencies
 
 Leases
 
 The
Company leases office space and certain equipment under operating leases which
expire at various dates through 2010 with some leases containing options for
renewal.  Rent expense for continuing operations under these leases
was $2.5 million and $2.3 million for the years ended December 31,
2007 and 2006, respectively.
  As of
December 31, 2007, approximate future commitments under operating leases and
future minimum rentals to be received under noncancelable subleases in excess of
one year are as follows (in thousands):
  Continuing
      Operations
                    
                    
                    Discontinued
      Operations(See
      Note 9)
                    
                    
                    (See
      Note 5)Leases
                    
                    
                    Subleases
                    
                    
                    Leases
                    
                    
                    Subleases2008
                    
                    $
                    2,340
                    
                    
                    $
                    (410
                    )
                    
                    $
                    385
                    
                    
                    $
                    (238
                    )2009
                    
                    
                    2,009
                    
                    
                    
                    (418
                    )
                    
                    
                    393
                    
                    
                    
                    (245
                    )2010
                    
                    
                    348
                    
                    
                    
                    (35
                    )
                    
                    
                    33
                    
                    
                    
                    (21
                    )Total
                    
                    $
                    4,697
                    
                    
                    $
                    (863
                    )
                    
                    $
                    811
                    
                    
                    $
                    (504
                    )
  The
Company remains a guarantor on a lease through December 2009 used in the
operations of the NACT business, which the Company sold in January
2005.  The total remaining commitment related to this lease is
approximately $1.3 million.
  F-41
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  16.  Other
Commitments and Contingencies – (Continued)
 
 Canadian
Tax Audit
 
 On March
7, 2006, the Canada Revenue Agency (the “CRA”) notified 38098 Yukon Inc.
(formerly known as MCK Telecommunications Inc.), a corporation organized under
the laws of the Yukon Territory (“MCK Canada”') and an indirect wholly owned
subsidiary of the Company, that the CRA had completed its international income
tax audit of MCK Canada for the period from May 1, 1998 to April 30, 2000 (the
“Audit”').  As a result of the Audit, the CRA has issued income tax
reassessments to MCK Canada. In addition, the Alberta Tax and Revenue
Administration (the “ATR”') has issued reassessments for each year of the
Audit.
 
 The key
issue under dispute in the audit is the valuation of certain intellectual
property that was transferred from MCK Canada to its U.S. parent company, MCK
Communications, Inc. (“MCK US”') in fiscal 1998.  MCK US consulted
with outside valuation advisors to establish the value of the intellectual
property transferred. The CRA and the ATR disagree with such value. The Company
and its advisors disagree with the reassessments, and the Company has filed
notices of objection with respect thereto with the CRA and the ATR and intends,
if necessary, to exhaust all of its rights of appeal in connection
therewith.
 
 The
Company estimates that, as of December 31, 2007, (i) the amount of taxes
allegedly due in respect of the CRA reassessments was approximately U.S. $9.1
million (plus penalties and interest thereon of approximately U.S.
$12.5 million);
and (ii) the amount of taxes allegedly due in respect of the ATR reassessments
was approximately U.S. $4.1 million (plus penalties and interest thereon of
approximately U.S. $5.2 million). The Company has been advised by its Canadian
and U.S. counsel that no such amounts should be collectible by the CRA or the
ATR against the Company or any of its other subsidiaries (other than MCK Canada)
and that the ability of the CRA and the ATR to collect such amounts should be
limited to the assets of MCK Canada, which have little or no value. Accordingly,
no provision for this matter has been recorded in the Company's financial
statements because the Company believes that it will not have a financial
statement impact.
  F-42
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 17.
Segment Information
  The
Company reports information for two segments, the Technologies Group and the
Advanced Applications Services Group.  Following the dispositions of
the NACT and MCK businesses, the Company re-evaluated its internal reporting and
decision-making and segregated the activity of the Verso Outsourcing Group and
combined the remaining operations of the Carrier Solutions Group and Enterprise
Solutions Group into the Packet-based Technologies Group.  Management
evaluates the business segment performance based on contributions before
unallocated items.  Inter-segment sales and transfers are not
significant.
 
 Technologies
Group:
 
 The
Technologies Group includes the Company’s softswitching, I-Master, NetPerformer
and AccessGate divisions, the Company’s subsidiaries; Telemate.Net Software,
Inc. (“Telemate.Net”), and the Company’s Verso Verilink, LLC (“Verso Verilink”),
Sentito Networks, Inc, (“Sentito”) and Verso Backhaul Solutions, Inc. (“Verso
Backhaul”). The Technologies Group includes domestic and international sales of
hardware and software, integration, applications and technical training and
support.  The Technologies Group core focus is on three market
segments: (i) Mobile Backhaul – an end-to-end cellular network bandwidth
optimization solution that helps network operators expand and migrate wireless
services, improve reliability and control operating costs; (ii)
Softswitch/Gateway – a pure IP platform that enables profitable end-to-end IP
communications over wireline, wireless, terrestrial and satellite links, which
is also interoperable with legacy architectures to deliver a seamless,
profitable VoIP migration path; and (iii) Integrated Access Devices – an ideal
access platform that provides integrated multi-service connectivity, aggregation
and compression to efficiently enable digital convergence, toll bypass, video
and conferencing. Also through our Technologies Group, we offer Network
Monitoring and Security, which minimizes communications costs and monitors and
controls employee productivity and computer usage through sophisticated software
products that provide monitoring, reporting, and filtering functions. The
Technologies Group offers software-based solutions (which include hardware) for
companies seeking to build private, converged packet-based voice and data
networks.  In addition, the Technologies Group offers software-based
solutions for Internet access and usage management that include call accounting
and usage reporting for Internet protocol network devices.  In 2006,
the Technologies Group added the product suites from the Verilink Acquisition
and the iMarc Acquisition.  These products provide access,
multiplexing and transport of voice and data services.   In 2007,
the Technology Group added product suites from the Sentito acquisition and
AccessGate acquisition.  These products enhance our catalog of
backhaul product offerings.
 
 Verso
Outsourcing Group:
 
 The Verso
Outsourcing Group consists of the Company’s technical applications support group
which was previously included as part of the Enterprise Solutions Group, and
includes outsourced technical application services and application installation
and training services to both customers of the Technologies Group and outside
customers.
  F-43
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 17.  Segment
Information – (Continued)
  Summarized
financial information concerning the Company’s reportable segments is shown in
the following table (in thousands):
 
 VersoTechnologies
                    
                    
                    OutsourcingGroup
                    
                    
                    Group
                    
                    
                    TotalFor
      the Years Ended December 31,2007Revenue
                    
                    $
                    43,352
                    
                    
                    $
                    7,283
                    
                    
                    $
                    50,635(Loss)
      contribution before unallocated items
                    
                    
                    (6,077
                    )
                    
                    
                    1,061
                    
                    
                    
                    (5,016
                    )Goodwill
                    
                    
                    2,289
                    
                    
                    
                    1,452
                    
                    
                    
                    3,741Total
      assets
                    
                    
                    24,274
                    
                    
                    
                    3,367
                    
                    
                    
                    27,6412006Revenue
                    
                    $
                    35,182
                    
                    
                    $
                    7,348
                    
                    
                    $
                    42,530(Loss)
      contribution before unallocated items
                    
                    
                    (2,496
                    )
                    
                    
                    363
                    
                    
                    
                    (2,133
                    )Goodwill
                    
                    
                    1,771
                    
                    
                    
                    1,453
                    
                    
                    
                    3,224Total
      assets
                    
                    
                    23,168
                    
                    
                    
                    3,864
                    
                    
                    
                    27,032
  The
following table reconciles the contribution before unallocated items to the loss
before discontinued operations (in thousands):
  Years
      Ended December 31,2007
                    
                    
                    2006Loss
      before unallocated items, per above
                    
                    $
                    (5,016
                    )
                    
                    $
                    (2,133
                    )Corporate
      general and administrative expenses
                    
                    
                    (8,511
                    )
                    
                    
                    (7,094
                    )Corporate
      research and development
                    
                    
                    (132
                    )
                    
                    
                    (298
                    )Depreciation
      and amortization
                    
                    
                    (2,754
                    )
                    
                    
                    (1,930
                    )Writedown
      of goodwill
                    
                    
                    (2,945
                    )
                    
                    
                    -Reorganization
      costs
                    
                    
                    (751
                    )
                    
                    
                    (674
                    )Other
      (expense) income
                    
                    
                    (6,590
                    )
                    
                    
                    (5,647
                    )Loss
      from continuing operations
                    
                    $
                    (26,699
                    )
                    
                    $
                    (17,776
                    )
 F-44
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 17.  Segment
Information – (Continued)
 
 The
following table reconciles the segment total assets to the Company’s total
assets:
  Years
      endedDecember
      31,2007
                    
                    
                    2006Total
      assets before unallocated items, per above
                    
                    $
                    27,641
                    
                    
                    $
                    27,032Corporate
      assets:Cash
      and cash equivalents
                    
                    
                    2,658
                    
                    
                    
                    1,134Restricted
      cash
                    
                    
                    344
                    
                    
                    
                    1,041Current
      portion of notes receivable
                    
                    
                    -
                    
                    
                    
                    324Other
      current assets
                    
                    
                    999
                    
                    
                    
                    394Property
      and equipment, net
                    
                    
                    518
                    
                    
                    
                    942Loan
      issuance costs
                    
                    
                    1,497
                    
                    
                    
                    3,427Investment
                    
                    
                    606
                    
                    
                    
                    745Notes
      receivable, net of current portion
                    
                    
                    -
                    
                    
                    
                    1,810$
                    34,263
                    
                    
                    $
                    36,849
 
 
 Following
the acquisition of substantially all the operating assets along with certain
liabilities of Clarent in February 2003, the Company began conducting research
and development in Canada.  International sales of the Company’s
products and services continue to originate only from the United
States.  The geographic distribution of the Company’s revenue and
contribution before unallocated items (in thousands) are as
follows:
  Canada
                    
                    
                    United
      States
                    
                    
                    TotalFor
      the Year Ended December 31,2007Revenue
                    
                    $
                    -
                    
                    
                    $
                    50,635
                    
                    
                    $
                    50,635(Loss)
      contribution before unallocated items
                    
                    
                    (4,421
                    )
                    
                    
                    (595
                    )
                    
                    
                    (5,016
                    )Total
      Assets
                    
                    
                    473
                    
                    
                    
                    33,790
                    
                    
                    
                    34,263For
      the Year Ended December 31,2006Revenue
                    
                    $
                    -
                    
                    
                    $
                    42,530
                    
                    
                    $
                    42,530(Loss)
      contribution before unallocated items
                    
                    
                    (5,014
                    )
                    
                    
                    2,881
                    
                    
                    
                    (2,133
                    )Total
      Assets
                    
                    
                    551
                    
                    
                    
                    36,298
                    
                    
                    
                    36,849
 18.
Litigation
 
 From time
to time, we are involved in litigation with customers, vendors, suppliers and
others in the ordinary course of business, and a number of such claims may exist
at any given time. All such existing proceedings are not expected to have a
material adverse impact on our results of operations or financial condition. In
addition, we or our subsidiaries are a party to the proceedings discussed
below.
  F-45
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  18.
Litigation – (Continued)
 
 In
December 2001, a complaint was filed in the Southern District of New York
seeking an unspecified amount of damages on behalf of an alleged class of
persons who purchased shares of MCK’s common stock between the date of MCK’s
initial public offering and December 6, 2000. The complaint named as defendants
MCK and certain of its former officers and other parties as underwriters of its
initial public offering (the “MCK defendants”). The plaintiffs allege, among
other things, that MCK’s prospectus, contained in the Registration Statement on
Form S-1 filed with the SEC, was materially false and misleading because it
failed to disclose that the investment banks which underwrote MCK’s initial
public offering of securities and others received undisclosed and excessive
brokerage commissions, and required investors to agree to buy shares of
securities after the initial public offering was completed at predetermined
prices as a precondition to obtaining initial public offering allocations. The
plaintiffs further allege that these actions artificially inflated the price of
MCK’s common stock after the initial public offering. This case is one of many
with substantially similar allegations known as the “Laddering Cases” filed
before the Southern District of New York against a variety of unrelated issuers
(the “Issuers”), directors and officers (the “Laddering Directors and Officers”)
and underwriters (the “Underwriters”), and have been consolidated for pre-trial
purposes before one judge to assist with administration. A motion to dismiss
addressing issues common to the companies and individuals who have been sued in
these actions was filed in July 2002. After a hearing on the motion to dismiss,
the court, on February 19, 2003, denied dismissal of the claims against MCK as
well as other Issuers. Although MCK believes that the claims asserted are
without merit, MCK and other Issuers have negotiated a tentative settlement with
the plaintiffs. The terms of the tentative settlement agreement provide, among
other things, that (i) the insurers of the Issuers will deliver a surety
undertaking in the amount of $1 billion payable to the plaintiffs to settle the
actions against all Issuers and the Laddering Directors and Officers; (ii) each
Issuer will assign to a litigation trust, for the benefit of the plaintiffs, any
claims it may have against its Underwriters in the initial public offering for
excess compensation in the form of fees or commissions paid to such Underwriters
by their customers for allocation of initial public offering shares; (iii) the
plaintiffs will release all claims against the Issuers and the Laddering
Directors and Officers asserted or which could have been asserted in the actions
arising out of the factual allegations of the amended complaints; and (iv)
appropriate releases and bar orders and, if necessary, judgment reductions, will
be entered to preclude the Underwriters and any non-settling defendants from
recovering any amounts from the settling Issuers or the Laddering Directors and
Officers by way of contribution or indemnification. Prior to the Company’s
acquisition of MCK, MCK’s board of directors voted to approve the tentative
settlement.  On February 15, 2005, the judge presiding over the
Laddering Cases granted preliminary approval of the proposed settlement, subject
to some changes, which were subsequently submitted.  The judge issued
an order on August 31, 2005, further approving modifications to the settlement
and certifying the class.  Notice of the settlement has been
distributed to the settlement class members.  The deadline for filing
objections to the settlement was March 24, 2006, and a fairness hearing was held
April 26, 2006.  On December 5, 2006, the U.S. Court of Appeals for
the Second Circuit issued a ruling reversing class certification for purposes of
the litigation.  The plaintiffs petitioned for rehearing and rehearing
en banc, and the Second Circuit Court denied the request on April 9, 2007.
Because the settlement as agreed was not viable without the class certification,
the parties stipulated to its termination without prejudicing their ability to
apply to the court regarding a future settlement.  The plaintiffs
filed Second Amended Complaints in six issuer “focus” cases on August 14, 2007,
and have moved for class certification in those cases. The six issuer focus
defendants have moved to dismiss the Second Amended Complaints, which motion the
court granted in part and denied in part on March 26, 2008.  All other
cases, including the MCK case, have been stayed until further order of the
court.  No provision was recorded for this matter in the financial
statements of MCK prepared prior to our acquisition of MCK because MCK believed
that its portion of the proposed settlement would be paid by its insurance
carrier. We agree with MCK’s treatment of this matter.
  F-46
  VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  18.
Litigation – (Continued)
 
 Needham
(Nevada) Corp., a direct subsidiary of MCK and, hence, an indirect subsidiary of
the Company (MCK Nevada) was named a defendant in a lawsuit filed in Norfolk
County, Massachusetts by Entrata Communications, Inc. (“Entrata”) in 2002 (the
“Entrata Litigation”). The case arose out of a dispute between Entrata and one
of its largest shareholders, Superwire.com, Inc. (“Superwire”). Pursuant to a
contract with Entrata, MCK Nevada was obligated to pay Entrata $750,000 in early
2002. In order to take advantage of a $100,000 discount offered for early
payment, MCK Nevada paid $650,000 in November 2001 in full satisfaction of its
contractual obligations. The funds were placed in escrow with Superwire’s
California law firm, Jeffers, Shaff & Falk, LLP (“JSF”) which agreed not to
disburse the funds until the dispute between Entrata and Superwire had been
resolved. Nevertheless, Entrata contends that it never received the funds from
MCK Nevada and that the funds were diverted to Superwire and JSF.  In
the Entrata Litigation, Entrata sought to recover from both MCK Nevada and
Superwire the $750,000 that MCK Nevada would have owed in 2002. MCK Nevada
asserted counterclaims against Entrata and cross-claims against Superwire for
fraud and breach of contract. MCK Nevada added JSF and two of its partners,
Barry D. Falk and Mark R. Ziebell, as third-party defendants.
 
 On August
18, 2003, Entrata entered Chapter 7 bankruptcy proceedings pursuant to the
United States Bankruptcy Code. Entrata did not pursue the Entrata Litigation
after entering bankruptcy and the court dismissed the lawsuit for failure to
prosecute on September 7, 2005.  On October 18, 2006, Entrata filed a
motion for relief from dismissal.  The court granted the motion which
revived the case.
 
 On May
25, 2007, Entrata filed a motion for partial summary judgment asking the court
to award damages against MCK Nevada of $750,000 plus 12% prejudgment interest
since February 1, 2002, and approximately $79,000 in attorneys’
fees.  The court allowed the motion on August 6, 2007. On March 20,
2008, the court granted Entrata’s motion for final judgment against MCK Nevada
for the judgment amount.
 
 On
February 22, 2008, Michael Daly, the Chapter 7 bankruptcy trustee for Entrata
(the “Trustee”), filed a complaint in Norfolk County, Massachusetts (the
“Trustee Litigation”) against the Company and Citel Technologies, Inc. (“Citel”)
claiming that Citel and the Company were liable to Entrata for monies owed by
MCK Nevada in the Entrata Litigation because Citel and the Company allegedly
assumed the liability of MCK and because of a fraudulent transfer of the assets
of MCK (Nevada) by the Company to Citel. On January 21, 2005, Citel purchased a
substantial portion of the assets of MCK Nevada, MCK and certain related
subsidiaries from the Company and its related subsidiaries under an Asset
Purchase Agreement (the “Citel APA”).  The Trustee also filed a motion
for a temporary restraining order against the Company and Citel asking the court
to enjoin each such entity from transferring or disposing of any of its property
of any kind other than in the ordinary course of business.  At a
hearing held on March 7, 2008, the court ruled against the Trustee on the motion
for injunction as it related to Citel.  The court delayed deciding on
the motion for injunction as it related to the Company so that the Company and
Entrata could first engage in discussions to settle the dispute.
 
 On March
12, 2008, the Company received notice of claim for indemnification from Citel
alleging that the Company and the other sellers were obligated under the Citel
APA to indemnify Citel against the claims asserted against it in the Trustee
Litigation.
  F-47
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  18.
Litigation – (Continued)
 
 On March
25, 2008 (the “Agreement Date”), the Company, MCK Nevada, the Trustee and Citel
entered into a Settlement and Release (the “Settlement Agreement”) covering both
the Entrata Litigation and the Trustee Litigation.  Under the
Settlement Agreement, the Company agreed to pay the Trustee $100,000 in cash by
May 1, 2008 and to issue to the Trustee shares of Common Stock having an
aggregate value of $250,000 based on the mean average closing price of the
Commons Stock for the ten consecutive trading days prior to the Agreement Date
(the “Trustee Shares”).  In addition, MCK Nevada agreed to assign to
the Trustee MCK Nevada’s claims in the Entrata Litigation against Superwire,
JSF, Barry D. Falk, and Mark R. Zeibel (the “Assigned Claims”).  In
the Settlement Agreement, the Trustee granted to the Company and MCK Nevada and
MCK Nevada and the Company granted to the Trustee mutual general releases. In
addition, Citel, the Company, MCK Nevada, and the Trustee each granted mutual
limited releases to the other parties relating to the claims of the releasing
parties arising from the Entrata Litigation and the Trustee Litigation. The
Settlement Agreement specifies that certain conditions subsequent must be
satisfied in order for the releases to remain effective. The conditions
subsequent include (i) approval of the Settlement Agreement by the bankruptcy
court in the Entrata bankruptcy; (ii) the Company paying Entrata the $100,000
cash settlement amount by May 1, 2008; (iii) the Company not entering
bankruptcy, ceasing operations, or becoming subject to liquidation, receivership
or a proceeding to restructure its debt during the period beginning on the
Agreement Date until the later of 91 days after the payment of the $100,000 or
the date that is 30 days after the Trustee Shares may be sold under a
registration statement or under Rule 144 of the Securities Act; and (iv) the
Trustee Shares being sellable under an effective registration statement or under
Rule 144 of the Securities Act on or before Oct. 31, 2008.  If the
condition requiring approval by the bankruptcy court fails, the Settlement
Agreement becomes null and void and the releases are revoked.  If any
of the other conditions fail, the Trustee can elect to revoke the
releases.  If the Trustee makes this election, the Company becomes
indebted to Entrata in the amount of $750,000 plus 12% interest on such amount
from the Agreement Date less (i) the amount of the cash payment if the payment
was made, (ii) a credit for the Trustee Shares not returned by the Trustee to
the Company, and (iii) the amount recovered by Entrata from the Assigned Claims
net of costs and expenses incurred by Entrata in the Entrata Litigation, the
Trustee Litigation, and the pursuit of the Assigned Claims.  The
Company, the Trustee, and Citel agreed in the Settlement Agreement to file a
stipulation for dismissal without prejudice with regard to the Trustee
Action.  Entrata and MCK Nevada agreed to file a motion in the Entrata
Litigation to vacate the judgment against MCK Nevada and to dismiss without
prejudice the claims between MCK Nevada and Entrata in the action.  If
the conditions precedent noted above are not met, the parties have the ability
to reinstate the dismissed claims at their option.
 
 19
.. Subsequent Events
 
 On
February 19, and February 21, 2008, we issued 1,381,200 and 2,114,000 shares of
our common stock, respectively, and warrants to purchase 1,381,200 and 2,114,000
shares of our common stock, respectively, in a private placement transaction for
an aggregate purchase price of approximately $802,000, or an average price of
$0.23 per share. The warrants issued in connection with the private placement
are exercisable for a period of five years at an average exercise price of $0.28
per share. We received proceeds from the private placement of approximately
$750,000, net of expenses.
 
 F-48
 
 VERSO
TECHNOLOGIES, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  
 
 SCHEDULE
II-VALUATION AND QUALIFYING ACCOUNTS
 
 AdditionsBalance
      at
                    
                    
                    Charges
      to
                    
                    
                    
                    
                    
                    
                    
                    
                    Balance
      atbeginning
                    
                    
                    costs
      and
                    
                    
                    Allowances
                    
                    
                    (Recoveries)
                    
                    
                    end
      ofDescription
                    
                    of
      period
                    
                    
                    expenses
                    
                    
                    acquired
                    
                    
                    deductions
                    
                    
                    periodAllowance
      for doubtful accounts:2007
                    
                    $
                    (1,266,000
                    )
                    
                    $
                    (1,143,000
                    )
                    
                    $
                    (20,000
                    )
                    
                    $
                    492,000
                    
                    
                    $
                    (1,937,000
                    )2006
                    
                    $
                    (744,000
                    )
                    
                    $
                    (513,000
                    )
                    
                    $
                    -
                    
                    
                    $
                    (9,000
                    )
                    
                    $
                    (1,266,000
                    )Deferred
      tax valuation allowance:2007
                    
                    $
                    (74,673,000
                    )
                    
                    $
                    (17,420,000
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (92,093,000
                    )2006
                    
                    $
                    (84,755,000
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    10,082,000
                    
                    
                    $
                    (74,673,000
                    )Inventory
      obsolescence reserve:2007
                    
                    $
                    (1,678,000
                    )
                    
                    $
                    (1,349,000
                    )
                    
                    $
                    (475,000
                    )
                    
                    $
                    486,000
                    
                    
                    $
                    (3,016,000
                    )2006
                    
                    $
                    (1,170,000
                    )
                    
                    $
                    (789,000
                    )
                    
                    $
                    -
                    
                    
                    $
                    281,000
                    
                    
                    $
                    (1,678,000
                    )
 F-49
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
 VERSO
      TECHNOLOGIES, INC.By:
              /s/
      Mark
      H. DunawayMark
      H. DunawayChief
      Executive Officer, Presidentand Chief Operating
      OfficerDate:  April
      15, 2008
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 Name
              
              
              Title
              
              Date/s/
      Mark H. Dunaway
              
              
              Chief
      Executive Officer, President, Chief Operating Officer
              April
      15, 2008Mark
      H. Dunaway
              
              
              and
      Director (Principal Executive Officer)/s/ Martin D.
      Kidder
              
              
              Chief
      Financial Officer (Principal Financial Officer and Principal Accounting
      Officer)
              
              April
      15, 2008Martin
      D. Kidder/s/
      E. Kenneth Greenwald
              
              
              Director
              
              April
      15, 2008E.
      Kenneth Greenwald/s/ Gary H.
      Heck
              
              
              Director
              
              April
      15, 2008Gary
      H. Heck/s/ James R.
      Kanely
              
              
              Director
              
              April
      15, 2008James
      R. Kanely/s/
      James A. Verbrugge
              
              
              Director
              
              April
      15, 2008James
      A. Verbrugge/s/
      William J. West
              
              
              Director
              
              April
      15, 2008William
      J. West
 
 
  EXHIBIT
INDEX
 
 
 Exhibit
      No.
                Exhibit
                
                Method of
      Filing
 2.1
                Asset
      Purchase Agreement dated as of December 13, 2002, between the Registrant
      and Clarent Corporation.
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed December 17, 2002.2.2
                First
      Amendment to the Asset Purchase Agreement dated as of February 4, 2003,
      between the Registrant and Clarent Corporation.
                
                Incorporated
      by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K
      filed February 13, 2003.2.3
                Securities
      Purchase Agreement dated as of February 20, 2004, among the Registrant and
      each of the Investors signatory thereto. (The schedules to the Securities
      Purchase Agreement have been omitted from this Report pursuant to Item
      601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies
      of such omitted schedules supplementally to the SEC upon
      request.)
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed on February 26, 2004.2.4
                Asset
      Purchase Agreement dated as of January 21, 2005 with respect to the
      Registrant’s disposition of its MCK business. (The schedules to the Asset
      Purchase Agreement have been omitted from this Report pursuant to Item
      601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies
      of such omitted schedules supplementally to the SEC upon
      request.)
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed on January 27, 2005.
  
 2.5
                Asset
      Purchase Agreement dated as of January 21, 2005 with respect to the
      Registrant’s disposition of its NACT business. (The schedules to the Asset
      Purchase Agreement have been omitted from this Report pursuant to Item
      601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies
      of such omitted schedules supplementally to the SEC upon
      request.)
                
                Incorporated
      by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K
      filed on January 27, 2005.2.6
                Securities
      Purchase Agreement dated as of February 4, 2005, among the Registrant and
      each of the Investors signatory thereto. (The schedules to the Securities
      Purchase Agreement have been omitted from this Report pursuant to Item
      601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies
      of such omitted schedules supplementally to the SEC upon
      request.)
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed on February 8, 2005.2.7
                Asset
      Purchase Agreement dated as of February 23, 2005 by and among the
      Registrant, WSECI, Inc. and the shareholders of WSECI, Inc.(The schedules to the
      Asset Purchase Agreement have been omitted from this Report pursuant to
      Item 601(b)(2) of Regulation S-K, and the Registrant agrees to furnish
      copies of such omitted schedules supplementally to the SEC upon
      request.)
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed on March 1, 2005.2.8
                Securities
      Purchase Agreement dated as of June 15, 2006 among the Registrant, Winslow
      Asset Group, LLC and Winslow Asset Holdings, LLC. (The schedules to the
      Securities Purchase Agreement have been omitted from this Quarterly Report
      pursuant to Item 601(b)(2) of Regulation S-K, and the Registrant agrees to
      furnish copies of such omitted schedules supplementally to the Securities
      and Exchange Commission upon request.
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed on June 21, 2006.2.9
                Amendment
      No. 1 to Asset Purchase Agreement, dated as of January 25, 2007, among the
      Registrant, Paradyne Networks, Inc. and Zhone Technologies,
      Inc.
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed January 31, 2007.2.10
                Amendment
      No. 2 to Asset Purchase Agreement, dated as of February 7, 2007, among the
      Registrant, Paradyne Networks, Inc. and Zhone Technologies,
      Inc.
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed February 12, 2007.
  E-2
  2.11
                Agreement
      and Plan of Merger, dated as of April 4, 2007, among the Registrant,
      sentitO Networks, Inc., SN Acquisition Corporation and Brett Hauser as the
      Stockholders’ Agent.  (The schedules to the Agreement and Plan
      of Merger have been omitted from this Current Report pursuant to Item
      601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies
      of such omitted copies supplementally to the Securities and Exchange
      Commission upon request.).
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed April 5, 2007.2.12
                Asset
      Purchase Agreement, entered into December 21, 2007, but dated as of
      December 20, 2007, between NMS Communications Corp. and the
      Registrant.
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed December 28, 2007.3.1
                Amended
      and Restated Articles of Incorporation of the Registrant.
                
                Incorporated
      by reference to Exhibit 3.1 to the Registrant’s Registration Statement on
      Form S-18 (File No. 33-51456).3.2
                Amendment
      to the Amended and Restated Articles of Incorporation of the Registrant,
      as amended.
                
                Incorporated
      by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      filed October 2, 2000.3.3
                Amendment
      to the Amended and Restated Articles of Incorporation of the Registrant,
      as amended.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed November 19, 2001.3.4
                Amendment
      to the Amended and Restated Articles of Incorporation of the Registrant,
      amended.
                
                Incorporated
      by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2005.3.5
                Amendment
      to Amended and Restated Articles of Incorporation, effective as of October
      11, 2005.
                
                Incorporated
      by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      filed on October 7, 2005.3.6
                The
      Registrant’s Amended and Restated Bylaws, adopted October 24,
      2005.
                
                Incorporated
      by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      filed October 7, 2005.3.7
                Amendment
      to Amended and Restated Articles of Incorporation,
amended.
                
                Incorporated
      by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form
      10-Q filed on June 30, 2005.
  E-3
  3.8
                Statement
      of Rights of Series C Preferred Stock of the Registrant effective June 16,
      2005.
                
                Incorporated
      by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      filed on June 21, 2006.3.9
                Articles
      of Amendment to the Registrant’s Articles of Incorporation, effective as
      of November 7, 2006.
                
                Incorporated
      by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      filed November 13, 2006.3.10
                Amendment
      to Amended and Restated Bylaws of the Registrant, adopted December 18,
      2007.
                
                Incorporated
      by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      filed December 17, 2007.
 4.1
                Warrant
      dated as of September 29, 2000, to purchase 1,750,000 shares of the
      Registrant’s common stock granted to Steven A. Odom. Represents an
      executive compensation plan or arrangement.
                
                Incorporated
      by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30,
2000.
 4.2
                Warrant
      dated as of August 21, 2000, to purchase 300,000 shares of Cereus
      Technology Partners, Inc.'s common stock granted to Steven A. Odom.
      Represents an executive compensation plan or arrangement.
                
                Incorporated
      by reference to Exhibit 10.10 to the Registrant's Quarterly Report on Form
      10-Q for the quarter ended September 30, 2000.4.3
                Warrant
      dated as of January 30, 2001, to purchase 472,689 shares of the
      Registrant’s common stock granted to Strong River Investments,
      Inc.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2001.4.4
                Warrant
      dated as of January 30, 2001, to purchase 472,689 shares of the
      Registrant’s common stock granted to Bay Harbor Investments,
      Inc.
                
                Incorporated
      by reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2001.4.5
                Form
      of 7.5% Convertible Debenture issued in connection with the Convertible
      Debenture and Warrant Purchase Agreement between the Registrant and the
      Purchasers named therein (the “Debenture Purchase
    Agreement”).
                
                Incorporated
      by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K
      filed December 6, 2000.4.6
                Purchase
      Agreement dated as of January 18, 2001, among the Registrant, Strong River
      Investments, Inc. and Bay Harbor Investments, Inc. (the “Strong River
      Debenture Purchase Agreement”).
                
                Incorporated
      by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31,
2001.
  E-4
  4.7
                Amendment
      dated as of January 23, 2001, to the Strong River Debenture Purchase
      Agreement.
                
                Incorporated
      by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2001.4.8
                Amendment
      dated as of January 25, 2001, to the Strong River Debenture Purchase
      Agreement.
                
                Incorporated
      by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2001.4.9
                Registration
      Rights Agreement dated as of January 30, 2001, among the Registrant,
      Strong River Investments, Inc. and Bay Harbor Investments,
      Inc.
                
                Incorporated
      by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2001.4.10
                Form
      of Warrant issued in connection with the Registrant’s acquisition of
      Telemate.Net Software, Inc.
                
                Incorporated
      by reference to Exhibit 4.42 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2001.4.11
                Form
      of Warrant issued in connection with the Registrant’s October 2002 private
      placement offering.
                
                Incorporated
      by reference to Exhibit 4.45 to the Registrant’s Annual Report on Form
      10-K for the period ending December 31, 2002.4.12
                Form
      of Registration Rights Agreement entered into in connection with the
      Registrant’s October 2002 private placement offering.
                
                Incorporated
      by reference to Exhibit 4.46 to the Registrant’s Annual Report on Form
      10-K for the period ending December 31,
2002.
  E-5
 
 4.13
                Form
      of Warrant issued by the Registrant to each Investor in connection with
      the Registrant’s February 2004 private placement.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed on February 26, 2004.4.14
                Form
      of Registration Rights Agreement among the Registrant and the Investors
      entered into in connection with the Registrant’s February 2004
      private.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      filed on February 26, 2004.4.15
                Form
      of 6% Senior Unsecured Convertible Debenture dated February 4, 2005 issued
      in connection with the Registrant’s February 2005 private
      placement.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed on February 8, 2005.4.16
                Form
      of Series A Warrant dated February 4, 2005 to purchase shares of the
      Registrant’s common stock issued in connection with the Registrant’s
      February 2005 private placement.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      filed on February 8, 2005.4.17
                Form
      of Registration Rights Agreement among the Registrant and the Investors
      signatory thereto entered into in connection with the Registrant’s
      February 2005 private placement.
                
                Incorporated
      by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K
      filed on February 8, 2005.4.18
                Form
      of Warrant to purchase the Registrant’s common stock issued to certain
      placement agents in connection with the Registrant’s February 2005 private
      placement.
                
                Incorporated
      by reference to Exhibit 4.62 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2004.4.19
                Form
      of Registration Rights Agreement to be executed in connection with the
      closing of the transactions contemplated by the Asset Purchase Agreement
      dated as of February 23, 2005 by and among the Registrant, WSECI, Inc. and
      the shareholders of WSECI, Inc.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed on March 1, 20054.20
                Warrant
      issued July 25, 2005 to Mainfield Enterprises Inc. to purchase 1,500,000
      shares of the Registrant’s common stock.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed on July 29, 2005.
  E-6
  4.21
                Warrant
      issued July 25, 2005 to Heimdall Investments, Ltd. to purchase 1,500,000
      shares of the Registrant’s common stock.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      filed on July 29, 2005.4.22
                Warrant
      issued July 25, 2005 to Mainfield Enterprises Inc. to purchase 500,000
      shares of the Registrant’s common stock.
                
                Incorporated
      by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K
      filed on July 29, 2005.4.23
                Warrant
      issued July 25, 2005 to Heimdall Investments, Ltd. to purchase 500,000
      shares of the Registrant’s common stock.
                
                Incorporated
      by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K
      filed on July 29, 2005.4.24
                Registration
      Rights Agreement dated as of July 25, 2005, among the Registrant and the
      investors signatory thereto.
                
                Incorporated
      by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K
      filed on July 29, 2005.4.25
                Registration
      Rights Agreement dated March 20, 2006, between the Registrant and Joseph
      Noel.
                
                Incorporated
      by reference to Exhibit 4.4 to the Registrant’s Registration Statement on
      Form S-3 (No. 333-1333373).4.26
                Registration
      Rights Agreement dated March 20, 2006, between the Registrant and J.P.
      Turner & Company, L.L.C.
                
                Incorporated
      by reference to Exhibit 4.5 to the Registrant’s Registration Statement on
      Form S-3 (No. 333-1333373).4.27
                Registration
      Rights Agreement dated March 20, 2006, between the Registrant and Croft
      & Bender.
                
                Incorporated
      by reference to Exhibit 4.6 to the Registrant’s Registration Statement on
      Form S-3 (No. 333-1333373).4.28
                Form
      of Warrant issued in the Registrant’s February 2006 Private
      Placement.
                
                Incorporated
      by reference to Exhibit 4.53 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2005.4.29
                Form
      of Registration Rights Agreement entered into in connection with the
      Registrant’s February 2006 Private Placement.
                
                Incorporated
      by reference to Exhibit 4.54 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31,
2005.
  E-7
  4.30
                Registration
      Rights Agreement dated as of June 16, 2006 between the Registrant and
      Winslow Asset Group, LLC.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed on June 21, 2006.4.31
                Secured
      Non-Convertible Tranche A Revolving Note issued by the Registrant to
      Laurus Master Fund, Ltd. on September 20, 2006.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).4.32
                Secured
      Non-Convertible Tranche B Revolving Note issued by the Registrant to
      Laurus Master Fund, Ltd. on September 20, 2006.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).4.33
                Common
      Stock Purchase Warrant to purchase 1,321,877 shares of the Registrant’s
      common stock issued to Laurus Master Fund, Ltd. dated September 20,
      2006.
                
                Incorporated
      by reference to Exhibit 4.3 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).4.34
                Common
      Stock Purchase Warrant to purchase 600,000 shares of the Registrant’s
      common stock issued to Laurus Master Fund, Ltd. dated September 20,
      2006.
                
                Incorporated
      by reference to Exhibit 4.4 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).4.35
                Registration
      Rights Agreement between the Registrant and Laurus Master Fund, Ltd. dated
      September 20, 2006.
                
                Incorporated
      by reference to Exhibit 4.5 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).4.36
                Warrant
      to purchase 192,000 shares of the Registrant’s common stock issued to J.
      P. Turner Partners, LP dated September 20, 2006.
                
                Incorporated
      by reference to Exhibit 4.6 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).4.37
                Form
      of Registration Rights Agreement dated as of March 31, 2005 among the
      Registrant, WSECI, Inc. and the shareholders thereof.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed on March 1, 2005.4.38
                Form
      of Registration Rights Agreement executed in connection with the
      Registrant’s acquisition of the assets of WSECI, Inc.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed on March 1, 2005.
  E-8
  4.39
                Form
      of Warrant to purchase shares of the Registrant’s common stock dated
      January 31, 2007 pursuant to the Securities Purchase Agreement dated
      January 30, 2007 among the Registrant and the purchasers signatory
      thereto.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed January 31, 2007.4.40
                Form
      of Registration Rights Agreement dated as of January 30, 2007 entered into
      pursuant to the Securities Purchase Agreement dated January 30, 2007 among
      the Registrant and the purchasers signatory thereto.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed January 31, 2007.4.41
                Form
      of Warrant to purchase shares of the Registrant’s common stock dated
      February 5, 2007 pursuant to the Securities Purchase Agreement among the
      Registrant and the purchasers signatory thereto dated as of February 2,
      2007.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed February 6, 2007.4.42
                Form
      of Warrant to purchase shares of the Registrant’s common stock dated
      February 6, 2007 pursuant to the Securities Purchase Agreement among the
      Registrant and the purchasers signatory thereto dated as of February 5,
      2007.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      filed February 6, 2007.4.43
                Form
      of Registration Rights Agreement dated as of February 2, 2007 entered into
      pursuant to the Securities Purchase Agreement among the Registrant and the
      purchasers signatory thereto dated as of February 2, 2007.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed February 6, 2007.4.44
                Form
      of Registration Rights Agreement dated as of February 5, 2007 entered into
      pursuant to the Securities Purchase Agreement among the Registrant and the
      purchasers signatory thereto dated as of February 5, 2007.
                
                Incorporated
      by reference to Exhibit 99.4 to the Registrant’s Current Report on Form
      8-K filed February 6, 2007.4.45
                Form
      of Warrant to purchase shares of the Registrant’s common stock dated
      February 9, 2007 pursuant to the Securities Purchase Agreement among the
      Registrant and the purchaser signatory thereto dated as of February 9,
      2007.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed February 12, 2007.4.46
                Form
      of Registration Rights Agreement dated as of February 9, 2007 entered into
      pursuant to the Securities Purchase Agreement among the Registrant and the
      purchaser signatory thereto dated as of February 9, 2007.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed February 12, 2007.
  E-9
  4.47
                Form
      of Registration Rights Agreement entered into between the Registrant and
      the shareholders signatory thereto in connection with the Agreement and
      Plan of Merger, dated as of April 4, 2007, among the Registrant, sentitO
      Networks, Inc., SN Acquisition Corporation and Brett Hauser as the
      Stockholders’ Agent.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed April 23, 2007.4.48
                Form
      of Warrant issued in connection with the Agreement and Plan of Merger,
      dated as of April 4, 2007, among the Registrant, sentitO Networks, Inc.,
      SN Acquisition Corporation and Brett Hauser as the Stockholders’
      Agent.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      filed April 23, 2007.4.49
                Form
      of Warrant issued on January 31, 2007 to placement agents in connection
      with the Registrant’s first quarter 2007 private
placement.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Registration statement on
      Form S-3 filed April 24, 2007 (No. 333-142339).4.50
                Form
      of Warrant issued on February 5, 2007 to placement agents in connection
      with the Registrant’s first quarter 2007 private
placement.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Registration statement on
      Form S-3 filed April 24, 2007 (No. 333-142339).4.51
                Form
      of Warrant issued on February 9, 2007 to placement agents in connection
      with the Registrant’s first quarter 2007 private
placement.
                
                Incorporated
      by reference to Exhibit 4.3 to the Registrant’s Registration statement on
      Form S-3 filed April 24, 2007 (No. 333-142339).4.52
                Form
      of Registration Rights Agreement dated April 17, 2007, entered into
      between the Registrant and the shareholders signatory thereto in
      connection with the Registrant’s acquisition of sentitO Networks,
      Inc.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed April 23, 2007.4.53
                Form
      of Warrant issued on April 17, 2007 in connection with the Registrant’s
      acquisition of sentitO Networks, Inc.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      filed April 23, 2007.4.54
                Form
      of Restricted Stock Award for restricted stock awarded pursuant to the
      Registrant’s 1999 Stock Incentive Plan, as amended.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30,
2007.
  E-10
  4.55
                Form
      of Non-Qualified Stock Option Agreement for non-qualified stock options
      awarded pursuant to the Registrant’s 1999 Stock Incentive Plan, as
      amended.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.56
                Option
      to purchase 16,438 shares of the Registrant’s common stock issued to
      Martin D. Kidder on October 16, 2007.  Represents an executive
      compensation arrangement.
                
                Incorporated
      by reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.57
                Option
      to purchase 44,643 shares of the Registrant’s common stock issued to
      Martin D. Kidder on October 18, 2007.  Represents an executive
      compensation arrangement.
                
                Incorporated
      by reference to Exhibit 4.4 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.58
                Option
      to purchase 21,825 shares of the Registrant’s common stock issued to Mark
      H. Dunaway on October 16, 2007.  Represents an executive
      compensation arrangement.
                
                Incorporated
      by reference to Exhibit 4.5 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.59
                Option
      to purchase 32,738 shares of the Registrant’s common stock issued to
      Steven A. Odom on October 16, 2007.  Represents an executive
      compensation arrangement.
                
                Incorporated
      by reference to Exhibit 4.6 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.60
                Option
      to purchase 89,286 shares of the Registrant’s common stock issued to
      Steven A. Odom on October 18, 2007.  Represents an executive
      compensation arrangement.
                
                Incorporated
      by reference to Exhibit 4.7 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.61
                Restricted
      Stock Award Agreement dated October 16, 2007, between the Registrant and
      Martin D. Kidder with respect to 16,438 shares of the Registrant’s common
      stock.  Represents an executive compensation
      arrangement.
                
                Incorporated
      by reference to Exhibit 4.8 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.62
                Restricted
      Stock Award Agreement dated October 16, 2007, between the Registrant and
      Mark H. Dunaway with respect to 21,825 shares of the Registrant’s common
      stock.  Represents an executive compensation
      arrangement.
                
                Incorporated
      by reference to Exhibit 4.9 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30,
2007.
  E-11
  4.63
                Restricted
      Stock Award Agreement dated October 16, 2007, between the Registrant and
      Steven A. Odom with respect to 32,738 shares of the Registrant’s common
      stock.  Represents an executive compensation
      arrangement.
                
                Incorporated
      by reference to Exhibit 4.10 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.64
                Form
      of Registration Rights Agreement entered into in connection with the
      Registrant’s September 2007 private placement.
                
                Incorporated
      by reference to Exhibit 4.11 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.65
                Form
      of Warrant to purchase shares of the Registrant’s common stock dated
      September 5, 2007, issued in connection with the Registrant’s September
      2007 private placement.
                
                Incorporated
      by reference to Exhibit 4.12 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.66
                Form
      of Warrant to purchase shares of the Registrant’s common stock dated
      September 6, 2007, issued in connection with the Registrant’s September
      2007 private placement.
                
                Incorporated
      by reference to Exhibit 4.13 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.67
                Form
      of Warrant to purchase shares of the Registrant’s common stock dated
      September 10, 2007, issued in connection with the Registrant’s September
      2007 private placement.
                
                Incorporated
      by reference to Exhibit 4.14 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2007.4.68
                Registration
      Rights Agreement, entered into December 21, 2007, but dated as of December
      20, 2007, between the Registrant and NMS Communications
    Corp.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed December 28, 2007.4.69
                Registration
      Rights Agreement, dated as of December 21, 2007, between the Registrant
      and Valens U.S. SPV I, LLC.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      filed December 28, 2007.4.70
                Registration
      Rights Agreement, dated as of December 21, 2007, between the Registrant
      and Valens U.S. Offshore SPV II, Corp.
                
                Incorporated
      by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K
      filed December 28, 2007.4.71
                Form
      of compensation warrant issued on September 5, 2007, in connection with
      the Registrant’s September 2007 private placement.
                
                Filed
      herewith.
  E-12
  4.72
                Form
      of compensation warrant issued on September 6, 2007, in connection with
      the Registrant’s September 2007 private placement.
                
                Filed
      herewith.4.73
                Form
      of Warrant to purchase shares of the Registrant’s common stock dated
      February 19, 2008, issued in connection with the Registrant’s February
      2008 private placement.
                
                Filed
      herewith.4.74
                Form
      of Warrant to purchase shares of the Registrant’s common stock dated
      February 21, 2008, issued in connection with the Registrant’s February
      2008 private placement.
                
                Filed
      herewith.4.75
                Form
      of Registration Rights Agreement entered into in connection with the
      Registrant’s February 2008 private placement.
                
                Filed
      herewith.4.76
                Registration
      Rights Agreement, dated as of February 25, 2008, between the Registrant
      and Valens Offshore SPV II, Corp.
                
                Filed
      herewith.4.77
                Registration
      Rights Agreement, dated as of February 25, 2008, between the Registrant
      and Valens U.S. SPV I, LLC.
                
                Filed
      herewith.4.78
                Registration
      Rights Agreement, dated as of February 25, 2008, between the Registrant
      and Laurus Master Fund, Ltd.
                
                Filed
      herewith.10.1
                Form
      of Incentive Stock Option Agreement.
                
                Incorporated
      by reference to Exhibit 10.6 to the Registrant’s Registration Statement on
      Form S-18 (File 33-51456).10.2
                Form
      of Non-Statutory Option Agreement.
                
                Incorporated
      by reference to Exhibit 10.7 to the Registrant’s Registration Statement on
      Form S-18 (File 33-51456).
  E-13
  10.3
                Form
      of Restricted Stock Award Agreement.
                
                Incorporated
      by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form
      10-K/A for the year ended December 31, 2006.10.4
                Form
      of Non-Employee Director Stock Option Agreement.
                
                Incorporated
      by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form
      10-KSB for the year ended March 31, 1993.10.5
                1992
      Stock Incentive Plan.
                
                Incorporated
      by reference to Exhibit 10.4 to the Registrant’s Registration Statement on
      Form S-18 (File No. 33-51456).10.6
                1995
      Stock Incentive Plan.
                
                Incorporated
      by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form
      10-KSB for the year ended March 31, 1995.10.7
                1997
      Stock Incentive Plan.
                
                Incorporated
      by reference to the Registrant’s Proxy Statement for its 1997 Annual
      Meeting of Stockholders.10.8
                1998
      Stock Incentive Plan.
                
                Incorporated
      by reference to Exhibit 10.27 to the Registrant’s Registration Statement
      on Form S-4 filed February 16, 1999 (File No.
  333-68699).10.9
                1999
      Stock Incentive Plan.
                
                Incorporated
      by reference to Appendix A to the Registrant’s Proxy Statement dated
      October 4, 2006.10.10
                1999
      Employee Stock Purchase Plan.
                
                Incorporated
      by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2004.10.11
                Office
      Lease Agreement dated as of September 20, 1999, between the Registrant and
      Galleria 400 LLC.
                
                Incorporated
      by reference to Exhibit 10.51 to the Registrant’s Registration Statement
      on Form S-4 filed August 7, 2000 (File No.
  333-43224).
  E-14
  10.12
                First
      Amendment to Office Lease Agreement dated as of March 31, 2000, between
      the Registrant and Galleria 400 LLC.
                
                Incorporated
      by reference to Exhibit 10.52 to the Registrant’s Registration Statement
      on Form S-4 filed August 7, 2000 (File No. 333-43224).10.13
                Convertible
      Debenture Purchase Agreement dated as of July 27, 2000, among the
      Registrant, Strong River Investments, Inc.
                
                Incorporated
      by reference to Exhibit 10.53 to the Registrant’s Registration Statement
      on Form S-4 filed August 7, 2000 (File No. 333-43224).10.14
                Executive
      Employment Agreement dated as of September 29, 2000, between the
      Registrant and Steven A. Odom. Represents an executive compensation plan
      or arrangement.
                
                Incorporated
      by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2000.10.15
                Executive
      Employment Agreement dated as of September 29, 2000, between the
      Registrant and James M. Logsdon. Represents an executive compensation plan
      or arrangement.
                
                Incorporated
      by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2000.10.16
                Executive
      Employment Agreement dated as of September 29, 2000, between the
      Registrant and Juliet M. Reising. Represents an executive compensation
      plan or arrangement.
                
                Incorporated
      by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2000.10.17
                Form
      of Escrow Agreement entered into in connection with the MessageClick
      Merger Agreement.
                
                Incorporated
      by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K
      filed December 6, 2000.10.18
                Convertible
      Debenture and Warrant Purchase Agreement dated as of October 31, 2000,
      between the Registrant and the purchasers signatory
    thereto.
                
                Incorporated
      by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K
      filed December 6, 2000.10.19
                Cereus
      Technology Partners, Inc. Directors’ Warrant Incentive Plan. Represents an
      executive compensation plan or arrangement.
                
                Incorporated
      by reference to Exhibit 10(cc) to Cereus Technology Partners, Inc.’s
      Annual Report on Form 10-KSB40 for the year ended December 31,
      1999.
  E-15
  10.20
                Cereus
      Technology Partners, Inc. Outside Directors’ Warrant Plan. Represents an
      executive compensation plan or arrangement.
                
                Incorporated
      by reference to Exhibit 10(dd) to Cereus Technology Partners, Inc.’s
      Annual Report on Form 10-KSB40 for the year ended December 31,
      1999.10.21
                Loan
      and Security Agreement dated December 14, 2001, among the Registrant, NACT
      Telecommunications, Inc., Telemate.Net Software, Inc. and Silicon Valley
      Bank, Commercial Finance Division.
                
                Incorporated
      by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2001.10.22
                Lease
      Agreement dated as of December 30, 1999, between NACT Telecommunications,
      Inc. and Boggess-Riverwoods Company, L.L.C.
                
                Incorporated
      by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2001.10.23
                Instrument
      of Assumption and Substitution of Guarantor of Lease dated as of July 27,
      2001, among the Registrant, World Access, Inc., Boggess Holdings, L.L.C.
      and NACT Telecommunications, Inc.
                
                Incorporated
      by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2001.10.24
                Intellectual
      Property Security Agreement dated as of December 14, 2001, between the
      Registrant and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.41 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2001.10.25
                Intellectual
      Property Security Agreement dated as of December 14, 2001, between NACT
      Telecommunications, Inc. and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2001.10.26
                Intellectual
      Property Security Agreement dated as of December 14, 2001, between
      Telemate.Net Software, Inc. and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.43 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2001.10.27
                Telemate.Net
      Software, Inc. 1999 Stock Incentive Plan.
                
                Incorporated
      by reference to Exhibit 10.13 to Telemate.Net Software, Inc.’s
      Registration Statement on Form S-1 filed June 24, 1999 (File No.
      333-81443).
  E-16
  10.28
                Amendment
      to the Telemate.Net 1999 Software, Inc. Stock Incentive
    Plan.
                
                Incorporated
      by reference to Exhibit 10.18 to Telemate.Net Software, Inc.’s
      Registration Statement on Form S-1 filed June 24, 1999 (File No.
      333-81443).10.29
                Telemate
      Stock Incentive Plan.
                
                Incorporated
      by reference to Exhibit 10.10 to Telemate.Net Software, Inc.’s
      Registration Statement on Form S-1 filed June 24, 1999 (File No.
      333-81443).10.30
                Amendment
      to Telemate Stock Incentive Plan.
                
                Incorporated
      by reference to Exhibit 10.14 to Telemate.Net Software, Inc.’s
      Registration Statement on Form S-1 filed June 24, 1999 (File No.
      333-81443).10.31
                Form
      of Indemnification Agreement entered into as of October 12, 2001, between
      the Registrant and each of its directors and non-director officers at the
      level of Vice-President and above.
                
                Incorporated
      by reference to Appendix F-1 to the Registrant’s Registration Statement on
      Form S-4/ A filed October 12, 2001 (File No.
333-62262).10.32
                Interest
      Purchase Agreement dated as of June 4, 2002, between the Registrant and
      NeTrue Communications, Inc.
                
                Incorporated
      by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2002.10.33
                Subordination
      Agreement dated April 25, 2002, among the Registrant, Telemate.Net
      Software, Inc., NACT Telecommunications, Inc. and Silicon Valley
      Bank.
                
                Incorporated
      by reference to Exhibit 99.6 to the Registrant’s Current Report on Form
      8-K filed May 1, 2002.10.34
                Amendment
      to Loan Documents dated February 12, 2003, among the Registrant,
      Telemate.Net Software, Inc., NACT Telecommunications, Inc. and Silicon
      Valley Bank.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.35
                Loan
      and Security Agreement (Exim Program) dated February 12, 2003, among the
      Registrant, Telemate.Net Software, Inc., NACT Telecommunications, Inc. and
      Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.36
                Borrower
      Agreement dated February 12, 2003, among the Registrant, Telemate.Net
      Software, Inc., NACT Telecommunications, Inc. and Silicon Valley
      Bank.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.
  E-17
  10.37
                Secured
      Promissory Note dated February 12, 2003, in principal amount of $4.0
      million, made by the Registrant in favor of Silicon Valley
      Bank.
                
                Incorporated
      by reference to Exhibit 99.4 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.38
                Subordination
      Agreement dated February 12, 2003, among the Registrant, Clarent
      Corporation and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 99.5 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.39
                Loan
      and Security Agreement dated as of February 12, 2003, between the
      Registrant and Clarent Corporation.
                
                Incorporated
      by reference to Exhibit 99.6 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.40
                Secured
      Subordinated Promissory Note dated February 12, 2003, in principal amount
      of $5.0 million, made by the Registrant in favor of Clarent
      Corporation.
                
                Incorporated
      by reference to Exhibit 99.7 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.41
                Secured
      Subordinated Promissory Note dated February 12, 2003, in principal amount
      of $3.0 million, made by the Registrant in favor of Clarent
      Corporation.
                
                Incorporated
      by reference to Exhibit 99.8 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.42
                Unsecured
      Subordinated Promissory Note, dated February 12, 2003, in principal amount
      of $1.8 million, made by the Registrant in favor of Clarent
      Corporation.
                
                Incorporated
      by reference to Exhibit 99.9 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.43
                Bill
      of Sale, Assignment and Assumption Agreement, dated as of February 12,
      2003, between the Registrant and Clarent Corporation.
                
                Incorporated
      by reference to Exhibit 99.10 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.44
                Assignment
      of Patent Rights dated as of February 7, 2003, made by Clarent Corporation
      to the Registrant.
                
                Incorporated
      by reference to Exhibit 99.11 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.45
                Assignment
      of Trademarks dated as of February 12, 2003, between the Registrant and
      Clarent Corporation.
                
                Incorporated
      by reference to Exhibit 99.12 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.10.46
                Intellectual
      Property and Security Agreement dated as of February 12, 2003, between the
      Registrant and Clarent Corporation.
                
                Incorporated
      by reference to Exhibit 99.13 to the Registrant’s Current Report on Form
      8-K filed February 13, 2003.
  E-18
  10.47
                Settlement
      Agreement dated November 6, 2002, between the Registrant and WA Telcom
      Products Co., Inc.
                
                Incorporated
      by reference to Exhibit 10.65 to the Registrant’s Annual Report on Form
      10-K for the period ended December 31, 2002.10.48
                Assignment
      and Collection Agreement dated December 5, 2002,  between the
      Registrant and WA Telcom Products Co., Inc.
                
                Incorporated
      by reference to Exhibit 10.66 to the Registrant’s Annual Report on Form
      10-K for the period ended December 31, 2002.10.49
                Cross-Corporate
      Continuing Guaranty dated as of February 12, 2003, among the Registrant,
      Telemate.Net Software, Inc., NACT Telecommunications, Inc. and Clarent
      Canada Ltd.
                
                Incorporated
      by reference to Exhibit 10.67 to the Registrant’s Annual Report on Form
      10-K for the period ended December 31, 2002.10.50
                Lease
      for 1221 West Mineral Avenue, dated as of February 11, 2003, between the
      Registrant and A.S. Burger Investments, LLC.
                
                Incorporated
      by reference to Exhibit 10.68 to the Registrant’s Annual Report on Form
      10-K for the period ended December 31, 2002.10.51
                Movable
      Hypothec dated as of February 20, 2003, between the Registrant and Silicon
      Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.69 to the Registrant’s Annual Report on Form
      10-K for the period ended December 31, 2002.10.52
                Movable
      Hypothec dated as of February 20, 2003, between the Clarent Canada Ltd.
      and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.70 to the Registrant’s Annual Report on Form
      10-K for the period ended December 31, 2002.10.53
                Settlement
      Agreement and Full Release of Claims dated as of February 12, 2003,
      between the Registrant and John M. Good.
                
                Incorporated
      by reference to Exhibit 10.71 to the Registrant’s Annual Report on Form
      10-K for the period ended December 31,
2002.
  E-19
  10.54
                Amendment
      to Loan Documents dated April 7, 2003, among the Registrant, Telemate.Net
      Software, Inc., NACT Telecommunications, Inc. and Silicon Valley
      Bank.
                
                Incorporated
      by reference to Exhibit 10.76 to the Registrant’s Annual Report on Form
      10-K for the period ended December 31, 2002.10.55
                Amendment
      to Loan Documents (Exim Program) dated April 7, 2003, among the
      Registrant, Telemate.Net Software, Inc., NACT Telecommunications, Inc. and
      Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.77 to the Registrant’s Annual Report on Form
      10-K for the period ended December 31, 2002.10.56
                Assignment
      and Assumption Agreement dated January 21, 2005 entered into in connection
      with the Registrant’s disposition of its MCK business with respect to the
      U.K. assets.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.57
                Assignment
      and Assumption Agreement dated January 21, 2005 entered into in connection
      with the Registrant’s disposition of its MCK business with respect to the
      U.S. assets.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.58
                Assignment
      and Assumption Agreement dated January 21, 2005 entered into in connection
      with the Registrant’s disposition of its MCK business with respect to the
      Canadian assets.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.59
                Bill
      of Sale dated January 21, 2005 entered into in connection with the
      Registrant’s disposition of its MCK business with respect to the U.K.
      assets.
                
                Incorporated
      by reference to Exhibit 99.4 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.
  E-20
  10.60
                Bill
      of Sale dated January 21, 2005 entered into in connection with the
      Registrant’s disposition of its MCK business with respect to the U.S.
      assets.
                
                Incorporated
      by reference to Exhibit 99.5 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.61
                Bill
      of Sale dated January 21, 2005 entered into in connection with the
      Registrant’s disposition of its MCK business with respect to the Canadian
      assets.
                
                Incorporated
      by reference to Exhibit 99.6 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.62
                Secured
      Convertible Promissory dated January 21, 2005 issued to the Registrant in
      principal amount of $3.5 million in connection with the Registrant’s
      disposition of its MCK business.
                
                Incorporated
      by reference to Exhibit 99.7 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.63
                Security
      Agreement dated January 21, 2005 entered into in connection with the
      Registrant’s disposition of its MCK business.
                
                Incorporated
      by reference to Exhibit 99.8 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.64
                Copyright
      Assignment Agreement dated January 21, 2005 entered into in connection
      with the Registrant’s disposition of its MCK business.
                
                Incorporated
      by reference to Exhibit 99.9 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.65
                Domain
      Name Assignment Agreement dated January 21, 2005 entered into in
      connection with the Registrant’s disposition of its MCK
      business.
                
                Incorporated
      by reference to Exhibit 99.10 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.66
                Patent
      Assignment Agreement dated January 21, 2005 entered into in connection
      with the Registrant’s disposition of its MCK business.
                
                Incorporated
      by reference to Exhibit 99.11 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.67
                Trademark
      Assignment Agreement dated January 21, 2005 entered into in connection
      with the Registrant’s disposition of its MCK business.
                
                Incorporated
      by reference to Exhibit 99.12 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.68
                Bill
      of Sale dated January 21, 2005 entered into in connection with the
      Registrant’s disposition of its NACT business.
                
                Incorporated
      by reference to Exhibit 99.13 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.69
                Copyright
      Assignment Agreement dated January 21, 2005 entered into in connection
      with the Registrant’s disposition of its NACT business.
                
                Incorporated
      by reference to Exhibit 99.14 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.
  E-21
  10.70
                Trademark
      Assignment Agreement dated January 21, 2005 entered into in connection
      with the Registrant’s disposition of its NACT business.
                
                Incorporated
      by reference to Exhibit 99.15to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.71
                Patent
      Assignment Agreement dated January 21, 2005 entered into in connection
      with the Registrant’s disposition of its NACT business.
                
                Incorporated
      by reference to Exhibit 99.16 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.72
                License
      Agreement dated January 21, 2005 entered into in connection with the
      Registrant’s disposition of its NACT business.
                
                Incorporated
      by reference to Exhibit 99.17 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.73
                Reciprocal
      Reseller Agreement dated January 21, 2005 entered into in connection with
      the Registrant’s disposition of its NACT business.
                
                Incorporated
      by reference to Exhibit 99.18 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.74
                Call
      Center Services Agreement dated January 21, 2005 entered into in
      connection with the Registrant’s disposition of its NACT
      business.
                
                Incorporated
      by reference to Exhibit 99.19 to the Registrant’s Current Report on Form
      8-K filed on January 27, 200510.75
                Instrument
      of Assignment, Agreement and Consent dated January 21, 2005 entered into
      in connection with the Registrant’s disposition of its NACT
      business.
                
                Incorporated
      by reference to Exhibit 99.20 to the Registrant’s Current Report on Form
      8-K filed on January 27, 2005.10.76
                Cash
      Collateral Agreement dated as of February 4, 2005 between the Registrant,
      the Investors signatory thereto and Wachovia Bank, National
      Association.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed on February 8, 2005.10.77
                Form
      of Seller Non-Competition Agreement to be executed in connection with the
      closing of the transactions contemplated by the Asset Purchase Agreement
      dated as of February 23, 2005 by and among the Registrant, WSECI, Inc. and
      the shareholders of WSECI, Inc.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed on March 1, 2005.10.78
                Form
      of Bill of Sale, Assignment and Assumption Agreement Seller to be executed
      in connection with the closing of the transactions contemplated by the
      Asset Purchase Agreement dated as of February 23, 2005 by and among the
      Registrant, WSECI, Inc. and the shareholders of WSECI,
Inc.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed on March 1, 2005.
  E-22
  10.79
                Non-qualified
      Stock Option entered into March 15, 2005 and effective November 3, 2004 to
      purchase 500,000 shares of the Registrant’s common stock granted to Lewis
      Jaffe. Represents an executive compensation plan or
      arrangement.
                
                Incorporated
      by reference to Exhibit 99.5 to the Registrant’s Current Report filed on
      March 21, 2005 and amended on April 28, 2005.10.80
                Non-qualified
      Stock Option entered into March 15, 2005 and effective November 3, 2004 to
      purchase 250,000 shares of the Registrant’s common stock granted to Lewis
      Jaffe. Represents an executive compensation plan or
      arrangement.
                
                Incorporated
      by reference to Exhibit 99.6 to the Registrant’s Current Report filed on
      March 21, 2005 and amended on April 28, 2005.10.81
                Non-qualified
      Stock Option entered into March 15, 2005 and effective November 3, 2004 to
      purchase 250,000 shares of the Registrant’s common stock granted to Lewis
      Jaffe. Represents an executive compensation plan or
      arrangement.
                
                Incorporated
      by reference to Exhibit 99.7 to the Registrant’s Current Report filed on
      March 21, 2005 and amended on April 28, 2005.10.82
                Non-qualified
      Stock Option entered into March 15, 2005 and effective November 19, 2004
      to purchase 250,000 shares of the Registrant’s common stock granted to
      Montgomery Bannerman. Represents an executive compensation plan or
      arrangement.
                
                Incorporated
      by reference to Exhibit 99.8 to the Registrant’s Current Report on Form
      8-K filed on March 21, 2005 and amended on April 28,
  2005.10.83
                Amendment
      to Loan Documents dated March 15, 2005, among the Registrant, Provo
      Prepaid (Delaware) Corp., Telemate.Net Software, Inc., Needham (Delaware)
      Corp. and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed on March 21, 2005 and amended on April 28,
  2005.10.84
                Amendment
      to Loan Documents (Exim Program) dated March 15, 2005, among the
      Registrant, Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc.
      and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed on March 21, 2005 and amended on April 28,
  2005.10.85
                Borrower
      Agreement dated March 15, 2005, among the Registrant, Provo Prepaid
      (Delaware) Corp., Telemate.Net Software, Inc. and Silicon Valley
      Bank.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Current Report on Form
      8-K filed on March 21, 2005 and amended on April 28,
  2005.10.86
                Amended
      and Restated Secured Promissory Note dated March 15, 2005, in principal
      amount of $10.0 million, made by the Registrant, Provo Prepaid (Delaware)
      Corp. and Telemate.Net Software, Inc. in favor of Silicon Valley
      Bank.
                
                Incorporated
      by reference to Exhibit 99.4 to the Registrant’s Current Report on Form
      8-K filed on March 21, 2005 and amended on April 28,
  2005.
  E-23
  10.87
                Assumption
      Agreement dated April 14, 2005, among the Registrant, Needham (Delaware)
      Corp., Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. and
      Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.32 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2005.10.88
                Borrower
      Agreement dated April 14, 2005, among the Registrant, Needham (Delaware)
      Corp., Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. and
      Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.33 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2005.10.89
                Amended
      and Restated Secured Promissory Note dated April 14, 2005, in principal
      amount of $10.0 million, made by the Registrant, Needham (Delaware) Corp.,
      Provo Prepaid (Delaware) Corp. and Telemate.Net Software, Inc. in favor of
      Silicon Valley Bank
                
                Incorporated
      by reference to Exhibit 10.34 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2005.10.90
                Assumption
      Agreement dated April 14, 2005, among the Registrant, Needham (Delaware)
      Corp., Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. and
      Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.32 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2005.10.91
                Borrower
      Agreement dated April 14, 2005, among the Registrant, Needham (Delaware)
      Corp., Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. and
      Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.33 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2005.10.92
                Amended
      and Restated Secured Promissory Note dated April 14, 2005, in principal
      amount of $10.0 million, made by the Registrant, Needham (Delaware) Corp.,
      Provo Prepaid (Delaware) Corp. and Telemate.Net Software, Inc. in favor of
      Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.34 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2005.10.93
                Sublease
      dated July 1, 2005, between the Registrant and Digital Insurance,
      Inc.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed on July 8, 2005.10.94
                Bill
      of Sale dated July 1, 2005, executed by the Registrant in favor of Digital
      Insurance, Inc.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed on July 8, 2005.10.95
                Security
      Agreement entered into on July 1, 2005, between the Registrant and Digital
      Insurance, Inc.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Current Report on Form
      8-K filed on July 8, 2005.
  E-24
  10.96
                Amendment
      to the 7.5% Convertible Debentures dated as of July 25, 2005 among the
      Registrant, Mainfield Enterprises Inc. and Heimdall Investments,
      Ltd.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed on July 29, 2005.10.97
                Limited
      Waiver and Amendment to Loan Documents dated July 25, 2005 between the
      Registrant and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed on July 29, 2005.10.98
                Limited
      Waiver and Amendment to Loan Documents (Exim Program) dated July 25, 2005
      between the Registrant and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Current Report on Form
      8-K filed on July 29, 2005.10.99
                Security
      Agreement entered into on July 1, 2005, between the Registrant and Digital
      Insurance, Inc.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Current Report on Form
      8-K filed July 8, 2005.10.100
                Amendment
      to the 7.5% Convertible Debentures dated as of July 25, 2005 among the
      Registrant, Mainfield Enterprises Inc. and Heimdall Investments,
      Ltd.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed July 29, 2005.10.101
                Limited
      Waiver and Amendment to Loan Documents dated July 25, 2005 between the
      Registrant and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed July 29, 2005.10.102
                Limited
      Waiver and Amendment to Loan Documents (Exim Program) dated July 25, 2005
      between the Registrant and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Current Report on Form
      8-K filed July 29, 2005.10.103
                Separation
      Agreement between the Registrant and Lewis Jaffe entered into on August
      16, 2005.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed August 22, 2005.10.104
                Verso
      Technologies, Inc. 1999 Stock Incentive Plan, as amended September 22,
      2005.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed September 28, 2005.10.105
                Amendment
      #1 to Secured Convertible Promissory Note among the Registrant, CITEL
      Technologies Limited and CITEL Technologies, Inc. entered into on
      September 23, 2005.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed September 28, 2005.
  E-25
  10.106
                Subordination
      Agreement dated as of September 23, 2005, between the Registrant and
      Bridge Bank, National Association.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Current Report on Form
      8-K filed September 28, 2005.10.107
                Executive
      Employment Agreement executed on October 24, 2005, but effective as of
      October 1, 2005 between the Registrant and Montgomery
      Bannerman.  (Represents an executive compensatory plan or
      arrangement.)
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Amendment No. 1 to
      Current Report on Form 8-K filed October 27, 2005.10.108
                Amended
      and Restated Executive Employment Agreement executed on October 24, 2005,
      but effective as of October 1, 2005 between the Registrant and Steven A.
      Odom.  (Represents an executive compensatory plan or
      arrangement.)
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed October 27, 2005.10.109
                Amended
      and Restated Executive Employment Agreement executed on October 24, 2005,
      but effective as of October 1, 2005 between the Registrant and Juliet M.
      Reising.  (Represents an executive compensatory plan or
      arrangement.)
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed October 27, 2005.10.110
                Amended
      and Restated Promissory Note made by the Registrant, Provo Prepaid
      (Delaware) Corp., Telemate.Net Software, Inc. and Needham (Delaware) Corp.
      dated March 24, 2006.
                
                Incorporated
      by reference to Exhibit 10.113 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2005.10.111
                Export-Import
      Bank of the United States Working Capital Guarantee Program Borrower
      Agreement dated as of March 24, 2006 among the Registrant, Provo Prepaid
      (Delaware) Corp., Telemate.Net Software, Inc. Needham (Delaware) Corp. and
      Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.114 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2005.10.112
                Amendment
      to Loan Documents dated January 27, 2006 among the Registrant, Provo
      Prepaid (Delaware) Corp., Telemate.Net Software, Inc. Needham (Delaware)
      Corp. and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.115 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2005.10.113
                Amendment
      to Loan Documents (EXIM Program) dated as of March 24, 2006 among the
      Registrant, Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc.
      Needham (Delaware) Corp. and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.116 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31,
2005.
  E-26
  10.114
                Amendment
      to Loan Documents dated as of March 24, 2006 among the Registrant, Provo
      Prepaid (Delaware) Corp., Telemate.Net Software, Inc. Needham (Delaware)
      Corp. and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.117 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2005.10.115
                Agreement
      of Software Development dated as of May 10, 2006, between the Registrant
      and Elitecore Technologies Limited.
                
                Incorporated
      by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.116
                Amendment
      to Loan Documents dated as of June 27, 2006 among the Registrant, certain
      of its subsidiaries and Silicon Valley Bank.
                
                Incorporated
      by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.117
                Contract
      entered into on July 17, 2006, among the Registrant, Verso Verilink, LLC
      and CM Solutions, Inc.
                
                Incorporated
      by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.118
                Manufacturing
      Agreement dated as of July 12, 2006 between the Registrant and CM
      Solutions Corporation.
                
                Incorporated
      by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.119
                Amendment
      to Note dated as of June 30, 2006 among the Registrant, CITEL
      Technologies, Inc. and CITEL Technologies Limited.
                
                Incorporated
      by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.120
                Agreement
      dated as of June 19, 2003 between Telesector Resources Group, Inc., d/b/a
      Verizon Services Group and XEL Communications, Inc., which amendment has
      been assumed by Verso Verilink, LLC.
                
                Incorporated
      by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.121
                Amendment
      No. 1 to Agreement dated as of August 25, 2003 between Telesector
      Resources Group, Inc., d/b/a Verizon Services Group and XEL
      Communications, Inc., which amendment has been assumed by Verso Verilink,
      LLC.
                
                Incorporated
      by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30,
2006.
  E-27
  10.122
                Amendment
      No. 2 to Product Purchase Agreement dated as of December 12, 2003 between
      Telesector Resources Group, Inc., d/b/a Verizon Services Group and XEL
      Communications, Inc., which amendment has been assumed by Verso Verilink,
      Inc.
                
                Incorporated
      by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.123
                Amendment
      No. 3 to Product Purchase Agreement dated as of February 18, 2004 between
      Telesector Resources Group, Inc., d/b/a Verizon Services Group and XEL
      Communications, Inc., which amendment has been assumed by Verso Verilink,
      Inc.
                
                Incorporated
      by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.124
                Amendment
      No. 4 to Contract No. C0302362 dated as of November 10, 2004 between
      Telesector Resources Group, Inc., d/b/a Verizon Services Group, and
      Verilink Corporation, which amendment has been assumed by Verso Verilink,
      Inc.
                
                Incorporated
      by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.125
                Amendment
      No. 5 to Product Purchase Agreement dated as of March 5, 2005 between
      Telesector Resources Group, Inc., d/b/a Verizon Services Group and
      Verilink Corporation, which amendment has been assumed by Verso Verilink,
      Inc.
                
                Incorporated
      by reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.126
                Amendment
      No. 6 to Product Purchase Agreement dated as of July 27, 2006, between
      Verso Verilink, LLC and Verizon Services Corp.
                
                Incorporated
      by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 2006.10.127
                Amendment
      No. 2 to Product Purchase Agreement dated as of December 12, 2003 between
      Telesector Resources Group, Inc., d/b/a Verizon Services Group and XEL
      Communications, Inc., which amendment has been assumed by Verso Verilink,
      Inc. (Portions of this Exhibit 10.8 have been omitted pursuant to a
      request for confidential treatment filed with the Securities and Exchange
      Commission.)
                
                Incorporated
      by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form
      10-Q/A for the quarter ended June 30, 2006.10.128
                Amendment
      No. 5 to Product Purchase Agreement dated as of March 5, 2005 between
      Telesector Resources Group, Inc., d/b/a Verizon Services Group and
      Verilink Corporation, which amendment has been assumed by Verso Verilink,
      Inc.  (Portions of this Exhibit 10.11 have been omitted pursuant
      to a request for confidential treatment filed with the Securities and
      Exchange Commission.)
                
                Incorporated
      by reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form
      10-Q/A for the quarter ended June 30,
2006.
  E-28
  10.129
                Security
      Agreement between the Registrant, certain of its subsidiaries and Laurus
      Master Fund dated September 20, 2006.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).10.130
                Intellectual
      Property Security Agreement between the Registrant, certain of its
      subsidiaries and Laurus Master Fund, Ltd. dated September 20,
      2006.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).10.131
                Stock
      Pledge Agreement between the Registrant, certain of its subsidiaries and
      Laurus Master Fund, Ltd. dated September 20, 2006.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).10.132
                Hypothecation
      of Movables between the Registrant, and Laurus Master Fund, Ltd. dated
      September 20, 2006.
                
                Incorporated
      by reference to Exhibit 99.4 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).10.133
                Letter
      Agreement between the Registrant and Laurus Master Fund, Ltd. dated
      September 20, 2006.
                
                Incorporated
      by reference to Exhibit 99.5 to the Registrant’s Registration Statement on
      Form S-3 filed on November 11, 2006 (No. 333-138429).10.134
                Verso
      Technologies, Inc. 1999 Stock Incentive Plan, as amended November 7,
      2006.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed November 13, 2006.10.135
                Consulting
      and Separation Agreement between the Registrant and Juliet M. Reising
      dated October 13, 2006.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed October 18, 2006.10.136
                Agreement
      between the Registrant and Martin D. Kidder dated October 5,
      2006.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed October 18, 2006.10.137
                Asset
      Purchase Agreement, dated as of December 29, 2006, among the Registrant,
      Paradyne Networks, Inc., and, for certain limited purposes, Zhone
      Technologies, Inc.
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed January 8, 2007.
  E-29
  10.138
                Common
      Stock Purchase Warrant to purchase 150,000 shares of the Registrant’s
      common stock issued to Laurus Master Fund, Ltd., dated December 29,
      2006.
                
                Incorporated
      by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
      filed January 8, 2007.10.139
                Common
      Stock Purchase Warrant to purchase 330,470 shares of the Registrant’s
      common stock issued to Laurus Master Fund, Ltd., dated December 29,
      2006.
                
                Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      filed January 8, 2007.10.140
                License
      Agreement, dated as of December 29, 2006, between the Registrant and
      Paradyne Networks, Inc.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed January 8, 2007.10.141
                Adaptation
      of Reseller Agreement, dated as of December 29, 2006, between the
      Registrant and Paradyne Networks, Inc.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed January 8, 2007.10.142
                Amendment
      No. 1 to Asset Purchase Agreement, dated as of January 25, 2007, among the
      Registrant, Paradyne Networks, Inc. and Zhone Technologies,
      Inc.
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed January 31, 2007.10.143
                Securities
      Purchase Agreement dated as of January 30, 2007 among the Registrant and
      the purchasers signatory thereto.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed January 31, 2007.10.144
                Securities
      Purchase Agreement dated as of February 2, 2007 among the Registrant and
      the purchasers signatory thereto.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed February 6, 2007.10.145
                Securities
      Purchase Agreement dated as of February 5, 2007 among the Registrant and
      the purchasers signatory thereto.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Current Report on Form
      8-K filed February 6, 2007.10.146
                Amendment
      No. 2 to Asset Purchase Agreement, dated as of February 7, 2007, among the
      Registrant, Paradyne Networks, Inc. and Zhone Technologies,
      Inc.
                
                Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      filed February 12, 2007.10.147
                Securities
      Purchase Agreement dated as of February 9, 2007 among the Registrant and
      the purchaser signatory thereto.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed February 12, 2007.
  E-30
  10.148
                Security
      Agreement between the Registrant, certain of its subsidiaries and Laurus
      Master Fund Ltd. dated September 20, 2006.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Registration Statement on
      Form S-3 (No. 333-138429).10.149
                Intellectual
      Property Security Agreement between the Registrant, certain of its
      subsidiaries and Laurus Master Fund, Ltd. dated September 20,
      2006.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Registration Statement on
      Form S-3 (No. 333-138429).10.150
                Stock
      Pledge Agreement between the Registrant, certain of its subsidiaries and
      Laurus Master Fund, Ltd. dated September 20, 2006.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Registration Statement on
      Form S-3 (No. 333-138429).10.151
                Hypothecation
      of Movables between the Registrant and Laurus Master Fund, Ltd. dated
      September 20, 2006.
                
                Incorporated
      by reference to Exhibit 99.4 to the Registrant’s Registration Statement on
      Form S-3 (No. 333-138429).10.152
                Letter
      Agreement between the Registrant and Laurus Master Fund, Ltd. dated
      September 20, 2006.
                
                Incorporated
      by reference to Exhibit 99.5 to the Registrant’s Registration Statement on
      Form S-3 (No. 333-138429).10.153
                Form
      of Seller’s Non-Competition Agreement entered into in connection with the
      Registrant’s acquisition of the assets of WSECI, Inc.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed March 1, 2005.10.154
                Intellectual
      Property Assignment dated as of March 26, 2007, among the Registrant,
      Paradyne Networks, Inc. and Paradyne Corporation.
                
                Incorporated
      by reference to Exhibit 10.158 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2006.10.155
                Exclusive
      License Agreement dated as of March 23, 2007, between the Registrant and
      Arcadia Patent Acquisition Corporation.
                
                Incorporated
      by reference to Exhibit 10.159 to the Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2006.10.156
                Escrow
      Agreement dated as of April 17, 2007 among the Registrant, the
      Stockholders’ Agent and SunTrust Bank, a Georgia Banking
      Corporation.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed April 23, 2007.
  E-31
  10.157
                Amendment
      to Intellectual Property Security Agreement dated as of May 10, 2007 among
      the Registrant, Telemate.Net Software, Inc., Verso Verilink, LLC and
      Laurus Master Fund, Ltd.
                
                Incorporated
      by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2007.10.158
                Trademark
      Assignment of Security dated as of May 10, 2007 among the Registrant and
      Laurus Master Fund, Ltd.
                
                Incorporated
      by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2007.10.159
                Patent
      Assignment of Security dated as of May 10, 2007 among the Registrant and
      Laurus Master Fund, Ltd.
                
                Incorporated
      by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2007.10.160
                Patent
      Assignment of Security dated as of April 18, 2007 among sentitO Networks,
      Inc. and Laurus Master Fund, Ltd.
                
                Incorporated
      by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2007.10.161
                Trademark
      Assignment of Security dated as of April 18, 2007 among sentitO Networks,
      Inc. and Laurus Master Fund, Ltd.
                
                Incorporated
      by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2007.10.162
                Joinder
      Agreement dated as of April 17, 2007 among sentitO Networks, Inc. and
      Laurus Master Fund, Ltd.
                
                Incorporated
      by reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2007.10.163
                Agreement
      among the Registrant, Citel Technologies Limited, Citel Technologies,
      Inc., MCK Canada Operations Inc. and Citel PLC executed on May 25, 2007
      but dated May 24, 2007.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed June 1, 2007.10.164
                Consulting
      and Separation Agreement between the Registrant and Montgomery Bannerman,
      dated June 30, 2007.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed July 6, 2007.
  E-32
  10.165
                Registrant’s
      2007 Restricted Stock and Option Incentive Program.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed October 12, 2007.10.166
                Registrant’s
      2007 Stock Incentive Plan.
                
                Incorporated
      by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
      8-K filed December 17, 2007.10.167
                Assignment
      of Asset Purchase Agreement, entered into December 21, 2007, but dated as
      of December 20, 2007, made by the Registrant in favor of Verso Backhaul
      Solutions, Inc.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.168
                Assignment
      and Bill of Sale and Assumption Agreement, entered into December 21, 2007,
      but dated as of December 20, 2007, among NMS Communications Corp., NMS
      Communications Europe Limited and Verso Backhaul Solutions,
      Inc.
                
                Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.169
                Intellectual
      Property Agreement, entered into December 21, 2007, but dated as of
      December 20, 2007, between NMS Communications Corp. and Verso Backhaul
      Solutions, Inc.
                
                Incorporated
      by reference to Exhibit 99.3 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.170
                Transition
      Services Agreement, entered into December 21, 2007, but dated as of
      December 20, 2007, between NMS Communications Corp. and Verso Backhaul
      Solutions, Inc.
                
                Incorporated
      by reference to Exhibit 99.4 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.171
                License
      Agreement, dated as of December 20, 2007, between NMS Communications Corp.
      and Verso Backhaul Solutions, Inc.
                
                Incorporated
      by reference to Exhibit 99.5 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.172
                Assignment
      of Loans, Liens and Documents Agreement, dated as of December 21, 2007,
      among Laurus Master Fund, Ltd., Valens U.S. SPV I, LLC and Valens Offshore
      SPV II, Corp.
                
                Incorporated
      by reference to Exhibit 99.6 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.173
                Joinder
      and Amendment Agreement, dated as of December 21, 2007, among the
      Registrant, Verso Backhaul Solutions, Inc. and Laurus Master Fund,
      Ltd.
                
                Incorporated
      by reference to Exhibit 99.7 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.174
                Collateral
      Assignment, dated as of December 21, 2007, is made by the Registrant, and
      Verso Backhaul Solutions, Inc. to Laurus Master Fund, Ltd. and agreed to
      by NMS Communications Corp.
                
                Incorporated
      by reference to Exhibit 99.8 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.
  E-33
  10.175
                Funds
      Escrow Agreement, dated as of December 21, 2007, among the Registrant,
      certain of its subsidiaries, Valens U.S. SPV I, LLC and Loeb & Loeb
      LLP.
                
                Incorporated
      by reference to Exhibit 99.9 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.176
                Funds
      Escrow Agreement, dated as of December 21, 2007, among the Registrant,
      certain of its subsidiaries, Valens Offshore SPV II Corp. and Loeb &
      Loeb LLP.
                
                Incorporated
      by reference to Exhibit 99.10 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.177
                Letter
      Agreement regarding Amendments to Warrants, dated as of December 21, 2007,
      among Laurus Master Fund, Ltd., Psource Structured Debt Limited, and
      Valens U.S. SPV I, LLC, and agreed to by the Registrant.
                
                Incorporated
      by reference to Exhibit 99.11 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.178
                Trade
      Style Letter, dated as of December 21, 2007, by the Registrant and certain
      of its subsidiaries.
                
                Incorporated
      by reference to Exhibit 99.12 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.179
                Post
      Closing and Further Assurances Letter, dated as of December 21, 2007,
      among Laurus Master Fund, Ltd., Valens U.S. SPV I, LLC and Valens Offshore
      SPV II, Corp. and agreed to by the Registrant and certain of its
      subsidiaries.
                
                Incorporated
      by reference to Exhibit 99.13 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.180
                Grant
      of Security Interest in Trademarks and Patents, dated as of December 21,
      2007, between the Registrant and Laurus Master Fund, Ltd.
                
                Incorporated
      by reference to Exhibit 99.14 to the Registrant’s Current Report on Form
      8-K filed December 28, 2007.10.181
                Movable
      hypothec against the Registrant in favor of Valens U.S. SPV I, LLC,
      dated December 20, 2007.
                
                Filed
      herewith.10.182
                Movable
      hypothec against the Registrant in favor of Valens Offshore SPV II,
      Corp., dated December 20, 2007.
                
                Filed
      herewith.10.183
                Movable
      hypothec against Verso Backhaul Solutions, Inc. in favor of Valens U.S.
      SPV I, LLC, dated December 20, 2007.
                
                Filed
      herewith.10.184
                Movable
      hypothec against Verso Backhaul Solutions, Inc. in favor of
      Valens Offshore SPV II, Corp., dated December 20,
    2007.
                
                Filed
      herewith.10.185
                Movable
      hypothec against Verso Backhaul Solutions, Inc. in favor of Laurus Master
      Fund, Ltd., dated December 20, 2007.
                
                Filed
      herewith.
  E-34
  10.186
                Movable
      hypothec against Verso Technologies Canada Inc. in favor of Valens U.S.
      SPV I, LLC, dated January 15, 2008.
                
                Filed
      herewith.10.187
                Movable
      hypothec against Verso Technologies Canada Inc. in favor of
      Valens Offshore SPV II, Corp., dated January 15,
2008.
                
                Filed
      herewith.10.188
                Movable
      hypothec against Verso Technologies Canada Inc. in favor of Laurus Master
      Fund, Ltd., dated January 15, 2008.
                
                Filed
      herewith.10.189
                First
      Amendment to the Loan and Security Agreement and Secured Subordinated
      Promissory Note, dated February 15, 2008, by and among the Registrant and
      Clarent Corporation.
                
                Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K filed February 22, 2008.10.190
                Letter
      Agreement dated as of February 25, 2008, among the Registrant, Laurus
      Master Fund, Ltd., Valens U.S. SPV I, LLC and Valens Offshore SPV II,
      Corp.
                
                Filed
      herewith.10.191
                Settlement
      Agreement and Release, dated as of March 25, 2008, between the Registrant,
      Michael Daly, Chapter 7 Trustee for the Estate of Entrata Communications
      Corporation, Citel Technologies, Inc. and Needham (Nevada)
      Corp.
                
                Filed
      herewith.10.192
                Amendment
      Agreement, executed as of January 24, 2008 by Verso Technologies Canada
      Inc., the Registrant and delivered to Laurus Master Fund
    Ltd.
                
                Filed
      herewith.16.1
                Letter
      from Grant Thornton LLP dated April 16, 2006.
                
                Incorporated
      by reference to Exhibit 16.1 to the Registrant’s Current Report on Form
      8-K filed April 14, 2006.
  E-35
  16.2
                Letter
      from Grant Thornton LLP dated June 16, 2006.
                
                Incorporated
      by reference to Exhibit 16.1 to the Registrant’s Current Report on Form
      8-K filed June 16, 2006.21.1
                Subsidiaries
      of the Registrant.
                
                Filed
      herewith.23.1
                Consent
      of Tauber & Balser, P.C.
                
                Filed
      herewith.31.1
                Rule
      13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Executive
      Officer.
                
                Filed
      herewith.31.2
                Rule
      13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Financial
      Officer.
                
                Filed
      herewith.32.1
                Section
      1350 Certification by the Registrant’s Chief Executive
      Officer.
                
                Filed
      herewith.32.2
                Section
      1350 Certification by the Registrant’s Chief Financial
      Officer.
                
                Filed
      herewith.