##### 









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | For the fiscal year ended December 31, 2004                                                 
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|  |  | For the transition period
    from           to                                             

Commission file number 0-22190





Verso Technologies, Inc.


(Exact Name of Registrant as Specified in Its Charter)


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

400 Galleria Parkway


Suite 300


Atlanta, GA 30339


(Address of Principal Executive Offices)


678-589-3750


(Registrants Telephone Number, Including Area Code)


Securities registered pursuant to Section 12(b) of the
Act: None


Securities registered pursuant to Section 12(g) of the
Act: common stock, $0.01 par value per share


þ o


þ


þ o






DOCUMENTS INCORPORATED BY REFERENCE:


None.










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##### 



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 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 Managements
Discussion and Analysis of Financial Condition and Results of
Operations  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






1



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##### 





Packet-based Technologies Group










2



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##### 



The Market for the Packet-based Technologies Group








Packet-based Technologies Group: Products and Solutions




| |                                         
| | ----------------------------------------
| | Clarent® Edge Access Softswitch Solution





| |   |                                   
| | - | ----------------------------------
| |  | Clarent Class 5 Call Manager;     
|
| |  | Clarent Command Center;           
|
| |  | Clarent Element Management System;
|
| |  | Clarent Border Agent;             
|
| |  | Clarent CPG; and                  
|
| |  | Clarent Connect.                  



3



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##### 







| |                                         
| | ----------------------------------------
| | Clarent® PSTN Access Softswitch Solution





| |   |                                   
| | - | ----------------------------------
| |  | Clarent Class 4 Call Manager;     
|
| |  | Clarent Command Center;           
|
| |  | Clarent Element Management System;
|
| |  | Clarent SS7 Signaling;            
|
| |  | Clarent BHG Media Gateways; and   
|
| |  | Clarent Connect.                  





| |                                             
| | --------------------------------------------
| | NetPerformer® Integrated Access VoIP Routers





| |                               
| | ------------------------------
| | I-Master Applications Platform



4



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##### 







| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | messaging;                                                                                                       
|
| |  | calling;                                                                                                         
|
| |  | conferencing;                                                                                                    
|
| |  | enhanced interactive voice response services such as alarm and
    wake-up, speed dial and streaming audio;      
|
| |  | additional real-time authentication for Internet and virtual
    private network access via ADSL and dial-up; and
|
| |  | pre-paid broadband access.                                                                                       



| |                                             
| | --------------------------------------------
| | TeleMate Voice Network Intelligence Software





| |                                                 
| | ------------------------------------------------
| | NetSpective® Internet Content Filtering Solution





Advanced Applications Services Group






Customers




5



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##### 















Sales and Marketing








Competition






| |                                
| | -------------------------------
| | Packet-based Technologies Group



6



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##### 













| |                                    
| | -----------------------------------
| | Advanced Application Services Group



Intellectual Property Rights








7



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##### 







Research and Development














8



---



##### 











Employees




Background










9



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##### 

















10



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##### 









|        |           
|------- | ----------
|Item 2. | Properties











11



---



##### 







|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings







12



---



##### 







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





|                       |  |     |             |  |                    |  |            | 
|---------------------- |  | --- | ----------- |  | ------------------ |  | ---------- | 
|Director Nominee       |  | For |             |  | Withheld Authority | 
|                       |  |     |             |  |                    | 
|Paul R. Garcia         |  |     | 112,784,630 |  |                    |  | 5,857,866  | 
|Gary H. Heck           |  |     | 100,801,357 |  |                    |  | 17,841,139 | 
|Amy L. Newmark         |  |     | 114,402,998 |  |                    |  | 4,239,498  | 
|Steven A. Odom         |  |     | 111,629,902 |  |                    |  | 7,012,594  | 
|Stephen E. Raville     |  |     | 115,704,627 |  |                    |  | 2,937,869  | 
|Juliet M. Reising      |  |     | 107,912,681 |  |                    |  | 10,729,815 | 
|Dr. James A. Verbrugge |  |     | 116,070,232 |  |                    |  | 2,572,264  | 
|Joseph R. Wright*      |  |     | 115,701,120 |  |                    |  | 2,941,376  | 






|  |                                                        
|- | -------------------------------------------------------
|* | Mr. Wright resigned from the Board on January 17, 2005.







13



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##### 









|         |                                     
|-------- | ------------------------------------
|Item 4.5 | Executive Officers of the Registrant





|                     |  |     |    |  |          |                                                                               
|-------------------- |  | --- | -- |  | -------- | ------------------------------------------------------------------------------
|Name                 |  | Age |    |  | Position
|                     |  |     |    |  |         
|Steven A. Odom       |  |     | 51 |  |          | Chairman of the Board and Chief Executive Officer                             
|Lewis Jaffe          |  |     | 48 |  |          | President and Chief Operating Officer                                         
|Juliet M. Reising    |  |     | 54 |  |          | Executive Vice President, Chief Financial Officer, Secretary and
    Treasurer
|Montgomery Bannerman |  |     | 49 |  |          | Senior Vice President, Strategic Initiatives                                  



Steven A. Odom


Lewis Jaffe


Juliet M. Reising


14



---



##### 





Montgomery Bannerman




PART II




|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities



|                              |                |      |   |      |     |  |   |      | 
|----------------------------- | -------------- | ---- | - | ---- | --- |  | - | ---- | 
|                              |                | High |   |      | Low | 
|                              |                |      |   |      |     | 
|Year ended December 31, 2004: |                |      |   |      |     |  |   |     
|                              | First Quarter  |      | $ | 3.32 |     |  | $ | 1.50 | 
|                              | Second Quarter |      |   | 1.92 |     |  |   | 1.12 | 
|                              | Third Quarter  |      |   | 1.65 |     |  |   | 0.90 | 
|                              | Fourth Quarter |      |   | 0.93 |     |  |   | 0.38 | 

15



---



##### 



|                              |                |      |   |      |     |  |   |      | 
|----------------------------- | -------------- | ---- | - | ---- | --- |  | - | ---- | 
|                              |                | High |   |      | Low | 
|                              |                |      |   |      |     | 
|Year ended December 31, 2003: |                |      |   |      |     |  |   |     
|                              | First Quarter  |      | $ | 0.71 |     |  | $ | 0.40 | 
|                              | Second Quarter |      |   | 1.84 |     |  |   | 0.43 | 
|                              | Third Quarter  |      |   | 5.22 |     |  |   | 1.70 | 
|                              | Fourth Quarter |      |   | 4.70 |     |  |   | 2.86 | 









16



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##### 





|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                                         |  |                          |         |   |         |   |        |         |  |   |         |   |  |         |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ------- | - | ------ | ------- |  | - | ------- | - |  | ------- | ------- | - |  | - | ------- | -
|                                                                         |  | Years Ended December 31, |        
|                                                                         |  |                          |        
|                                                                         |  | 2004(2)                  |         |   | 2003(3) |   |        | 2002(4) |  |   | 2001(5) |   |  | 2000(6) |        
|                                                                         |  |                          |         |   |         |   |        |         |  |   |         |   |  |         |        
|Statement of Operations Data(1):                                         |  |                          |         |   |         |   |        |         |  |   |         |   |  |         |         |   |  |   |         |  
|Revenue                                                                  |  | $                        | 32,263  |   |         | $ | 38,139 |         |  | $ | 18,479  |   |  | $       | 16,953  |   |  | $ | 12,732  |  
|Loss from Continuing Operations                                          |  |                          | (18,770 | ) |         |   | (4,215 | )       |  |   | (4,716  | ) |  |         | (13,820 | ) |  |   | (12,532 | )
|Loss from Continuing Operations per Common Share 
    basic and diluted |  |                          | (0.14   | ) |         |   | (0.04  | )       |  |   | (0.06   | ) |  |         | (0.25   | ) |  |   | (0.48   | )
|Balance Sheet Data:                                                      |  |                          |         |   |         |   |        |         |  |   |         |   |  |         |         |   |  |   |         |  
|Total Assets(7)                                                          |  |                          | 33,429  |   |         |   | 63,252 |         |  |   | 39,835  |   |  |         | 45,159  |   |  |   | 175,473 |  
|Long-term Liabilities, net of current portion                            |  |                          | 4,401   |   |         |   | 9,102  |         |  |   | 6,133   |   |  |         | 5,200   |   |  |   | 3,153   |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the continuing operations of TeleMate.Net (since its
    acquisition on November 16, 2001) and includes the
    continuing operations of assets acquired by the Company from
    Clarent Corporation since their acquisition on February 12,
    2003.                                                                                                                                                                                                                                           
|   
|(2) | 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.                                                                                                                                                                               
|   
|(3) | 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.                                                                                                                                                                               
|   
|(4) | The fiscal year 2002 loss from continuing operations includes
    $1.2 million in amortization of deferred compensation and
    $601,000 in non-cash interest expense related to the
    amortization of the discount on convertible subordinated
    debentures and loan fees.                                                                                                                                                                                                                           
|   
|(5) | The fiscal year 2001 loss from continuing operations includes
    $1.3 million of intangibles amortization, $1.8 million
    in amortization of deferred compensation and $606,000 in
    non-cash interest expense related to the amortization of the
    discount on convertible subordinated debentures and loan fees,
    and a $1,640,000 loss on debt conversion.                                                                                                                                   
|   
|(6) | The fiscal year 2000 loss from continuing operations includes
    $982,000 of goodwill amortization, $482,000 in amortization of
    deferred compensation, $511,000 in reorganization costs,
    $1.8 million in loss on asset abandonment and $715,000 in
    non-cash interest expense primarily related to the amortization
    of the discount on convertible subordinated debentures and loan
    fees.                                                                                             
|   
|(7) | Includes $9.0 million, $33.3 million,
    $27.4 million, $26.1 million and $153.0 million
    of assets of discontinued operations, as of December 31,
    2004, 2003, 2002, 2001 and 2000, respectively. The assets of
    discontinued operations as of December 31, 2000 included
    intangible assets totaling $119.2 million. The assets of
    discontinued operations as of December 31, 2004 have been
    reduced by the loss on disposal of discontinued operations
    totaling $14.8 million.



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Overview




17



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##### 













18



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##### 







Results of Operations




| |                                                
| | -----------------------------------------------
| | Fiscal Year 2004 Compared with Fiscal Year 2003





| |                      
| | ---------------------
| | Continuing Operations









19



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##### 

























20



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##### 





| |                          
| | -------------------------
| | Business Unit Performance

|                                                                                        |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |   |         |         |   |   |        |        |  
|--------------------------------------------------------------------------------------- | -------------- | ------------------------------- | ------ | - | --------------------- | - | ------ | ------------ |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ------- | ------- | - | - | ------ | ------ | -
|                                                                                        |                | Packet-based                    |        |   | Advanced Applications |   |        |             
|                                                                                        |                | Technologies Group              |        |   | Services Group        |   |        | Consolidated | 
|                                                                                        |                |                                 |        |   |                       |   |        |              | 
|                                                                                        |                | For the Year Ended December 31, |       
|                                                                                        |                |                                 |       
|                                                                                        |                | 2004                            |        |   | 2003                  |   |        | 2004         |  |   | 2003   |   |  | 2004 |        |   | 2003 |  
|                                                                                        |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |  
|                                                                                        |                | (Dollars in thousands)          |       
|Revenue                                                                                 |                | $                               | 20,527 |   |                       | $ | 25,128 |              |  | $ | 11,736 |   |  | $    | 13,011 |   |      | $ | 32,263  |         |   | $ | 38,139 |       
|                                                                                        |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |  
|Gross profit                                                                            |                |                                 | 11,134 |   |                       |   | 15,172 |              |  |   | 3,985  |   |  |      | 5,999  |   |      |   | 15,119  |         |   |   | 21,171 |       
|Gross margin                                                                            |                |                                 | 54     | % |                       |   | 60     | %            |  |   | 34     | % |  |      | 46     | % |      |   | 47      | %       |   |   | 56     | %     
|General and administrative                                                              |                |                                 | 2,375  |   |                       |   | 1,840  |              |  |   | 1,059  |   |  |      | 820    |   |      |   | 3,434   |         |   |   | 2,660  |       
|Sales and marketing                                                                     |                |                                 | 9,302  |   |                       |   | 6,474  |              |  |   | 126    |   |  |      | 196    |   |      |   | 9,428   |         |   |   | 6,670  |       
|Research and development                                                                |                |                                 | 6,584  |   |                       |   | 4,844  |              |  |   |       |   |  |      |       |   |      |   | 6,584   |         |   |   | 4,844  |       
|                                                                                        |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |  
|Contribution before unallocated items                                                   |                | $                               | (7,127 | ) |                       | $ | 2,014  |              |  | $ | 2,800  |   |  | $    | 4,983  |   |      | $ | (4,327  | )       |   | $ | 6,997  |       
|                                                                                        |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |  
|Unallocated items:                                                                      |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |   |         |         |   |   |        |       
|Corporate general and administrative                                                    |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |   | 8,958   |         |   |   | 6,967  |       
|Corporate research and development                                                      |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |   | 379     |         |   |   |       |       
|Depreciation and amortization of property and equipment                                 |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |   | 2,278   |         |   |   | 1,928  |       
|Amortization of intangibles                                                             |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |   | 240     |         |   |   | 240    |       
|Amortization of deferred compensation, related to sales, general
    and administrative |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |   | 435     |         |   |   | 780    |       
|Reorganization costs                                                                    |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |   | 1,414   |         |   |   | 159    |       
|                                                                                        |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |  
|                                                                                        | Operating loss |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |   |         | (18,031 | ) |   |        | (3,077 | )
|                                                                                        |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |  
|Other                                                                                   |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |   | (739    | )       |   |   | (1,138 | )     
|                                                                                        |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |  
|Loss from continuing operations before income taxes                                     |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      | $ | (18,770 | )       |   | $ | (4,215 | )     
|                                                                                        |                |                                 |        |   |                       |   |        |              |  |   |        |   |  |      |        |   |      |  



| |                                
| | -------------------------------
| | Packet-based Technologies Group





21



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##### 







| |                                     
| | ------------------------------------
| | Advanced Applications Services Group









| |                        
| | -----------------------
| | Discontinued Operations





|                                            |  |                    |         |   |      |   |         |  
|------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                            |  | For the year ended |        
|                                            |  | December 31,       |        
|                                            |  |                    |        
|                                            |  | 2004               |         |   | 2003 |  
|                                            |  |                    |         |   |      |  
|Revenue                                     |  | $                  | 18,889  |   |      | $ | 21,359  |  
|                                            |  |                    |         |   |      |  
|Gross profit                                |  |                    | 8,074   |   |      |   | 10,600  |  
|                                            |  |                    |         |   |      |  
|Operating loss                              |  |                    | (5,229  | ) |      |   | (14,072 | )
|Loss on disposal of discontinued operations |  |                    | (14,788 | ) |      |   |        |  
|                                            |  |                    |         |   |      |  
|Loss from discontinued operations           |  | $                  | (20,017 | ) |      | $ | (14,072 | )
|                                            |  |                    |         |   |      |  

22



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##### 









| |                                                
| | -----------------------------------------------
| | Fiscal Year 2003 Compared with Fiscal Year 2002





| |                      
| | ---------------------
| | Continuing Operations







23



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##### 

























24



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##### 









| |                          
| | -------------------------
| | Business Unit Performance

|                           |                                                                                         |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |   |        |        |        |   |        |        |        |  
|-------------------------- | --------------------------------------------------------------------------------------- | ------------------------------- | ------ | ----- | --------------------- | - | ----- | ------------ |  | - | ------ | ----- |  | ---- | ------ | ----- | ---- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                           |                                                                                         | Packet-based                    |        |       |                       |   |       |              | 
|                           |                                                                                         | Technologies                    |        |       | Advanced Applications |   |       |             
|                           |                                                                                         | Group                           |        |       | Services Group        |   |       | Consolidated | 
|                           |                                                                                         |                                 |        |       |                       |   |       |              | 
|                           |                                                                                         | For the Year Ended December 31, |       
|                           |                                                                                         |                                 |       
|                           |                                                                                         | 2003                            |        |       | 2002                  |   |       | 2003         |  |   | 2002   |       |  | 2003 |        |       | 2002 |  
|                           |                                                                                         |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |  
|                           |                                                                                         | (Dollars in thousands)          |       
|Revenue                    |                                                                                         | $                               | 25,128 |       |                       | $ | 5,939 |              |  | $ | 13,011 |       |  | $    | 12,539 |       |      | $ | 38,139 |        |        | $ | 18,478 |       
|                           |                                                                                         |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |  
|Gross profit               |                                                                                         |                                 | 15,172 |       |                       |   | 4,240 |              |  |   | 5,999  |       |  |      | 5,732  |       |      |   | 21,171 |        |        |   | 9,972  |       
|Gross margin               |                                                                                         |                                 | 60     | %     |                       |   | 71    | %            |  |   | 46     | %     |  |      | 46     | %     |      |   | 56     | %      |        |   | 54     | %     
|General and administrative |                                                                                         |                                 | 1,840  |       |                       |   | 310   |              |  |   | 820    |       |  |      | 846    |       |      |   | 2,660  |        |        |   | 1,156  |       
|Sales and marketing        |                                                                                         |                                 | 6,474  |       |                       |   | 2,734 |              |  |   | 196    |       |  |      | 528    |       |      |   | 6,670  |        |        |   | 3,262  |       
|Research and development   |                                                                                         |                                 | 4,844  |       |                       |   | 457   |              |  |   |       |       |  |      |       |       |      |   | 4,844  |        |        |   | 457    |       
|                           |                                                                                         |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |  
|                           | Contribution before unallocated items                                                   |                                 | $      | 2,014 |                       |   | $     | 739          |  |   | $      | 4,983 |  |      | $      | 4,358 |      |   | $      | 6,997  |        |   | $      | 5,097  |       
|                           |                                                                                         |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |  
|Unallocated items:         |                                                                                         |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |   |        |        |        |   |        |       
|                           | Corporate general and administrative                                                    |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |   |        | 6,967  |        |   |        | 6,094  |       
|                           | Depreciation and amortization of property and equipment                                 |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |   |        | 1,928  |        |   |        | 1,523  |       
|                           | Amortization of intangibles                                                             |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |   |        | 240    |        |   |        |        |       
|                           | Amortization of deferred compensation, related to sales, general
    and administrative |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |   |        | 780    |        |   |        | 1,173  |       
|                           | Reorganization costs                                                                    |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |   |        | 159    |        |   |        | 324    |       
|                           |                                                                                         |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |  
|                           |                                                                                         | Operating loss                  |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |   |        |        | (3,077 | ) |        |        | (4,017 | )
|Other                      |                                                                                         |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |   | (1,138 | )      |        |   | (899   | )     
|                           |                                                                                         |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |  
|                           | Loss from continuing operations before income taxes                                     |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |   | $      | (4,215 | )      |   | $      | (4,916 | )     
|                           |                                                                                         |                                 |        |       |                       |   |       |              |  |   |        |       |  |      |        |       |      |  



| |                                
| | -------------------------------
| | Packet-based Technologies Group





25



---



##### 









| |                                     
| | ------------------------------------
| | Advanced Applications Services Group









| |                        
| | -----------------------
| | Discontinued Operations



26



---



##### 





|                                            |  |                    |         |   |      |   |        | 
|------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------ | 
|                                            |  | For the Year Ended |        
|                                            |  | December 31,       |        
|                                            |  |                    |        
|                                            |  | 2003               |         |   | 2002 |  
|                                            |  |                    |         |   |      |  
|Revenue                                     |  | $                  | 21,359  |   |      | $ | 26,542 | 
|                                            |  |                    |         |   |      |  
|Gross profit                                |  |                    | 10,600  |   |      |   | 16,046 | 
|                                            |  |                    |         |   |      |  
|Operating (loss) income                     |  |                    | (14,072 | ) |      |   | 1,990  | 
|Loss on disposal of discontinued operations |  |                    |        |   |      |   |       | 
|                                            |  |                    |         |   |      |  
|(Loss) income from discontinued operations  |  | $                  | (14,072 | ) |      | $ | 1,990  | 
|                                            |  |                    |         |   |      |  







Critical Accounting Policies






| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts



27



---



##### 







| |                       
| | ----------------------
| | Inventory Obsolescence





| |                                       
| | --------------------------------------
| | Deferred Tax Asset Valuation Allowance





| |                                     
| | ------------------------------------
| | Litigation and Related Contingencies





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





28



---



##### 



Liquidity and Capital Resources




| |        
| | -------
| | Summary









| |          
| | ---------
| | Cash Flow









29



---



##### 







Contractual Obligations and Commercial Commitments




|                                                        |                         |                        |        |           |        |   |       |           |       |   |           |       |  |         |       |       |  |   |     |     | 
|------------------------------------------------------- | ----------------------- | ---------------------- | ------ | --------- | ------ | - | ----- | --------- | ----- | - | --------- | ----- |  | ------- | ----- | ----- |  | - | --- | --- | 
|                                                        |                         | Payments Due By Period |       
|                                                        |                         |                        |       
|                                                        |                         |                        |        | Less Than |        |   |       |           | After |  
|Contractual Obligations                                 |                         | Total                  |        |           | 1 Year |   |       | 1-3 Years |       |   | 4-5 Years |       |  | 5 Years |      
|                                                        |                         |                        |        |           |        |   |       |           |       |   |           |       |  |         |      
|Line of credit                                          |                         | $                      |       |           |        | $ |      |           |       | $ |          |       |  | $       |      |       |  | $ |    |    
|Additional payments for the acquisition of Encore Group |                         |                        | 519    |           |        |   | 290   |           |       |   | 229       |       |  |         |      |       |  |   |    |    
|Notes payable                                           |                         |                        | 3,000  |           |        |   |      |           |       |   |           |       |  |         | 3,000 |       |  |   |     |    
|Convertible subordinated debentures                     |                         |                        | 4,500  |           |        |   | 4,500 |           |       |   |          |       |  |         |      |       |  |   |    |    
|Operating leases:                                       |                         |                        |        |           |        |   |       |           |       |   |           |       |  |         |       |       |  |   |     |    
|                                                        | Continuing operations   |                        |        | 8,283     |        |   |       | 2,076     |       |   |           | 3,174 |  |         |       | 2,912 |  |   |     | 121 | 
|                                                        | Discontinued operations |                        |        | 5,350     |        |   |       | 1,787     |       |   |           | 2,752 |  |         |       | 778   |  |   |     | 33  | 
|                                                        |                         |                        |        |           |        |   |       |           |       |   |           |       |  |         |      
|Total contractual cash obligations                      |                         | $                      | 21,652 |           |        | $ | 8,653 |           |       | $ | 6,155     |       |  | $       | 6,690 |       |  | $ | 154 |    
|                                                        |                         |                        |        |           |        |   |       |           |       |   |           |       |  |         |      







Sources of Cash




30



---



##### 









Risk Factors




| |                                                 
| | ------------------------------------------------
| | The price of the Common Stock has been volatile.







31



---



##### 





| |                                                 
| | ------------------------------------------------
| | The Company may be unable to fund future growth.





| |                                                                                 
| | --------------------------------------------------------------------------------
| | The Company has a history of losses and may not be
    profitable in the future.





| |                                                                      
| | ---------------------------------------------------------------------
| | The Common Stock may be delisted from The Nasdaq SmallCap
    Market.







32



---



##### 







| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | The Companys growth could be limited if it is unable
    to attract and retain qualified personnel.





| |                                                                                      
| | -------------------------------------------------------------------------------------
| | The Company is exposed to the general condition of the
    telecommunications market.





| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | The Companys need to invest in research and
    development could harm the Companys operating
    results.





| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 the Companys business.





| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Intellectual property infringement claims against the
    Company, even without merit, could require the Company to enter
    into costly licenses or deprive the Company of the technology it
    needs.



33



---



##### 







| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Failure to protect the Companys intellectual
    property rights could have a material adverse effect on the
    Companys business.









| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | If the Companys products contain defects, then the
    Companys sales are likely to suffer, and the Company may
    be exposed to legal claims.







| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The Company may be obligated to indemnify customers who
    purchase equipment from the Company against claims of patent
    infringement.



34



---



##### 







| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | The new softswitch and VoIP routers which the Company
    intends to offer may not achieve acceptance in the
    marketplace.





| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales to customers based outside the United States have
    accounted for a significant portion of the Companys
    revenues, which exposes the Company to risks inherent in
    international operations.









| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | The Companys dependence on contract manufacturers
    and suppliers could result in product delivery delays.



35



---



##### 







| |                                          
| | -----------------------------------------
| | The Company may be subject to litigation.





| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company derives a substantial amount of its revenues
    from channel distribution partners, and such revenues may
    decline significantly if any major partner cancels or delays a
    purchase of its products.







| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys inability to develop and maintain
    relationships with key technology suppliers could harm its
    ability to sustain and grow its business.





|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk

Market Risk




36



---



##### 





Interest Rate Risks




Foreign Currency Risks






|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data



Quarterly Financial Data (Unaudited)




37



---



##### 





|                                                  |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |   |         |         |   |   |         |         |  
|------------------------------------------------- | -------------------------------------------------- | ---------------------------------------- | - | ------ | ------- | - | - | ---------- | ------ | - | ------- | ------- | ------- | ----- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                  |                                                    | First                                    |   |        | Second  |   |   | Third      |        |   | Fourth  |         |         | Total |  
|                                                  |                                                    | Quarter                                  |   |        | Quarter |   |   | Quarter(1) |        |   | Quarter |         |         | Year  |  
|                                                  |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |  
|                                                  |                                                    | (In thousands, except per share amounts) |  
|2004                                              |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |   |         |         |   |   |        
|                                                  | Revenue                                            |                                          | $ | 11,099 |         |   | $ | 6,631      |        |   | $       | 6,966   |         |       | $ | 7,566   |         |   | $ | 32,262  |        
|                                                  | Gross profit                                       |                                          |   | 5,913  |         |   |   | 2,934      |        |   |         | 3,049   |         |       |   | 3,223   |         |   |   | 15,119  |        
|                                                  | General and administrative                         |                                          |   | 2,836  |         |   |   | 2,983      |        |   |         | 3,284   |         |       |   | 3,289   |         |   |   | 12,392  |        
|                                                  | Sales and marketing                                |                                          |   | 1,956  |         |   |   | 2,409      |        |   |         | 2,583   |         |       |   | 2,480   |         |   |   | 9,428   |        
|                                                  | Research and development                           |                                          |   | 1,581  |         |   |   | 1,806      |        |   |         | 1,754   |         |       |   | 1,822   |         |   |   | 6,963   |        
|                                                  | Operating income (loss) from continuing operations |                                          |   | (2,383 | )       |   |   | (4,941     | )      |   |         | (5,318  | )       |       |   | (5,390  | )       |   |   | (18,032 | )      
|                                                  | Loss from continuing operations                    |                                          |   | (2,645 | )       |   |   | (5,150     | )      |   |         | (5,557  | )       |       |   | (5,419  | )       |   |   | (18,771 | )      
|                                                  | Loss from discontinued operations                  |                                          |   | (1,091 | )       |   |   | (1,130     | )      |   |         | (1,764  | )       |       |   | (1,243  | )       |   |   |        |        
|                                                  | Loss on disposal of discontinued operations        |                                          |   |       |         |   |   |           |        |   |         |        |         |       |   | (14,788 | )       |   |   | (14,788 | )      
|                                                  |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |  
|                                                  |                                                    | Net loss                                 |   | $      | (3,736  | ) |   | $          | (6,280 | ) |         | $       | (7,321  | )     |   | $       | (21,450 | ) |   | $       | (38,787 | )
|                                                  |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |  
|Net loss per common share  basic and diluted:(2) |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |   |         |         |   |   |        
|                                                  | Loss from continuing operations                    |                                          | $ | (0.02  | )       |   | $ | (0.04      | )      |   | $       | (0.04   | )       |       | $ | (0.04   | )       |   | $ | (0.14   | )      
|                                                  | Loss from discontinued operations                  |                                          |   | (0.01  | )       |   |   | (0.01      | )      |   |         | (0.01   | )       |       |   | (0.01   | )       |   |   | (0.04   | )      
|                                                  | Loss on disposal of discontinued operations        |                                          |   |       |         |   |   |           |        |   |         |        |         |       |   | (0.11   | )       |   |   | (0.11   | )      
|                                                  |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |  
|                                                  |                                                    | Net loss per common share                |   | $      | (0.03   | ) |   | $          | (0.05  | ) |         | $       | (0.05   | )     |   | $       | (0.16   | ) |   | $       | (0.29   | )
|                                                  |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |  
|2003                                              |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |   |         |         |   |   |        
|                                                  | Revenue                                            |                                          | $ | 7,263  |         |   | $ | 10,892     |        |   | $       | 10,767  |         |       | $ | 9,217   |         |   | $ | 38,139  |        
|                                                  | Gross profit                                       |                                          |   | 3,972  |         |   |   | 6,841      |        |   |         | 6,553   |         |       |   | 3,805   |         |   |   | 21,171  |        
|                                                  | General and administrative                         |                                          |   | 2,302  |         |   |   | 2,586      |        |   |         | 2,102   |         |       |   | 2,637   |         |   |   | 9,627   |        
|                                                  | Sales and marketing                                |                                          |   | 1,196  |         |   |   | 1,625      |        |   |         | 1,869   |         |       |   | 1,980   |         |   |   | 6,670   |        
|                                                  | Research and development                           |                                          |   | 764    |         |   |   | 1,269      |        |   |         | 1,285   |         |       |   | 1,526   |         |   |   | 4,844   |        
|                                                  | Operating income (loss) from continuing operations |                                          |   | (1,120 | )       |   |   | 766        |        |   |         | 390     |         |       |   | (3,113  | )       |   |   | (3,077  | )      
|                                                  | Income (loss) from continuing operations           |                                          |   | (1,464 | )       |   |   | 293        |        |   |         | (7      | )       |       |   | (3,037  | )       |   |   | (4,215  | )      
|                                                  | Income (loss) from discontinued operations         |                                          |   | 339    |         |   |   | (684       | )      |   |         | (11,600 | )       |       |   | (2,127  | )       |   |   | (14,072 | )      
|                                                  |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |  
|                                                  |                                                    | Net loss                                 |   | $      | (1,125  | ) |   | $          | (391   | ) |         | $       | (11,607 | )     |   | $       | (5,164  | ) |   | $       | (18,287 | )
|                                                  |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |  
|Net loss per common share  basic and diluted:(2) |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |   |         |         |   |   |        
|                                                  | Loss from continuing operations                    |                                          | $ | (0.01  | )       |   | $ |           |        |   | $       |        |         |       | $ | (0.02   | )       |   | $ | (0.04   | )      
|                                                  | Loss from discontinued operations                  |                                          |   |       |         |   |   |           |        |   |         | (0.12   | )       |       |   | (0.02   | )       |   |   | (0.14   | )      
|                                                  |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |  
|                                                  | Net loss per common share                          |                                          | $ | (0.01  | )       |   | $ |           |        |   | $       | (0.12   | )       |       | $ | (0.04   | )       |   | $ | (0.18   | )      
|                                                  |                                                    |                                          |   |        |         |   |   |            |        |   |         |         |         |       |  






|    |                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Third quarter 2003 net loss includes a write-down of
    goodwill totaling $10.9 million included in loss from
    discontinued operations.                                                                                                               
|   
|(2) | 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
    average common shares outstanding during each period.

38



---



##### 





|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure





|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures











|         |                  
|-------- | -----------------
|Item 9B. | Other Information



PART III




|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

Board of Directors




|                   |  |     |    |  |          |                                                                              
|------------------ |  | --- | -- |  | -------- | -----------------------------------------------------------------------------
|Name               |  | Age |    |  | Position
|                   |  |     |    |  |         
|Paul R. Garcia     |  |     | 52 |  |          | Director                                                                     
|Gary H. Heck       |  |     | 60 |  |          | Director, President and Chief Operating Officer                              
|Amy L. Newmark     |  |     | 47 |  |          | Director                                                                     
|Steven A. Odom     |  |     | 51 |  |          | Director, Chairman of the Board and Chief Executive Officer                  
|Stephen E. Raville |  |     | 57 |  |          | Director                                                                     
|Juliet M. Reising  |  |     | 54 |  |          | Director, Executive Vice President, Chief Financial Officer and
    Secretary
|James A. Verbrugge |  |     | 64 |  |          | Director                                                                     

39



---



##### 





Paul R. Garcia,


Gary H. Heck,


Amy L. Newmark,


Stephen E. Raville,


Dr. James A. Verbrugge,




40



---



##### 





Executive Officers




Audit Committee and Audit Committee Financial Expert








Code of Ethics




Section 16(a) Beneficial Ownership Reporting
Compliance




41



---



##### 





|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Director Compensation




Executive Compensation




Summary Compensation Table


|                            |                              |      |      |                     |            |  |            |              |  |           |                |   |  |              |         |         |     |  |        |     | 
|--------------------------- | ---------------------------- | ---- | ---- | ------------------- | ---------- |  | ---------- | ------------ |  | --------- | -------------- | - |  | ------------ | ------- | ------- | --- |  | ------ | --- | 
|                            |                              |      |      |                     |            |  |            | Long-Term    |  |           |               
|                            |                              |      |      |                     |            |  |            | Compensation |  |           |               
|                            |                              |      |      |                     |            |  |            |              | 
|                            |                              |      |      | Annual Compensation |            |  | Securities |              |  |          
|                            |                              |      |      |                     |            |  | Underlying |              |  | All Other |               
|Name and Principal Position |                              | Year |      |                     | Salary ($) |  |            | Bonus ($)    |  |           | Options (#)(1) |   |  | Compensation |        
|                            |                              |      |      |                     |            |  |            |              |  |           |                |   |  |              |        
|Steven A. Odom              |                              |      | 2004 |                     |            |  | 442,500    |              |  |           |               |   |  |              |        |         |     |  |       |    
|                            | Chief Executive Officer      |      |      | 2003                |            |  |            | 435,000      |  |           |                |  |  |              |         | 500,000 | (2) |  |        |    | 
|                            |                              |      | 2002 |                     |            |  | 443,180    |              |  |           |               |   |  |              |        |         |     |  |       |    
|Gary Heck                   |                              |      | 2004 |                     |            |  | 224,891    | (3)          |  |           |               |   |  |              | 100,000 | (4)     |     |  | 30,000 | (5)
|                            | President and Chief          |      |      | 2003                |            |  |            |             |  |           |                |  |  |              |         | 110,000 | (4) |  |        |    | 
|                            | Operating Officer            |      |      | 2002                |            |  |            |             |  |           |                |  |  |              |         | 227,500 | (4) |  |        |    | 
|James A. Logsdon            |                              |      | 2004 |                     |            |  | 275,711    | (6)          |  |           |               |   |  |              |        |         |     |  |       |    
|                            | President and Chief          |      |      | 2003                |            |  |            | 261,000      |  |           |                |  |  |              |         | 304,621 | (7) |  |        |    | 
|                            | Operating Officer            |      |      | 2002                |            |  |            | 270,000      |  |           |                |  |  |              |         |        |     |  |        |    | 
|Juliet M. Reising           |                              |      | 2004 |                     |            |  | 266,667    |              |  |           |               |   |  |              |        |         |     |  |       |    
|                            | Executive Vice President and |      |      | 2003                |            |  |            | 261,000      |  |           |                |  |  |              |         | 238,728 | (8) |  |        |    | 
|                            | Chief Financial Officer      |      |      | 2002                |            |  |            | 258,680      |  |           |                |  |  |              |         | 437,500 | (8) |  |        |    | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The exercise prices of all options granted to the Named
    Executive Officers are equal to or greater than the fair market
    value of the Common Stock on the dates such options were granted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | The amount of 2001 bonus earned by Mr. Odom was previously
    reported by the Company as $225,000. Of such amount, only
    $168,750 was paid to Mr. Odom in cash and the remainder was
    paid to Mr. Odom in the form of a stock option to
    purchase 248,773 shares of Common Stock at an exercise
    price of $0.46 per share granted to Mr. Odom on
    January 3, 2003 and exercisable in its entirety on the date
    thereof. On February 12, 2003, the Company also granted to
    Mr. Odom an option to purchase 251,227 shares of
    Common Stock at an exercise price of $0.42 per share,
    exercisable in its entirety on the date of grant.                                                                                                                                                                                                                                        
|   
|(3) | Mr. Heck served as President and Chief Operating Officer of
    the Company from February 23, 2004 to November 3,
    2004. Salary earned during 2004 was compensation for such
    service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(4) | The Company granted to Mr. Heck (i) on March 1,
    2004 an option to purchase 100,000 shares of Common
    Stock at an exercise price of $1.82 per share, exercisable
    in its entirety on September 1, 2004, in connection with
    his appointment as President and Chief Operating Officer of the
    Company; (ii) on February 7, 2003, an option to
    purchase 100,000 shares of Common stock at an exercise
    price of $0.43 per share, exercisable in its entirety on
    February 7, 2004, in exchange for his services as a
    director of the Company; (iii) on January 3, 2003, an
    option to purchase 10,000 shares of Common Stock at an
    exercise price of $0.46 per share, exercisable in its
    entirety on the date of grant, in exchange for consulting
    services rendered to the Company by PacifiCom, a consulting firm
    in which Mr. Heck is a partner; (iv) on

42



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##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | January 7, 2002, an option to
    purchase 87,500 shares of Common Stock at an exercise
    price of $1.50 per share, exercisable in its entirety on
    January 7, 2003, in exchange for his services as a
    director; (v) on March 28, 2002, an option to
    purchase 25,000 shares of Common Stock at an exercise
    price of $1.21 per share, exercisable in its entirety on
    the date of grant, in exchange for his services as a director;
    and (vi) on December 31, 2002, an option to
    purchase 115,000 shares of Common Stock at an exercise
    price of $0.50 per share, exercisable in its entirety on
    the date of grant, in exchange for consulting services rendered
    to the Company by PacifiCom, a consulting firm in which
    Mr. Heck is a partner.                                                                                                                                                       
|   
|(5) | Represents amounts paid to PacifiCom, a consulting firm in which
    Mr. Heck is a partner, in connection with consulting
    services rendered by PacifiCom to the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(6) | Represents amounts paid to Mr. Logsdon pursuant to his
    employment agreement with the Company while serving as the
    President and Chief Operating Officer of the Company, and
    amounts paid to him under such agreement after he ceased serving
    as the President and Chief Operating Officer of the Company on
    February 23, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(7) | The amount of 2001 bonus earned by Mr. Logsdon was
    previously reported by the Company as $85,000. Of such amount,
    only $63,750 was paid to Mr. Logsdon in cash and the
    remainder was paid to Mr. Logsdon in the form of a stock
    option to purchase 104,621 shares of Common Stock at
    an exercise price of $0.46 per share granted to
    Mr. Logsdon on January 3, 2003 and exercisable in its
    entirety on the date thereof. The Company also granted to
    Mr. Logsdon an option to purchase 200,000 shares
    of Common Stock at an exercise price of $0.42 per share,
    exercisable with respect to fifty percent (50%) of the
    underlying shares on the date of grant and all of the underlying
    shares as of February 12, 2004. Mr. Logsdon ceased
    serving as the President, Chief Operating Officer and a director
    of the Company effective February 23, 2004.                                   
|   
|(8) | On January 3, 2003, the Company granted to Ms. Reising
    a stock option to purchase 38,728 shares of Common
    Stock at an exercise price of $0.46 per share, exercisable
    in its entirety on the date of grant. The Company granted this
    option to Ms. Reising in lieu of payments of cash salary
    and bonus earned by Ms. Reising in the years ended 2002 and
    2001, respectively. On February 12, 2003, the Company also
    granted to Ms. Reising a stock option to
    purchase 200,000 shares of Common Stock at an exercise
    price of $0.42 per share, exercisable in its entirety on
    the date of grant. On August 2, 2002, the Company granted
    to Ms. Reising an option to
    purchase 437,500 shares of Common Stock at an exercise
    price of $2.14 per share, exercisable as to 291,667 of the
    underlying shares on the date of grant and as to the remaining
    145,833 shares on March 23, 2003.

Option Grants in Last Fiscal Year




|             |  |                   |         |  |                      |  |   |                |  |                        |            |  |  |    |           |  |     |   |         |  |  |   |         | 
|------------ |  | ----------------- | ------- |  | -------------------- |  | - | -------------- |  | ---------------------- | ---------- |  |  | -- | --------- |  | --- | - | ------- |  |  | - | ------- | 
|             |  | Individual Grants |         |  | Potential Realizable | 
|             |  |                   |         |  | Value at Assumed     | 
|             |  | Number of         |         |  | Percent of Total     |  |   |                |  | Annual Rates of Stock  |           
|             |  | Securities        |         |  | Options              |  |   |                |  | Price Appreciation for |           
|             |  | Underlying        |         |  | Granted to           |  |   |                |  | Option Term(1)         |           
|             |  | Options           |         |  | Employees in         |  |   | Exercise Price |  |                        | Expiration |  |  |    |          
|Name         |  | Granted           |         |  | 2004                 |  |   | (per share)    |  |                        | Date       |  |  | 5% |           |  | 10% |  
|             |  |                   |         |  |                      |  |   |                |  |                        |            |  |  |    |           |  |     |  
|Gary H. Heck |  |                   | 100,000 |  |                      |  | 4 | %              |  | $                      | 1.82       |  |  |    | 2/28/2014 |  |     | $ | 114,459 |  |  | $ | 290,061 | 






|    |                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts represent certain assumed rates of appreciation as set
    forth by the rules of the SEC. Actual gains, if any, on stock
    option exercises are dependent on the future performance of the
    Common Stock and overall market conditions. The amounts
    reflected in this table may not necessarily be achieved.
|   
|(2) | On March 1, 2004, the Company granted to Mr. Heck an
    option to purchase 100,000 shares of Common Stock at
    an exercise price of $1.82 per share, exercisable in its
    entirety on September 1, 2004, in connection with his
    appointment as President and Chief Operating Officer of the
    Company.            

43



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##### 



Aggregated Option Exercises in the Last Fiscal Year and
Fiscal Year-End Option Values




|                     |  |                            |           |  |                             |  |         |             |  |   |               |  |  |   |   | 
|-------------------- |  | -------------------------- | --------- |  | --------------------------- |  | ------- | ----------- |  | - | ------------- |  |  | - | - | 
|                     |  | Number of Securities       |           |  | Value of Unexercised In-    | 
|                     |  | Underlying Unexercised     |           |  | The-Money Options at Fiscal | 
|                     |  | Options at Fiscal Year-End |           |  | Year-End(1)                 | 
|                     |  |                            |           |  |                             | 
|Name                 |  | Exercisable                |           |  | Unexercisable               |  |         | Exercisable |  |   | Unexercisable | 
|                     |  |                            |           |  |                             |  |         |             |  |   |               | 
|Steven A. Odom(2)    |  |                            | 3,133,321 |  |                             |  | 437,500 |             |  | $ | 150,049       |  |  | $ | 0 | 
|Gary H. Heck         |  |                            | 700,000   |  |                             |  | 0       |             |  |   | 59,400        |  |  |   | 0 | 
|James M. Logsdon(3)  |  |                            | 1,478,474 |  |                             |  | 0       |             |  |   | 93,294        |  |  |   | 0 | 
|Juliet M. Reising(4) |  |                            | 1,347,581 |  |                             |  | 0       |             |  |   | 74,844        |  |  |   | 0 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Value of the Companys unexercised, in-the-money options
    based on the average of the high and low price of a share of the
    Common Stock as of December 31, 2004, which was $0.74.                                                                                                                                                                                                                                                                                                
|   
|(2) | Includes options and warrants originally issued by Cereus prior
    to September 29, 2000, which were converted into options or
    warrants to acquire an aggregate of 2,345,821 shares of
    Common Stock, of which options or warrants to acquire an
    aggregate of 1,908,321 shares of Common Stock were
    exercisable at December 31, 2004, and options or warrants
    to acquire an aggregate of 437,500 shares of Common Stock
    were unexercisable at December 31, 2004.
|   
|(3) | Includes options and warrants originally issued by Cereus prior
    to September 29, 2000 which were converted into options or
    warrants to acquire 1,058,853 shares of Common Stock.                                                                                                                                                                                                                                                                                                
|   
|(4) | Includes options and warrants originally issued by Cereus prior
    to September 29, 2000, which were converted into options or
    warrants to acquire an aggregate of 621,353 shares of
    Common Stock.                                                                                                                                                                                                                                                                             

Employment Agreements






44



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##### 









Compensation Committee Interlocks and Insider
Participation






45



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##### 





|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters

Equity Compensation Plan Information




|                                                            |  |                            |            |        |                   |   |      |                      |  |  |           | 
|----------------------------------------------------------- |  | -------------------------- | ---------- | ------ | ----------------- | - | ---- | -------------------- |  |  | --------- | 
|                                                            |  | Number of Securities to be |            |        | Weighted Average  |   |      | Number of Securities | 
|                                                            |  | Issued Upon Exercise of    |            |        | Exercise Price of |   |      | Remaining Available  | 
|                                                            |  | Outstanding                |            |        | Outstanding       |   |      | for Future Issuance  | 
|                                                            |  | Options, Warrants          |            |        | Options, Warrants |   |      | Under Equity         | 
|Plan Category                                               |  | and Rights                 |            |        | and Rights        |   |      | Compensation Plans   | 
|                                                            |  |                            |            |        |                   |   |      |                      | 
|Equity compensation plans approved by security holders:(1)  |  |                            | 11,395,240 |        |                   | $ | 1.84 |                      |  |  | 3,791,482 | 
|Equity compensation plans not approved by security holders: |  |                            | 1,667,172  | (2)(3) |                   | $ | 1.62 | (2)(3)               |  |  | 0         | 
|                                                            |  |                            |            |        |                   |   |      |                      | 
|Total                                                       |  |                            | 13,062,412 |        |                   | $ | 1.82 |                      |  |  | 3,791,482 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents options granted pursuant to the Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | Does not include (i) options to
    purchase 757,265 shares of Common Stock with a
    weighted average exercise price of $1.56 per share, which
    were originally granted as options to purchase shares of
    TeleMate.Nets common stock pursuant to the TeleMate Stock
    Incentive Plan and the TeleMate.Net Software, Inc. 1999 Stock
    Incentive Plan and which were assumed by the Company in
    connection with the Companys acquisition of TeleMate.Net;
    and (ii) options and warrants to
    purchase 5,080,244 shares of Common Stock with a
    weighted average exercise price of $2.52 per share, which
    were originally granted as options and warrants to purchase
    shares of Cereus common stock pursuant to the Cereus
    Outside Director Warrant Plan, Directors Warrant Plan and
    1997 Stock Option Plan and which were assumed by the Company in
    connection with the Companys acquisition of Cereus. The
    Company has not made, and will not make, any grants under the
    stock option or warrant plans of TeleMate.Net or Cereus.
|   
|(3) | Includes options and warrants to purchase Common Stock granted
    under plans not approved by the Companys shareholders. The
    material features of such plans are set forth below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (a) On November 3, 2004, the Company issued to
    Mr. Jaffe in connection with his appointment as President
    and Chief Operating Officer of the Company a ten-year option to
    purchase 500,000 shares of the Common Stock at an
    exercise price of $0.53 per share; (ii) a ten-year
    option to purchase 250,000 shares of Common Stock at
    an exercise price of $0.75 per share; and (iii) a
    ten-year option to purchase 250,000 shares of Common
    Stock at an exercise price of $1.25 per share. Each option
    vests with respect to twenty-five percent (25%) of the
    underlying shares on each of November 3, 2005,
    November 3, 2006, November 3, 2007 and
    November 3, 2008; provided, however that each option vests
    in its entirety upon a change of control of the Company.
|
| |  | (b) On November 19, 2004, the Company issued to
    Mr. Bannerman in connection with his appointment as Senior
    Vice President, Strategic Initiatives of the Company a ten-year
    option to purchase 250,000 shares of Common Stock at
    an exercise price of $0.69 per share exercisable with
    respect to twenty-five percent (25%) of the underling shares on
    each of November 19, 2005, November 19, 2006,
    November 19, 2007 and November 19, 2008.                                                                                                                                                                                                                                                                                                                                                 
|
| |  | (c) On January 30, 2001, the Company issued a warrant
    to purchase 83,334 shares of Common Stock to PNC Bank,
    National Association, a former lender to the Company
    (PNC), in consideration of PNC consenting to certain
    transactions engaged in by the Company. The warrant is
    exercisable until January 30, 2006, at an exercise price of
    $1.50 per share. The number of shares of Common Stock
    underlying the warrant and the exercise price thereof are
    subject to adjustment as set forth in the warrant.                                                                                                                                                                                                                                                                           

46



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##### 





| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (d) On September 1, 2000, the Company issued a warrant
    to purchase 12,532 shares of Common Stock to PNC in
    consideration of PNC consenting to certain transactions engaged
    in by the Company. The warrant is exercisable until
    September 1, 2005, at an exercise price of $0.01 per
    share. The number of shares of Common Stock underlying the
    warrant and the exercise price thereof are subject to adjustment
    as set forth in the warrant.                                                                                                                                                                                                                                                                                            
|
| |  | (e) On October 16, 2001, the Company issued a warrant
    to purchase 25,000 shares of Common Stock to PNC in
    consideration of PNC consenting to certain transactions engaged
    in by the Company. The warrant is exercisable until
    October 16, 2006, at an exercise price of $0.01 per
    share. The number of shares of Common Stock underlying the
    warrant and the exercise price thereof are subject to adjustment
    as set forth in the warrant.                                                                                                                                                                                                                                                                                              
|
| |  | (f) On February 8, 2000, the Company issued warrants
    to purchase an aggregate of 37,364 shares of Common Stock
    to Burnham Securities, Inc. and three of its affiliates as
    compensation for services rendered by Burnham Securities, Inc.
    in connection with a private placement of securities conducted
    by the Company in February 2000. The warrants are exercisable
    until February 8, 2005, with an exercise price of $3.09
    with respect to 5,336 shares underlying such warrants and
    $5.62 with respect to the remaining 32,028 shares
    underlying such warrants. The number of shares of Common Stock
    underlying the warrants and the exercise prices thereof are
    subject to adjustment as set forth in the warrants.
|
| |  | (g) On February 18, 2000, the Company issued a warrant
    to purchase 8,942 shares of Common Stock to a broker
    dealer as compensation for services rendered by such broker
    dealer in connection with a private placement of securities
    conducted by the Company in August 2000. The warrant is
    exercisable until August 2005, with an exercise price of
    $1.82 per share.                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | (h) On October 31, 1996, the Company issued warrants
    to purchase an aggregate of 150,000 shares of Common Stock
    to three individuals as compensation for consulting services
    rendered by such individuals to the Company. The warrants are
    exercisable until October 30, 2006, at an exercise price of
    $6.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | (i) On September 19, 1997, the Company issued warrants
    to purchase an aggregate of 100,000 shares of Common Stock
    to two individuals as compensation for consulting services
    rendered by such individuals to the Company. The warrants are
    exercisable until October 30, 2006, at an exercise price of
    $5.25 per share.                                                                                                                                                                                                                                                                                                                                                                                                                         

47



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##### 



Beneficial Ownership




|                                                                |  |                           |           |  |             |  |     |  
|--------------------------------------------------------------- |  | ------------------------- | --------- |  | ----------- |  | --- | -
|                                                                |  | Common Stock Beneficially |          
|                                                                |  | Owned(1)                  |          
|                                                                |  |                           |          
|                                                                |  | Number of                 |           |  |            
|                                                                |  | Shares of                 |           |  | Percentage  | 
|Name of Beneficial Owner                                        |  | Common Stock              |           |  | of Class(2) | 
|                                                                |  |                           |           |  |             | 
|Barclays Global Investors, NA(3)                                |  |                           | 9,693,915 |  |             |  | 7.3 | %
|Steven A. Odom (4)                                            |  |                           | 3,905,921 |  |             |  | 2.9 |  
|James M. Logsdon(5)                                             |  |                           | 1,520,888 |  |             |  | 1.1 |  
|Juliet M. Reising (6)                                         |  |                           | 1,490,663 |  |             |  | *   |  
|Stephen E. Raville(7)                                          |  |                           | 652,500   |  |             |  | *   |  
|Gary H. Heck (8)                                               |  |                           | 474,375   |  |             |  | *   |  
|Paul R. Garcia(9)                                              |  |                           | 472,000   |  |             |  | *   |  
|Amy L. Newmark(10)                                             |  |                           | 452,500   |  |             |  | *   |  
|James A. Verbrugge(11)                                         |  |                           | 50,000    |  |             |  | *   |  
|Lewis Jaffe                                                    |  |                           | 28,500    |  |             |  | *   |  
|Montgomery L. Bannerman                                        |  |                           | 0         |  |             |  | 0   |  
|All executive officers and directors as a group (9 persons)(12) |  |                           | 7,526,459 |  |             |  | 5.4 |  






|  |                        
|- | -----------------------
| | Director of the Company
| | Officer of the Company 

|  |                                                                           
|- | --------------------------------------------------------------------------
|* | Less than 1% of the issued and outstanding shares of the Common
    Stock.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless otherwise noted, all of the shares shown are held by
    individuals or entities possessing sole voting and investment
    power with respect to such shares. Shares not outstanding but
    deemed beneficially owned by virtue of the right of a person or
    member of a group to acquire them within 60 days after
    March 18, 2005, are treated as outstanding only when
    determining the amount and percentage owned by such individual
    or group.                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(2) | In accordance with regulations of the SEC, the percentage
    calculations are based on 133,439,697 shares of Common
    Stock issued and outstanding as of March 18, 2005, plus
    shares of Common Stock which may be acquired within 60 days
    after March 18, 2005, by each individual or group listed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(3) | On February 14, 2005, a Schedule 13G was filed jointly
    with the SEC by the following reporting persons: Barclays Global
    Investors, NA, Barclays Global Fund Advisors, Barclays
    Global Investors, Ltd., Barclays Global Investors Japan Trust
    and Banking Company Limited, Barclays Life Assurance Company
    Limited, Barclays Bank PLC, Barclays Capital Securities Limited,
    Barclays Capital Inc., Barclays Private Bank & Trust
    (Isle of Man) Limited, Barclays Private Bank and Trust (Jersey)
    Limited, Barclays Bank Trust Company Limited, Barclays Bank
    (Suisse) SA, Barclays Private Bank Limited, Bronco (Barclays
    Cayman) Limited, Palomino Limited and HYMF Limited. Each
    reporting person disclaims group status. The address of Barclays
    Global Investors, NA is 45 Fremont Street, San Francisco,
    California 94105.
|   
|(4) | Includes (i) 1,300 shares of Common Stock held by
    Mr. Odoms wife as to which Mr. Odom may be
    deemed to share voting and investment power;
    (ii) 14,600 shares of Common Stock held by
    Mr. Odoms son as to which Mr. Odom may be deemed
    to share voting and investment power; and
    (iii) 3,570,821 shares of Common Stock issuable
    pursuant to options or warrants exercisable within 60 days
    after March 18, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                

48



---



##### 





|    |                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Includes 1,478,474 shares of Common Stock issuable pursuant
    to options or warrants exercisable within 60 days after
    March 18, 2005.                                                                                                                                                                                                                          
|   
|(6) | Includes (i) 143,082 shares of Common Stock held in an
    account owned by Ms. Reisings husband as to which
    Ms. Reising may be deemed to share voting and investment
    power; and (ii) 1,347,581 shares of Common Stock
    issuable pursuant to options or warrants exercisable within
    60 days after March 18, 2005.                                    
|   
|(7) | Includes (i) 547,500 shares of Common Stock issuable
    pursuant to options exercisable within 60 days after
    March 18, 2005; and (ii) 50,000 shares of Common
    Stock owned by the Raville 1994 Family Limited Partnership over
    which Mr. Raville does not have investment or voting power
    and as to which Mr. Raville disclaims beneficial ownership.
|   
|(8) | Includes 437,500 shares of Common Stock issuable pursuant
    to options or warrants exercisable within 60 days after
    March 18, 2005.                                                                                                                                                                                                                            
|   
|(9) | Represents 362,000 shares of Common Stock issuable pursuant
    to options exercisable within 60 days after March 18,
    2005.                                                                                                                                                                                                                                      



|     |                                                                                                                                            
|---- | -------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 312,500 shares of Common Stock issuable pursuant
    to options or warrants exercisable within 60 days after
    March 18, 2005.  
|    
|(11) | Represents 50,000 shares of Common Stock issuable pursuant
    to options exercisable within 60 days after March 18,
    2005.             
|    
|(12) | Includes 6,577,902 shares of Common Stock issuable pursuant
    to options or warrants exercisable within 60 days after
    March 18, 2005.



|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions











49



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##### 









|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



Audit Fees




Audit-Related Fees




Tax Fees




All Other Fees




Policy on Audit Committee Pre-Approval of Audit and
Permissible Non-Audit Services of Independent Auditors






50



---



##### 





|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and Reports on
    Form 8-K

Lists of certain documents filed herewith as part of
this Annual Report may be found as follows:




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) 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.                                                                                                                                                                                                                                                                                                                                                               
|
| | (2) 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 and Related Reports on page F-1 and filed
    herewith.
|
| | (3) 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.                                                                                                                                                                                                                                                                                                                                                                                                            

Reports on Form 8-K.






| |                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) On November 4, 2004, a Current Report on
    Form 8-K which reported under Item 12 of such report
    information regarding the Companys results of operations
    and financial condition for the third quarter of 2003;                                                                                                                                                                             
|
| | (ii) On November 9, 2004, a Current Report on
    Form 8-K reporting under Item 5.02 thereof certain
    changes in management and under Item 5.03 thereof certain
    amendments to the Companys Bylaws;                                                                                                                                                                                                 
|
| | (iii) On November 10, 2004, a Current Report on
    Form 8-K reporting under Item 5.02 thereof certain
    changes to the Board;                                                                                                                                                                                                                                                                           
|
| | (iv) On November 17, 2004, a Current Report on
    Form 8-K reporting under Item 1.01 thereof the
    Companys execution of an amendment to the Companys
    credit facility with Silicon Valley Bank and under
    Item 3.01 thereof correspondence the Company received from
    The Nasdaq Stock Market regarding the Companys failure to
    comply with certain continued listing requirements; and
|
| | (v) On December 22, 2004, a current report on
    Form 8-K reporting under Item 1.01 thereof amendments
    made to the Incentive Plan and the Purchase Plan.                                                                                                                                                                                                                                              

51



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##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED
REPORTS




|                                                                                                         |  |      |      | 
|-------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                         |  | Page |     
|                                                                                                         |  |      |     
|Reports of Independent Registered Public Accounting Firm                                                 |  |      | F-2  | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                             |  |      | F-4  | 
|Consolidated Statements of Operations for the years ended
    December 31, 2004, 2003 and 2002           |  |      | F-5  | 
|Consolidated Statements of Shareholders Equity for the
    years ended December 31, 2004, 2003 and 2002 |  |      | F-6  | 
|Consolidated Statements of Cash Flows for the years ended
    December 31, 2004 2003 and 2002            |  |      | F-7  | 
|Notes to Consolidated Financial Statements                                                               |  |      | F-9  | 
|Report of Independent Registered Public Accounting Firm on
    Financial Statement Schedule              |  |      | F-35 | 
|Schedule II  Valuation and Qualifying Accounts                                                          |  |      | F-36 | 
|Managements Annual Report on Internal Control Over
    Financing Reporting                              |  |      | F-37 | 
|Report of Independent Registered Public Accounting Firm                                                  |  |      | F-38 | 

F-1



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






















| |                       
| | ----------------------
| | /s/ Grant Thornton LLP

F-2



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |             
| | ------------
| | /s/ KPMG LLP









F-3



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


|                                                                                                                |                                                                                                                            |                            |                                            |          |              |        |        |          |        |        | 
|--------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | -------- | ------------ | ------ | ------ | -------- | ------ | ------ | 
|                                                                                                                |                                                                                                                            | December 31,               |                                            |          | December 31, |       
|                                                                                                                |                                                                                                                            | 2004                       |                                            |          | 2003         |       
|                                                                                                                |                                                                                                                            |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                            | (In thousands,             |                                           
|                                                                                                                |                                                                                                                            | except share data)         |                                           
|ASSETS:                                                                                                        
|Current assets:                                                                                                 |                                                                                                                            |                            |                                            |          |              |        |        |         
|                                                                                                                | Cash and cash equivalents                                                                                                  |                            | $                                          | 4,234    |              |        | $      | 7,654    |       
|                                                                                                                | Restricted cash                                                                                                            |                            |                                            |         |              |        |        | 2,290    |       
|                                                                                                                | Accounts receivable, net of allowance for doubtful accounts of
    $255 and $489, respectively                             |                            |                                            | 3,961    |              |        |        | 4,966    |       
|                                                                                                                | Inventories                                                                                                                |                            |                                            | 5,362    |              |        |        | 4,150    |       
|                                                                                                                | Other current assets                                                                                                       |                            |                                            | 1,451    |              |        |        | 817      |       
|                                                                                                                | Current portion of assets held for sale                                                                                    |                            |                                            | 8,995    |              |        |        | 13,417   |       
|                                                                                                                |                                                                                                                            |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                            | Total current assets       |                                            |          | 24,003       |        |        |          | 33,294 |       
|Property and equipment, net of accumulated depreciation and
    amortization of $7,047 and $5,322, respectively |                                                                                                                            |                            | 3,879                                      |          |              |        | 4,099  |         
|Investment                                                                                                      |                                                                                                                            |                            | 729                                        |          |              |        | 673    |         
|Assets held for sale, net of current portion                                                                    |                                                                                                                            |                            |                                           |          |              |        | 19,855 |         
|Other intangibles, net of accumulated amortization of $921 and
    $407, respectively                           |                                                                                                                            |                            | 2,304                                      |          |              |        | 2,817  |         
|Goodwill                                                                                                        |                                                                                                                            |                            | 2,514                                      |          |              |        | 2,514  |         
|                                                                                                                |                                                                                                                            |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                            | Total assets               |                                            | $        | 33,429       |        |        | $        | 63,252 |       
|                                                                                                                |                                                                                                                            |                            |                                            |          |              |       
|                                                                                                               
|LIABILITIES AND SHAREHOLDERS EQUITY:                                                                          
|Current liabilities:                                                                                            |                                                                                                                            |                            |                                            |          |              |        |        |         
|                                                                                                                | Line of credit                                                                                                             |                            | $                                          |         |              |        | $      |         |       
|                                                                                                                | Accounts payable                                                                                                           |                            |                                            | 2,095    |              |        |        | 2,830    |       
|                                                                                                                | Accrued compensation                                                                                                       |                            |                                            | 1,356    |              |        |        | 821      |       
|                                                                                                                | Accrued expenses                                                                                                           |                            |                                            | 1,973    |              |        |        | 2,128    |       
|                                                                                                                | Current portion of notes payable                                                                                           |                            |                                            |         |              |        |        | 347      |       
|                                                                                                                | Current portion of liabilities of discontinued operations                                                                  |                            |                                            | 1,200    |              |        |        | 1,798    |       
|                                                                                                                | Liabilities held for sale                                                                                                  |                            |                                            | 2,353    |              |        |        | 8,825    |       
|                                                                                                                | Convertible subordinated debentures                                                                                        |                            |                                            | 4,254    |              |        |        |         |       
|                                                                                                                | Unearned revenue and customer deposits                                                                                     |                            |                                            | 3,157    |              |        |        | 3,808    |       
|                                                                                                                |                                                                                                                            |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                            | Total current liabilities  |                                            |          | 16,388       |        |        |          | 20,557 |       
|Liabilities of discontinued operations, net of current portion                                                  |                                                                                                                            |                            | 1,461                                      |          |              |        | 1,952  |         
|Other long-term liabilities                                                                                     |                                                                                                                            |                            | 229                                        |          |              |        | 519    |         
|Notes payable, net of current portion                                                                           |                                                                                                                            |                            | 2,711                                      |          |              |        | 2,652  |         
|Convertible subordinated debentures                                                                             |                                                                                                                            |                            |                                           |          |              |        | 3,979  |         
|                                                                                                                |                                                                                                                            |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                            | Total liabilities          |                                            |          | 20,789       |        |        |          | 29,659 |       
|                                                                                                                |                                                                                                                            |                            |                                            |          |              |       
|Commitments and contingencies (Notes 6, 7, 10, 14, 16 and
    17)                                               |                                                                                                                            |                            |                                            |          |              |        |        |         
|Shareholders equity:                                                                                           |                                                                                                                            |                            |                                            |          |              |        |        |         
|                                                                                                                | Preferred stock, no par value, 1,000,000 shares authorized;
    780,000 shares issued and none outstanding                 |                            |                                            |         |              |        |        |         |       
|                                                                                                                | Common stock, $.01 par value, 200,000,000 shares authorized;
    133,243,205 and 122,781,117 shares issued and outstanding |                            |                                            | 1,332    |              |        |        | 1,228    |       
|                                                                                                                | Additional paid-in capital                                                                                                 |                            |                                            | 322,971  |              |        |        | 306,293  |       
|                                                                                                                | Stock payable                                                                                                              |                            |                                            | 128      |              |        |        | 130      |       
|                                                                                                                | Accumulated deficit                                                                                                        |                            |                                            | (311,931 | )            |        |        | (273,144 | )     
|                                                                                                                | Deferred compensation                                                                                                      |                            |                                            | (7       | )            |        |        | (1,012   | )     
|                                                                                                                | Accumulated other comprehensive income  foreign
    currency translation                                                  |                            |                                            | 147      |              |        |        | 98       |       
|                                                                                                                |                                                                                                                            |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                            | Total shareholders equity |                                            |          | 12,640       |        |        |          | 33,593 |       
|                                                                                                                |                                                                                                                            |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                            |                            | Total liabilities and shareholders equity |          | $            | 33,429 |        |          | $      | 63,252 | 
|                                                                                                                |                                                                                                                            |                            |                                            |          |              |       



F-4



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |         |   |            |        |        |  
|------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------------------ | ----------- | ------- | ------- | - | ---------- | ------- | ------- | - | ---------- | ------ | ------ | -
|                                                        |                                                                                        | For the Years Ended December 31,                 |            
|                                                        |                                                                                        |                                                  |            
|                                                        |                                                                                        | 2004                                             |             |         | 2003    |   |            | 2002    |        
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|                                                        |                                                                                        | (In thousands, except share data)                |            
|Revenue:                                                |                                                                                        |                                                  |             |         |         |   |            |         |         |   |            |       
|                                                        | Products                                                                               |                                                  | $           | 15,527  |         |   | $          | 19,330  |         |   | $          | 1,532  |       
|                                                        | Services                                                                               |                                                  |             | 16,736  |         |   |            | 18,809  |         |   |            | 16,947 |       
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|                                                        |                                                                                        | Total revenue                                    |             |         | 32,263  |   |            |         | 38,139  |   |            |        | 18,479 |  
|Cost of revenue:                                        |                                                                                        |                                                  |             |         |         |   |            |         |         |   |            |       
|                                                        | Products:                                                                              |                                                  |             |         |         |   |            |         |         |   |            |        |       
|                                                        |                                                                                        | Product costs                                    |             |         | 6,844   |   |            |         | 7,887   |   |            |        | 553    |  
|                                                        |                                                                                        | Amortization of intangibles                      |             |         | 274     |   |            |         | 167     |   |            |        |       |  
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|                                                        |                                                                                        | Total cost of product                            |             |         | 7,118   |   |            |         | 8,054   |   |            |        | 553    |  
|                                                        | Services                                                                               |                                                  |             | 10,026  |         |   |            | 8,914   |         |   |            | 7,954  |       
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|                                                        |                                                                                        | Total cost of revenue                            |             |         | 17,144  |   |            |         | 16,968  |   |            |        | 8,507  |  
|Gross profit:                                           |                                                                                        |                                                  |             |         |         |   |            |         |         |   |            |       
|                                                        | Products                                                                               |                                                  |             | 8,409   |         |   |            | 11,276  |         |   |            | 979    |       
|                                                        | Services                                                                               |                                                  |             | 6,710   |         |   |            | 9,895   |         |   |            | 8,993  |       
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|                                                        |                                                                                        | Total gross profit                               |             |         | 15,119  |   |            |         | 21,171  |   |            |        | 9,972  |  
|Operating expenses:                                     |                                                                                        |                                                  |             |         |         |   |            |         |         |   |            |       
|                                                        | General and administrative                                                             |                                                  |             | 12,392  |         |   |            | 9,627   |         |   |            | 7,250  |       
|                                                        | Sales and marketing                                                                    |                                                  |             | 9,428   |         |   |            | 6,670   |         |   |            | 3,262  |       
|                                                        | Research and development                                                               |                                                  |             | 6,963   |         |   |            | 4,844   |         |   |            | 457    |       
|                                                        | Depreciation and amortization of property and equipment                                |                                                  |             | 2,278   |         |   |            | 1,928   |         |   |            | 1,523  |       
|                                                        | Amortization of intangibles                                                            |                                                  |             | 240     |         |   |            | 240     |         |   |            |       |       
|                                                        | Amortization of deferred stock compensation, related to general
    and administrative |                                                  |             | 435     |         |   |            | 780     |         |   |            | 1,173  |       
|                                                        | Reorganization costs                                                                   |                                                  |             | 1,414   |         |   |            | 159     |         |   |            | 324    |       
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|                                                        |                                                                                        | Total operating expenses                         |             |         | 33,150  |   |            |         | 24,248  |   |            |        | 13,989 |  
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|                                                        |                                                                                        | Operating loss from continuing operations        |             |         | (18,031 | ) |            |         | (3,077  | ) |            |        | (4,017 | )
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|Other income (expense), net:                            |                                                                                        |                                                  |             |         |         |   |            |         |         |   |            |       
|                                                        | Other income                                                                           |                                                  |             | 259     |         |   |            | 314     |         |   |            | 263    |       
|                                                        | Equity in income (loss) of investment                                                  |                                                  |             | 56      |         |   |            | 73      |         |   |            | (5     | )     
|                                                        | Interest expense, net                                                                  |                                                  |             | (1,054  | )       |   |            | (1,525  | )       |   |            | (1,157 | )     
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|                                                        |                                                                                        | Other expense, net                               |             |         | (739    | ) |            |         | (1,138  | ) |            |        | (899   | )
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|Loss from continuing operations before income taxes     |                                                                                        |                                                  | (18,770     | )       |         |   | (4,215     | )       |         |   | (4,916     | )     
|Income tax benefit                                      |                                                                                        |                                                  |            |         |         |   |           |         |         |   | 200        |       
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|Loss from continuing operations                         |                                                                                        |                                                  | (18,770     | )       |         |   | (4,215     | )       |         |   | (4,716     | )     
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|Discontinued operations:                                |                                                                                        |                                                  |             |         |         |   |            |         |         |   |            |       
|                                                        | (Loss) income from discontinued operations                                             |                                                  |             | (5,229  | )       |   |            | (14,072 | )       |   |            | 1,990  |       
|                                                        | Loss on disposal of discontinued operations                                            |                                                  |             | (14,788 | )       |   |            |        |         |   |            |       |       
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|                                                        |                                                                                        | Total (loss) income from discontinued operations |             |         | (20,017 | ) |            |         | (14,072 | ) |            |        | 1,990  |  
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|Net loss                                                |                                                                                        | $                                                | (38,787     | )       |         | $ | (18,287    | )       |         | $ | (2,726     | )     
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|Net loss per common share  basic and diluted:          |                                                                                        |                                                  |             |         |         |   |            |         |         |   |            |       
|                                                        | Loss from continuing operations                                                        |                                                  | $           | (0.14   | )       |   | $          | (0.04   | )       |   | $          | (0.06  | )     
|                                                        | Loss from discontinued operations                                                      |                                                  |             | (0.04   | )       |   |            | (0.14   | )       |   |            | 0.03   |       
|                                                        | Loss on disposal of discontinued operations                                            |                                                  |             | (0.11   | )       |   |            |        |         |   |            |       |       
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|Net loss per common share  basic and diluted           |                                                                                        | $                                                | (0.29       | )       |         | $ | (0.18      | )       |         | $ | (0.03      | )     
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        
|Weighted average shares outstanding  basic and diluted |                                                                                        |                                                  | 131,523,863 |         |         |   | 99,134,790 |         |         |   | 80,533,324 |       
|                                                        |                                                                                        |                                                  |             |         |         |   |            |         |        



F-5



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002


|                                                                                 |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |     |     |   |   |        |         |         |  
|-------------------------------------------------------------------------------- | --------------------------------------- | --------------------------------- | ----------- | - | ---------- | - | ----- | ------- |  | ---------- | ------- | - |  | ------------ | ---- | - | -------- | - | ------ | ------------ |  | - | ----------- | ------- | - | ----- | ------ | - |  | - | --- | --- | - | - | ------ | ------- | ------- | -
|                                                                                 |                                         |                                   |             |   |            |   |       | Notes   |  |            |         |   |  |              |      |   |         
|                                                                                 |                                         | Common Stock                      |             |   | Additional |   |       |         |  | Receivable |         |   |  |              |      |   | Foreign  |   |        |             
|                                                                                 |                                         |                                   |             |   | Paid-in    |   |       | Stock   |  |            | from    |   |  | Accumulated  |      |   | Deferred |   |        | Currency     |  |   |            
|                                                                                 |                                         | Shares                            |             |   | Amount     |   |       | Capital |  |            | Payable |   |  | Shareholders |      |   | Deficit  |   |        | Compensation |  |   | Translation |         |   | Total |       
|                                                                                 |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|                                                                                 |                                         | (In thousands, except share data) |            
|BALANCES, December 31, 2001                                                      |                                         |                                   | 77,619,654  |   |            | $ | 776   |         |  | $          | 271,462 |   |  | $            |     |   |          | $ | (1,620 | )            |  | $ | (252,131    | )       |   | $     | (3,166 | ) |  | $ | (15 | )   |   | $ | 15,306 |        
|Comprehensive loss:                                                              |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |     |     |   |   |        |        
|                                                                                 | Net loss                                |                                   |             |  |            |   |       |        |  |            |         |  |  |              |      |  |          |   |        |             |  |   |             | (2,726  | ) |       |        |  |  |   |     |    |   |   |        | (2,726  | )      
|                                                                                 | Foreign currency translation adjustment |                                   |             |  |            |   |       |        |  |            |         |  |  |              |      |  |          |   |        |             |  |   |             |        |   |       |        |  |  |   |     | (5  | ) |   |        | (5      | )      
|                                                                                 |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|                                                                                 |                                         | Comprehensive loss                |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |     |     |   |   |        |         | (2,731  | )
|Amortization of deferred compensation                                            |                                         |                                   |            |   |            |   |      |         |  |            |        |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       | 1,173  |   |  |   |    |     |   |   | 1,173  |        
|Exercise of stock options                                                        |                                         |                                   | 847,082     |   |            |   | 9     |         |  |            | 9       |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 18     |        
|Issuance of stock through Employee Stock Purchase Plan                           |                                         |                                   | 290,171     |   |            |   | 3     |         |  |            | 119     |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 122    |        
|Reduction of deferred compensation due to forfeitures                            |                                         |                                   |            |   |            |   |      |         |  |            | (196    | ) |  |              |     |   |          |   |       |              |  |   |            |         |   |       | 196    |   |  |   |    |     |   |   |       |        
|Accrued interest on notes receivable from shareholders                           |                                         |                                   |            |   |            |   |      |         |  |            |        |   |  |              |     |   |          |   | (27    | )            |  |   |            |         |   |       |       |   |  |   |    |     |   |   | (27    | )      
|Issuance of compensatory options in reorganization                               |                                         |                                   |            |   |            |   |      |         |  |            | 88      |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 88     |        
|Issuance of shares and warrants in private placement, net of
    associated fees |                                         |                                   | 9,646,302   |   |            |   | 96    |         |  |            | 2,889   |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 2,985  |        
|Shares issued in litigation settlement                                           |                                         |                                   | 588,430     |   |            |   | 6     |         |  |            | 431     |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 437    |        
|Shares issued in lieu of compensation                                            |                                         |                                   | 86,207      |   |            |   | 1     |         |  |            | 27      |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 28     |        
|Warrants issued in connection with credit facility                               |                                         |                                   |            |   |            |   |      |         |  |            | 211     |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 211    |        
|Payment received on notes receivable from shareholders                           |                                         |                                   |            |   |            |   |      |         |  |            |        |   |  |              |     |   |          |   | 24     |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 24     |        
|                                                                                 |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|BALANCES, December 31, 2002                                                      |                                         |                                   | 89,077,846  |   |            | $ | 891   |         |  | $          | 275,040 |   |  | $            |     |   |          | $ | (1,623 | )            |  | $ | (254,857    | )       |   | $     | (1,797 | ) |  | $ | (20 | )   |   | $ | 17,634 |        
|Comprehensive loss:                                                              |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |     |     |   |   |        |        
|                                                                                 | Net loss                                |                                   |             |  |            |   |       |        |  |            |         |  |  |              |      |  |          |   |        |             |  |   |             | (18,287 | ) |       |        |  |  |   |     |    |   |   |        | (18,287 | )      
|                                                                                 | Foreign currency translation adjustment |                                   |             |  |            |   |       |        |  |            |         |  |  |              |      |  |          |   |        |             |  |   |             |        |   |       |        |  |  |   |     | 118 |   |   |        | 118     |        
|                                                                                 |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|                                                                                 |                                         | Comprehensive loss                |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |     |     |   |   |        |         | (18,169 | )
|Amortization of deferred compensation                                            |                                         |                                   |            |   |            |   |      |         |  |            |        |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       | 780    |   |  |   |    |     |   |   | 780    |        
|Exercise of stock options and warrants                                           |                                         |                                   | 14,708,688  |   |            |   | 147   |         |  |            | 6,439   |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 6,586  |        
|Reduction of deferred compensation due to forfeitures                            |                                         |                                   |            |   |            |   |      |         |  |            | (5      | ) |  |              |     |   |          |   |       |              |  |   |            |         |   |       | 5      |   |  |   |    |     |   |   |       |        
|Issuance of common stock in MCK Communications, Inc. acquisition                 |                                         |                                   | 18,278,423  |   |            |   | 183   |         |  |            | 23,947  |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |     |     |   |   | 24,130 |        
|Acceleration of compensatory options in reorganization                           |                                         |                                   |            |   |            |   |      |         |  |            | 219     |   |  |              |     |   |          |   | 45     |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 264    |        
|Shares issued in employee stock purchase plan                                    |                                         |                                   | 166,160     |   |            |   | 2     |         |  |            | 166     |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 168    |        
|Shares issued in litigation settlement                                           |                                         |                                   | 550,000     |   |            |   | 5     |         |  |            | 259     |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 264    |        
|Warrants issued in connection with credit facility                               |                                         |                                   |            |   |            |   |      |         |  |            | 119     |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 119    |        
|Stock payable for consulting services                                            |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              | 130  |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |     |     |   |   | 130    |        
|Accrued interest on notes receivable from shareholders                           |                                         |                                   |            |   |            |   |      |         |  |            |        |   |  |              |     |   |          |   | (84    | )            |  |   |            |         |   |       |       |   |  |   |    |     |   |   | (84    | )      
|Payment received on notes receivable from shareholders                           |                                         |                                   |            |   |            |   |      |         |  |            | 109     |   |  |              |     |   |          |   | 1,662  |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 1,771  |        
|                                                                                 |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|BALANCES, December 31, 2003                                                      |                                         |                                   | 122,781,117 |   |            | $ | 1,228 |         |  | $          | 306,293 |   |  | $            | 130  |   |          | $ |       |              |  | $ | (273,144    | )       |   | $     | (1,012 | ) |  | $ | 98  |     |   | $ | 33,593 |        
|                                                                                 |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|Comprehensive loss:                                                              |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |     |     |   |   |        |        
|                                                                                 | Net loss                                |                                   |             |  |            |   |       |        |  |            |         |  |  |              |      |  |          |   |        |             |  |   |             | (38,787 | ) |       |        |  |  |   |     |    |   |   |        | (38,787 | )      
|                                                                                 | Foreign currency translation adjustment |                                   |             |  |            |   |       |        |  |            |         |  |  |              |      |  |          |   |        |             |  |   |             |        |   |       |        |  |  |   |     | 49  |   |   |        | 49      |        
|                                                                                 |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|                                                                                 |                                         | Comprehensive loss                |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |     |     |   |   |        |         | (38,738 | )
|Amortization of deferred compensation                                            |                                         |                                   |            |   |            |   |      |         |  |            |        |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       | 435    |   |  |   |    |     |   |   | 435    |        
|Exercise of stock options and warrants                                           |                                         |                                   | 404,710     |   |            |   | 3     |         |  |            | 10      |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 13     |        
|Reduction of deferred compensation due to reorganization                         |                                         |                                   |            |   |            |   |      |         |  |            |        |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       | 570    |   |  |   |    |     |   |   | 570    |        
|Shares issued in employee stock purchase plan                                    |                                         |                                   | 177,338     |   |            |   | 2     |         |  |            | 160     |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 162    |        
|Shares issued in exchange for services                                           |                                         |                                   | 49,938      |   |            |   | 1     |         |  |            | 132     |   |  |              | (133 | ) |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   |       |        
|Issuance of shares and warrants in private placement, net of
    associated fees |                                         |                                   | 9,830,102   |   |            |   | 98    |         |  |            | 16,376  |   |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |    |     |   |   | 16,474 |        
|Stock payable for consulting services                                            |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              | 131  |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |     |     |   |   | 131    |        
|                                                                                 |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|BALANCES, December 31, 2004                                                      |                                         |                                   | 133,243,205 |   |            | $ | 1,332 |         |  | $          | 322,971 |   |  | $            | 128  |   |          | $ |       |              |  | $ | (311,931    | )       |   | $     | (7     | ) |  | $ | 147 |     |   | $ | 12,640 |        
|                                                                                 |                                         |                                   |             |   |            |   |       |         |  |            |         |   |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       



F-6



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |        |        |   |        |        |        |  
|--------------------- | ------------------------ | --------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | -
|                      |                          | For the Years Ended December 31,                                                                                                  |                                                                                         
|                      |                          |                                                                                                                                   |                                                                                         
|                      |                          | 2004                                                                                                                              |                                                                                          |                                                                                        | 2003    |         |         | 2002 |        
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          | (In thousands, except share data)                                                                                                 |                                                                                         
|Operating Activities: |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |        |        |  
|                      | Continuing operations:   |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |        |        |   |       
|                      |                          | Net loss from continuing operations                                                                                               |                                                                                          | $                                                                                      | (18,770 | )       |         | $    | (4,215  | )      |        | $ | (4,716 | )     
|                      |                          | Adjustments to reconcile net loss from continuing operations to
    net cash used in continuing operating activities:             |                                                                                          |                                                                                        |         |         |         |      |         |        |        |   |        |       
|                      |                          |                                                                                                                                   | Equity in (income) loss of investment                                                    |                                                                                        |         | (56     | )       |      |         | (73    | )      |   |        | 5      |       
|                      |                          |                                                                                                                                   | Depreciation and amortization of property and equipment                                  |                                                                                        |         | 2,278   |         |      |         | 1,928  |        |   |        | 1,523  |       
|                      |                          |                                                                                                                                   | Amortization of intangibles                                                              |                                                                                        |         | 514     |         |      |         | 407    |        |   |        |       |       
|                      |                          |                                                                                                                                   | Amortization of deferred compensation                                                    |                                                                                        |         | 435     |         |      |         | 780    |        |   |        | 1,173  |       
|                      |                          |                                                                                                                                   | Provision for doubtful accounts                                                          |                                                                                        |         | 494     |         |      |         | 86     |        |   |        | (137   | )     
|                      |                          |                                                                                                                                   | Amortization of loan fees and discount on convertible
    subordinated debentures        |                                                                                        |         | 517     |         |      |         | 561    |        |   |        | 601    |       
|                      |                          |                                                                                                                                   | Reorganization costs  stock related                                                     |                                                                                        |         | 570     |         |      |         |       |        |   |        |       |       
|                      |                          |                                                                                                                                   | Other                                                                                    |                                                                                        |         | 119     |         |      |         | (73    | )      |   |        | (35    | )     
|                      |                          |                                                                                                                                   | Changes in current operating assets and liabilities, net of
    effects of acquisitions: |                                                                                        |         |         |         |      |         |        |        |   |        |        |       
|                      |                          |                                                                                                                                   |                                                                                          | Accounts receivable                                                                    |         |         | 511     |      |         |        | (1,036 | ) |        |        | 1,524  |  
|                      |                          |                                                                                                                                   |                                                                                          | Inventories                                                                            |         |         | (1,212  | )    |         |        | 1,315  |   |        |        |       |  
|                      |                          |                                                                                                                                   |                                                                                          | Other current assets                                                                   |         |         | (940    | )    |         |        | 192    |   |        |        | 312    |  
|                      |                          |                                                                                                                                   |                                                                                          | Accounts payable                                                                       |         |         | (735    | )    |         |        | 938    |   |        |        | 956    |  
|                      |                          |                                                                                                                                   |                                                                                          | Accrued compensation                                                                   |         |         | 535     |      |         |        | 402    |   |        |        | (1,666 | )
|                      |                          |                                                                                                                                   |                                                                                          | Accrued expenses                                                                       |         |         | (445    | )    |         |        | (2,332 | ) |        |        | (686   | )
|                      |                          |                                                                                                                                   |                                                                                          | Unearned revenue and customer deposits                                                 |         |         | (651    | )    |         |        | (528   | ) |        |        | 37     |  
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   | Net cash used in continuing operating activities                                         |                                                                                        |         | (16,836 | )       |      |         | (1,648 | )      |   |        | (1,109 | )     
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      | Discontinued operations: |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |        |        |   |       
|                      |                          | (Loss) income from discontinued operations                                                                                        |                                                                                          |                                                                                        | (20,017 | )       |         |      | (14,072 | )      |        |   | 1,990  |       
|                      |                          | Estimated loss on disposal of discontinued operations                                                                             |                                                                                          |                                                                                        | 14,788  |         |         |      |        |        |        |   |       |       
|                      |                          | Adjustment to reconcile loss from discontinued operations to net
    cash provided by (used in) discontinued operating activities |                                                                                          |                                                                                        | 6,638   |         |         |      | 14,262  |        |        |   | (5,512 | )     
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   | Net cash provided by (used in) discontinued operating activities                         |                                                                                        |         | 1,409   |         |      |         | 190    |        |   |        | (3,522 | )     
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   | Net cash used in operating activities                                                    |                                                                                        |         | (15,427 | )       |      |         | (1,458 | )      |   |        | (4,631 | )     
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|Investing Activities: |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |        |        |  
|                      | Continuing operations:   |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |        |        |   |       
|                      |                          | Net cash provided by (used in) investing activities for
    continuing operations                                                |                                                                                          |                                                                                        |         |         |         |      |         |        |        |   |        |       
|                      |                          |                                                                                                                                   | Purchases of property and equipment                                                      |                                                                                        |         | (2,021  | )       |      |         | (801   | )      |   |        | (113   | )     
|                      |                          |                                                                                                                                   | Decrease in restricted cash                                                              |                                                                                        |         | 2,290   |         |      |         | 88     |        |   |        |       |       
|                      |                          |                                                                                                                                   | Investment in Shanghai BeTrue Infotech Co. Ltd.                                          |                                                                                        |         |        |         |      |         |       |        |   |        | (605   | )     
|                      |                          |                                                                                                                                   | Acquisition of certain assets of Clarent Corporation, net of
    cash acquired           |                                                                                        |         |        |         |      |         | (906   | )      |   |        |       |       
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   |                                                                                          | Net cash provided by (used in) investing activities for
    continuing operations      |         |         | 269     |      |         |        | (1,619 | ) |        |        | (718   | )
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      | Discontinued operations: |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |        |        |   |       
|                      |                          | Purchased software development                                                                                                    |                                                                                          |                                                                                        |        |         |         |      | (533    | )      |        |   | (348   | )     
|                      |                          | Purchases of property and equipment                                                                                               |                                                                                          |                                                                                        | (321    | )       |         |      | (680    | )      |        |   | (776   | )     
|                      |                          | Acquisition of MCK Communications, Inc., net of cash acquired                                                                     |                                                                                          |                                                                                        | (4,263  | )       |         |      | 9,345   |        |        |   |       |       
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   | Net cash (used in) provided by investing activities for
    discontinued operations      |                                                                                        |         | (4,584  | )       |      |         | 8,132  |        |   |        | (1,124 | )     
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   | Net cash (used in) provided by investing activities                                      |                                                                                        |         | (4,315  | )       |      |         | 6,513  |        |   |        | (1,842 | )     
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   |                                                                                          | Net cash (used in) provided by operating and investing
    activities, carried forward |         |         | (19,742 | )    |         |        | 5,055  |   |        |        | (6,473 | )
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        



F-7



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)


|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |        |        |        |        |       |        |  
|-------------------------------------------------------------------------------------- | ---------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | - | ------ | ------ | ----- | ---- | ------ | ------ | ------ | ------ | ----- | ------ | -
|                                                                                       |                                                      | For the Years Ended December 31,                                                                         |                                                                             
|                                                                                       |                                                      |                                                                                                          |                                                                             
|                                                                                       |                                                      | 2004                                                                                                     |                                                                              |   | 2003   |        |       | 2002 |       
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|                                                                                       |                                                      | (In thousands, except share data)                                                                        |                                                                             
|Net cash provided by (used in) operating and investing
    activities, carried forward |                                                      | $                                                                                                        | (19,742                                                                      | ) |        | $      | 5,055 |      |        | $      | (6,473 | )     
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|Financing Activities:                                                                  |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |        |        |        |       
|                                                                                       | Continuing operations:                               |                                                                                                          |                                                                              |   |        |        |       |      |        |        |        |        |      
|                                                                                       |                                                      | Net borrowings (payments) on line of credit                                                              |                                                                              |   |       |        |       |      | (800   | )      |        |        | 800   |       
|                                                                                       |                                                      | Payments of notes payable                                                                                |                                                                              |   | (350   | )      |       |      | (6,450 | )      |        |        |      |       
|                                                                                       |                                                      | Proceeds from private placement, net                                                                     |                                                                              |   | 16,474 |        |       |      |       |        |        |        | 2,985 |       
|                                                                                       |                                                      | Proceeds from issuances of common stock in connection with the
    exercise of options and warrants, net |                                                                              |   | 175    |        |       |      | 6,754  |        |        |        | 408   |       
|                                                                                       |                                                      | Proceeds from repayments of notes receivable by shareholders                                             |                                                                              |   |       |        |       |      | 1,771  |        |        |        | 24    |       
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|                                                                                       |                                                      |                                                                                                          | Net cash provided by financing activities for continuing
    operations      |   |        | 16,299 |       |      |        | 1,275  |        |        |       | 4,217  |  
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|                                                                                       | Discontinued operations  payments of long-term debt |                                                                                                          |                                                                              |  |        |        |       |     |        |        |        | (3,900 | )    
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|                                                                                       |                                                      |                                                                                                          | Net cash provided by financing activities                                    |   |        | 16,299 |       |      |        | 1,275  |        |        |       | 317    |  
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|Effect of exchange rate changes on cash                                                |                                                      |                                                                                                          | 23                                                                           |   |        |        | 30    |      |        |        | 5      |       
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|                                                                                       |                                                      |                                                                                                          | (Decrease) increase in cash and cash equivalents                             |   |        | (3,420 | )     |      |        | 6,360  |        |        |       | (6,151 | )
|Cash and cash equivalents at beginning of year                                         |                                                      |                                                                                                          | 7,654                                                                        |   |        |        | 1,294 |      |        |        | 7,445  |       
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|Cash and cash equivalents at end of year                                               |                                                      | $                                                                                                        | 4,234                                                                        |   |        | $      | 7,654 |      |        | $      | 1,294  |       
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|Supplemental disclosure of cash flow information:                                      |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |        |        |        |       
|                                                                                       | Cash payments during the years for:                  |                                                                                                          |                                                                              |   |        |        |       |      |        |        |        |        |      
|                                                                                       |                                                      | Interest                                                                                                 |                                                                              | $ | 387    |        |       | $    | 814    |        |        | $      | 395   |       
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|                                                                                       |                                                      | Income taxes                                                                                             |                                                                              | $ | 67     |        |       | $    | 16     |        |        | $      | 47    |       
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       
|                                                                                       | Non-cash investing and financing activities          |                                                                                                          |                                                                              |   |        |        |       |      |        |        |        |        |      
|                                                                                       |                                                      | Common stock consideration for acquisitions:                                                             |                                                                              |   |        |        |       |      |        |        |        |        |       |       
|                                                                                       |                                                      |                                                                                                          | MCK Communications, Inc.  issuance of 18,278,423
    shares of common stock |   | $      |       |       |      | $      | 24,130 |        |        | $     |       |  
|                                                                                       |                                                      | Additional payments accrued for the acquisition of Encore Group                                          |                                                                              |   |       |        |       |      |       |        |        |        | 2,403 |       
|                                                                                       |                                                      | Common stock and compensatory options issued in reorganization                                           |                                                                              |   | 570    |        |       |      | 264    |        |        |        | 88    |       
|                                                                                       |                                                      | Issuance of common stock in arbitration settlement                                                       |                                                                              |   |       |        |       |      | 264    |        |        |        | 437   |       
|                                                                                       |                                                      | Issuance of warrants in exchange for services                                                            |                                                                              |   |       |        |       |      | 119    |        |        |        | 211   |       
|                                                                                       |                                                      | Issuance of common stock in exchange for services                                                        |                                                                              |   | 133    |        |       |      |       |        |        |        | 28    |       
|                                                                                       |                                                      | Assets acquired and liabilities assumed in conjunction with
    business acquisitions:                   |                                                                              |   |        |        |       |      |        |        |        |        |       |       
|                                                                                       |                                                      |                                                                                                          | Fair value of assets acquired, excluding cash and restricted cash            |   |        |       |       |      |        | 20,695 |        |        |       |       |  
|                                                                                       |                                                      |                                                                                                          | Liabilities assumed                                                          |   |        |       |       |      |        | 8,931  |        |        |       |       |  
|                                                                                       |                                                      |                                                                                                          | Notes payable for acquisition of certain assets of Clarent
    Corporation   |   | $      |       |       |      | $      | 9,339  |        |        | $     |       |  
|                                                                                       |                                                      |                                                                                                          |                                                                              |   |        |        |       |      |       



F-8



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.     Business and Basis of
Presentation










2.     Summary of Significant
Accounting Policies and Practices




| |                            
| | ---------------------------
| | Principles of Consolidation



F-9



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


2.     Summary of Significant
Accounting Policies and Practices  (Continued)




| |                 
| | ----------------
| | Use of Estimates





| |                    
| | -------------------
| | Revenue Recognition















| |                 
| | ----------------
| | Cash Equivalents





F-10



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


2.     Summary of Significant
Accounting Policies and Practices  (Continued)






| |                               
| | ------------------------------
| | Allowance or Doubtful Accounts





| |                                           
| | ------------------------------------------
| | Credit, Customer and Vendor Concentrations









| |            
| | -----------
| | Inventories





|                |                   |              |       |       |      |   |       |       | 
|--------------- | ----------------- | ------------ | ----- | ----- | ---- | - | ----- | ----- | 
|                |                   | December 31, |      
|                |                   |              |      
|                |                   | 2004         |       |       | 2003 |  
|                |                   |              |       |       |      |  
|Raw materials   |                   | $            | 3,315 |       |      | $ | 3,336 |      
|Work in process |                   |              | 9     |       |      |   | 78    |      
|Finished goods  |                   |              | 2,038 |       |      |   | 736   |      
|                |                   |              |       |       |      |  
|                | Total inventories |              | $     | 5,362 |      |   | $     | 4,150 | 
|                |                   |              |       |       |      |  



F-11



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




2.     Summary of Significant
Accounting Policies and Practices  (Continued)




| |                       
| | ----------------------
| | Property and Equipment





|                                               |                            |      |        |       |      |   |        |       | 
|---------------------------------------------- | -------------------------- | ---- | ------ | ----- | ---- | - | ------ | ----- | 
|                                               |                            | 2004 |        |       | 2003 |  
|                                               |                            |      |        |       |      |  
|Computers and equipment                        |                            | $    | 5,546  |       |      | $ | 4,541  |      
|Purchased software                             |                            |      | 2,229  |       |      |   | 1,706  |      
|Furniture and fixtures                         |                            |      | 695    |       |      |   | 729    |      
|Leasehold improvements                         |                            |      | 2,456  |       |      |   | 2,445  |      
|                                               |                            |      |        |       |      |  
|                                               |                            |      | 10,926 |       |      |   | 9,421  |      
|Less accumulated depreciation and amortization |                            |      | (7,047 | )     |      |   | (5,322 | )    
|                                               |                            |      |        |       |      |  
|                                               | Net property and equipment |      | $      | 3,879 |      |   | $      | 4,099 | 
|                                               |                            |      |        |       |      |  





| |                               
| | ------------------------------
| | Goodwill and Other Intangibles



F-12



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




2.     Summary of Significant
Accounting Policies and Practices  (Continued)




|                                     |                                         |                         |  |              |           |   |       |       |       |   |       |       |       |  
|------------------------------------ | --------------------------------------- | ----------------------- |  | ------------ | --------- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | -
|                                     |                                         |                         |  | December 31, |          
|                                     |                                         | Amortization            |  |              |           |  
|                                     |                                         | Period in months        |  |              | 2004      |   |       | 2003  |      
|                                     |                                         |                         |  |              |           |   |       |       |      
|Intangibles subject to amortization: |                                         |                         |  |              |           |   |       |       |       |   |       |      
|                                     | Current technology                      |                         |  | 36 months    |           |   | $     | 821   |       |   | $     | 821   |      
|                                     | Customer relationship                   |                         |  | 120 months   |           |   |       | 2,403 |       |   |       | 2,403 |      
|                                     |                                         |                         |  |              |           |   |       |       |      
|                                     |                                         | Weighted average months |  |              | 99 months |   |       |       | 3,224 |   |       |       | 3,224 |  
|                                     |                                         |                         |  |              |           |   |       |       |      
|                                     | Accumulated amortization:               |                         |  |              |           |   |       |       |       |   |       |       |      
|                                     |                                         | Current technology      |  |              |           |   |       |       | (440  | ) |       |       | (167  | )
|                                     |                                         | Customer relationship   |  |              |           |   |       |       | (480  | ) |       |       | (240  | )
|                                     |                                         |                         |  |              |           |   |       |       |      
|                                     | Net intangibles subject to amortization |                         |  |              |           |   |       | 2,304 |       |   |       | 2,817 |      
|Goodwill                             |                                         |                         |  |              |           |   | 2,514 |       |       |   | 2,514 |      
|                                     |                                         |                         |  |              |           |   |       |       |      
|Total goodwill and other intangibles |                                         |                         |  |              |           | $ | 4,818 |       |       | $ | 5,331 |      
|                                     |                                         |                         |  |              |           |   |       |       |      





|           |  |              |       | 
|---------- |  | ------------ | ----- | 
|           |  | Annual       |      
|           |  | Amortization |      
|           |  |              |      
|2005       |  | $            | 514   | 
|2006       |  |              | 347   | 
|2007       |  |              | 240   | 
|2008       |  |              | 240   | 
|2009       |  |              | 240   | 
|Thereafter |  |              | 723   | 
|           |  |              |      
|           |  | $            | 2,304 | 
|           |  |              |      





| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets





F-13



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


2.     Summary of Significant
Accounting Policies and Practices  (Continued)








| |           
| | ----------
| | Warranties





|                                     |  |      |      |   |      |   |      |  
|------------------------------------ |  | ---- | ---- | - | ---- | - | ---- | -
|                                     |  | 2004 |      |   | 2003 |  
|                                     |  |      |      |   |      |  
|Balance beginning of year            |  | $    | 265  |   |      | $ |     |  
|Warranty liability from acquisitions |  |      |     |   |      |   | 281  |  
|Provision for warranty costs         |  |      | 168  |   |      |   | 186  |  
|Warranty expenditures                |  |      | (151 | ) |      |   | (202 | )
|                                     |  |      |      |   |      |  
|Balance end of year                  |  | $    | 282  |   |      | $ | 265  |  
|                                     |  |      |      |   |      |  



| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash and cash equivalents, accounts receivable, inventories,
    accrued expenses, accounts payable, unearned revenue and
    customer deposits: 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. The carrying amount of the Companys notes
    payable has been discounted to approximate its fair value in
    connection with the accounting for the acquisition of
    substantially all of the operating assets of Clarent. The
    carrying amount of convertible subordinated debentures under
    fixed rate debt approximates its fair value because it
    approximates the Companys estimated long-term borrowing
    rate.





| |                              
| | -----------------------------
| | Stock-Based Compensation Plan



F-14



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


2.     Summary of Significant
Accounting Policies and Practices  (Continued)




F-14.1



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


2.     Summary of Significant
Accounting Policies and Practices  (Continued)






|                        |  |      |        |   |      |  |        |      |  |  |        |  
|----------------------- |  | ---- | ------ | - | ---- |  | ------ | ---- |  |  | ------ | -
|Assumption              |  | 2004 |        |   | 2003 |  |        | 2002 | 
|                        |  |      |        |   |      |  |        |      | 
|Expected Term           |  |      | 4.00   |   |      |  | 4.00   |      |  |  | 4.00   |  
|Expected Volatility     |  |      | 112.00 | % |      |  | 115.00 | %    |  |  | 110.00 | %
|Expected Dividend Yield |  |      | 0.00   | % |      |  | 0.00   | %    |  |  | 0.00   | %
|Risk-Free Interest Rate |  |      | 3.00   | % |      |  | 3.00   | %    |  |  | 3.00   | %



|                                                                                                                      |           |                          |         |       |      |   |         |       |   |   |        |       |  
|--------------------------------------------------------------------------------------------------------------------- | --------- | ------------------------ | ------- | ----- | ---- | - | ------- | ----- | - | - | ------ | ----- | -
|                                                                                                                      |           | Years Ended December 31, |        
|                                                                                                                      |           |                          |        
|                                                                                                                      |           | 2004                     |         |       | 2003 |   |         | 2002  |  
|                                                                                                                      |           |                          |         |       |      |   |         |       |  
|Net loss, as reported                                                                                                 |           | $                        | (38,787 | )     |      | $ | (18,287 | )     |   | $ | (2,726 | )    
|Add: Stock-based compensation expense included in net loss                                                            |           |                          | 435     |       |      |   | 780     |       |   |   | 1,173  |      
|Less: Total stock-based employee compensation expense
    determined under fair value based method for
    all awards |           |                          | (2,615  | )     |      |   | (3,146  | )     |   |   | (3,296 | )    
|                                                                                                                      |           |                          |         |       |      |   |         |       |  
|Pro forma net loss                                                                                                    |           | $                        | (40,967 | )     |      | $ | (20,653 | )     |   | $ | (4,849 | )    
|                                                                                                                      |           |                          |         |       |      |   |         |       |  
|Net loss per common share as reported                                                                                 |           | $                        | (0.29   | )     |      | $ | (0.18   | )     |   | $ | (0.03  | )    
|                                                                                                                      | Pro forma |                          |         | (0.31 | )    |   |         | (0.21 | ) |   |        | (0.06 | )



|                                                                                                                      |           |                          |         |       |      |   |        |       |   |   |        |       |  
|--------------------------------------------------------------------------------------------------------------------- | --------- | ------------------------ | ------- | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                                      |           | Years Ended December 31, |        
|                                                                                                                      |           |                          |        
|                                                                                                                      |           | 2004                     |         |       | 2003 |   |        | 2002  |  
|                                                                                                                      |           |                          |         |       |      |   |        |       |  
|Loss from continuing operations, as reported                                                                          |           | $                        | (18,770 | )     |      | $ | (4,215 | )     |   | $ | (4,716 | )    
|Add: Stock-based compensation expense included in net loss                                                            |           |                          | 435     |       |      |   | 780    |       |   |   | 1,173  |      
|Less: Total stock-based employee compensation expense
    determined under fair value based method for
    all awards |           |                          | (2,615  | )     |      |   | (3,146 | )     |   |   | (3,296 | )    
|                                                                                                                      |           |                          |         |       |      |   |        |       |  
|Pro forma net loss                                                                                                    |           | $                        | (20,950 | )     |      | $ | (6,581 | )     |   | $ | (6,839 | )    
|                                                                                                                      |           |                          |         |       |      |   |        |       |  
|Net loss per common share as reported                                                                                 |           |                          | (0.14   | )     |      |   | (0.04  | )     |   |   | (0.06  | )    
|                                                                                                                      | Pro forma |                          |         | (0.16 | )    |   |        | (0.07 | ) |   |        | (0.08 | )

F-15



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




2.     Summary of Significant
Accounting Policies and Practices  (Continued)




| |             
| | ------------
| | Income Taxes





| |                   
| | ------------------
| | Net Loss Per Share



|                                                              |  |      |           |  |      |  |            |      |  |  |           | 
|------------------------------------------------------------- |  | ---- | --------- |  | ---- |  | ---------- | ---- |  |  | --------- | 
|                                                              |  | 2004 |           |  | 2003 |  |            | 2002 | 
|                                                              |  |      |           |  |      |  |            |      | 
|Shares issuable under stock options                           |  |      | 2,906,378 |  |      |  | 5,232,642  |      |  |  | 2,376,136 | 
|Shares issuable pursuant to warrants to purchase common stock |  |      | 37,247    |  |      |  | 7,056,306  |      |  |  | 1,641,781 | 
|                                                              |  |      |           |  |      |  |            |      | 
|                                                              |  |      | 2,943,625 |  |      |  | 12,288,948 |      |  |  | 4,017,917 | 
|                                                              |  |      |           |  |      |  |            |      | 





| |                            
| | ---------------------------
| | Comprehensive Income (Loss)





| |                                   
| | ----------------------------------
| | Segment and Geographic Information





| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements



F-16



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




2.     Summary of Significant
Accounting Policies and Practices  (Continued)




3.     Mergers and Acquisitions




| |                         
| | ------------------------
| | MCK Communications, Inc.









| |                    
| | -------------------
| | Clarent Corporation



F-17



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


3.     Mergers and
Acquisitions  (Continued)






| |                             
| | ----------------------------
| | Allocation of Purchase Price



|                       |  |   |        |  
|---------------------- |  | - | ------ | -
|Cash                   |  | $ | 571    |  
|Restricted cash        |  |   | 115    |  
|Accounts receivable    |  |   | 2,717  |  
|Inventories            |  |   | 5,465  |  
|Other current assets   |  |   | 613    |  
|Property and equipment |  |   | 1,650  |  
|Other intangibles      |  |   | 821    |  
|Accounts payable       |  |   | (103   | )
|Accrued compensation   |  |   | (198   | )
|Accrued expenses       |  |   | (331   | )
|Deferred revenue       |  |   | (480   | )
|                       |  |   |       
|Cost of acquisition    |  | $ | 10,840 |  
|                       |  |   |       



| |                                        
| | ---------------------------------------
| | Pro Forma Effect of Clarent Acquisition



|                                                                         |  |      |         |   |      |   |        |  
|------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------ | -
|                                                                         |  | 2003 |         |   | 2002 |  
|                                                                         |  |      |         |   |      |  
|Revenues                                                                 |  | $    | 39,786  |   |      | $ | 49,117 |  
|Loss from continuing operations                                          |  | $    | (6,344  | ) |      | $ | (3,604 | )
|Net loss                                                                 |  | $    | (20,416 | ) |      | $ | (1,614 | )
|Loss from continuing operations per common share 
    basic and diluted |  | $    | (0.06   | ) |      | $ | (0.04  | )
|Net loss per common share  basic and diluted                            |  |      | (0.21   | ) |      |   | (0.02  | )
|Weighted average shares outstanding  basic and diluted                  |  |      | 99,135  |   |      |   | 80,533 |  



|   |                          
|-- | -------------------------
|4. | Unconsolidated Affiliates



| |                                   
| | ----------------------------------
| | Shanghai BeTrue Infotech Co., Ltd.



F-18



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




4.     Unconsolidated
Affiliates  (Continued)








|                   |                         |              |   |       |              |  |   |               |  |  |   |     |  
|------------------ | ----------------------- | ------------ | - | ----- | ------------ |  | - | ------------- |  |  | - | --- | -
|                   |                         | Year Ended   |   |       | Year Ended   |  |   | Quarter Ended | 
|                   |                         | December 31, |   |       | December 31, |  |   | December 31,  | 
|                   |                         | 2004         |   |       | 2003         |  |   | 2002          | 
|                   |                         |              |   |       |              |  |   |               | 
|Operating results: |                         |              |   |       |              |  |   |               |  |  |   |    
|                   | Revenues                |              | $ | 2,713 |              |  | $ | 3,324         |  |  | $ | 725 |  
|                   |                         |              |   |       |              |  |   |               | 
|                   | Operating income (loss) |              | $ | 93    |              |  | $ | 128           |  |  | $ | (5  | )
|                   |                         |              |   |       |              |  |   |               | 
|                   | Net income (loss)       |              | $ | 110   |              |  | $ | 141           |  |  | $ | (9  | )
|                   |                         |              |   |       |              |  |   |               | 



|   |                        
|-- | -----------------------
|5. | Discontinued Operations





F-19



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




5.     Discontinued
Operations  (Continued)




|                                            |  |                                 |         |   |      |   |         |      |  |   |        | 
|------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | 
|                                            |  | For the Year Ended December 31, |        
|                                            |  |                                 |        
|                                            |  | 2004                            |         |   | 2003 |   |         | 2002 | 
|                                            |  |                                 |         |   |      |   |         |      | 
|Revenue                                     |  | $                               | 18,889  |   |      | $ | 21,359  |      |  | $ | 26,542 | 
|                                            |  |                                 |         |   |      |   |         |      | 
|Gross profit                                |  |                                 | 8,074   |   |      |   | 10,600  |      |  |   | 16,046 | 
|                                            |  |                                 |         |   |      |   |         |      | 
|Operating (loss) income                     |  |                                 | (5,229  | ) |      |   | (14,072 | )    |  |   | 1,990  | 
|Loss on disposal of discontinued operations |  |                                 | (14,788 | ) |      |   |        |      |  |   |        | 
|                                            |  |                                 |         |   |      |   |         |      | 
|(Loss) income from discontinued operations  |  | $                               | (20,017 | ) |      | $ | (14,072 | )    |  | $ | 1,990  | 
|                                            |  |                                 |         |   |      |   |         |      | 









F-20



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


5.     Discontinued
Operations  (Continued)




|                                       |                           |              |       |       |      |   |        |        | 
|-------------------------------------- | ------------------------- | ------------ | ----- | ----- | ---- | - | ------ | ------ | 
|                                       |                           | December 31, |      
|                                       |                           |              |      
|                                       |                           | 2004         |       |       | 2003 |  
|                                       |                           |              |       |       |      |  
|Accounts receivable, net               |                           | $            | 3,085 |       |      | $ | 8,654  |       
|Inventory                              |                           |              | 2,901 |       |      |   | 4,577  |       
|Other current assets                   |                           |              | 419   |       |      |   | 186    |       
|Furniture and equipment, net           |                           |              | 977   |       |      |   | 1,650  |       
|Goodwill and other intangibles         |                           |              | 1,613 |       |      |   | 18,205 |       
|                                       |                           |              |       |       |      |  
|                                       | Assets held for sale      |              | $     | 8,995 |      |   | $      | 33,272 | 
|                                       |                           |              |       |       |      |  
|Accounts payable                       |                           | $            | 163   |       |      | $ | 1,588  |       
|Accrued compensation                   |                           |              | 465   |       |      |   | 743    |       
|Accrued retention bonuses              |                           |              |      |       |      |   | 2,978  |       
|Unearned revenue and customer deposits |                           |              | 1,127 |       |      |   | 1,909  |       
|Other current liabilities              |                           |              | 598   |       |      |   | 1,607  |       
|                                       |                           |              |       |       |      |  
|                                       | Liabilities held for sale |              | $     | 2,353 |      |   | $      | 8,825  | 
|                                       |                           |              |       |       |      |  



|                          |                                        |              |       |       |      |   |       |       | 
|------------------------- | -------------------------------------- | ------------ | ----- | ----- | ---- | - | ----- | ----- | 
|                          |                                        | December 31, |      
|                          |                                        |              |      
|                          |                                        | 2004         |       |       | 2003 |  
|                          |                                        |              |       |       |      |  
|Accrued rent              |                                        | $            | 2,384 |       |      | $ | 3,163 |      
|Other current liabilities |                                        |              | 277   |       |      |   | 587   |      
|                          |                                        |              |       |       |      |  
|                          | Liabilities of discontinued operations |              | $     | 2,661 |      |   | $     | 3,750 | 
|                          |                                        |              |       |       |      |  





|                                                    |  |      |       |   |      |   |       |  
|--------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                    |  | 2004 |       |   | 2003 |  
|                                                    |  |      |       |   |      |  
|Balance beginning of year                           |  | $    | 3,750 |   |      | $ | 3,131 |  
|Lease payments, net of sublease receipts            |  |      | (939  | ) |      |   | (892  | )
|Other payments                                      |  |      | (150  | ) |      |   | (720  | )
|                                                    |  |      |       |   |      |  
|Additional lease accrual                            |  |      |      |   |      |   | 201   |  
|Additional lease accrual related to MCK acquisition |  |      |      |   |      |   | 2,030 |  
|Balance December 31, 2004                           |  | $    | 2,661 |   |      | $ | 3,750 |  
|                                                    |  |      |       |   |      |  

F-21



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


6.     Financing Arrangements






7.     Convertible Subordinated
Debentures




8.     Reorganization Costs




F-22



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




8.     Reorganization
Costs  (Continued)








9.     Shareholders Equity




| |                
| | ---------------
| | Preferred Stock







| |                   
| | ------------------
| | Private Placements







| |               
| | --------------
| | Stock Warrants



F-23



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




9.     Shareholders
Equity  (Continued)










|               |  |             |            |          |          |   |      |                 |  |  |                               | 
|-------------- |  | ----------- | ---------- | -------- | -------- | - | ---- | --------------- |  |  | ----------------------------- | 
|               |  |             |            | Weighted |          |   |     
|               |  | Number of   |            |          | Average  |   |      |                
|               |  | Outstanding |            |          | Exercise |   |      |                
|Exercise Price |  | Warrants    |            |          | Price    |   |      | Expiration Date | 
|               |  |             |            |          |          |   |      |                 | 
|$0.01          |  |             | 37,532     |          |          | $ | 0.01 |                 |  |  | September 2005  October 2006 | 
|$1.50-$1.82    |  |             | 1,244,106  |          |          | $ | 1.63 |                 |  |  | August 2005  January 2006    | 
|$2.30-$3.09    |  |             | 2,462,861  |          |          | $ | 2.30 |                 |  |  | February 2005  February 2011 | 
|$3.80-$4.03    |  |             | 664,905    |          |          | $ | 3.86 |                 |  |  | July 2005  November 2005     | 
|$5.25-$5.65    |  |             | 5,992,403  |          |          | $ | 5.61 |                 |  |  | February 2005  October 2006  | 
|$6.00          |  |             | 150,000    |          |          | $ | 6.00 |                 |  |  | October 2006                  | 
|               |  |             |            |          |          |   |      |                 | 
|Total          |  |             | 10,551,807 |          |          | $ | 4.25 |                 |  |  |                               | 
|               |  |             |            |          |          |   |      |                 | 







|    |                     
|--- | --------------------
|10. | Stock Incentive Plan





F-24



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|    |                                   
|--- | ----------------------------------
|10. | Stock Incentive Plan  (Continued)













F-25



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|    |                                   
|--- | ----------------------------------
|10. | Stock Incentive Plan  (Continued)





|                                                                       |  |            |            |  |          |   |      |            |  |  |            |  |  |            |      |  |          |  |            |  |  |   |      | 
|---------------------------------------------------------------------- |  | ---------- | ---------- |  | -------- | - | ---- | ---------- |  |  | ---------- |  |  | ---------- | ---- |  | -------- |  | ---------- |  |  | - | ---- | 
|                                                                       |  | 2004       |            |  | 2003     |   |      | 2002       | 
|                                                                       |  |            |            |  |          |   |      |            | 
|                                                                       |  | Number of  |            |  | Weighted |   |      | Number of  |  |  | Weighted   |  |  | Number of  |      |  | Weighted | 
|                                                                       |  | Shares of  |            |  | Average  |   |      | Shares of  |  |  | Average    |  |  | Shares of  |      |  | Average  | 
|                                                                       |  | Underlying |            |  | Exercise |   |      | Underlying |  |  | Exercise   |  |  | Underlying |      |  | Exercise | 
|                                                                       |  | Options    |            |  | Prices   |   |      | Options    |  |  | Prices     |  |  | Options    |      |  | Prices   | 
|                                                                       |  |            |            |  |          |   |      |            |  |  |            |  |  |            |      |  |          | 
|Outstanding at beginning of the year                                   |  |            | 14,727,764 |  |          | $ | 2.13 |            |  |  | 15,798,288 |  |  | $          | 2.13 |  |          |  | 18,029,478 |  |  | $ | 2.57 | 
|Granted                                                                |  |            | 2,512,730  |  |          |   | 1.15 |            |  |  | 4,863,197  |  |  |            | 1.07 |  |          |  | 1,366,300  |  |  |   | 1.46 | 
|Exercised                                                              |  |            | 404,710    |  |          |   | 0.53 |            |  |  | 3,702,017  |  |  |            | 0.55 |  |          |  | 847,082    |  |  |   | 0.34 | 
|Forfeited                                                              |  |            | 624,843    |  |          |   | 1.54 |            |  |  | 2,231,704  |  |  |            | 2.52 |  |          |  | 2,750,408  |  |  |   | 5.10 | 
|Expired                                                                |  |            |           |  |          |   |     |            |  |  |           |  |  |            |     |  |          |  |           |  |  |   |     | 
|                                                                       |  |            |            |  |          |   |      |            |  |  |            |  |  |            |      |  |          | 
|Outstanding at end of year                                             |  |            | 16,210,941 |  |          |   | 2.04 |            |  |  | 14,727,764 |  |  |            | 2.13 |  |          |  | 15,798,288 |  |  |   | 2.13 | 
|                                                                       |  |            |            |  |          |   |      |            |  |  |            |  |  |            |      |  |          | 
|Exercisable at end of year                                             |  |            | 12,201,507 |  |          |   | 2.25 |            |  |  | 10,143,506 |  |  |            | 2.29 |  |          |  | 9,901,956  |  |  |   | 2.16 | 
|                                                                       |  |            |            |  |          |   |      |            |  |  |            |  |  |            |      |  |          | 
|Weighted-average fair value of all options granted                     |  |            |            |  |          |   | 0.88 |            |  |  |            |  |  |            | 0.85 |  |          |  |            |  |  |   | 0.70 | 
|Weighted-average remaining contractual life of outstanding
    options |  |            |            |  |          |   | 6.41 |            |  |  |            |  |  |            | 6.99 |  |          |  |            |  |  |   | 6.46 | 



|                         |  |                      |            |  |                      |   |        |             |  |  |                |  |  |   |      | 
|------------------------ |  | -------------------- | ---------- |  | -------------------- | - | ------ | ----------- |  |  | -------------- |  |  | - | ---- | 
|                         |  | Options and Warrants |            |  | Options and Warrants |  
|                         |  | Outstanding          |            |  | Exercisable          |  
|                         |  |                      |            |  |                      |  
|                         |  | Number               |            |  |                      |   | Number |             |  | 
|                         |  | Outstanding          |            |  | Wgtd. Avg.           |   |        | Exercisable |  |  | Wgtd. Avg.     | 
|Range of Exercise Prices |  | at 12/31/04          |            |  | Exercise Price       |   |        | at 12/31/04 |  |  | Exercise Price | 
|                         |  |                      |            |  |                      |   |        |             |  |  |                | 
|$0.19 to $0.50           |  |                      | 3,253,826  |  |                      | $ | 0.42   |             |  |  | 2,762,826      |  |  | $ | 0.42 | 
|$0.51 to $1.19           |  |                      | 2,689,506  |  |                      | $ | 0.81   |             |  |  | 1,129,072      |  |  | $ | 0.86 | 
|$1.20 to $1.50           |  |                      | 748,250    |  |                      | $ | 1.37   |             |  |  | 422,750        |  |  | $ | 1.46 | 
|$1.51 to $2.14           |  |                      | 5,489,480  |  |                      | $ | 2.05   |             |  |  | 4,278,730      |  |  | $ | 2.13 | 
|$2.15 to $3.05           |  |                      | 290,690    |  |                      | $ | 2.74   |             |  |  | 288,065        |  |  | $ | 2.73 | 
|$3.06 to $4.00           |  |                      | 1,692,109  |  |                      | $ | 3.48   |             |  |  | 1,290,234      |  |  | $ | 3.44 | 
|$4.01 to $5.00           |  |                      | 1,364,005  |  |                      | $ | 4.24   |             |  |  | 1,346,755      |  |  | $ | 4.24 | 
|$5.01 to $18.00          |  |                      | 683,075    |  |                      | $ | 6.77   |             |  |  | 683,075        |  |  | $ | 6.77 | 
|                         |  |                      |            |  |                      |   |        |             |  |  |                | 
|$0.19 to $18.00          |  |                      | 16,210,941 |  |                      | $ | 2.04   |             |  |  | 12,201,507     |  |  | $ | 2.25 | 
|                         |  |                      |            |  |                      |   |        |             |  |  |                | 

F-26



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


11.     Income Taxes




|         |  |                          |         |   |      |   |        |      |  |   |        |  
|-------- |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|         |  | Years Ended December 31, |        
|         |  |                          |        
|         |  | 2004                     |         |   | 2003 |   |        | 2002 | 
|         |  |                          |         |   |      |   |        |      | 
|Domestic |  | $                        | (13,875 | ) |      | $ | (3,682 | )    |  | $ | (4,916 | )
|Foreign  |  |                          | (4,895  | ) |      |   | (533   | )    |  |   |       |  
|         |  |                          |         |   |      |   |        |      | 
|         |  | $                        | (18,770 | ) |      | $ | (4,215 | )    |  | $ | (4,916 | )
|         |  |                          |         |   |      |   |        |      | 



|              |                    |                          |                    |      |   |      |   |   |   |   |      |   |      |      |  
|------------- | ------------------ | ------------------------ | ------------------ | ---- | - | ---- | - | - | - | - | ---- | - | ---- | ---- | -
|              |                    | Years Ended December 31, |                   
|              |                    |                          |                   
|              |                    | 2004                     |                    | 2003 |   | 2002 |  
|              |                    |                          |                    |      |   |      |  
|Income Taxes: |                    |                          |                    |      |   |      |   |   |   |   |      |  
|              | Currently Payable: |                          |                    |      |   |      |   |   |   |   |      |   |     
|              |                    | Domestic                 |                    | $    |  |      |   | $ |  |   |      | $ | (200 | )   
|              |                    | Foreign                  |                    |      |  |      |   |   |  |   |      |   |     |     
|              |                    |                          |                    |      |   |      |   |   |  
|              |                    |                          |                   |      |   |      |  |   |   |   | (200 | )
|              | Deferred           |                          |                    |      |   |      |   |   |   |   |      |   |     
|              |                    | Domestic                 |                    |      |  |      |   |   |  |   |      |   |     |     
|              |                    | Foreign                  |                    |      |  |      |   |   |  |   |      |   |     |     
|              |                    |                          |                    |      |   |      |   |   |  
|              |                    |                          |                   |      |   |      |  |   |   |   |     |  
|              |                    |                          |                    |      |   |      |   |   |  
|              |                    |                          | Income Tax Benefit |      | $ |     |   |   | $ |  |      |   | $    | (200 | )
|              |                    |                          |                    |      |   |      |   |   |  



|                                                 |  |                          |       |    |      |  |       |      |  |  |       |   
|------------------------------------------------ |  | ------------------------ | ----- | -- | ---- |  | ----- | ---- |  |  | ----- | --
|                                                 |  | Years Ended December 31, |      
|                                                 |  |                          |      
|                                                 |  | 2004                     |       |    | 2003 |  |       | 2002 | 
|                                                 |  |                          |       |    |      |  |       |      | 
|Statutory U.S. rate                              |  |                          | (34.0 | )% |      |  | (34.0 | )%   |  |  | (34.0 | )%
|State income taxes, net of federal benefit       |  |                          | (4.0  | )  |      |  | (3.3  | )    |  |  | (4.0  | ) 
|Non-deductible charges for intangibles           |  |                          | 2.3   |    |      |  | 0.0   |      |  |  | 4.1   |   
|Effect of valuation allowance                    |  |                          | 35.7  |    |      |  | 48.0  |      |  |  | 8.1   |   
|Other permanent differences                      |  |                          | 0.0   |    |      |  | (33.3 | )    |  |  | 18.0  |   
|Non-deductible compensation                      |  |                          | 0.0   |    |      |  | 0.0   |      |  |  | 0.5   |   
|Effect of expiring net operating loss            |  |                          | 0.0   |    |      |  | 22.5  |      |  |  | 7.3   |   
|Reversal of accrued exposure no longer necessary |  |                          | 0.0   |    |      |  | 0.0   |      |  |  | (4.1  | ) 
|                                                 |  |                          |       |    |      |  |       |      | 
|Total income tax expense (benefit)               |  |                          | 0.0   | %  |      |  | (0.0  | )%   |  |  | (4.1  | )%
|                                                 |  |                          |       |    |      |  |       |      | 

F-27



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


11.     Income
Taxes  (Continued)




|                     |                                           |                        |   |         |      |  |   |         |   | 
|-------------------- | ----------------------------------------- | ---------------------- | - | ------- | ---- |  | - | ------- | - | 
|                     |                                           | December 31,           |  
|                     |                                           |                        |  
|                     |                                           | 2004                   |   |         | 2003 | 
|                     |                                           |                        |   |         |      | 
|Deferred tax assets: |                                           |                        |   |         |      |  |   |        
|                     | Net operating loss carryforwards          |                        | $ | 69,888  |      |  | $ | 62,912  |  
|                     | Capital loss carryforwards                |                        |   | 269     |      |  |   | 269     |  
|                     | Research and development credits          |                        |   | 1,248   |      |  |   | 1,248   |  
|                     | Foreign research and development expenses |                        |   | 1,879   |      |  |   | 854     |  
|                     | Foreign investment tax credits            |                        |   | 1,666   |      |  |   | 307     |  
|                     | Unearned revenue                          |                        |   | 1,121   |      |  |   | 1,376   |  
|                     | Reserves                                  |                        |   | 2,931   |      |  |   | 845     |  
|                     | Compensation accruals                     |                        |   | 422     |      |  |   | 5       |  
|                     | Intangible assets                         |                        |   | 597     |      |  |   | 1,962   |  
|                     | Depreciable assets                        |                        |   | 2,792   |      |  |   | 1,122   |  
|                     | Other                                     |                        |   | (494    | )    |  |   |         |  
|                     | Valuation allowance                       |                        |   | (82,319 | )    |  |   | (70,900 | )
|                     |                                           |                        |   |         |      | 
|                     |                                           | Net deferred tax asset |   | $       |     |  |   | $       |  | 
|                     |                                           |                        |   |         |      | 







12.     Savings and Retirement
Plan




F-28



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


13.     Employee Stock Purchase
Plan




F-28.1



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




13.     Employee Stock Purchase
Plan  (Continued)




14.     Other Commitments and
Contingencies




| |       
| | ------
| | Leases





|           |  |            |       |                         |        |   |       |           |  |   |        |  
|---------- |  | ---------- | ----- | ----------------------- | ------ | - | ----- | --------- |  | - | ------ | -
|           |  |            |       | Discontinued Operations |       
|           |  |            |       | (See Note 5)            |       
|           |  | Continuing |       |                         |        |  
|           |  | Operations |       |                         | Leases |   |       | Subleases | 
|           |  |            |       |                         |        |   |       |           | 
|2005       |  | $          | 2,076 |                         |        | $ | 1,787 |           |  | $ | (1,165 | )
|2006       |  |            | 1,727 |                         |        |   | 1,787 |           |  |   | (1,172 | )
|2007       |  |            | 1,447 |                         |        |   | 965   |           |  |   | (547   | )
|2008       |  |            | 1,454 |                         |        |   | 385   |           |  |   | (236   | )
|2009       |  |            | 1,458 |                         |        |   | 393   |           |  |   | (241   | )
|Thereafter |  |            | 121   |                         |        |   | 33    |           |  |   | (20    | )
|           |  |            |       |                         |        |   |       |           | 
|Total      |  | $          | 8,283 |                         |        | $ | 5,350 |           |  | $ | (3,381 | )
|           |  |            |       |                         |        |   |       |           | 



15.     Segment Information




F-29



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


15.     Segment
Information  (Continued)




|                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Packet-based Technologies Group:      |  | The Companys Packet-based Technologies Group consists of
    the operations of the Companys softswitching division and
    Netperformer divisions and the Companys subsidiary
    Telemate.Net. The Packet-based Technologies Group includes
    domestic and international sales of hardware and software,
    integration, applications and technical training and support.
    The Packet-based Technologies Group offers hardware-based
    solutions (which include software) for companies seeking to
    build private, packet-based voice and data networks.
    Additionally, the Packet-based Technologies Group offers
    software-based solutions for Internet access and usage
    management that include call accounting and usage reporting for
    Internet protocol network devices.
|                                     
|Advanced Applications Services Group: |  | The Companys Advanced Applications Services 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
    outside customers, as well as customers of the Companys
    Packet-based Technologies Group segment.                                                                                                                                                                                                                                                                                                                                                                        



|                                          |                                              |              |   |        |                |  |   |        |  |  |   |        |   | 
|----------------------------------------- | -------------------------------------------- | ------------ | - | ------ | -------------- |  | - | ------ |  |  | - | ------ | - | 
|                                          |                                              | Packet-based |   |        | Advanced       |  |   |       
|                                          |                                              | Technologies |   |        | Application    |  |   |       
|                                          |                                              | Group        |   |        | Services Group |  |   | Total  | 
|                                          |                                              |              |   |        |                |  |   |        | 
|For the Years Ended December 31,
    2004 |                                              |              |   |        |                |  |   |        |  |  |   |       
|                                          | Revenue                                      |              | $ | 20,527 |                |  | $ | 11,736 |  |  | $ | 32,263 |  
|                                          | Contribution (loss) before unallocated items |              |   | (7,127 | )              |  |   | 2,800  |  |  |   | (4,327 | )
|                                          | Goodwill                                     |              |   | 1,061  |                |  |   | 1,453  |  |  |   | 2,514  |  
|                                          | Total assets                                 |              |   | 11,104 |                |  |   | 4,027  |  |  |   | 15,131 |  
|                                         
|                                          |                                              | 2003         |   |        |                |  |   |        |  |  |   |        |   | 
|                                          | Revenue                                      |              | $ | 25,128 |                |  | $ | 13,011 |  |  | $ | 38,139 |  
|                                          | Contribution before unallocated items        |              |   | 2,014  |                |  |   | 4,983  |  |  |   | 6,997  |  
|                                          | Goodwill                                     |              |   | 1,061  |                |  |   | 1,453  |  |  |   | 2,514  |  
|                                          | Total assets                                 |              |   | 11,622 |                |  |   | 4,366  |  |  |   | 15,988 |  
|                                         
|                                          |                                              | 2002         |   |        |                |  |   |        |  |  |   |        |   | 
|                                          | Revenue                                      |              | $ | 5,939  |                |  | $ | 12,540 |  |  | $ | 18,479 |  
|                                          | Contribution before unallocated items        |              |   | 739    |                |  |   | 4,358  |  |  |   | 5,097  |  
|                                          | Goodwill                                     |              |   | 1,061  |                |  |   | 1,453  |  |  |   | 2,514  |  
|                                          | Total assets                                 |              |   | 1,589  |                |  |   | 4,629  |  |  |   | 6,218  |  

F-30



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


15.     Segment
Information  (Continued)




|                                                        |  |                          |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                        |  | Years Ended December 31, |        
|                                                        |  |                          |        
|                                                        |  | 2004                     |         |   | 2003 |   |        | 2002 | 
|                                                        |  |                          |         |   |      |   |        |      | 
|(Loss) contribution before unallocated items, per above |  | $                        | (4,327  | ) |      | $ | 6,997  |      |  | $ | 5,097  |  
|Corporate and administrative expenses                   |  |                          | (8,958  | ) |      |   | (6,967 | )    |  |   | (6,094 | )
|Corporate research and development                      |  |                          | (379    | ) |      |   |       |      |  |   |       |  
|Depreciation                                            |  |                          | (2,278  | ) |      |   | (1,928 | )    |  |   | (1,523 | )
|Amortization of intangibles                             |  |                          | (240    | ) |      |   | (240   | )    |  |   |       |  
|Deferred compensation                                   |  |                          | (435    | ) |      |   | (780   | )    |  |   | (1,173 | )
|Reorganization costs                                    |  |                          | (1,414  | ) |      |   | (159   | )    |  |   | (324   | )
|Other income                                            |  |                          | 259     |   |      |   | 314    |      |  |   | 263    |  
|Equity in income (loss) of investment                   |  |                          | 56      |   |      |   | 73     |      |  |   | (5     | )
|Interest expense, net                                   |  |                          | (1,054  | ) |      |   | (1,525 | )    |  |   | (1,157 | )
|Income taxes                                            |  |                          |        |   |      |   |       |      |  |   | 200    |  
|                                                        |  |                          |         |   |      |   |        |      | 
|Loss from continuing operations                         |  | $                        | (18,770 | ) |      | $ | (4,215 | )    |  | $ | (4,716 | )
|                                                        |  |                          |         |   |      |   |        |      | 



|                                                 |  |              |        |  |      |   |        | 
|------------------------------------------------ |  | ------------ | ------ |  | ---- | - | ------ | 
|                                                 |  | December 31, |       
|                                                 |  |              |       
|                                                 |  | 2004         |        |  | 2003 |  
|                                                 |  |              |        |  |      |  
|Total assets before unallocated items, per above |  | $            | 15,131 |  |      | $ | 15,988 | 
|Corporate assets:                                |  |              |        |  |      |   |        | 
|Cash and cash equivalents                        |  |              | 4,234  |  |      |   | 7,654  | 
|Restricted cash                                  |  |              |       |  |      |   | 2,290  | 
|Other current assets                             |  |              | 1,253  |  |      |   | 636    | 
|Assets held for sale                             |  |              | 8,995  |  |      |   | 33,272 | 
|Property and equipment, net                      |  |              | 3,087  |  |      |   | 2,739  | 
|Investment                                       |  |              | 729    |  |      |   | 673    | 
|                                                 |  |              |        |  |      |  
|                                                 |  | $            | 33,429 |  |      | $ | 63,252 | 
|                                                 |  |              |        |  |      |  



F-31



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




15.     Segment
Information  (Continued)




|                                |                                              |        |   |        |               |  |   |        |   |  |   |        |   | 
|------------------------------- | -------------------------------------------- | ------ | - | ------ | ------------- |  | - | ------ | - |  | - | ------ | - | 
|                                |                                              | Canada |   |        | United States |  |   | Total  |  
|                                |                                              |        |   |        |               |  |   |        |  
|For the Year Ended December 31, |                                              |        |   |        |               |  |   |        |   |  |   |       
|                                |                                              | 2004   |   |        |               |  |   |        |   |  |   |        |   | 
|                                | Revenue                                      |        | $ |       |               |  | $ | 32,263 |   |  | $ | 32,263 |  
|                                | Contribution (loss) before unallocated items |        |   | (3,670 | )             |  |   | (657   | ) |  |   | (4,327 | )
|                                | Total Assets                                 |        |   | 704    |               |  |   | 32,725 |   |  |   | 33,429 |  
|For the Year Ended December 31, |                                              |        |   |        |               |  |   |        |   |  |   |       
|                                |                                              | 2003   |   |        |               |  |   |        |   |  |   |        |   | 
|                                | Revenue                                      |        | $ |       |               |  | $ | 38,139 |   |  | $ | 38,139 |  
|                                | Contribution (loss) before unallocated items |        |   | (3,206 | )             |  |   | 10,203 |   |  |   | 6,997  |  
|                                | Total Assets                                 |        |   | 1,215  |               |  |   | 62,037 |   |  |   | 63,252 |  

16.     Litigation






F-32



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




16.     Litigation  (Continued)








|    |                  
|--- | -----------------
|17. | Subsequent Events



| |                            
| | ---------------------------
| | Agreement to Purchase WSECI





F-33



---



##### 



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|    |                                
|--- | -------------------------------
|17. | Subsequent Events  (Continued)





| |                         
| | ------------------------
| | Sale of the MCK Business





| |                          
| | -------------------------
| | Sale of the NACT Business





| |                   
| | ------------------
| | Sale of Debentures



F-34



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















| |             
| | ------------
| | /s/ KPMG LLP

F-35



---



##### 



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS


|                                  |      |              |   |             |            |  |   |             |   |  |            |          |                |           |   |         |  |  |   |             |  
|--------------------------------- | ---- | ------------ | - | ----------- | ---------- |  | - | ----------- | - |  | ---------- | -------- | -------------- | --------- | - | ------- |  |  | - | ----------- | -
|                                  |      |              |   | Additions   |            |  |   |             |  
|                                  |      |              |   |             |            |  |   |             |  
|                                  |      | Balance at   |   |             | Charges to |  |   |             |   |  |            |         
|                                  |      | beginning of |   |             | costs and  |  |   | Allowances  |   |  |            |          | Balance at end |          
|Description                       |      | period       |   |             | expenses   |  |   | acquired    |   |  | Deductions |          |                | of period |  
|                                  |      |              |   |             |            |  |   |             |   |  |            |          |                |           |  
|Allowance for doubtful accounts: 
|                                  | 2004 |              | $ | (489,000    | )          |  | $ | (494,000    | ) |  | $          |         |                |           | $ | 728,000 |  |  | $ | (255,000    | )
|                                  | 2003 |              | $ | (84,000     | )          |  | $ | (86,000     | ) |  | $          | (360,000 | )              |           | $ | 41,000  |  |  | $ | (489,000    | )
|                                  | 2002 |              | $ | (492,000    | )          |  | $ | 137,000     |   |  | $          |         |                |           | $ | 271,000 |  |  | $ | (84,000     | )
|Deferred tax valuation allowance:
|                                  | 2004 |              | $ | (70,900,000 | )          |  | $ | (11,419,000 | ) |  | $          |         |                |           | $ |        |  |  | $ | (82,319,000 | )
|                                  | 2003 |              | $ | (57,429,000 | )          |  | $ | (13,471,000 | ) |  | $          |         |                |           | $ |        |  |  | $ | (70,900,000 | )
|                                  | 2002 |              | $ | (57,375,000 | )          |  | $ | (54,000     | ) |  | $          |         |                |           | $ |        |  |  | $ | (57,429,000 | )

F-36



---



##### 



Verso Technologies, Inc.


Managements Report on Internal Control Over Financial
Reporting
















| |                         
| | ------------------------
| | Verso Technologies, Inc.



| |    |                   
| | -- | ------------------
| | by | /s/ Steven A. Odom

| |                                     
| | ------------------------------------
| |                                     
| | Steven A. Odom                      
| | Chairman and Chief Executive Officer



| |    |                      
| | -- | ---------------------
| | by | /s/ Juliet M. Reising

| |                                                     
| | ----------------------------------------------------
| |                                                     
| | Juliet M. Reising                                   
| | Executive Vice President and Chief Financial Officer



F-37



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














.






| |                       
| | ----------------------
| | /s/ Grant Thornton LLP





F-38



---



##### 



SIGNATURES






| |                         
| | ------------------------
| | Verso Technologies, Inc.



| |     |                   
| | --- | ------------------
| | By: | /s/ Steven A. Odom

| |                          
| | -------------------------
| |                          
| | Steven A. Odom           
| | Chairman of the Board and
| | Chief Executive Officer  





|                                         |  |                                                                                                                                   |  |                |  | 
|---------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                     |  | Title                                                                                                                             |  | Date          
|                                         |  |                                                                                                                                   |  |               
|                                        
|/s/ Steven A. OdomSteven A. Odom         |  | Chairman of the Board and Chief Executive Officer (Principal
    Executive Officer)                                               |  | March 16, 2005
|                                        
|/s/ Juliet M. ReisingJuliet M. Reising   |  | Executive Vice President, Chief Financial Officer (Principal
    Financial Officer and Principal Accounting Officer) and Director |  | March 16, 2005
|                                        
|/s/ Lewis JaffeLewis Jaffe               |  | President and Chief Operating Officer                                                                                             |  | March 16, 2005
|                                        
|/s/ Paul R. GarciaPaul R. Garcia         |  | Director                                                                                                                          |  | March 16, 2005
|                                        
|/s/ Gary H. HeckGary H. Heck             |  | Director                                                                                                                          |  | March 16, 2005
|                                        
|/s/ Amy L. NewmarkAmy L. Newmark         |  | Director                                                                                                                          |  | March 16, 2005
|                                        
|/s/ Stephen E. RavilleStephen E. Raville |  | Director                                                                                                                          |  | March 16, 2005
|                                        
|/s/ James A. VerbruggeJames A. Verbrugge |  | Director                                                                                                                          |  | March 16, 2005



---



##### 



EXHIBIT INDEX


|            |   |         |  |                                                                                                                                                                                                                                                    |  |                                                                                                                                                      
|----------- | - | ------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   | Exhibit |  | Method of Filing                                                                                                                                                                                                                                  
|            |   |         |  |                                                                                                                                                                                                                                                   
|            | 2 | .1      |  | Second Amended and Restated Agreement and Plan of Merger dated
    as of July 27, 2000, among the Registrant, Solemn
    Acquisition Corporation and Cereus Technology Partners,
    Inc.                                                          |  | Incorporated by reference to Appendix A to the Registrants
    Registration Statement on Form S-4 filed August 7,
    2000 (File No. 333- 43224).   
|            | 2 | .2      |  | Agreement and Plan of Merger dated as of August 31, 1998,
    among the Registrant, Encore Acquiring Corporation, Encore
    Systems, Inc., Global Systems and Support, Inc., Five Star
    Systems, Inc., Penelope A. Sellers and Joseph T. Dyer. |  | Incorporated by reference to Exhibit 2.1 to the
    Registrants Current Report on Form 8-K filed
    September 10, 1998.                            
|            | 2 | .3      |  | Agreement and Plan of Merger dated as of November 11, 1998,
    among the Registrant, Sulcus Hospitality Technologies Corp. and
    Sulcus Acquiring Corporation.                                                                                  |  | Incorporated by reference to Exhibit 2.1 to the
    Registrants Registration Statement on Form S-4 filed
    February 16, 1999 (File No. 333-68699).
|            | 2 | .4      |  | Stock Purchase Agreement dated as of October 26, 2000,
    among the Registrant, Squirrel Systems, Inc., Squirrel Systems
    of Canada Ltd. and SQS Acquisitions Inc.                                                                             |  | Incorporated by reference to Exhibit 10.15 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2000.       
|            | 2 | .5      |  | Agreement and Plan of Merger dated October 31, 2000, among
    the Registrant, MessageClick, Inc. and MCLICK Acquisition
    Corporation (the MessageClick Merger Agreement).                                                                    |  | Incorporated by reference to Exhibit 2.1 to the
    Registrants Current Report on Form 8-K filed
    December 6, 2000.                              
|            | 2 | .6      |  | First Amendment to the Agreement and Plan of Merger dated as of
    November 9, 2000, among the Registrant, MessageClick, Inc.
    and MCLICK Acquisition Corporation.                                                                             |  | Incorporated by reference to Exhibit 2.2 to the
    Registrants Current Report on Form 8-K filed
    December 6, 2000.                              
|            | 2 | .7      |  | Second Amendment to the Agreement and Plan of Merger dated as of
    November 10, 2000, among the Registrant, MessageClick, Inc.
    and MCLICK Acquisition Corporation.                                                                           |  | Incorporated by reference to Exhibit 2.3 to the
    Registrants Current Report on Form 8-K filed
    December 6, 2000.                              
|            | 2 | .8      |  | Agreement for the Purchase and Sale of Assets dated as of
    September 28, 2000, among the Registrant, AremisSoft
    Corporation and Eltrax Hospitality Group, Inc. (the
    AremisSoft Agreement).                                            |  | Incorporated by reference to Exhibit 2.2 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.                             
|            | 2 | .9      |  | Letter amending the AremisSoft Agreement dated as of
    October 18, 2000.                                                                                                                                                                         |  | Incorporated by reference to Exhibit 2.2 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.                             
|            | 2 | .10     |  | Letter amending the AremisSoft Agreement dated as of
    November 22, 2000.                                                                                                                                                                        |  | Incorporated by reference to Exhibit 2.3 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.                             
|            | 2 | .11     |  | Form of Agreement between AremisSoft Norway AS and Eltrax System
    Scandinavia AS.                                                                                                                                                               |  | Incorporated by reference to Exhibit 2.4 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.                             
|            | 2 | .12     |  | Form of Agreement among the Registrant, AremisSoft Corporation,
    AremisSoft Hospitality (Switzerland) GmbH, Eltrax AG and Eltrax
    Holdings AG.                                                                                               |  | Incorporated by reference to Exhibit 2.5 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.                             



---



##### 



|            |   |     |         |                                                                                                                                                                                      |                  |                                                                                                                                         
|----------- | - | --- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------- | ----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |     | Exhibit |                                                                                                                                                                                      | Method of Filing
|            |   |     |         |                                                                                                                                                                                      |                 
|            | 2 | .13 |         | Form of Agreement among the Registrant, AremisSoft Corporation,
    AremisSoft Australia Pty Limited, Eltrax Systems Pty Ltd. and
    Eltrax International Group, Inc.               |                  | Incorporated by reference to Exhibit 2.6 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.                
|            | 2 | .14 |         | Form of Agreement among the Registrant, AremisSoft Corporation,
    AremisSoft Hospitality (UK) Limited and Eltrax Hospitality
    UK Ltd.                                           |                  | Incorporated by reference to Exhibit 2.7 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.                
|            | 2 | .15 |         | Form of Agreement among the Registrant, AremisSoft Corporation,
    Impact Level(M) Sdn. Bhd., Eltrax Systems Sdn. Bhd. and
    Eltrax International Inc.                            |                  | Incorporated by reference to Exhibit 2.8 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.                
|            | 2 | .16 |         | Form of Agreement among the Registrant, AremisSoft Hospitality
    Group (US), Inc. and Eltrax Group, Inc.                                                                           |                  | Incorporated by reference to Exhibit 2.9 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.                
|            | 2 | .17 |         | Form of Agreement among the Registrant, AremisSoft Corporation,
    AremisSoft (HK) Corporation Limited, Eltrax Systems Pty
    Limited and Eltrax International Inc.                |                  | Incorporated by reference to Exhibit 2.10 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.               
|            | 2 | .18 |         | Form of Agreement among the Registrant, AremisSoft Corporation,
    Latin America One Pte Ltd. and Eltrax Systems Pte Ltd.                                                           |                  | Incorporated by reference to Exhibit 2.11 to the
    Registrants Current Report on Form 8-K filed
    December 29, 2000.               
|            | 2 | .19 |         | Agreement and Plan of Merger dated as of May 4, 2001, among
    the Registrant, Telemate.Net Software, Inc. and Titan Acquiring
    Sub, Inc. (the Telemate.Net Merger Agreement). |                  | Incorporated by reference to Exhibit 2.1 to the
    Registrants Current Report on Form 8-K filed May 16,
    2001.                     
|            | 2 | .20 |         | First Amendment to the Telemate.Net Merger Agreement dated as of
    June 1, 2001.                                                                                                   |                  | Incorporated by reference to Exhibit 2.2 to Amendment
    No. 1 to the Registrants Current Report on
    Form 8-K/A filed June 5, 2001.
|            | 2 | .21 |         | Stock Purchase Agreement dated as of May 4, 2001, between
    the Registrant and WA Telcom Products Co., Inc.                                                                        |                  | Incorporated by reference to Exhibit 2.1 to the
    Registrants Current Report on Form 8-K filed June 5,
    2001.                     
|            | 2 | .22 |         | Series B Preferred Stock Purchase Agreement dated as of
    May 4, 2001, between the Registrant and Telemate.Net
    Software, Inc. (the Series B Stock Purchase
    Agreement).   |                  | Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed May 16,
    2001.                    
|            | 2 | .23 |         | First Amendment to the Series B Stock Purchase Agreement
    dated as of June 1, 2001, between the Registrant and
    Telemate.Net Software, Inc.                                    |                  | Incorporated by reference to Exhibit 99.2 to Amendment No 1
    to the Registrants Current Report on Form 8-K/A filed
    June 5, 2001.
|            | 2 | .24 |         | Second Amendment to the Series B Stock Purchase Agreement
    dated as of July 27, 2001, between the Registrant and
    Telemate.Net Software, Inc.                                  |                  | Incorporated by reference to Exhibit 99.3 to the
    Registrants Current Report on Form 8-K filed
    August 10, 2001.                 
|            | 2 | .25 |         | Agreement and Plan of Merger dated as of January 10, 2001,
    among the Registrant, SS & Co., Inc. and Senercomm,
    Inc.                                                          |                  | Incorporated by reference to Exhibit 2.1 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended March 31, 2001.



---



##### 



|            |   |     |         |                                                                                                                                                                                                                                                                                                                                                                                                                   |                  |                                                                                                                            
|----------- | - | --- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ---------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |     | Exhibit |                                                                                                                                                                                                                                                                                                                                                                                                                   | Method of Filing
|            |   |     |         |                                                                                                                                                                                                                                                                                                                                                                                                                   |                 
|            | 2 | .26 |         | 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 | .27 |         | 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 | .28 |         | Agreement and Plan of Merger dated as of April 21, 2003,
    among the Registrant, Mickey Acquiring Sub, Inc. and MCK
    Communications, Inc. (The schedules to the Agreement and Plan of
    Merger have been omitted from this Report pursuant to
    Item 601(b)(2) of Regulation S-K, and the 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
    April 23, 2003.   
|            | 2 | .29 |         | First Amendment to the Agreement and Plan of Merger dated as of
    April 21, 2003, among the Registrant, Mickey Acquiring Sub,
    Inc. and MCK Communications, Inc.                                                                                                                                                                                                                                             |                  | Incorporated by reference to Exhibit 2.2 to the
    Registrants Current Report on Form 8-K filed on
    April 23, 2003.   
|            | 2 | .30 |         | Second Amendment to the Agreement and Plan of Merger dated as of
    June 13, 2003, among the Registrant, Mickey Acquiring Sub,
    Inc. and MCK Communications, Inc.                                                                                                                                                                                                                                             |                  | Incorporated by reference to Exhibit 2.3 to the
    Registrants Current Report on Form 8-K filed on
    June 17, 2003.    
|            | 2 | .31 |         | 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 | .32 |         | 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 | .33 |         | 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. 



---



##### 



|            |   |     |         |                                                                                                                                                                                                                                                                                                                                                                                                            |                  |                                                                                                                                                   
|----------- | - | --- | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |     | Exhibit |                                                                                                                                                                                                                                                                                                                                                                                                            | Method of Filing
|            |   |     |         |                                                                                                                                                                                                                                                                                                                                                                                                            |                 
|            | 2 | .34 |         | 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 | .35 |         | 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.                           
|            | 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  |         | Bylaws of the Registrant, as amended.                                                                                                                                                                                                                                                                                                                                                                      |                  | Incorporated by reference to Exhibit 3.2 to the
    Registrants Registration Statement on Form S-4 filed
    August 7, 2000 (File No. 333-43224).
|            | 3 | .5  |         | Amendment to the Bylaws of the Registrant, as amended.                                                                                                                                                                                                                                                                                                                                                     |                  | Incorporated by reference to Exhibit 4.2 to the
    Registrants Current Report on Form 8-K filed
    November 19, 2001.                          
|            | 3 | .6  |         | Amendment to the Bylaws of the Registrant, as amended.                                                                                                                                                                                                                                                                                                                                                     |                  | Incorporated by reference to Exhibit 3.1 to the
    Registrants Current Report on Form 8-K filed
    November 9, 2004.                           
|            | 3 | .7  |         | Bylaws of the Registrant, as amended and currently in effect.                                                                                                                                                                                                                                                                                                                                              |                  | Incorporated by reference to Exhibit 3.2 to the
    Registrants Current Report on Form 8-K filed
    November 9, 2004.                           
|            | 4 | .1  |         | Specimen form of the Registrants common stock certificate.                                                                                                                                                                                                                                                                                                                                                |                  | Incorporated by reference to Exhibit 4.1 to the
    Registrants Registration Statement on Form S-18 (File
    No. 33-51456).                     
|            | 4 | .2  |         | Warrant dated October 31, 1996, to
    purchase 106,250 shares of the Registrants
    common stock granted to Walter C. Lovett.                                                                                                                                                                                                                                                                           |                  | Incorporated by reference to Exhibit 10.4 to the
    Registrants Current Report on Form 8-K filed
    November 12, 1996.                         



---



##### 



|            |   |     |         |                                                                                                                                                                                                         |                  |                                                                                                                                                    
|----------- | - | --- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |     | Exhibit |                                                                                                                                                                                                         | Method of Filing
|            |   |     |         |                                                                                                                                                                                                         |                 
|            | 4 | .3  |         | Warrant dated October 31, 1996, to
    purchase 106,250 shares of the Registrants
    common stock granted to Douglas L. Roberson.                                                                     |                  | Incorporated by reference to Exhibit 10.5 to the
    Registrants Current Report on Form 8-K filed
    November 12, 1996.                          
|            | 4 | .4  |         | Registration Rights Agreement dated as of July 27, 2000,
    among the Registrant, Strong River Investments, Inc. and Bay
    Harbor Investments, Inc.                                                  |                  | Incorporated by reference to Exhibit 4.7 to the
    Registrants Registration Statement on Form S-4 filed
    August 7, 2000 (File No. 333-43224). 
|            | 4 | .5  |         | Warrant dated as of July 27, 2000, to
    purchase 104,168 shares of the Registrants
    common stock granted to Strong River Investments, Inc.                                                        |                  | Incorporated by reference to Exhibit 4.10 to the
    Registrants Registration Statement on Form S-4 filed
    August 7, 2000 (File No. 333-43224).
|            | 4 | .6  |         | Warrant dated as of July 27, 2000, to
    purchase 104,168 shares of the Registrants
    common stock granted to Bay Harbor Investments, Inc.                                                          |                  | Incorporated by reference to Exhibit 4.11 to the
    Registrants Registration Statement on Form S-4 filed
    August 7, 2000 (File No. 333-43224).
|            | 4 | .7  |         | Warrant dated as of July 27, 2000, to
    purchase 26,041 shares of the Registrants common
    stock granted to Strong River Investments, Inc.                                                         |                  | Incorporated by reference to Exhibit 4.12 to the
    Registrants Registration Statement on Form S-4 filed
    August 7, 2000 (File No. 333-43224).
|            | 4 | .8  |         | Warrant dated as of July 27, 2000, to
    purchase 26,041 shares of the Registrants common
    stock granted to Bay Harbor Investments, Inc.                                                           |                  | Incorporated by reference to Exhibit 4.13 to the
    Registrants Registration Statement on Form S-4 filed
    August 7, 2000 (File No. 333-43224).
|            | 4 | .8  |         | Warrant dated as of July 27, 2000, to
    purchase 52,083 shares of the Registrants common
    stock granted to Strong River Investments, Inc.                                                         |                  | Incorporated by reference to Exhibit 4.14 to the
    Registrants Registration Statement on Form S-4 filed
    August 7, 2000 (File No. 333-43224).
|            | 4 | .10 |         | Warrant dated as of July 27, 2000, to
    purchase 52,083 shares of the Registrants common
    stock granted to Bay Harbor Investments, Inc.                                                           |                  | Incorporated by reference to Exhibit 4.15 to the
    Registrants Registration Statement on Form S-4 filed
    August 7, 2000 (File No. 333-43224).
|            | 4 | .11 |         | 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 | .12 |         | Warrant dated as of September 29, 2000, to
    purchase 875,000 shares of the Registrants
    common stock granted to James M. Logsdon. Represents an
    executive compensation plan or arrangement.  |                  | Incorporated by reference to Exhibit 10.8 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2000.      
|            | 4 | .13 |         | Warrant dated as of September 29, 2000, to
    purchase 665,000 shares of the Registrants
    common stock granted to Juliet M. Reising. Represents an
    executive compensation plan or arrangement. |                  | Incorporated by reference to Exhibit 10.9 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2000.      



---



##### 



|            |   |     |         |                                                                                                                                                                                                                                 |                  |                                                                                                                                               
|----------- | - | --- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |     | Exhibit |                                                                                                                                                                                                                                 | Method of Filing
|            |   |     |         |                                                                                                                                                                                                                                 |                 
|            | 4 | .14 |         | 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 | .15 |         | Warrant dated as of August 21, 2000, to
    purchase 100,000 shares of Cereus Technology Partners,
    Inc.s common stock granted to James M. Logsdon. Represents
    an executive compensation plan or arrangement.           |                  | Incorporated by reference to Exhibit 10.11 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2000.
|            | 4 | .16 |         | Warrant dated as of August 21, 2000, to
    purchase 350,000 shares of Cereus Technology Partners,
    Inc.s common stock granted to Juliet M. Reising.
    Represents an executive compensation plan or arrangement.          |                  | Incorporated by reference to Exhibit 10.12 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2000.
|            | 4 | .17 |         | Warrant dated as of August 21, 2000, to
    purchase 250,000 shares of Cereus Technology Partners,
    Inc.s common stock granted to Juliet M. Reising.
    Represents an executive compensation plan or arrangement.          |                  | Incorporated by reference to Exhibit 10.13 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2000.
|            | 4 | .18 |         | Warrant dated as of August 21, 2000, to
    purchase 50,000 shares of Cereus Technology Partners,
    Inc.s common stock granted to Peter Pamplin. Represents an
    executive compensation plan or arrangement.               |                  | Incorporated by reference to Exhibit 10.14 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2000.
|            | 4 | .19 |         | Warrant dated as of January 30, 2001, to
    purchase 83,334 shares of the Registrants common
    stock granted to PNC Bank, National Association.                                                                             |                  | Incorporated by reference to Exhibit 4.1 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended March 31, 2001.      
|            | 4 | .20 |         | 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 | .21 |         | 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 | .22 |         | Form of Warrant issued in connection with the MessageClick
    Merger Agreement.                                                                                                                                                |                  | Incorporated by reference to Exhibit 4.1 to the
    Registrants Current Report on Form 8-K filed
    December 6, 2000.                       
|            | 4 | .23 |         | Form of Registration Rights Agreement entered into in connection
    with the MessageClick Merger Agreement.                                                                                                                    |                  | Incorporated by reference to Exhibit 4.2 to the
    Registrants Current Report on Form 8-K filed
    December 6, 2000.                       
|            | 4 | .24 |         | 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.                       



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##### 



|            |   |     |         |                                                                                                                                                                                                       |                  |                                                                                                                                                           
|----------- | - | --- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |     | Exhibit |                                                                                                                                                                                                       | Method of Filing
|            |   |     |         |                                                                                                                                                                                                       |                 
|            | 4 | .25 |         | Form of Warrant issued in connection with the Debenture Purchase
    Agreement.                                                                                                                       |                  | Incorporated by reference to Exhibit 4.6 to the
    Registrants Current Report on Form 8-K filed
    December 6, 2000.                                   
|            | 4 | .26 |         | Form of Registration Rights Agreement entered into in connection
    with the Debenture Purchase Agreement.                                                                                           |                  | Incorporated by reference to Exhibit 4.7 to the
    Registrants Current Report on Form 8-K filed
    December 6, 2000.                                   
|            | 4 | .27 |         | Registration Rights Agreement dated as of February 8, 2000,
    among Cereus Technology Partners, Inc. and the stockholders
    party thereto.                                                        |                  | Incorporated by reference to Exhibit 4(e) to Cereus
    Technology Partners, Inc.s Annual Report on Form 10-KSB
    for the year ended December 31, 1999.
|            | 4 | .28 |         | Registration Rights Agreement dated as of August 18, 2000,
    among Cereus Technology Partners, Inc. and the stockholders
    party thereto.                                                         |                  | Incorporated by reference to Exhibit 4.32 of the
    Registrants Annual Report for the year ended
    December 31, 2000.                                 
|            | 4 | .29 |         | Registration Rights Agreement dated as of September 15,
    2000, among Cereus Technology Partners, Inc. and the
    stockholders party thereto.                                                      |                  | Incorporated by reference to Exhibit 4.31 to the
    Registrants Annual Report on Form 10-K for the year ended
    December 31, 2000.                    
|            | 4 | .30 |         | Registration Rights Agreement dated as of September 27,
    2000, among Cereus Technology Partners, Inc. and the
    stockholders party thereto.                                                      |                  | Incorporated by reference to Exhibit 4.32 to the
    Registrants Annual Report on Form 10-K for the year ended
    December 31, 2000.                    
|            | 4 | .31 |         | Registration Rights Agreement dated as of July 27, 2002,
    entered into in connection with the Series B Stock Purchase
    Agreement.                                                               |                  | Incorporated by reference to Exhibit 4.1 to the
    Registrants Current Report on Form 8-K filed on
    August 10, 2001.                                 
|            | 4 | .32 |         | 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.                 
|            | 4 | .33 |         | 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 | .34 |         | 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 | .35 |         | 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 | .36 |         | 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 | .37 |         | Warrant dated as of May 15, 2002, to
    purchase 308,641 shares of the Registrants
    common stock granted to Silicon Valley Bank.                                                                 |                  | Incorporated by reference to Exhibit 4.2 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2002.                   



---



##### 



|            |   |     |         |                                                                                                                                                                  |                  |                                                                                                                                                       
|----------- | - | --- | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |     | Exhibit |                                                                                                                                                                  | Method of Filing
|            |   |     |         |                                                                                                                                                                  |                 
|            | 4 | .38 |         | Registration Rights Agreement dated May 15, 2002, between
    the Registrant and Silicon Valley Bank.                                                            |                  | Incorporated by reference to Exhibit 4.4 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2002.               
|            | 4 | .39 |         | Antidilution Agreement dated May 15, 2002, between the
    Registrant and Silicon Valley Bank.                                                                   |                  | Incorporated by reference to Exhibit 4.3 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2002.               
|            | 4 | .40 |         | Convertible Secured Promissory Note dated April 25, 2002,
    executed by the Registrant in favor of WA Telcom Products Co.,
    Inc.                            |                  | Incorporated by reference to Exhibit 4.1 to the
    Registrants Current Report on Form 8-K filed May 1,
    2002.                                    
|            | 4 | .41 |         | Warrant to Purchase Stock dated as of February 12, 2003, to
    purchase 350,000 shares of the Registrants
    common stock granted to Silicon Valley Bank.     |                  | Incorporated by reference to Exhibit 4.1 to the
    Registrants Current Report on Form 8-K filed
    February 13, 2003.                              
|            | 4 | .42 |         | Registration Rights Agreement dated as of February 12,
    2003, between the Registrant and Silicon Valley Bank.                                                 |                  | Incorporated by reference to Exhibit 4.2 to the
    Registrants Current Report on Form 8-K filed
    February 13, 2003.                              
|            | 4 | .43 |         | Antidilution Agreement dated as of February 12, 2003,
    between the Registrant and Silicon Valley Bank.                                                        |                  | Incorporated by reference to Exhibit 4.3 to the
    Registrants Current Report on Form 8-K filed
    February 13, 2003.                              
|            | 4 | .44 |         | 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 | .45 |         | 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.             
|            | 4 | .46 |         | Warrant Agreement dated as of August 17, 1999 to
    purchase 35,250 shares of AIM Group, Inc.s stock
    granted to Randall P. Stern.                          |                  | Incorporated by reference to Exhibit 4.10 to the
    Registrants Registration Statement on Form S-1 filed
    September 8, 2003 (File No. 333-108613).
|            | 4 | .47 |         | Warrant Agreement dated as of October 29, 1999 to
    purchase 11,750 share of AIM Group, Inc.s common
    stock granted to Randall P. Stern.                   |                  | Incorporated by reference to Exhibit 4.11 to the
    Registrants Registration Statement on Form S-1 filed
    September 8, 2003 (File No. 333-108613).
|            | 4 | .48 |         | Warrant Agreement dated as of February 8, 2000 to
    purchase 85,500 shares of Cereus Technology Partners,
    Inc.s common stock granted to Randall P. Stern. |                  | Incorporated by reference to Exhibit 4.12 to the
    Registrants Registration Statement on Form S-1 filed
    September 8, 2003 (File No. 333-108613).
|            | 4 | .49 |         | Warrant Agreement dated as of August 17, 1999 to
    purchase 35,250 shares of AIM Group, Inc.s stock
    granted to Burnham Securities, Inc.                   |                  | Incorporated by reference to Exhibit 4.13 to the
    Registrants Registration Statement on Form S-1 filed
    September 8, 2003 (File No. 333-108613).



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##### 



|            |   |     |         |                                                                                                                                                                                             |                  |                                                                                                                                                         
|----------- | - | --- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |     | Exhibit |                                                                                                                                                                                             | Method of Filing
|            |   |     |         |                                                                                                                                                                                             |                 
|            | 4 | .50 |         | Warrant Agreement dated as of October 29, 1999 to
    purchase 11,750 shares of AIM Group, Inc.s
    common stock granted to Burnham Securities, Inc.                                      |                  | Incorporated by reference to Exhibit 4.14 to the
    Registrants Registration Statement on Form S-1 filed
    September 8, 2003 (File No. 333-108613).  
|            | 4 | .51 |         | Warrant Agreement dated as of February 8, 2000 to
    purchase 85,500 shares of Cereus Technology Partners,
    Inc.s common stock granted to Burnham Securities,
    Inc.                 |                  | Incorporated by reference to Exhibit 4.15 to the
    Registrants Registration Statement on Form S-1 filed
    September 8, 2003 (File No. 333-108613).  
|            | 4 | .52 |         | Warrant Agreement dated as of February 8, 2000 to
    purchase 5,250 shares of Cereus Technology Partners,
    Inc.s common stock granted to Burnham Securities,
    Inc.                  |                  | Incorporated by reference to Exhibit 4.16 to the
    Registrants Registration Statement on Form S-1 filed
    September 8, 2003 (File No. 333-108613).  
|            | 4 | .53 |         | Warrant Agreement dated as of February 8, 2000 to
    purchase 5,000 shares of Cereus Technology Partners,
    Inc.s common stock granted to Jon M. Burnham.                               |                  | Incorporated by reference to Exhibit 4.17 to the
    Registrants Registration Statement on Form S-1/ A filed
    October 21, 2003 (File No. 333-108613).
|            | 4 | .54 |         | Warrant Agreement dated as of February 8, 2000 to
    purchase 7,750 shares of Cereus Technology Partners,
    Inc.s common stock granted Randall P. Stern.                                |                  | Incorporated by reference to Exhibit 4.18 to the
    Registrants Registration Statement on Form S-1/ A filed
    October 21, 2003 (File No. 333-108613).
|            | 4 | .55 |         | 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 | .56 |         | 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 | .57 |         | 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 | .58 |         | 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 | .59 |         | Form of Series B 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 4.3 to the
    Registrants Current Report on Form 8-K filed on
    February 8, 2005.                              
|            | 4 | .60 |         | 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 | .61 |         | 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 4.1 to the
    Registrants Current Report on Form 8-K filed on
    March 21, 2005.                                



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##### 



|            |    |     |         |                                                                                                                                                                                                                                                                                 |                  |                                                                                                                                                                  
|----------- | -- | --- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     | Exhibit |                                                                                                                                                                                                                                                                                 | Method of Filing
|            |    |     |         |                                                                                                                                                                                                                                                                                 |                 
|            | 4  | .62 |         | Form of warrant to purchase the Registrants common stock
    which may become issuable to certain placement agents in
    connection with the Registrants February 2005 private
    placement.                                                                                |                  | Filed herewith.                                                                                                                                                  
|            | 4  | .63 |         | 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, 2005                                           
|            | 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).                                       
|            | 10 | .3  |         | 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 | .4  |         | 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 | .5  |         | 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 | .6  |         | 1997 Stock Incentive Plan.                                                                                                                                                                                                                                                      |                  | Incorporated by reference to the Registrants Proxy
    Statement for its 1997 Annual Meeting of Stockholders.                                                   
|            | 10 | .7  |         | 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 | .8  |         | 1999 Stock Incentive Plan.                                                                                                                                                                                                                                                      |                  | Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed on
    December 22, 2004.                                     
|            | 10 | .11 |         | 1999 Employee Stock Purchase Plan.                                                                                                                                                                                                                                              |                  | Incorporated by reference to Exhibit 99.2 to the
    Registrants Current Report on Form 8-K filed on
    December 22, 2004.                                     
|            | 10 | .12 |         | Real Estate Lease dated as of June 1, 1996, among Walt
    Lovett, Doug and Lisa Roberson, and Atlantic Network Systems,
    Inc.                                                                                                                                               |                  | Incorporated by reference to Exhibit 10.11 to the
    Registrants Annual Report on Form 10-KSB for the
    nine-month transition period ended December 31, 1996.



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##### 



|            |    |     |         |                                                                                                                                                                                |                  |                                                                                                                                                               
|----------- | -- | --- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     | Exhibit |                                                                                                                                                                                | Method of Filing
|            |    |     |         |                                                                                                                                                                                |                 
|            | 10 | .13 |         | Lease Agreement dated as of September 15, 1996, among
    Burgoe/Wyomissing Partners and Hi-Tech Connections, Inc.                                                             |                  | Incorporated by reference to Exhibit 10.30 to the
    Registrants Annual Report on Form 10-KSB for the year
    ended December 31, 1997.                     
|            | 10 | .14 |         | Lease Agreement dated as of December 1, 1996, among JMG
    Development Co. Ltd. and DataComm Associates, Inc.                                                                 |                  | Incorporated by reference to Exhibit 10.31 to the
    Registrants Annual Report on Form 10-KSB for the year
    ended December 31, 1997.                     
|            | 10 | .15 |         | Amended and Restated Preferred Vendor Arrangement dated as of
    May 15, 1992, between Holiday Hospitality Corporation and
    Encore Systems, Inc. February 16, 1999         |                  | Incorporated by reference to Exhibit 10.29 to the
    Registrants Registration Statement on Form S-4 filed
    (File No. 333-68699).                         
|            | 10 | .16 |         | 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).          
|            | 10 | .17 |         | 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 | .18 |         | 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 | .19 |         | 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 | .20 |         | 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 | .21 |         | 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 | .22 |         | 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 | .23 |         | 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 | .24 |         | 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.



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##### 



|            |    |     |         |                                                                                                                                                                                                                                                                                                    |                  |                                                                                                                                                               
|----------- | -- | --- | ------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     | Exhibit |                                                                                                                                                                                                                                                                                                    | Method of Filing
|            |    |     |         |                                                                                                                                                                                                                                                                                                    |                 
|            | 10 | .25 |         | 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 | .26 |         | Assignment and Assumption Agreement dated as of
    September 29, 2000, between the Registrant and Cereus
    Technology Partners, Inc. assigning rights under the
    Registration Rights Agreements dated February 8, 2000,
    August 18, 2000, September 15, 2000, and
    September 27, 2000. |                  | Incorporated by reference to Exhibit 10.40 to the
    Registrants Annual Report on Form 10-K for the year ended
    December 31, 2000.                       
|            | 10 | .27 |         | 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 | .28 |         | Final Settlement Agreement and General Release dated as of
    March 13, 2002, among the Registrant, NACT
    Telecommunications, Inc., RSL COM U.S.A., Inc., and RSL COM
    Primecall, Inc.                                                                                                      |                  | Incorporated by reference to Exhibit 10.36 to the
    Registrants Annual Report on Form 10-K for the year ended
    December 31, 2001.                       
|            | 10 | .29 |         | Separation Agreement dated as of November 16, 2001, between
    Telemate.Net Software, Inc. and Richard L. Mauro. Represents an
    executive compensation plan or arrangement.                                                                                                                    |                  | Incorporated by reference to Exhibit 10.37 to the
    Registrants Annual Report on Form 10-K for the year ended
    December 31, 2001.                       
|            | 10 | .30 |         | Separation Agreement dated as of November 16, 2001, between
    Telemate.Net Software, Inc. and Janet Van Pelt. Represents an
    executive compensation plan or arrangement.                                                                                                                      |                  | Incorporated by reference to Exhibit 10.38 to the
    Registrants Annual Report on Form 10-K for the year ended
    December 31, 2001.                       
|            | 10 | .31 |         | 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 | .32 |         | 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 | .33 |         | 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 | .34 |         | 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 | .35 |         | 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 | .36 |         | Form of Affiliate Agreement executed in connection with the
    Telemate.Net Merger Agreement.                                                                                                                                                                                                     |                  | Incorporated by reference to Exhibit 99.4 to the
    Registrants Current Report on Form 8-K dated May 16,
    2001.                                          



---



##### 



|            |    |     |         |                                                                                                                                                                                                         |                  |                                                                                                                                                                 
|----------- | -- | --- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     | Exhibit |                                                                                                                                                                                                         | Method of Filing
|            |    |     |         |                                                                                                                                                                                                         |                 
|            | 10 | .37 |         | 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).
|            | 10 | .38 |         | 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 | .39 |         | 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 | .40 |         | 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 | .41 |         | 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 | .42 |         | Settlement Agreement and General Release dated March 29,
    2002, between the Registrant and WA Telcom Products Co.,
    Inc.                                                                          |                  | Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed May 1,
    2002.                                             
|            | 10 | .43 |         | Stipulation for Settlement and Mutual Release dated as of
    July 19, 2002, among the Registrant, AremisSoft
    Corporation, Softbrands, Inc. and others.                                             |                  | Incorporated by reference to Exhibit 10.8 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2002.                        
|            | 10 | .44 |         | 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 | .45 |         | Security Agreement dated April 25, 2002, between the
    Registrant and WA Telcom Products Co., Inc.                                                                                                    |                  | Incorporated by reference to Exhibit 99.2 to the
    Registrants Current Report on Form 8-K filed May 1,
    2002.                                             
|            | 10 | .46 |         | Security Agreement dated April 25, 2002, among Telemate.Net
    Software, Inc., NACT Telecommunications, Inc. and WA Telcom
    Products Co., Inc.                                                      |                  | Incorporated by reference to Exhibit 99.3 to the
    Registrants Current Report on Form 8-K filed May 1,
    2002.                                             
|            | 10 | .47 |         | Pledge Agreement dated April 25, 2002, between the
    Registrant and WA Telcom Products Co., Inc.                                                                                                      |                  | Incorporated by reference to Exhibit 99.4 to the
    Registrants Current Report on Form 8-K filed May 1,
    2002.                                             
|            | 10 | .48 |         | Guaranty dated April 25, 2002, among Telemate.Net Software,
    Inc., NACT Telecommunications, Inc. and WA Telcom Products Co.,
    Inc.                                                                |                  | Incorporated by reference to Exhibit 99.5 to the
    Registrants Current Report on Form 8-K filed May 1,
    2002.                                             



---



##### 



|            |    |     |         |                                                                                                                                                                                           |                  |                                                                                                                           
|----------- | -- | --- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | --------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     | Exhibit |                                                                                                                                                                                           | Method of Filing
|            |    |     |         |                                                                                                                                                                                           |                 
|            | 10 | .49 |         | 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 | .50 |         | Form of Deposit Account Control Agreement among the
    Registrant, WA Telcom Products Co., Inc. and Silicon Valley Bank.                                                                 |                  | Incorporated by reference to Exhibit 99.7 to the
    Registrants Current Report on Form 8-K filed May 1,
    2002.       
|            | 10 | .51 |         | 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 | .52 |         | 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 | .53 |         | 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. 
|            | 10 | .54 |         | 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 | .55 |         | 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 | .56 |         | 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 | .57 |         | 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 | .58 |         | 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 | .59 |         | 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 | .60 |         | 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 | .61 |         | 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.



---



##### 



|            |    |     |         |                                                                                                                                                                                         |                  |                                                                                                                                          
|----------- | -- | --- | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     | Exhibit |                                                                                                                                                                                         | Method of Filing
|            |    |     |         |                                                                                                                                                                                         |                 
|            | 10 | .62 |         | 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 | .63 |         | 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.               
|            | 10 | .64 |         | 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 | .65 |         | 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 | .66 |         | 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 | .67 |         | 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 | .68 |         | 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 | .69 |         | 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 | .70 |         | 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.
|            | 10 | .71 |         | Arbitration Award Agreement dated February 3, 2002, and
    among the Registrant, Clunet R. Lewis and CLR Enterprises,
    Inc.                                                         |                  | Incorporated by reference to Exhibit 10.72 to the
    Registrants Annual Report on Form 10-K for the period
    ended December 31, 2002.
|            | 10 | .72 |         | Arbitration Award Agreement dated February 3, 2002, among
    the Registrant, William P. OReilly and Montana Corporation.                                                              |                  | Incorporated by reference to Exhibit 10.73 to the
    Registrants Annual Report on Form 10-K for the period
    ended December 31, 2002.
|            | 10 | .73 |         | Consulting Agreement dated as of March 14, 2003, between
    the Registrant and William P. OReilly.                                                                                    |                  | Incorporated by reference to Exhibit 10.74 to the
    Registrants Annual Report on Form 10-K for the period
    ended December 31, 2002.
|            | 10 | .74 |         | Consulting Agreement dated as of March 14, 2003, between
    the Registrant and Clunet R. Lewis.                                                                                        |                  | Incorporated by reference to Exhibit 10.75 to the
    Registrants Annual Report on Form 10-K for the period
    ended December 31, 2002.



---



##### 



|            |    |     |         |                                                                                                                                                                                                     |                  |                                                                                                                                          
|----------- | -- | --- | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     | Exhibit |                                                                                                                                                                                                     | Method of Filing
|            |    |     |         |                                                                                                                                                                                                     |                 
|            | 10 | .75 |         | 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 | .76 |         | 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 | .77 |         | 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 | .78 |         | 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 | .79 |         | 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 | .80 |         | 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.              
|            | 10 | .81 |         | 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 | .82 |         | 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 | .83 |         | 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 | .84 |         | 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 | .85 |         | 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 | .86 |         | 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 | .87 |         | 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.             



---



##### 



|            |    |     |         |                                                                                                                                                                                                                                                                                                            |                  |                                                                                                                             
|----------- | -- | --- | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ----------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     | Exhibit |                                                                                                                                                                                                                                                                                                            | Method of Filing
|            |    |     |         |                                                                                                                                                                                                                                                                                                            |                 
|            | 10 | .88 |         | 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 | .89 |         | 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 | .90 |         | 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.
|            | 10 | .91 |         | 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 99.15 to the
    Registrants Current Report on Form 8-K filed on
    January 27, 2005.
|            | 10 | .92 |         | 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 | .93 |         | 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 | .94 |         | 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 | .95 |         | 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, 2005 
|            | 10 | .96 |         | 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 | .97 |         | 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 | .98 |         | 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 | .99 |         | 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.    



---



##### 



|            |    |      |         |                                                                                                                                                                                                                                                               |                  |                                                                                                                          
|----------- | -- | ---- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | -------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |      | Exhibit |                                                                                                                                                                                                                                                               | Method of Filing
|            |    |      |         |                                                                                                                                                                                                                                                               |                 
|            | 10 | .100 |         | Non-qualified Stock Option entered into as of 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 on Form 8-K filed on March 21,
    2005.
|            | 10 | .101 |         | Non-qualified Stock Option entered into as of 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 on Form 8-K filed on March 21,
    2005.
|            | 10 | .102 |         | Non-qualified Stock Option entered into as of 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 on Form 8-K filed on March 21,
    2005.
|            | 10 | .103 |         | 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.
|            | 10 | .104 |         | 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.
|            | 10 | .105 |         | 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.
|            | 10 | .106 |         | 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 the
    Registrants Current Report on Form 8-K filed on
    March 21, 2005.   
|            | 10 | .107 |         | 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.
|            | 21 | .1   |         | Subsidiaries of the Registrant.                                                                                                                                                                                                                               |                  | Filed herewith.                                                                                                          
|            | 23 | .1   |         | Consent of Grant Thornton LLP.                                                                                                                                                                                                                                |                  | Filed herewith.                                                                                                          
|            | 23 | .2   |         | Consent of KPMG LLP.                                                                                                                                                                                                                                          |                  | 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.