##### Table of Contents









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, 2005                                                 
|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 200


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


o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2


o o þ


12b-2 o þ


35,003,384.




DOCUMENTS INCORPORATED BY REFERENCE:


None.










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TABLE OF CONTENTS



|                                                                           |                                                                                                                      |  |  |  |  |  |  | 
|-------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                    
|                                                                           | Item 1. Business                                                                                                    
|                                                                           | Item 1A. Risk Factors                                                                                               
|                                                                           | Item 2. Properties                                                                                                  
|                                                                           | Item 3. Legal Proceedings                                                                                           
|                                                                           | Item 4. Submission of Matters to a Vote of Security Holders                                                         
|                                                                           | Item 4.5 Executive Officers of the Registrant                                                                       
|PART II                                                                   
|                                                                           | Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|                                                                           | Item 6. Selected Financial Data                                                                                     
|                                                                           | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations                       
|                                                                           | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                                 
|                                                                           | Item 8. Financial Statements and Supplementary Data                                                                 
|                                                                           | 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                                                         
|                                                                           | Item 11. Executive Compensation                                                                                     
|                                                                           | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters             
|                                                                           | Item 13. Certain Relationships and Related Transactions                                                             
|                                                                           | Item 14. Principal Accountant Fees and Services                                                                     
|                                                                           | Item 15. Exhibits and Financial Statement Schedules                                                                 
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED REPORTS            
|CONSOLIDATED BALANCE SHEETS                                               
|CONSOLIDATED STATEMENTS OF OPERATIONS                                     
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY                           
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                
|SIGNATURES                                                                
|EX-4.53 FORM OF WARRANT                                                   
|EX-4.54 FORM OF REGISTRATION RIGHTS AGREEMENT                             
|EX-10.9 1999 EMPLOYEE STOCK PURCHASE PLAN                                 
|EX-10.113 AMENDED AND RESTATED PROMISSORY NOTE                            
|EX-10.114 EXPORT-IMPORT BANK                                              
|EX-10.115 AMENDMENT TO LOAN DOCUMENTS                                     
|EX-10.116 AMENDMENT TO LOAN DOCUMENTS                                     
|EX-10.117 AMENDMENT TO LOAN DOCUMENTS                                     
|EX-21.1 SUBSIDIARIES OF THE REGISTRANT                                    
|EX-23.1 CONSENT OF GRANT THORNTON LLP.                                    
|EX-23.2 CONSENT OF KPMG LLP.                                              
|EX-31.1 CERTIFICATION BY THE REGISTRANT'S CHIEF EXECUTIVE OFFICER         
|EX-31.2 CERTIFICATION BY THE REGISTRANT'S CHIEF FINANCIAL OFFICER         
|EX-32.1 SECTION 1350 CERTIFICATION BY REGISTRANT'S CHIEF EXECUTIVE OFFICER
|EX-32.2 SECTION 1350 CERTIFICATION BY REGISTRANT'S CHIEF FINANCIAL OFFICER



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##### Table of Contents






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
communications market; market demand for and market acceptance
of our products; legal claims against us, including, but not
limited to, claims of patent infringement; our ability to
protect our intellectual property; defects in our products; our
obligations to indemnify our customers; our exposure to risks
inherent in international operations; our dependence on contract
manufacturers and suppliers; general economic and business
conditions; other risks and uncertainties included in the
section of this Annual Report titled Risk Factors;
and other factors disclosed in our other filings made with the
Securities and Exchange Commission (the SEC).


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







|        |         
|------- | --------
|Item 1. | Business

General






1



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Packet-based Technologies Group


end-to


® ®






2



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The Market for the Packet-based Technologies Group


IP-based




IP-centric




Packet-based Technologies Group: Products and Solutions




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

®




| |   |                                   
| | - | ----------------------------------
| |  | Clarent Class 5 Call Manager;     
|
| |  | Clarent Class 4 Call Manager;     
|
| |  | Clarent Command Center;           
|
| |  | Clarent Element Management System;

3



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| |   |                            
| | - | ---------------------------
| |  | Clarent BHG Media Gateways;
|
| |  | Clarent Border Agent;      
|
| |  | Clarent CPG; and           
|
| |  | Clarent Connect.           





| |                                             
| | --------------------------------------------
| | 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

®




4



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

®






| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | calling;                                                                                                                                                       
|
| |  | additional real-time authentication for Internet and virtual
    private network access via Asymmetric Digital Subscriber Line
    (ADSL) and
    dial-up;and
|
| |  | pre-paid broadband access.                                                                                                                                     



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

®




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

® peer-to


5



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NEBS-3/ETSI tm peer-to


Advanced Applications Services Group




on-site


Customers














6



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Sales and Marketing










Competition


end-to




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







7



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



Intellectual Property Rights












8



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Research and Development
















9



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Employees




Background






end-to e-business business-to e-business




10



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IP-based,


11



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1-for-5







|         |             
|-------- | ------------
|Item 1A. | Risk Factors



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









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



12



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





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





Over-the




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



13



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| |                                                                                      
| | -------------------------------------------------------------------------------------
| | 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.





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



14



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| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | The Companys focus on emerging markets could make
    achievement of its sales goals more difficult.





| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



15



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





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



16



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







17



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



S-1


18



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





|                        |  |     |            |  |                    |  |           | 
|----------------------- |  | --- | ---------- |  | ------------------ |  | --------- | 
|Director Nominee        |  | For |            |  | Withheld Authority | 
|                        |  |     |            |  |                    | 
|Montgomery L. Bannerman |  |     | 23,050,600 |  |                    |  | 434,051   | 
|Mark H. Dunaway         |  |     | 22,883,729 |  |                    |  | 600,922   | 
|Paul R. Garcia          |  |     | 22,844,687 |  |                    |  | 639,964   | 
|Gary H. Heck            |  |     | 22,550,699 |  |                    |  | 933,952   | 
|James R. Kanely         |  |     | 23,012,670 |  |                    |  | 471,981   | 
|Amy L. Newmark          |  |     | 22,749,024 |  |                    |  | 735,627   | 
|Steven A. Odom          |  |     | 22,207,104 |  |                    |  | 1,277,547 | 
|James A. Verbrugge      |  |     | 23,000,183 |  |                    |  | 484,468   | 







19



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

10-K S-K




|                        |  |     |    |  |          |                                                                               
|----------------------- |  | --- | -- |  | -------- | ------------------------------------------------------------------------------
|Name                    |  | Age |    |  | Position
|                        |  |     |    |  |         
|Montgomery L. Bannerman |  |     | 50 |  |          | Chief Executive Officer                                                       
|Steven A. Odom          |  |     | 52 |  |          | Executive Chairman of the Board                                               
|Juliet M. Reising       |  |     | 55 |  |          | Executive Vice President, Chief Financial Officer, Secretary and
    Treasurer
|Yves Desmet             |  |     | 38 |  |          | Senior Vice President, Worldwide Sales                                        



Montgomery L. Bannerman


Steven A. Odom


Juliet M. Reising


Yves Desmet


20



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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, 2005: |                |      |   |      |     |  |   |     
|                              | First Quarter  |      | $ | 3.75 |     |  | $ | 1.60 | 
|                              | Second Quarter |      |   | 1.95 |     |  |   | 1.10 | 
|                              | Third Quarter  |      |   | 2.55 |     |  |   | 1.25 | 
|                              | Fourth Quarter |      |   | 1.75 |     |  |   | 1.00 | 

|                              |                |      |   |       |     |  |   |      | 
|----------------------------- | -------------- | ---- | - | ----- | --- |  | - | ---- | 
|                              |                | High |   |       | Low | 
|                              |                |      |   |       |     | 
|Year ended December 31, 2004: |                |      |   |       |     |  |   |     
|                              | First Quarter  |      | $ | 16.60 |     |  | $ | 7.50 | 
|                              | Second Quarter |      |   | 9.60  |     |  |   | 5.60 | 
|                              | Third Quarter  |      |   | 8.25  |     |  |   | 4.50 | 
|                              | Fourth Quarter |      |   | 4.65  |     |  |   | 1.90 | 





21



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8-K








22



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



|                                                                         |  |                          |         |   |         |   |         |         |  |   |         |   |  |         |        |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ------- | - | ------- | ------- |  | - | ------- | - |  | ------- | ------ | - |  | - | ------- | -
|                                                                         |  | Years Ended December 31, |        
|                                                                         |  |                          |        
|                                                                         |  | 2005(2)                  |         |   | 2004(3) |   |         | 2003(4) |  |   | 2002(5) |   |  | 2001(6) |       
|                                                                         |  |                          |         |   |         |   |         |         |  |   |         |   |  |         |       
|Statement of Operations Data(1):                                         |  |                          |         |   |         |   |         |         |  |   |         |   |  |         |        |   |  |   |         |  
|Revenue                                                                  |  | $                        | 32,873  |   |         | $ | 32,263  |         |  | $ | 38,139  |   |  | $       | 18,479 |   |  | $ | 16,953  |  
|Loss from Continuing Operations                                          |  |                          | (19,494 | ) |         |   | (18,770 | )       |  |   | (4,215  | ) |  |         | (4,716 | ) |  |   | (13,820 | )
|Loss from Continuing Operations per Common Share 
    basic and diluted |  |                          | (0.72   | ) |         |   | (0.71   | )       |  |   | (0.21   | ) |  |         | (0.30  | ) |  |   | (1.25   | )
|Balance Sheet Data:                                                      |  |                          |         |   |         |   |         |         |  |   |         |   |  |         |        |   |  |   |         |  
|Total Assets(7)                                                          |  |                          | 28,098  |   |         |   | 33,429  |         |  |   | 63,252  |   |  |         | 39,835 |   |  |   | 45,159  |  
|Long-term Liabilities, net of current portion                            |  |                          | 10,222  |   |         |   | 4,401   |         |  |   | 9,102   |   |  |         | 6,133  |   |  |   | 5,200   |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the continuing operations of Telemate.Net (since its
    acquisition on November 16, 2001), the continuing
    operations of assets acquired by the Company from Clarent
    Corporation since its acquisition on February 12, 2003, and
    the continuing operations of substantially all the operating
    assets of WSECI beginning October 1, 2004.                                                                                                                        
|   
|(2) | The fiscal year 2005 loss from continuing operations includes
    $809,000 of intangibles amortization, $7,000 in amortization of
    deferred compensation, $2.9 million in non-cash interest
    related to the amortization of the discount on notes payable and
    convertible subordinated debentures and loan fees and
    $2.6 million of reorganization costs  loss on
    sublease.                                                                                           
|   
|(3) | 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.                                                                                                                                                              
|   
|(4) | 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.                                                                                                                                                              
|   
|(5) | 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.                                                                                                                                                                                                          
|   
|(6) | 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.                                                                                                                  
|   
|(7) | Includes $3.4 million of notes receivable as of
    December 31, 2005 related to the sale of assets of
    discontinued operations. Includes $9.0 million,
    $33.4 million, $27.4 million and $26.1 million of
    assets of discontinued operations, as of December 31, 2004,
    2003, 2002 and 2001, respectively. The assets of discontinued
    operations as of December 31, 2004 were reduced by the loss
    on disposal of discontinued operations totaling
    $14.8 million.

23



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

Overview












24



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Results of Operations




| |                                                
| | -----------------------------------------------
| | Fiscal Year 2005 Compared with Fiscal Year 2004





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









25



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26



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

|                                                    |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |   |         |   |  |   |         |  
|--------------------------------------------------- |  | ------------------------------- | ------ | -------- | -------------- | - | ------ | ------------ |  | - | ----- | - |  | ---- | ------ | - | ---- | - | ------- | - |  | - | ------- | -
|                                                    |  |                                 |        | Advanced |                |   |        |              | 
|                                                    |  | Packet-based                    |        |          | Applications   |   |        |             
|                                                    |  | Technologies Group              |        |          | Services Group |   |        | Consolidated | 
|                                                    |  |                                 |        |          |                |   |        |              | 
|                                                    |  | For the Year Ended December 31, |       
|                                                    |  |                                 |       
|                                                    |  | 2005                            |        |          | 2004           |   |        | 2005         |  |   | 2004  |   |  | 2005 |        |   | 2004 |  
|                                                    |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |  
|                                                    |  | Dollars in thousands            |       
|Revenue                                             |  | $                               | 23,697 |          |                | $ | 20,527 |              |  | $ | 9,176 |   |  | $    | 11,736 |   |      | $ | 32,873  |   |  | $ | 32,263  |  
|                                                    |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |  
|Gross profit                                        |  |                                 | 12,317 |          |                |   | 11,134 |              |  |   | 2,541 |   |  |      | 3,985  |   |      |   | 14,858  |   |  |   | 15,119  |  
|Gross margin                                        |  |                                 | 52     | %        |                |   | 54     | %            |  |   | 28    | % |  |      | 34     | % |      |   | 45      | % |  |   | 47      | %
|General and administrative                          |  |                                 | 2,545  |          |                |   | 2,375  |              |  |   | 740   |   |  |      | 1,059  |   |      |   | 3,285   |   |  |   | 3,434   |  
|Sales and marketing                                 |  |                                 | 7,945  |          |                |   | 9,302  |              |  |   | 101   |   |  |      | 126    |   |      |   | 8,046   |   |  |   | 9,428   |  
|Research and development                            |  |                                 | 6,594  |          |                |   | 6,584  |              |  |   |      |   |  |      |       |   |      |   | 6,594   |   |  |   | 6,584   |  
|                                                    |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |  
|Contribution before unallocated items               |  | $                               | (4,767 | )        |                | $ | (7,127 | )            |  | $ | 1,700 |   |  | $    | 2,800  |   |      |   | (3,067  | ) |  |   | (4,327  | )
|                                                    |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |  
|Unallocated items:                                  |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |   |         |   |  |   |         |  
|Corporate general and administrative                |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |   | 6,935   |   |  |   | 8,958   |  
|Corporate research and development                  |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |   | 238     |   |  |   | 379     |  
|Depreciation and amortization                       |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |   | 2,270   |   |  |   | 2,953   |  
|Reorganization costs  loss on sublease             |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |   | 2,550   |   |  |   |         |  
|Reorganization costs                                |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |   | 464     |   |  |   | 1,414   |  
|                                                    |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |  
|Operating loss                                      |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |   | (15,524 | ) |  |   | (18,031 | )
|Other                                               |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |   | (3,970  | ) |  |   | (739    | )
|                                                    |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |  
|Loss from continuing operations before income taxes |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      | $ | (19,494 | ) |  | $ | (18,770 | )
|                                                    |  |                                 |        |          |                |   |        |              |  |   |       |   |  |      |        |   |      |  



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







27



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









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





|                                            |  |                    |      |   |      |   |         |  
|------------------------------------------- |  | ------------------ | ---- | - | ---- | - | ------- | -
|                                            |  | For the Year Ended |     
|                                            |  | December 31,       |     
|                                            |  |                    |     
|                                            |  | 2005               |      |   | 2004 |  
|                                            |  |                    |      |   |      |  
|Revenue                                     |  | $                  | 212  |   |      | $ | 18,889  |  
|                                            |  |                    |      |   |      |  
|Gross (loss) profit                         |  |                    | (27  | ) |      |   | 8,074   |  
|                                            |  |                    |      |   |      |  
|Operating loss                              |  |                    | (566 | ) |      |   | (5,229  | )
|Loss on disposal of discontinued operations |  |                    |     |   |      |   | (14,788 | )
|                                            |  |                    |      |   |      |  
|Loss from discontinued operations           |  | $                  | (566 | ) |      | $ | (20,017 | )
|                                            |  |                    |      |   |      |  



28



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





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















29



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30



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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





31



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









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



32



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|                                            |  |                    |         |   |      |   |         |  
|------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                            |  | 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 | )
|                                            |  |                    |         |   |      |  





Critical Accounting Policies








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



33



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





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





| |                                       
| | --------------------------------------
| | Liabilities of Discontinued Operations





34



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





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





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





35



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Liquidity and Capital Resources




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











36



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











37



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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                                          |                         | $                      | 1,269  |           |        | $ | 1,269 |           |       | $ |          |       |  | $       |      |       |  | $ |  |  
|Additional payments for the acquisition of Encore Group |                         |                        | 229    |           |        |   | 179   |           |       |   | 50        |       |  |         |      |       |  |   |  |  
|Notes payable                                           |                         |                        | 3,000  |           |        |   |      |           |       |   | 3,000     |       |  |         |      |       |  |   |  |  
|Convertible subordinated debentures                     |                         |                        | 2,250  |           |        |   | 2,250 |           |       |   |          |       |  |         |      |       |  |   |  |  
|Senior unsecured convertible debentures                 |                         |                        | 13,500 |           |        |   | 1,406 |           |       |   | 9,281     |       |  |         | 2,813 |       |  |   |  |  
|Operating Leases:                                       |                         |                        |        |           |        |   |       |           |       |   |           |       |  |         |       |       |  |   |   |  
|                                                        | Continuing operations   |                        |        | 7,361     |        |   |       | 2,132     |       |   |           | 3,622 |  |         |       | 1,607 |  |   |   |  | 
|                                                        | Discontinued operations |                        |        | 3,266     |        |   |       | 1,736     |       |   |           | 1,104 |  |         |       | 426   |  |   |   |  | 
|                                                        |                         |                        |        |           |        |   |       |           |       |   |           |       |  |         |      
|Total contractual cash obligations                      |                         |                        | 30,875 |           |        | $ | 8,972 |           |       | $ | 17,057    |       |  | $       | 4,846 |       |  | $ |  |  
|                                                        |                         |                        |        |           |        |   |       |           |       |   |           |       |  |         |      



Sources of Cash








38



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

Market Risk




Interest Rate Risks




39



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Foreign Currency Risks









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



Quarterly Financial Data (Unaudited)




40



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|                                                  |                                                    |                                          |   |        |            |   |   |         |        |   |         |        |        |            |   |         |         |   |   |         |         |  
|------------------------------------------------- | -------------------------------------------------- | ---------------------------------------- | - | ------ | ---------- | - | - | ------- | ------ | - | ------- | ------ | ------ | ---------- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                  |                                                    | First                                    |   |        | Second     |   |   | Third   |        |   | Fourth  |        |        |           
|                                                  |                                                    | Quarter                                  |   |        | Quarter(1) |   |   | Quarter |        |   | Quarter |        |        | Total Year |  
|                                                  |                                                    |                                          |   |        |            |   |   |         |        |   |         |        |        |            |  
|                                                  |                                                    | (In thousands, except per share amounts) |  
|2005                                              |                                                    |                                          |   |        |            |   |   |         |        |   |         |        |        |            |   |         |         |   |   |        
|                                                  | Revenue                                            |                                          | $ | 6,606  |            |   | $ | 8,513   |        |   | $       | 8,281  |        |            | $ | 9,473   |         |   | $ | 32,873  |        
|                                                  | Gross profit                                       |                                          |   | 2,863  |            |   |   | 3,754   |        |   |         | 3,718  |        |            |   | 4,523   |         |   |   | 14,858  |        
|                                                  | General and administrative                         |                                          |   | 2,586  |            |   |   | 2,468   |        |   |         | 2,592  |        |            |   | 2,574   |         |   |   | 10,220  |        
|                                                  | Sales and marketing                                |                                          |   | 2,146  |            |   |   | 2,049   |        |   |         | 1,948  |        |            |   | 1,903   |         |   |   | 8,046   |        
|                                                  | Research and development                           |                                          |   | 1,684  |            |   |   | 1,737   |        |   |         | 1,655  |        |            |   | 1,756   |         |   |   | 6,832   |        
|                                                  | Operating income (loss) from continuing operations |                                          |   | (4,337 | )          |   |   | (5,630  | )      |   |         | (3,344 | )      |            |   | (2,213  | )       |   |   | (15,524 | )      
|                                                  | Income (loss) from continuing operations           |                                          |   | (4,934 | )          |   |   | (6,400  | )      |   |         | (4,599 | )      |            |   | (3,561  | )       |   |   | (19,494 | )      
|                                                  | Income (loss) from discontinued operations         |                                          |   | (566   | )          |   |   |        |        |   |         |       |        |            |   |        |         |   |   | (566    | )      
|                                                  |                                                    |                                          |   |        |            |   |   |         |        |   |         |        |        |            |  
|                                                  |                                                    | Net loss                                 |   | $      | (5,500     | ) |   | $       | (6,400 | ) |         | $      | (4,599 | )          |   | $       | (3,561  | ) |   | $       | (20,060 | )
|                                                  |                                                    |                                          |   |        |            |   |   |         |        |   |         |        |        |            |  
|Net loss per common share  basic and diluted:(2) |                                                    |                                          |   |        |            |   |   |         |        |   |         |        |        |            |   |         |         |   |   |        
|                                                  | Loss from continuing operations                    |                                          | $ | (0.18  | )          |   | $ | (0.24   | )      |   | $       | (0.17  | )      |            | $ | (0.13   | )       |   | $ | (0.72   | )      
|                                                  | Loss from discontinued operations                  |                                          |   | (0.02  | )          |   |   |        |        |   |         |       |        |            |   |        |         |   |   | (0.02   | )      
|                                                  |                                                    |                                          |   |        |            |   |   |         |        |   |         |        |        |            |  
|                                                  |                                                    | Net loss per common share                |   | $      | (0.20      | ) |   | $       | (0.24  | ) |         | $      | (0.17  | )          |   | $       | (0.13   | ) |   | $       | (0.74   | )
|                                                  |                                                    |                                          |   |        |            |   |   |         |        |   |         |        |        |            |  
|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  |        |            |   | 3,290   |         |   |   | 12,393  |        
|                                                  | Sales and marketing                                |                                          |   | 1,956  |            |   |   | 2,409   |        |   |         | 2,583  |        |            |   | 2,479   |         |   |   |         |        
|                                                  | 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                    |                                          | $ | (0.10  | )          |   | $ | (0.20   | )      |   | $       | (0.20  | )      |            | $ | (0.20   | )       |   | $ | (0.71   | )      
|                                                  | Loss from discontinued operations                  |                                          |   | (0.05  | )          |   |   | (0.05   | )      |   |         | (0.05  | )      |            |   | (0.05   | )       |   |   | (0.20   | )      
|                                                  | Loss on disposal of discontinued operations        |                                          |   |        |            |   |   |         |        |   |         |        |        |            |   | (0.55   | )       |   |   | (0.56   | )      
|                                                  |                                                    |                                          |   |        |            |   |   |         |        |   |         |        |        |            |  
|                                                  | Net loss per common share                          |                                          | $ | (0.15  | )          |   | $ | (0.25   | )      |   | $       | (0.25  | )      |            | $ | (0.80   | )       |   | $ | (1.47   | )      
|                                                  |                                                    |                                          |   |        |            |   |   |         |        |   |         |        |        |            |  






|    |                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Second quarter 2005 net loss includes reorganizations
    costs  loss on sublease totaling $2.6 million
    included in loss from continuing 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.

41



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








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

13a-15(e) 15d-15(e) 13a-15 15d-15


13a-15 15d-15







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











42



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PART III







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

Board of Directors




|                        |  |     |    |  |          |                                     
|----------------------- |  | --- | -- |  | -------- | ------------------------------------
|Name                    |  | Age |    |  | Position
|                        |  |     |    |  |         
|Montgomery L. Bannerman |  |     | 50 |  |          | Chief Executive Officer and Director
|Mark H. Dunaway         |  |     | 60 |  |          | Director                            
|Paul R. Garcia          |  |     | 53 |  |          | Director                            
|Gary H. Heck            |  |     | 61 |  |          | Director                            
|James R. Kanely         |  |     | 64 |  |          | Director                            
|Amy L. Newmark          |  |     | 48 |  |          | Director                            
|Steven A. Odom          |  |     | 52 |  |          | Executive Chairman of the Board     
|James A. Verbrugge      |  |     | 65 |  |          | Director                            



Mark H. Dunaway,


Paul R. Garcia,


Gary H. Heck,


43



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James R. Kanely,


Amy L. Newmark,


Dr. James A. Verbrugge,






Executive Officers




Audit Committee and Audit Committee Financial Expert




S-K.


44



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S-K. S-K S-K


Code of Ethics




Section 16(a) Beneficial Ownership Reporting
Compliance









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

Director Compensation


out-of


45



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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              |                                  |      | 2005 |                     |            |  | 405,000    |              |     |           |               |   |  |              |        |         |      |  |       |       
|                            | Executive Chairman of the        |      |      | 2004                |            |  |            | 442,500      |     |           |                |  |  |              |         |        |      |  |        |       |     
|                            | Board and former Chief           |      |      | 2003                |            |  |            | 435,000      |     |           |                |  |  |              |         | 100,000 | (2)  |  |        |       |     
|                            | Executive Officer                |      |      |                     |            |  |            |              |     |           |                |   |  |              |         |        |      |  |        |        |     
|Montgomery L. Bannerman     |                                  |      | 2005 |                     |            |  | 263,750    |              |     |           |               |   |  |              | 100,000 | (3)     |      |  |       |       
|                            | Chief Executive Officer, former  |      |      | 2004                |            |  |            | 25,102       |     |           |                |  |  |              |         | 50,000  | (3)  |  |        |       |     
|                            | President and former Senior Vice |      |      | 2003                |            |  |            |             |     |           |                |  |  |              |         |        |      |  |        |       |     
|                            | President, Strategic Initiatives |      |      |                     |            |  |            |              |     |           |                |   |  |              |         |         |      |  |        |        |     
|Lewis Jaffe                 |                                  |      | 2005 |                     |            |  | 295,416    | (4)          |     |           |               |   |  |              |        |         |      |  |       |       
|                            | Former President and former      |      |      | 2004                |            |  |            | 40,017       | (4) |           |                |  |  |              |         | 200,000 | (5)  |  |        |       |     
|                            | Chief Operating Officer          |      |      | 2003                |            |  |            |             |     |           |                |  |  |              |         |        |      |  |        |       |     
|Gary Heck                   |                                  |      | 2005 |                     |            |  |           |              |     |           |               |   |  |              |         |         |      |  |       |       
|                            | Former President and former      |      |      | 2004                |            |  |            | 224,891      | (6) |           |                |  |  |              |         | 20,000  | (7)  |  |        | 30,000 | (8) 
|                            | Chief Operating Officer          |      |      | 2003                |            |  |            |             |     |           |                |  |  |              |         | 22,000  | (7)  |  |        |       |     
|James A. Logsdon            |                                  |      | 2005 |                     |            |  | 270,000    | (9)          |     |           |               |   |  |              |        |         |      |  |       |       
|                            | Former President and former      |      |      | 2004                |            |  |            | 275,711      | (9) |           |                |  |  |              |         | 60,924  | (10) |  |        |       |     
|                            | Chief Operating Officer          |      |      | 2003                |            |  |            | 261,000      |     |           |                |  |  |              |         |        |      |  |        |       |     
|Juliet M. Reising           |                                  |      | 2005 |                     |            |  | 250,000    |              |     |           |                |   |  |              |         |         |      |  |        |       
|                            | Executive Vice President and     |      |      | 2004                |            |  |            | 266,667      |     |           |                |  |  |              |         |        |      |  |        |       |     
|                            | Chief Financial Officer          |      |      | 2003                |            |  |            | 261,000      |     |           |                |  |  |              |         | 47,745  | (11) |  |        |       |     
|Yves Desmet                 |                                  |      | 2005 |                     |            |  | 183,859    |              |     |           |               |   |  |              | 62,000  | (12)    |      |  | 86,459 | (13)  
|                            | Senior Vice President,           |      |      | 2004                |            |  |            | 184,149      |     |           |                |  |  |              |         |        |      |  |        | 84,548 | (13)
|                            | Worldwide Sales and former       |      |      | 2003                |            |  |            | 150,621      |     |           |                |  |  |              |         | 3,500   | (12) |  |        | 42,338 | (13)
|                            | Director of Sales                |      |      |                     |            |  |            |              |     |           |                |   |  |              |         |         |      |  |        |        |     






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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. All options to purchase shares of Common Stock and the
    exercise prices thereof have been adjusted to reflect the
    Reverse Split.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(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 49,755 shares of Common Stock at an exercise
    price of $2.30 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 50,245 shares of
    Common Stock at an exercise price of $2.10 per share,
    exercisable in its entirety on the date of grant. Mr. Odom
    served as Chief Executive Officer of the Company from
    September 29, 2000 until October 1, 2005, when he
    began serving as the Companys Executive Chairman of the
    Board. See the section of this Annual Report titled
    Executive Compensation  Employment
    Agreements.
|   
|(3) | The Company granted to Mr. Bannerman (i) on
    November 19, 2004 an option to
    purchase 50,000 shares of Common Stock at an exercise
    price of $3.45 per share, exercisable as to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | twenty-five percent (25%) of the underlying shares of Common
    Stock on November 19, 2005, November 19, 2006,
    November 19, 2007 and November 19, 2009, in connection
    with his appointment as Senior Vice President, Strategic
    Initiatives of the Company; and (ii) on August 1, 2005
    an option to purchase 100,000 shares of Common Stock
    at an exercise price of $2.50 per share, exercisable as to
    fifty percent (50%) of the underlying shares on the date of
    grant and as to the remaining fifty percent (50%) on
    August 1, 2006, August 1, 2007, August 1, 2008
    and August 1, 2009, in connection with his appointment to
    President and Chief Operating Officer of the Company. See the
    section of this Annual Report titled Executive
    Compensation  Employment Agreements.                                                                                                                                                                                                                       
|   
|(4) | Represents amounts paid to Mr. Jaffe pursuant to his
    employment agreement with the Company while serving as President
    and Chief Operating Officer of the Company, and amounts paid to
    him under the Separation Agreement he entered into with the
    Company on August 16, 2005 (the Separation
    Agreement) after he ceased serving as the President and
    Chief Operating Officer of the Company on August 1, 2005.
    See the section of this Annual Report titled Certain
    Relationships and Related Transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(5) | The Company granted to Mr. Jaffe on November 2, 2004
    (i) an option to purchase 100,000 shares of
    Common Stock at an exercise price of $2.65 per share;
    (ii) an option to purchase 50,000 shares of
    Common Stock at an exercise price of $3.75 per share; and
    (iii) an option to purchase 50,000 shares of
    Common Stock at an exercise price of $6.25, in connection with
    his appointment to President and Chief Operating Officer of the
    Company. Mr. Jaffes employment with the Company
    terminated on August 1, 2005 (the Separation
    Date). On August 16, 2005, the Company entered into a
    Separation Agreement with Mr. Jaffe. Pursuant to the
    Separation Agreement, the Company agreed that twenty-five
    percent (25%) of the shares of the Companys common stock
    underlying the options granted to Mr. Jaffe vested as of
    the Separation Date and such vested options could be exercised
    at any time and from time to time until the one year anniversary
    of the Separation Date.
|   
|(6) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(7) | The Company granted to Mr. Heck (i) on March 1,
    2004 an option to purchase 20,000 shares of Common
    Stock at an exercise price of $9.10 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 20,000 shares of Common stock at an exercise
    price of $2.15 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.                                                                                                                                                             
|   
|(8) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(9) | 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. See the section of this Annual Report
    titled Executive Compensation  Employment
    Agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | 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 20,924 shares of Common Stock at an
    exercise price of $2.30 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 40,000 shares
    of Common Stock at an exercise price of $2.10 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

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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | effective February 23, 2004. See the section of this Annual
    Report titled Executive Compensation 
    Employment Agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|(11) | On January 3, 2003, the Company granted to Ms. Reising
    an option to purchase 7,745 shares of Common Stock at
    an exercise price of $2.30 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 an option to
    purchase 40,000 shares of Common Stock at an exercise
    price of $2.10 per share, exercisable in its entirety on
    the date of grant. See the section of this Annual Report titled
    Executive Compensation  Employment
    Agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|(12) | The Company granted to Mr. Desmet (i) on
    February 11, 2003 an option to
    purchase 2,000 shares of Common Stock at an exercise
    price of $2.20 per share, exercisable as to twenty-five
    percent (25%) of the underlying shares of Common Stock on the
    date of grant and as to the remaining seventy-five percent (75%)
    on June 30, 2003, September 30, 2003 and
    December 31, 2003; (ii) on August 25, 2003 an
    option to purchase 1,500 shares of Common Stock at an
    exercise price of $16.75 per share, exercisable as to
    twenty-five percent (25%) of the underlying shares of Common
    Stock on the date of grant and as to the remaining seventy-five
    percent (75%) on August 25, 2004, August 25, 2005 and
    August 25, 2006; (iii) on January 3, 2005 an
    option to purchase 4,000 shares of Common Stock at an
    exercise price of $3.55 per share, exercisable as to
    twenty-five percent (25%) on January 3, 2006,
    January 3, 2007, January 3, 2008 and January 3,
    2009; (iv) on June 17, 2005 an option to
    purchase 15,000 shares of Common Stock at an exercise
    price of $1.55 per share, exercisable as to twenty-five
    percent (25%) on June 17, 2006, June 17, 2007,
    June 17, 2008 and June 17, 2009; (v) on
    July 8, 2005 an option to purchase 3,000 shares
    of Common Stock at an exercise price of $1.45 per share,
    exercisable as to twenty-five percent (25%) on January 8,
    2006, July 8, 2006, January 8, 2007 and July 8,
    2007; and (vi) on October 14, 2005 an option to
    purchase 40,000 shares of Common Stock at an exercise
    price of $1.45 per share, exercisable as to twenty-five
    percent (25) on October 14, 2006, October 14,
    2007, October 14, 2008 and October 14, 2009 or subject
    to acceleration upon meeting quarterly performance criteria as
    established by the Chief Executive Officer, in connection with
    his appointment to Senior Vice President, Worldwide Sales of the
    Company.
|    
|(13) | Represents amounts paid to Mr. Desmet for commissions on
    sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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           |         |  | 2005                 |  |    | (per share)    |  |                        | Date       |  |  | 5% |            |  | 10% |  
|                           |  |                   |         |  |                      |  |    |                |  |                        |            |  |  |    |            |  |     |  
|Montgomery L. Bannerman(2) |  |                   | 100,000 |  |                      |  | 10 | %              |  | $                      | 2.50       |  |  |    | 8/1/2015   |  |     | $ | 157,224 |  |  | $ | 398,436 | 
|Yves Desmet(3)             |  |                   | 4,000   |  |                      |  | *  |                |  |                        | 3.55       |  |  |    | 1/3/2015   |  |     |   | 8,930   |  |  |   | 22,631  | 
|                           |  |                   | 15,000  |  |                      |  | 2  |                |  |                        | 1.55       |  |  |    | 6/17/2015  |  |     |   | 14,622  |  |  |   | 37,055  | 
|                           |  |                   | 3,000   |  |                      |  | *  |                |  |                        | 1.45       |  |  |    | 7/8/2015   |  |     |   | 2,736   |  |  |   | 6,933   | 
|                           |  |                   | 40,000  |  |                      |  | 4  |                |  |                        | 1.45       |  |  |    | 10/14/2015 |  |     |   | 36,476  |  |  |   | 92,437  | 






| |   |                        
| | - | -----------------------
| | * | represents less than 1%



|    |                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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. All

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | options to purchase shares of Common Stock and the exercise
    prices thereof have been adjusted to reflect the Reverse Split.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(2) | On August 1, 2005, the Company granted to
    Mr. Bannerman an option to
    purchase 100,000 shares of Common Stock at an exercise
    price of $2.50 per share, exercisable as to fifty percent
    (50%) of the underlying shares on the date of grant and as to
    the remaining fifty percent (50%) on August 1, 2006,
    August 1, 2007, August 1, 2008 and August 1,
    2009, in connection with his appointment to President and Chief
    Operating Officer of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) | The Company granted to Mr. Desmet: (i) on
    January 3, 2005 an option to
    purchase 4,000 shares of Common Stock at an exercise
    price of $3.55 per share, exercisable as to twenty-five
    percent (25%) on January 3, 2006, January 3, 2007,
    January 3, 2008 and January 3, 2009; (ii) on
    June 17, 2005 an option to purchase 15,000 shares
    of Common Stock at an exercise price of $1.55 per share,
    exercisable as to twenty-five percent (25%) on June 17,
    2006, June 17, 2007, June 17, 2008 and June 17,
    2009; (iii) on July 8, 2005 an option to
    purchase 3,000 shares of Common Stock at an exercise
    price of $1.45 per share, exercisable as to twenty-five
    percent (25%) on January 8, 2006, July 8, 2006,
    January 8, 2007 and July 8, 2007; and (iv) on
    October 14, 2005 an option to
    purchase 40,000 shares of Common Stock at an exercise
    price of $1.45 per share, exercisable as to twenty-five
    percent (25) on October 14, 2006, October 14,
    2007, October 14, 2008 and October 14, 2009 or subject
    to acceleration upon meeting quarterly performance criteria as
    established by the Chief Executive Officer, in connection with
    his appointment to Senior Vice President, Worldwide Sales of the
    Company.

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(1) |         |  | Year-End(2)                 | 
|                        |  |                               |         |  |                             | 
|Name                    |  | Exercisable                   |         |  | Unexercisable               |  |        | Exercisable |  |   | Unexercisable | 
|                        |  |                               |         |  |                             |  |        |             |  |   |               | 
|Steven A. Odom(3)       |  |                               | 700,000 |  |                             |  | 0      |             |  | $ | 0             |  |  | $ | 0 | 
|Montgomery L. Bannerman |  |                               | 62,500  |  |                             |  | 87,500 |             |  |   | 0             |  |  |   | 0 | 
|Lewis Jaffe             |  |                               | 50,000  |  |                             |  | 0      |             |  |   | 0             |  |  |   | 0 | 
|Gary Heck               |  |                               | 107,500 |  |                             |  | 0      |             |  |   | 0             |  |  |   | 0 | 
|James M. Logsdon(4)     |  |                               | 293,925 |  |                             |  | 0      |             |  |   | 0             |  |  |   | 0 | 
|Juliet M. Reising(5)    |  |                               | 267,746 |  |                             |  | 0      |             |  |   | 0             |  |  |   | 0 | 
|Yves Desmet             |  |                               | 14,875  |  |                             |  | 50,625 |             |  |   | 0             |  |  |   | 0 | 






|    |                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The number of shares of Common Stock underlying the unexercised
    options held by each of the Named Executive Officers at
    December 31, 2005 have been adjusted to reflect the Reverse
    Split.     
|   
|(2) | 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 30, 2005, which was $1.00.               
|   
|(3) | 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 455,000 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 210,000 shares of Common Stock.                     
|   
|(5) | 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 122,500 shares of
    Common Stock.

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Employment Agreements






50



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Compensation Committee Interlocks and Insider
Participation









|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|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)  |  |                            | 2,634,411 |        |                   | $ | 6.02 |                      |  |  | 366,660 | 
|Equity compensation plans not approved by security holders: |  |                            | 474,067   | (2)(3) |                   | $ | 6.33 | (2)(3)               |  |  |        | 
|                                                            |  |                            |           |        |                   |   |      |                      | 
|Total                                                       |  |                            | 3,108,478 |        |                   | $ | 6.07 |                      |  |  | 366,660 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents options granted pursuant to the Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Does not include (i) options to
    purchase 151,453 shares of Common Stock with a
    weighted average exercise price of $7.80 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 1,016,048 shares of Common Stock with a
    weighted average exercise price of $12.60 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 March 16, 2005, the Company issued warrants to
    purchase an aggregate of 302,400 shares of Common Stock to
    two placement agents and 16 employees of the placement agents as
    compensation

52



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | for placement agent services rendered to the Company by such
    agents. The warrants are exercisable over a four-year period
    commencing on February 4, 2006 at an initial exercise price
    of $3.60 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | (b) 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 100,000 shares of the Common Stock at an
    exercise price of $2.65 per share; (ii) a ten-year
    option to purchase 50,000 shares of Common Stock at an
    exercise price of $3.75 per share; and (iii) a
    ten-year option to purchase 50,000 shares of Common
    Stock at an exercise price of $6.25 per share. Each option
    was to vest 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. Pursuant to the Separation Agreement, the
    Company agreed that twenty-five percent (25%) of the shares of
    the Companys common stock underlying the options granted
    to Mr. Jaffe vested as of the Separation Date and such
    vested options could be exercised at any time and from time to
    time until the one year anniversary of the Separation Date.
|
| |  | (c) 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 50,000 shares of Common Stock at an
    exercise price of $3.45 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | (d) On January 30, 2001, the Company issued a warrant
    to purchase 16,666 shares of Common Stock at an
    exercise price of $7.50 per share 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 expired on
    January 30, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | (e) On October 16, 2001, the Company issued a warrant
    to purchase 5,000 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 $0.05 per
    share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | (f) On October 31, 1996, the Company issued warrants
    to purchase an aggregate of 30,000 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
    $30.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | (g) On September 19, 1997, the Company issued warrants
    to purchase an aggregate of 20,000 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
    $26.25 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

53



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##### Table of Contents



Beneficial Ownership




|                                                                 |  |                           |           |  |             |  |      |  
|---------------------------------------------------------------- |  | ------------------------- | --------- |  | ----------- |  | ---- | -
|                                                                 |  | Common Stock Beneficially |          
|                                                                 |  | Owned(1)                  |          
|                                                                 |  |                           |          
|                                                                 |  | Number of                 |           |  |            
|                                                                 |  | Shares of                 |           |  | Percentage  | 
|Name of Beneficial Owner                                         |  | Common Stock              |           |  | of Class(2) | 
|                                                                 |  |                           |           |  |             | 
|Prescott Group Capital Management, L.L.C.(3)                     |  |                           | 2,177,783 |  |             |  | 6.62 | %
|Steven A. Odom (4)                                             |  |                           | 767,020   |  |             |  | 2.28 |  
|Juliet M. Reising(5)                                            |  |                           | 316,362   |  |             |  | *    |  
|James M. Logsdon(6)                                              |  |                           | 302,408   |  |             |  | *    |  
|Amy L. Newmark(7)                                               |  |                           | 146,500   |  |             |  | *    |  
|Gary H. Heck (8)                                                |  |                           | 114,875   |  |             |  | *    |  
|Paul R. Garcia(9)                                               |  |                           | 114,400   |  |             |  | *    |  
|Montgomery L. Bannerman (10)                                   |  |                           | 90,000    |  |             |  | *    |  
|James A. Verbrugge(11)                                          |  |                           | 40,000    |  |             |  | *    |  
|James R. Kanely                                                 |  |                           | 15,000    |  |             |  | *    |  
|Yves Desmet(12)                                                 |  |                           | 14,875    |  |             |  | *    |  
|Mark H. Dunaway                                                 |  |                           | 0         |  |             |  | *    |  
|Lewis Jaffe(13)                                                  |  |                           | 55,700    |  |             |  | *    |  
|All executive officers and directors as a group (10 persons)(14) |  |                           | 1,806,565 |  |             |  | 5.24 |  






|  |                        
|- | -----------------------
| | 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 of
    March 23, 2006, 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 32,910,078 shares of Common Stock
    issued and outstanding as of March 23, 2006, plus shares of
    Common Stock which may be acquired within 60 days of
    March 23, 2006, by each individual or group listed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(3) | On January 30, 2006, a Schedule 13G was filed with the
    SEC by Prescott Group Capital Management, L.L.C.
    (Prescott) reporting that Prescott is the beneficial
    owner of 1,408,552 shares of Common Stock. In addition,
    Prescott purchased 769,231 units from the Company in the
    private placement closed by the Company on February 17,
    2006. Each unit consists of one share of Common Stock and one
    warrant to purchase one share of Common Stock at an exercise
    price of $1.56 per share exercisable for a period of five
    years beginning six months after the close of the private
    placement. The figure in this table includes the shares of
    Common stock purchased by Prescott in the private placement, but
    not the shares exercisable under the warrants.
|   
|(4) | Includes (i) 260 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) 2,920 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

54



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##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | (iii) 700,000 shares of Common Stock issuable pursuant
    to options or warrants exercisable within 60 days of
    March 23, 2006.                                                                                                                                                                                        
|   
|(5) | Includes (i) 28,616 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) 267,746 shares of Common Stock
    issuable pursuant to options or warrants exercisable within
    60 days of March 23, 2006.
|   
|(6) | Includes 293,925 shares of Common Stock issuable pursuant
    to options or warrants exercisable within 60 days of
    March 23, 2006.                                                                                                                                                                                     
|   
|(7) | Includes 107,500 shares of Common Stock issuable pursuant
    to options or warrants exercisable within 60 days of
    March 23, 2006.                                                                                                                                                                                     
|   
|(8) | Includes 107,500 shares of Common Stock issuable pursuant
    to options or warrants exercisable within 60 days of
    March 23, 2006.                                                                                                                                                                                     
|   
|(9) | Includes 92,400 shares of Common Stock issuable pursuant to
    options or warrants exercisable within 60 days of
    March 23, 2006.                                                                                                                                                                                      



|     |                                                                                                                                         
|---- | ----------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 62,500 shares of Common Stock issuable pursuant to
    options exercisable within 60 days of March 23, 2006.                   
|    
|(11) | Includes 40,000 shares of Common Stock issuable pursuant to
    options exercisable within 60 days of March 23, 2006.                   
|    
|(12) | Includes 14,875 shares of Common Stock issuable pursuant to
    options exercisable within 60 days of March 23, 2006.                   
|    
|(13) | Includes 50,000 shares of Common Stock issuable pursuant to
    options exercisable within 60 days of March 23, 2006.                   
|    
|(14) | Includes 1,578,946 shares of Common Stock issuable pursuant
    to options or warrants exercisable within 60 days of
    March 23, 2006.






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







55



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##### Table of Contents








|         |                                       
|-------- | --------------------------------------
|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











|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) A list of the consolidated financial statements
    required to be filed as a part of this Annual Report is shown in
    the Index to Consolidated Financial Statements on
    page F-1.                                                                                                                                                                                                                                                                                                                                                            
|
| | (ii) Except for Financial Statement Schedule II,
    Valuation and Qualifying Accounts, which is filed
    herewith, the financial statement schedules required to be filed
    as a part of this Annual Report are omitted from this Annual
    Report because the information required by such schedules is
    either not applicable or is included in the consolidated
    financial statements and notes thereto, which statements and
    notes are listed on the Index to Consolidated Financial
    Statements on page F-1 and filed herewith.
|
| | (iii) A list of the exhibits required by Item 601 of
    Regulation S-K to
    be filed as a part of this Annual Report is shown on the
    Exhibit Index filed herewith.                                                                                                                                                                                                                                                                                                                                                                               

56



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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, 2005 and 2004                                             |  |      | F-4  | 
|Consolidated Statements of Operations for the years ended
    December 31, 2005, 2004 and 2003           |  |      | F-5  | 
|Consolidated Statements of Shareholders Equity for the
    years ended December 31, 2005, 2004 and 2003 |  |      | F-6  | 
|Consolidated Statements of Cash Flows for the years ended
    December 31, 2005 2004 and 2003            |  |      | F-7  | 
|Notes to Consolidated Financial Statements                                                               |  |      | F-9  | 
|Report of Independent Registered Public Accounting Firm on
    Financial Statement Schedule              |  |      | F-38 | 
|Schedule II  Valuation and Qualifying Accounts                                                          |  |      | F-39 | 

F-1



---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
















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







F-2



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM






















F-3



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES







CONSOLIDATED BALANCE SHEETS


|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |        |       |          |        |        | 
|--------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | -------- | ------------ | ------ | ----- | -------- | ------ | ------ | 
|                                                                                                                |                                                                                                                                               | December 31,               |                                            |          | December 31, |       
|                                                                                                                |                                                                                                                                               | 2005                       |                                            |          | 2004         |       
|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                                               | (In thousands,             |                                           
|                                                                                                                |                                                                                                                                               | except share data)         |                                           
|ASSETS:                                                                                                        
|Current assets:                                                                                                 |                                                                                                                                               |                            |                                            |          |              |        |       |         
|                                                                                                                | Cash and cash equivalents                                                                                                                     |                            | $                                          | 1,079    |              |        | $     | 4,234    |       
|                                                                                                                | Restricted cash                                                                                                                               |                            |                                            | 1,656    |              |        |       |         |       
|                                                                                                                | Accounts receivable, net of allowance for doubtful accounts of
    $742 and $255, respectively                                                |                            |                                            | 7,336    |              |        |       | 3,961    |       
|                                                                                                                | Inventories                                                                                                                                   |                            |                                            | 4,259    |              |        |       | 5,362    |       
|                                                                                                                | Other current assets                                                                                                                          |                            |                                            | 1,954    |              |        |       | 1,451    |       
|                                                                                                                | Current portion of note receivable                                                                                                            |                            |                                            | 655      |              |        |       |         |       
|                                                                                                                | Current portion of assets held for sale                                                                                                       |                            |                                            |         |              |        |       | 8,995    |       
|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                                               | Total current assets       |                                            |          | 16,939       |        |       |          | 24,003 |       
|Property and equipment, net of accumulated depreciation and
    amortization of $6,785 and $7,047, respectively |                                                                                                                                               |                            | 2,305                                      |          |              |        | 3,879 |         
|Investment                                                                                                      |                                                                                                                                               |                            | 745                                        |          |              |        | 729   |         
|Note receivable, net of current portion                                                                         |                                                                                                                                               |                            | 2,736                                      |          |              |        |      |         
|Other intangibles, net of accumulated amortization of $1,729 and
    $921, respectively                         |                                                                                                                                               |                            | 2,859                                      |          |              |        | 2,304 |         
|Goodwill                                                                                                        |                                                                                                                                               |                            | 2,514                                      |          |              |        | 2,514 |         
|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                                               | Total assets               |                                            | $        | 28,098       |        |       | $        | 33,429 |       
|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |       
|                                                                                                               
|LIABILITIES AND SHAREHOLDERS EQUITY:                                                                          
|Current liabilities:                                                                                            |                                                                                                                                               |                            |                                            |          |              |        |       |         
|                                                                                                                | Line of credit                                                                                                                                |                            | $                                          | 1,269    |              |        | $     |         |       
|                                                                                                                | Accounts payable                                                                                                                              |                            |                                            | 2,309    |              |        |       | 2,095    |       
|                                                                                                                | Accrued compensation                                                                                                                          |                            |                                            | 1,111    |              |        |       | 1,356    |       
|                                                                                                                | Accrued expenses                                                                                                                              |                            |                                            | 2,231    |              |        |       | 1,973    |       
|                                                                                                                | Current portion of accrued loss on sublease                                                                                                   |                            |                                            | 543      |              |        |       |         |       
|                                                                                                                | Current portion of liabilities of discontinued operations                                                                                     |                            |                                            | 1,921    |              |        |       | 1,568    |       
|                                                                                                                | Liabilities held for sale                                                                                                                     |                            |                                            |         |              |        |       | 1,985    |       
|                                                                                                                | Current portion of convertible debentures                                                                                                     |                            |                                            | 3,262    |              |        |       | 4,254    |       
|                                                                                                                | Unearned revenue and customer deposits                                                                                                        |                            |                                            | 2,391    |              |        |       | 3,157    |       
|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                                               | Total current liabilities  |                                            |          | 15,037       |        |       |          | 16,388 |       
|Accrued loss on sublease, net of current portion                                                                |                                                                                                                                               |                            | 1,150                                      |          |              |        |      |         
|Liabilities of discontinued operations, net of current portion                                                  |                                                                                                                                               |                            | 610                                        |          |              |        | 1,461 |         
|Other long-term liabilities                                                                                     |                                                                                                                                               |                            | 50                                         |          |              |        | 229   |         
|Notes payable                                                                                                   |                                                                                                                                               |                            | 2,785                                      |          |              |        | 2,711 |         
|Convertible debentures, net of current portion                                                                  |                                                                                                                                               |                            | 5,627                                      |          |              |        |      |         
|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                                               | Total liabilities          |                                            |          | 25,259       |        |       |          | 20,789 |       
|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |       
|Commitments and contingencies (Notes 6, 7,
    10, 14, 16 and 17)                                               |                                                                                                                                               |                            |                                            |          |              |        |       |         
|Shareholders equity:                                                                                           |                                                                                                                                               |                            |                                            |          |              |        |       |         
|                                                                                                                | Preferred stock,no par value, 200,000 shares authorized;
    156,000 shares issued and none outstanding                                       |                            |                                            |         |              |        |       |         |       
|                                                                                                                | Common stock, $.01 par value, authorized shares of
    60,000,000 and 40,000,000; 27,310,524 and 26,648,641 shares
    issued and outstanding |                            |                                            | 273      |              |        |       | 266      |       
|                                                                                                                | Additional paid-in capital                                                                                                                    |                            |                                            | 334,650  |              |        |       | 324,037  |       
|                                                                                                                | Stock payable                                                                                                                                 |                            |                                            | 67       |              |        |       | 128      |       
|                                                                                                                | Accumulated deficit                                                                                                                           |                            |                                            | (331,991 | )            |        |       | (311,931 | )     
|                                                                                                                | Deferred compensation                                                                                                                         |                            |                                            |         |              |        |       | (7       | )     
|                                                                                                                | Accumulated other comprehensive income (loss) 
    foreign currency translation                                                              |                            |                                            | (160     | )            |        |       | 147      |       
|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                                               | Total shareholders equity |                                            |          | 2,839        |        |       |          | 12,640 |       
|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |       
|                                                                                                                |                                                                                                                                               |                            | Total liabilities and shareholders equity |          | $            | 28,098 |       |          | $      | 33,429 | 
|                                                                                                                |                                                                                                                                               |                            |                                            |          |              |       



F-4



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES







CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |         |   |            |         |         |  
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ---------- | ------ | ------- | - | ---------- | ------- | ------- | - | ---------- | ------- | ------- | -
|                                                        |                                                                                                                                                                 | For the Years Ended December 31,          |           
|                                                        |                                                                                                                                                                 |                                           |           
|                                                        |                                                                                                                                                                 | 2005                                      |            |        | 2004    |   |            | 2003    |        
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|                                                        |                                                                                                                                                                 | (In thousands, except share data)         |           
|Revenue:                                                |                                                                                                                                                                 |                                           |            |        |         |   |            |         |         |   |            |        
|                                                        | Products                                                                                                                                                        |                                           | $          | 18,272 |         |   | $          | 15,527  |         |   | $          | 19,330  |        
|                                                        | Services                                                                                                                                                        |                                           |            | 14,601 |         |   |            | 16,736  |         |   |            | 18,809  |        
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|                                                        |                                                                                                                                                                 | Total revenue                             |            |        | 32,873  |   |            |         | 32,263  |   |            |         | 38,139  |  
|Cost of revenue:                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |         |   |            |        
|                                                        | Products:                                                                                                                                                       |                                           |            |        |         |   |            |         |         |   |            |         |        
|                                                        |                                                                                                                                                                 | Product costs                             |            |        | 8,245   |   |            |         | 6,844   |   |            |         | 7,887   |  
|                                                        |                                                                                                                                                                 | Amortization of intangibles               |            |        | 568     |   |            |         | 274     |   |            |         | 167     |  
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|                                                        |                                                                                                                                                                 | Total cost of product                     |            |        | 8,813   |   |            |         | 7,118   |   |            |         | 8,054   |  
|                                                        | Services                                                                                                                                                        |                                           |            | 9,202  |         |   |            | 10,026  |         |   |            | 8,914   |        
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|                                                        |                                                                                                                                                                 | Total cost of revenue                     |            |        | 18,015  |   |            |         | 17,144  |   |            |         | 16,968  |  
|Gross profit:                                           |                                                                                                                                                                 |                                           |            |        |         |   |            |         |         |   |            |        
|                                                        | Products                                                                                                                                                        |                                           |            | 9,459  |         |   |            | 8,409   |         |   |            | 11,276  |        
|                                                        | Services                                                                                                                                                        |                                           |            | 5,399  |         |   |            | 6,710   |         |   |            | 9,895   |        
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|                                                        |                                                                                                                                                                 | Total gross profit                        |            |        | 14,858  |   |            |         | 15,119  |   |            |         | 21,171  |  
|Operating expenses:                                     |                                                                                                                                                                 |                                           |            |        |         |   |            |         |         |   |            |        
|                                                        | General and administrative                                                                                                                                      |                                           |            | 10,220 |         |   |            | 12,392  |         |   |            | 9,627   |        
|                                                        | Sales and marketing                                                                                                                                             |                                           |            | 8,046  |         |   |            | 9,428   |         |   |            | 6,670   |        
|                                                        | Research and development                                                                                                                                        |                                           |            | 6,832  |         |   |            | 6,963   |         |   |            | 4,844   |        
|                                                        | Depreciation and amortization                                                                                                                                   |                                           |            | 2,263  |         |   |            | 2,518   |         |   |            | 2,168   |        
|                                                        | Amortization of deferred stock compensation, relating to general
    and administrative                                                                         |                                           |            | 7      |         |   |            | 435     |         |   |            | 780     |        
|                                                        | Reorganization costs                                                                                                                                            |                                           |            | 464    |         |   |            | 1,414   |         |   |            | 159     |        
|                                                        | Reorganization costs  loss on sublease                                                                                                                         |                                           |            | 2,550  |         |   |            |        |         |   |            |        |        
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|                                                        |                                                                                                                                                                 | Total operating expenses                  |            |        | 30,382  |   |            |         | 33,150  |   |            |         | 24,248  |  
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|                                                        |                                                                                                                                                                 | Operating loss from continuing operations |            |        | (15,524 | ) |            |         | (18,031 | ) |            |         | (3,077  | )
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|Other (expense) income, net:                            |                                                                                                                                                                 |                                           |            |        |         |   |            |         |         |   |            |        
|                                                        |                                                                                                                                                                 | Other (expense) income                    |            |        | (58     | ) |            |         | 259     |   |            |         | 314     |  
|                                                        | Equity in income of investment                                                                                                                                  |                                           |            | 17     |         |   |            | 56      |         |   |            | 73      |        
|                                                        | Interest expense, net, including $2,940, $517 and $561 of
    amortization of loan fees and discount on convertible debentures
    in each period, respectively |                                           |            | (3,929 | )       |   |            | (1,054  | )       |   |            | (1,525  | )      
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|                                                        |                                                                                                                                                                 | Other (expense) income, net               |            |        | (3,970  | ) |            |         | (739    | ) |            |         | (1,138  | )
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|Loss from continuing operations before income taxes     |                                                                                                                                                                 |                                           | (19,494    | )      |         |   | (18,770    | )       |         |   | (4,215     | )      
|Income taxes                                            |                                                                                                                                                                 |                                           |           |        |         |   |           |         |         |   |           |        
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|Loss from continuing operations                         |                                                                                                                                                                 |                                           | (19,494    | )      |         |   | (18,770    | )       |         |   | (4,215     | )      
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|Discontinued operations:                                |                                                                                                                                                                 |                                           |            |        |         |   |            |         |         |   |            |        
|                                                        | Loss from discontinued operations                                                                                                                               |                                           |            | (566   | )       |   |            | (5,229  | )       |   |            | (14,072 | )      
|                                                        | Loss on disposal of discontinued operations                                                                                                                     |                                           |            |       |         |   |            | (14,788 | )       |   |            |        |        
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|                                                        |                                                                                                                                                                 | Total loss from discontinued operations   |            |        | (566    | ) |            |         | (20,017 | ) |            |         | (14,072 | )
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|Net loss                                                |                                                                                                                                                                 | $                                         | (20,060    | )      |         | $ | (38,787    | )       |         | $ | (18,287    | )      
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|Net loss per common share  basic and diluted:          |                                                                                                                                                                 |                                           |            |        |         |   |            |         |         |   |            |        
|                                                        | Loss from continuing operations                                                                                                                                 |                                           | $          | (0.72  | )       |   | $          | (0.71   | )       |   | $          | (0.21   | )      
|                                                        | Loss from discontinued operations                                                                                                                               |                                           |            | (0.02  | )       |   |            | (0.20   | )       |   |            | (0.71   | )      
|                                                        | Loss on disposal of discontinued operations                                                                                                                     |                                           |            |       |         |   |            | (0.56   | )       |   |            |        |        
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|Net loss per common share  basic and diluted           |                                                                                                                                                                 | $                                         | (0.74      | )      |         | $ | (1.47      | )       |         | $ | (0.92      | )      
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        
|Weighted average shares outstanding  basic and diluted |                                                                                                                                                                 |                                           | 26,964,227 |        |         |   | 26,304,773 |         |         |   | 19,826,958 |        
|                                                        |                                                                                                                                                                 |                                           |            |        |         |   |            |         |        



F-5



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES







CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003


|                                                                                 |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |      |      |   |   |        |         |         |  
|-------------------------------------------------------------------------------- | --------------------------------------- | -------------------------------- | ---------- | - | ---------- | - | --- | ------- |  | ---------- | ------- | --- |  | ------------ | ---- | - | -------- | - | ------ | ------------ |  | - | ----------- | ------- | - | ----- | ------ | - |  | - | ---- | ---- | - | - | ------ | ------- | ------- | -
|                                                                                 |                                         |                                  |            |   |            |   |     | 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, 2002                                                                |                                         |                                  | 17,815,568 |   |            | $ | 178 |         |  | $          | 275,753 |     |  | $            |     |   |          | $ | (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                                           |                                         |                                  | 2,941,738  |   |            |   | 29  |         |  |            | 6,557   |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 6,586  |        
|Reduction of deferred compensation due to forfeitures                            |                                         |                                  |           |   |            |   |    |         |  |            | (5      | )   |  |              |     |   |          |   |       |              |  |   |            |         |   |       | 5      |   |  |   |     |      |   |   |       |        
|Issuance of common stock in
    MCK Communications, Inc. acquisition             |                                         |                                  | 3,655,685  |   |            |   | 37  |         |  |            | 24,093  |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |      |      |   |   | 24,130 |        
|Acceleration of compensatory options in reorganization                           |                                         |                                  |           |   |            |   |    |         |  |            | 219     |     |  |              |     |   |          |   | 45     |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 264    |        
|Shares issued in employee stock purchase plan                                    |                                         |                                  | 33,232     |   |            |   |    |         |  |            | 168     |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 168    |        
|Shares issued in litigation settlement                                           |                                         |                                  | 110,000    |   |            |   | 1   |         |  |            | 263     |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 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                                                                |                                         |                                  | 24,556,223 |   |            | $ | 245 |         |  | $          | 307,276 |     |  | $            | 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                                           |                                         |                                  | 80,942     |   |            |   | 1   |         |  |            | 12      |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 13     |        
|Reduction of deferred compensation due to reorganization                         |                                         |                                  |           |   |            |   |    |         |  |            |        |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       | 570    |   |  |   |     |      |   |   | 570    |        
|Shares issued in employee stock
    purchase plan                                |                                         |                                  | 35,468     |   |            |   |    |         |  |            | 162     |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 162    |        
|Shares issued in exchange for services                                           |                                         |                                  | 9,988      |   |            |   |    |         |  |            | 133     |     |  |              | (133 | ) |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   |       |        
|Issuance of shares and warrants in private placement, net of
    associated fees |                                         |                                  | 1,966,020  |   |            |   | 20  |         |  |            | 16,454  |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 16,474 |        
|Stock payable for consulting services                                            |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              | 131  |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |      |      |   |   | 131    |        
|                                                                                 |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|BALANCES,                                                                        |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |      |      |   |   |        |        
|December 31, 2004                                                                |                                         |                                  | 26,648,641 |   |            | $ | 266 |         |  | $          | 324,037 |     |  | $            | 128  |   |          | $ |       |              |  | $ | (311,931    | )       |   | $     | (7     | ) |  | $ | 147  |      |   | $ | 12,640 |        
|Comprehensive loss:                                                              |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |      |      |   |   |        |        
|                                                                                 | Net loss                                |                                  |            |  |            |   |     |        |  |            |         |    |  |              |      |  |          |   |        |             |  |   |             | (20,060 | ) |       |        |  |  |   |      |     |   |   |        | (20,060 | )      
|                                                                                 | Foreign currency translation adjustment |                                  |            |  |            |   |     |        |  |            |         |    |  |              |      |  |          |   |        |             |  |   |             |        |   |       |        |  |  |   |      | (307 | ) |   |        | (307    | )      
|                                                                                 |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|                                                                                 |                                         | Comprehensive loss               |            |   |            |   |     |         |  |            |         |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |      |      |   |   |        |         | (20,367 | )
|Amortization of deferred compensation                                            |                                         |                                  |           |   |            |   |    |         |  |            |        |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       | 7      |   |  |   |     |      |   |   | 7      |        
|Exercise of stock options and warrants                                           |                                         |                                  | 25,160     |   |            |   |    |         |  |            | 21      |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 21     |        
|Issuance of shares in WSECI acquisition                                          |                                         |                                  | 467,099    |   |            |   | 5   |         |  |            | 722     |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 727    |        
|Warrants issued in conjunction with convertible debentures                       |                                         |                                  |           |   |            |   |    |         |  |            | 5,084   |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 5,084  |        
|Beneficial conversion on convertible debentures                                  |                                         |                                  |           |   |            |   |    |         |  |            | 3,590   |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 3,590  |        
|Warrants issued in conjunction with                                              |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |      |      |   |   |        |        
|                                                                                 | convertible debenture restructuring     |                                  |            |  |            |   |     |        |  |            |         | 877 |  |              |      |  |          |   |        |             |  |   |             |        |   |       |        |  |  |   |      |     |   |   |        | 877     |        
|Shares issued in employee stock purchase plan                                    |                                         |                                  | 50,103     |   |            |   | 1   |         |  |            | 43      |     |  |              |     |   |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 44     |        
|Shares issued in exchange for services                                           |                                         |                                  | 119,521    |   |            |   | 1   |         |  |            | 276     |     |  |              | (133 | ) |          |   |       |              |  |   |            |         |   |       |       |   |  |   |     |      |   |   | 144    |        
|Stock payable for consulting services                                            |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              | 72   |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |      |      |   |   | 72     |        
|                                                                                 |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       
|BALANCES,                                                                        |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |        |   |  |   |      |      |   |   |        |        
|December 31, 2005                                                                |                                         |                                  | 27,310,524 |   |            | $ | 273 |         |  | $          | 334,650 |     |  | $            | 67   |   |          | $ |       |              |  | $ | (331,991    | )       |   | $     |       |   |  | $ | (160 | )    |   | $ | 2,839  |        
|                                                                                 |                                         |                                  |            |   |            |   |     |         |  |            |         |     |  |              |      |   |          |   |        |              |  |   |             |         |   |       |       



F-6



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES







CONSOLIDATED STATEMENTS OF CASH FLOWS


|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |         |         |   |         |        |        |  
|--------------------- | ------------------------ | --------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------ | ------ | -
|                      |                          | For the Years Ended December 31,                                                                                                  |                                                                                         
|                      |                          |                                                                                                                                   |                                                                                         
|                      |                          | 2005                                                                                                                              |                                                                                          |                                                                                        | 2004    |         |         | 2003 |        
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          | (In thousands, except share data)                                                                                                 |                                                                                         
|Operating Activities: |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |         |         |  
|                      | Continuing operations:   |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |         |         |   |        
|                      |                          | Net loss from continuing operations                                                                                               |                                                                                          | $                                                                                      | (19,494 | )       |         | $    | (18,770 | )       |         | $ | (4,215  | )     
|                      |                          | Adjustments to reconcile net loss from continuing operations to
    net cash used in continuing operating activities:             |                                                                                          |                                                                                        |         |         |         |      |         |         |         |   |         |       
|                      |                          |                                                                                                                                   | Equity in income of investment                                                           |                                                                                        |         | (16     | )       |      |         | (56     | )       |   |         | (73    | )     
|                      |                          |                                                                                                                                   | Depreciation and amortization                                                            |                                                                                        |         | 2,839   |         |      |         | 3,227   |         |   |         | 3,115  |       
|                      |                          |                                                                                                                                   | Provision for doubtful accounts                                                          |                                                                                        |         | 463     |         |      |         | 494     |         |   |         | 86     |       
|                      |                          |                                                                                                                                   | Amortization of loan fees and discount on convertible
    subordinated debentures        |                                                                                        |         | 2,940   |         |      |         | 517     |         |   |         | 561    |       
|                      |                          |                                                                                                                                   | Reorganization costs  loss on sublease                                                  |                                                                                        |         | 2,550   |         |      |         |        |         |   |         |       |       
|                      |                          |                                                                                                                                   | Reorganization costs  stock related                                                     |                                                                                        |         |        |         |      |         | 570     |         |   |         |       |       
|                      |                          |                                                                                                                                   | Other                                                                                    |                                                                                        |         | (29     | )       |      |         | 119     |         |   |         | (73    | )     
|                      |                          |                                                                                                                                   | Changes in current operating assets and liabilities, net of
    effects of acquisitions: |                                                                                        |         |         |         |      |         |         |         |   |         |        |       
|                      |                          |                                                                                                                                   |                                                                                          | Accounts receivable                                                                    |         |         | (3,745  | )    |         |         | 511     |   |         |        | (1,036 | )
|                      |                          |                                                                                                                                   |                                                                                          | Inventories                                                                            |         |         | 1,103   |      |         |         | (1,212  | ) |         |        | 1,315  |  
|                      |                          |                                                                                                                                   |                                                                                          | Other current assets                                                                   |         |         | 39      |      |         |         | (940    | ) |         |        | 192    |  
|                      |                          |                                                                                                                                   |                                                                                          | Accounts payable                                                                       |         |         | 214     |      |         |         | (735    | ) |         |        | 938    |  
|                      |                          |                                                                                                                                   |                                                                                          | Accrued compensation                                                                   |         |         | (245    | )    |         |         | 535     |   |         |        | 402    |  
|                      |                          |                                                                                                                                   |                                                                                          | Accrued expenses                                                                       |         |         | (792    | )    |         |         | (445    | ) |         |        | (2,332 | )
|                      |                          |                                                                                                                                   |                                                                                          | Unearned revenue and customer deposits                                                 |         |         | (766    | )    |         |         | (651    | ) |         |        | (528   | )
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   | Net cash used in continuing operating activities                                         |                                                                                        |         | (14,939 | )       |      |         | (16,836 | )       |   |         | (1,648 | )     
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      | Discontinued operations: |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |         |         |   |        
|                      |                          | Loss from discontinued operations                                                                                                 |                                                                                          |                                                                                        | (566    | )       |         |      | (20,017 | )       |         |   | (14,072 | )     
|                      |                          | Estimated loss on disposal of discontinued operations                                                                             |                                                                                          |                                                                                        |        |         |         |      | 14,788  |         |         |   |        |       
|                      |                          | Adjustment to reconcile loss from discontinued operations to net
    cash (used in) provided by discontinued operating activities |                                                                                          |                                                                                        | (1,042  | )       |         |      | 6,638   |         |         |   | 14,262  |       
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   | Net cash (used in) provided by discontinued operating activities                         |                                                                                        |         | (1,608  | )       |      |         | 1,409   |         |   |         | 190    |       
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   | Net cash used in operating activities                                                    |                                                                                        |         | (16,547 | )       |      |         | (15,427 | )       |   |         | (1,458 | )     
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|Investing Activities: |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |         |         |  
|                      | Continuing operations:   |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |         |         |   |        
|                      |                          | Net cash provided by (used in) investing activities for
    continuing operations  Purchases of property and
    equipment       |                                                                                          |                                                                                        | (820    | )       |         |      | (2,021  | )       |         |   | (801    | )     
|                      |                          |                                                                                                                                   | (Increase) decrease in restricted cash                                                   |                                                                                        |         | (1,656  | )       |      |         | 2,290   |         |   |         | 88     |       
|                      |                          |                                                                                                                                   | Purchase of WSECI                                                                        |                                                                                        |         | (273    | )       |      |         |        |         |   |         |       |       
|                      |                          |                                                                                                                                   | Acquisition of certain assets of Clarent Corporation, net of
    cash acquired           |                                                                                        |         |        |         |      |         |        |         |   |         | (906   | )     
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   |                                                                                          | Net cash (used in) provided by investing activities for
    continuing operations      |         |         | (2,749  | )    |         |         | 269     |   |         |        | (1,619 | )
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      | Discontinued operations: |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |         |         |         |   |        
|                      |                          | Proceeds from notes receivable                                                                                                    |                                                                                          |                                                                                        | 300     |         |         |      |        |         |         |   |        |       
|                      |                          | Proceeds from sale of discontinued operations                                                                                     |                                                                                          |                                                                                        | 4,015   |         |         |      |        |         |         |   |        |       
|                      |                          | Purchased software development                                                                                                    |                                                                                          |                                                                                        |        |         |         |      |        |         |         |   | (533    | )     
|                      |                          | Purchases of property and equipment                                                                                               |                                                                                          |                                                                                        |        |         |         |      | (321    | )       |         |   | (680    | )     
|                      |                          | Acquisition of MCK Communications, Inc., net of cash acquired                                                                     |                                                                                          |                                                                                        |        |         |         |      | (4,263  | )       |         |   | 9,345   |       
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   | Net cash provided by (used in) investing activities for
    discontinued operations      |                                                                                        |         | 4,315   |         |      |         | (4,584  | )       |   |         | 8,132  |       
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   | Net cash provided by (used in) investing activities                                      |                                                                                        |         | 1,566   |         |      |         | (4,315  | )       |   |         | 6,513  |       
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        
|                      |                          |                                                                                                                                   |                                                                                          | Net cash (used in) provided by operating and investing
    activities, carried forward |         |         | (14,981 | )    |         |         | (19,742 | ) |         |        | 5,055  |  
|                      |                          |                                                                                                                                   |                                                                                          |                                                                                        |         |         |         |      |        



F-7



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)


|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |        |        |       |   |        |        | 
|-------------------------------------------------------------------------------------- | ------------------------------------------- | -------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | - | ------ | ------ | ------- | ---- | ------ | ------ | ----- | - | ------ | ------ | 
|                                                                                       |                                             | For the Years Ended December 31,                                                                         |                                                                            
|                                                                                       |                                             |                                                                                                          |                                                                            
|                                                                                       |                                             | 2005                                                                                                     |                                                                             |   | 2004   |        |         | 2003 |       
|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |       
|                                                                                       |                                             | (In thousands, except share data)                                                                        |                                                                            
|Net cash (used in) provided by operating and investing
    activities, carried forward |                                             |                                                                                                          | (14,981                                                                     | ) |        |        | (19,742 | )    |        |        | 5,055 |  
|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |       
|Financing Activities:                                                                  |                                             |                                                                                                          |                                                                             |   |        |        |         |      |        |        |       |  
|                                                                                       |                                             | Net borrowings (payments) on line of credit                                                              |                                                                             |   | 1,269  |        |         |      |       |        |       |   | (800   | )     
|                                                                                       |                                             | Payments of notes payable                                                                                |                                                                             |   |       |        |         |      | (350   | )      |       |   | (6,450 | )     
|                                                                                       |                                             | Payments of convertible debentures                                                                       |                                                                             |   | (2,250 | )      |         |      |       |        |       |   |       |       
|                                                                                       |                                             | Proceeds from convertible debentures, net                                                                |                                                                             |   | 12,757 |        |         |      |       |        |       |   |       |       
|                                                                                       |                                             | Proceeds from private placement, net                                                                     |                                                                             |   |       |        |         |      | 16,474 |        |       |   |       |       
|                                                                                       |                                             | Proceeds from issuances of common stock in connection with the
    exercise of options and warrants, net |                                                                             |   | 65     |        |         |      | 175    |        |       |   | 6,754  |       
|                                                                                       |                                             | Proceeds from repayments of notes receivable by shareholders                                             |                                                                             |   |       |        |         |      |       |        |       |   | 1,771  |       
|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |       
|                                                                                       |                                             |                                                                                                          | Net cash provided by financing activities                                   |   |        | 11,841 |         |      |        | 16,299 |       |   |        | 1,275  | 
|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |       
|Effect of exchange rate changes on cash                                                |                                             |                                                                                                          | (15                                                                         | ) |        |        | 23      |      |        |        | 30    |  
|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |       
|                                                                                       |                                             |                                                                                                          | (Decrease) increase in cash and cash equivalents                            |   |        | (3,155 | )       |      |        | (3,420 | )     |   |        | 6,360  | 
|Cash and cash equivalents at beginning of year                                         |                                             |                                                                                                          | 4,234                                                                       |   |        |        | 7,654   |      |        |        | 1,294 |  
|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |       
|Cash and cash equivalents at end of year                                               |                                             | $                                                                                                        | 1,079                                                                       |   |        | $      | 4,234   |      |        | $      | 7,654 |  
|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |       
|Supplemental disclosure of cash flow information:                                      |                                             |                                                                                                          |                                                                             |   |        |        |         |      |        |        |       |  
|                                                                                       | Cash payments during the years for:         |                                                                                                          |                                                                             |   |        |        |         |      |        |        |       |   |       
|                                                                                       |                                             | Interest                                                                                                 |                                                                             | $ | 835    |        |         | $    | 387    |        |       | $ | 814    |       
|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |       
|                                                                                       |                                             | Income taxes                                                                                             |                                                                             | $ | (14    | )      |         | $    | 67     |        |       | $ | 16     |       
|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |       
|                                                                                       | Non-cash investing and financing activities |                                                                                                          |                                                                             |   |        |        |         |      |        |        |       |   |       
|                                                                                       |                                             | Common stock consideration for acquisitions:                                                             |                                                                             |   |        |        |         |      |        |        |       |   |        |       
|                                                                                       |                                             |                                                                                                          | WSECI  issuance of 467,099 shares of common stock                          |   | $      | 727    |         |      | $      |       |       |   | $      |       | 
|                                                                                       |                                             |                                                                                                          | MCK Communications, Inc.  issuance of
    3,655,685 shares of common stock |   |        |       |         |      |        |       |       |   |        | 24,130 | 
|                                                                                       |                                             | Issuance of note receivable in disposition of MCK                                                        |                                                                             |   | 3,500  |        |         |      |       |        |       |   |       |       
|                                                                                       |                                             | Common stock and compensatory options issued in reorganization                                           |                                                                             |   |       |        |         |      | 570    |        |       |   | 264    |       
|                                                                                       |                                             | Issuance of common stock in arbitration settlement                                                       |                                                                             |   |       |        |         |      |       |        |       |   | 264    |       
|                                                                                       |                                             | Issuance of warrants in conjunction with convertible debentures                                          |                                                                             |   | 8,113  |        |         |      |       |        |       |   |       |       
|                                                                                       |                                             | Issuance of warrants in subordinated debenture restructuring                                             |                                                                             |   | 877    |        |         |      |       |        |       |   |       |       
|                                                                                       |                                             | Issuance of common stock and warrants in exchange for services                                           |                                                                             |   | 838    |        |         |      | 133    |        |       |   | 119    |       
|                                                                                       |                                             | Assets acquired and liabilities assumed in conjunction with
    business acquisitions:                   |                                                                             |   |        |        |         |      |        |        |       |   |        |       
|                                                                                       |                                             |                                                                                                          | Fair value of assets acquired, excluding cash and restricted cash           |   |        | 1,509  |         |      |        |       |       |   |        | 20,695 | 
|                                                                                       |                                             |                                                                                                          | Liabilities assumed                                                         |   |        |       |         |      |        |       |       |   |        | 8,931  | 
|                                                                                       |                                             |                                                                                                          | Notes payable for acquisition of certain assets of Clarent
    Corporation  |   | $      |       |         |      | $      |       |       |   | $      | 9,339  | 
|                                                                                       |                                             |                                                                                                          |                                                                             |   |        |        |         |      |       



F-8



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES







NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                   
|-- | ----------------------------------
|1. | Business and Basis of Presentation





1-for-5 10-K.








|   |                                                         
|-- | --------------------------------------------------------
|2. | Summary of Significant Accounting Policies and Practices



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



F-9



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##### Table of Contents



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





97-2)










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



F-10



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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





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









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





|                |                   |              |       |       |      |   |       |       | 
|--------------- | ----------------- | ------------ | ----- | ----- | ---- | - | ----- | ----- | 
|                |                   | December 31, |      
|                |                   |              |      
|                |                   | 2005         |       |       | 2004 |  
|                |                   |              |       |       |      |  
|Raw materials   |                   | $            | 3,026 |       |      | $ | 3,315 |      
|Work in process |                   |              | 5     |       |      |   | 9     |      
|Finished goods  |                   |              | 1,228 |       |      |   | 2,038 |      
|                |                   |              |       |       |      |  
|                | Total inventories |              | $     | 4,259 |      |   | $     | 5,362 | 
|                |                   |              |       |       |      |  



F-11



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



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





|                                               |                            |      |        |       |      |   |        |       | 
|---------------------------------------------- | -------------------------- | ---- | ------ | ----- | ---- | - | ------ | ----- | 
|                                               |                            | 2005 |        |       | 2004 |  
|                                               |                            |      |        |       |      |  
|Computers and equipment                        |                            | $    | 5,511  |       |      | $ | 5,546  |      
|Purchased software                             |                            |      | 1,844  |       |      |   | 2,229  |      
|Furniture and fixtures                         |                            |      | 386    |       |      |   | 695    |      
|Leasehold improvements                         |                            |      | 1,349  |       |      |   | 2,456  |      
|                                               |                            |      |        |       |      |  
|                                               |                            |      | 9,090  |       |      |   | 10,926 |      
|Less accumulated depreciation and amortization |                            |      | (6,785 | )     |      |   | (7,047 | )    
|                                               |                            |      |        |       |      |  
|                                               | Net property and equipment |      | $      | 2,305 |      |   | $      | 3,879 | 
|                                               |                            |      |        |       |      |  





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



F-12



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##### Table of Contents



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        |  |              | 2005      |   |       | 2004  |       
|                                     |                                         |                         |  |              |           |   |       |       |       
|Intangibles subject to amortization: |                                         |                         |  |              |           |   |       |       |        |   |       |      
|                                     | Current technology                      |                         |  | 36 months    |           |   | $     | 2,185 |        |   | $     | 821   |      
|                                     | Customer relationship                   |                         |  | 120 months   |           |   |       | 2,403 |        |   |       | 2,403 |      
|                                     |                                         |                         |  |              |           |   |       |       |       
|                                     |                                         | Weighted average months |  |              | 99 months |   |       |       | 4,588  |   |       |       | 3,224 |  
|                                     |                                         |                         |  |              |           |   |       |       |       
|                                     | Accumulated amortization:               |                         |  |              |           |   |       |       |        |   |       |       |      
|                                     |                                         | Current technology      |  |              |           |   |       |       | (1,008 | ) |       |       | (440  | )
|                                     |                                         | Customer relationship   |  |              |           |   |       |       | (721   | ) |       |       | (480  | )
|                                     |                                         |                         |  |              |           |   |       |       |       
|                                     | Net intangibles subject to amortization |                         |  |              |           |   |       | 2,859 |        |   |       | 2,304 |      
|Goodwill                             |                                         |                         |  |              |           |   | 2,514 |       |        |   | 2,514 |      
|                                     |                                         |                         |  |              |           |   |       |       |       
|Total goodwill and other intangibles |                                         |                         |  |              |           | $ | 5,373 |       |        | $ | 4,818 |      
|                                     |                                         |                         |  |              |           |   |       |       |       





|           |  |              |       | 
|---------- |  | ------------ | ----- | 
|           |  | Annual       |      
|           |  | Amortization |      
|           |  |              |      
|2006       |  | $            | 823   | 
|2007       |  |              | 716   | 
|2008       |  |              | 359   | 
|2009       |  |              | 240   | 
|2010       |  |              | 240   | 
|Thereafter |  |              | 481   | 
|           |  |              |      
|           |  | $            | 2,859 | 
|           |  |              |      





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





F-13



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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







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





|                                     |  |      |      |   |      |   |      |      |  |   |      |  
|------------------------------------ |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                     |  | 2005 |      |   | 2004 |   |      | 2003 | 
|                                     |  |      |      |   |      |   |      |      | 
|Balance beginning of year            |  | $    | 282  |   |      | $ | 265  |      |  | $ |     |  
|Warranty liability from acquisitions |  |      |      |   |      |   |      |      |  |   | 281  |  
|Provision for warranty costs         |  |      | 199  |   |      |   | 168  |      |  |   | 186  |  
|Warranty expenditures                |  |      | (213 | ) |      |   | (151 | )    |  |   | (202 | )
|                                     |  |      |      |   |      |   |      |      | 
|Balance end of year                  |  | $    | 268  |   |      | $ | 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.



F-14



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



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









|                        |  |      |        |   |      |  |        |      |  |  |        |  
|----------------------- |  | ---- | ------ | - | ---- |  | ------ | ---- |  |  | ------ | -
|Assumption              |  | 2005 |        |   | 2004 |  |        | 2003 | 
|                        |  |      |        |   |      |  |        |      | 
|Expected Term           |  |      | 4.00   |   |      |  | 4.00   |      |  |  | 4.00   |  
|Expected Volatility     |  |      | 105.00 | % |      |  | 112.00 | %    |  |  | 115.00 | %
|Expected Dividend Yield |  |      | 0.00   | % |      |  | 0.00   | %    |  |  | 0.00   | %
|Risk-Free Interest Rate |  |      | 4.30   | % |      |  | 3.00   | %    |  |  | 3.00   | %



F-15



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                                                                                                  |             |                          |         |       |      |   |         |       |   |   |         |       |  
|----------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------ | ------- | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                  |             | Years Ended December 31, |        
|                                                                                                                  |             |                          |        
|                                                                                                                  |             | 2005                     |         |       | 2004 |   |         | 2003  |  
|                                                                                                                  |             |                          |         |       |      |   |         |       |  
|Net loss, as reported                                                                                             |             | $                        | (20,060 | )     |      | $ | (38,787 | )     |   | $ | (18,287 | )    
|Add: Stock-based compensation expense included in net loss                                                        |             |                          | 7       |       |      |   | 435     |       |   |   | 780     |      
|Less: Total stock-based employee compensation expense
    determined under fair value based method for all awards |             |                          | (708    | )     |      |   | (2,615  | )     |   |   | (3,146  | )    
|                                                                                                                  |             |                          |         |       |      |   |         |       |  
|Pro forma net loss                                                                                                |             | $                        | (20,761 | )     |      | $ | (40,967 | )     |   | $ | (20,653 | )    
|                                                                                                                  |             |                          |         |       |      |   |         |       |  
|Net loss per common share                                                                                         |             |                          |         |       |      |   |         |       |   |   |         |      
|                                                                                                                  | As reported |                          | $       | (0.74 | )    |   | $       | (1.47 | ) |   | $       | (0.92 | )
|                                                                                                                  | Pro forma   |                          |         | (0.77 | )    |   |         | (1.56 | ) |   |         | (1.04 | )



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





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



|                                                              |  |      |        |  |      |  |         |      |  |  |           | 
|------------------------------------------------------------- |  | ---- | ------ |  | ---- |  | ------- | ---- |  |  | --------- | 
|                                                              |  | 2005 |        |  | 2004 |  |         | 2003 | 
|                                                              |  |      |        |  |      |  |         |      | 
|Shares issuable under stock options                           |  |      | 51,704 |  |      |  | 581,276 |      |  |  | 1,046,528 | 
|Shares issuable pursuant to warrants to purchase common stock |  |      | 6,421  |  |      |  | 7,449   |      |  |  | 1,411,261 | 
|                                                              |  |      |        |  |      |  |         |      | 
|                                                              |  |      | 58,125 |  |      |  | 588,725 |      |  |  | 2,457,789 | 
|                                                              |  |      |        |  |      |  |         |      | 





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



F-16



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



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





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

03-1, 03-1). 03-1








F-17



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





|   |                         
|-- | ------------------------
|3. | Mergers and Acquisitions



| |            
| | -----------
| | WSECI, Inc.



18-month


F-18



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                       
|-- | --------------------------------------
|3. | Mergers and Acquisitions  (Continued)



|                       |  |       |       | 
|---------------------- |  | ----- | ----- | 
|                       |  | WSECI |      
|                       |  |       |      
|Property and equipment |  | $     | 52    | 
|Accounts receivable    |  |       | 93    | 
|Other intangibles      |  |       | 1,364 | 
|                       |  |       |      
|Cost of acquisition    |  | $     | 1,509 | 
|                       |  |       |      



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









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



F-19



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##### Table of Contents



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 and WSECI, Inc.
    Acquisition



|                                                                         |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                         |  | 2004 |         |   | 2003 |  
|                                                                         |  |      |         |   |      |  
|Revenues                                                                 |  | $    | 32,563  |   |      | $ | 40,665  |  
|Loss from continuing operations                                          |  | $    | (18,101 | ) |      | $ | (5,320  | )
|Net loss                                                                 |  | $    | (38,857 | ) |      | $ | (20,613 | )
|Loss from continuing operations per common share 
    basic and diluted |  | $    | (0.70   | ) |      | $ | (0.32   | )
|Net loss per common share  basic and diluted                            |  |      | (1.45   | ) |      |   | (1.02   | )
|Weighted average shares outstanding  basic and diluted                  |  |      | 26,772  |   |      |   | 20,294  |  



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



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



F-20



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                        
|-- | ---------------------------------------
|4. | Unconsolidated Affiliates  (Continued)







|                   |                         |      |   |       |      |  |   |       |  |  |   |       | 
|------------------ | ----------------------- | ---- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                   |                         | 2005 |   |       | 2004 |  |   | 2003  | 
|                   |                         |      |   |       |      |  |   |       | 
|Operating results: |                         |      |   |       |      |  |   |       |  |  |   |      
|                   | Revenues                |      | $ | 2,224 |      |  | $ | 2,713 |  |  | $ | 3,324 | 
|                   |                         |      |   |       |      |  |   |       | 
|                   | Operating (loss) income |      | $ | (21   | )    |  | $ | 93    |  |  | $ | 128   | 
|                   |                         |      |   |       |      |  |   |       | 
|                   | Net income              |      | $ | 33    |      |  | $ | 110   |  |  | $ | 141   | 
|                   |                         |      |   |       |      |  |   |       | 



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





F-21



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                      
|-- | -------------------------------------
|5. | Discontinued Operations  (Continued)



|                                            |  |                                 |      |   |      |   |         |      |  |   |         |  
|------------------------------------------- |  | ------------------------------- | ---- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                            |  | For the Year Ended December 31, |     
|                                            |  |                                 |     
|                                            |  | 2005                            |      |   | 2004 |   |         | 2003 | 
|                                            |  |                                 |      |   |      |   |         |      | 
|Revenue                                     |  | $                               | 212  |   |      | $ | 18,889  |      |  | $ | 21,359  |  
|                                            |  |                                 |      |   |      |   |         |      | 
|Gross (loss) profit                         |  |                                 | (27  | ) |      |   | 8,074   |      |  |   | 10,600  |  
|                                            |  |                                 |      |   |      |   |         |      | 
|Operating loss                              |  |                                 | (566 | ) |      |   | (5,229  | )    |  |   | (14,072 | )
|Loss on disposal of discontinued operations |  |                                 |     |   |      |   | (14,788 | )    |  |   |         |  
|                                            |  |                                 |      |   |      |   |         |      | 
|Loss from discontinued operations           |  | $                               | (566 | ) |      | $ | (20,017 | )    |  | $ | (14,072 | )
|                                            |  |                                 |      |   |      |   |         |      | 









F-22



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                      
|-- | -------------------------------------
|5. | Discontinued Operations  (Continued)



|                                       |                           |   |       |       | 
|-------------------------------------- | ------------------------- | - | ----- | ----- | 
|Accounts receivable, net               |                           | $ | 3,085 |      
|Inventory                              |                           |   | 2,901 |      
|Other current assets                   |                           |   | 419   |      
|Furniture and equipment, net           |                           |   | 977   |      
|Goodwill and other intangibles         |                           |   | 1,613 |      
|                                       |                           |   |      
|                                       | Assets held for sale      |   | $     | 8,995 | 
|                                       |                           |   |      
|Accounts payable                       |                           | $ | 163   |      
|Accrued compensation                   |                           |   | 465   |      
|Unearned revenue and customer deposits |                           |   | 1,127 |      
|Other current liabilities              |                           |   | 230   |      
|                                       |                           |   |      
|                                       | Liabilities held for sale |   | $     | 1,985 | 
|                                       |                           |   |      



|                                        |                           |                                        |   |       |       |  |   |       |       | 
|--------------------------------------- | ------------------------- | -------------------------------------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                        |                           | December 31,                           |  
|                                        |                           |                                        |  
|                                        |                           | 2005                                   |   |       | 2004  | 
|                                        |                           |                                        |   |       |       | 
|Assets of discontinued operations:      |                           |                                        |   |       |       |  |   |      
|                                        | Notes receivable          |                                        | $ | 3,391 |       |  | $ |      |      
|Liabilities of discontinued operations: |                           |                                        |   |       |       |  |   |      
|                                        | Accrued rent              |                                        | $ | 1,707 |       |  | $ | 2,384 |      
|                                        | Other current liabilities |                                        |   | 824   |       |  |   | 645   |      
|                                        |                           |                                        |   |       |       | 
|                                        |                           | Liabilities of discontinued operations |   | $     | 2,531 |  |   | $     | 3,029 | 
|                                        |                           |                                        |   |       |       | 





F-23



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                      
|-- | -------------------------------------
|5. | Discontinued Operations  (Continued)



|                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                       |  | 2005 |       |   | 2004 |   |       | 2003 | 
|                                                       |  |      |       |   |      |   |       |      | 
|Balance beginning of year                              |  | $    | 3,029 |   |      | $ | 4,579 |      |  | $ | 3,131 |  
|Lease payments, net of sublease receipts               |  |      | (677  | ) |      |   | (780  | )    |  |   | (892  | )
|Other payments                                         |  |      | (358  | ) |      |   | (770  | )    |  |   | (720  | )
|Additional accruals related to MCK acquisition         |  |      |       |   |      |   |       |      |  |   | 829   |  
|Additional lease accrual                               |  |      |       |   |      |   |       |      |  |   | 201   |  
|Additional lease accrual related to MCK acquisition    |  |      |       |   |      |   |       |      |  |   | 2,030 |  
|Estimated costs of disposal of discontinued operations |  |      | 1,000 |   |      |   |      |      |  |   |      |  
|Legal and other costs of disposal                      |  |      | (463  | ) |      |   |      |      |  |   |      |  
|                                                       |  |      |       |   |      |   |       |      | 
|Balance end of year                                    |  | $    | 2,531 |   |      | $ | 3,029 |      |  | $ | 4,579 |  
|                                                       |  |      |       |   |      |   |       |      | 



|   |                       
|-- | ----------------------
|6. | Financing Arrangements





F-24



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                       
|-- | ----------------------
|7. | Convertible Debentures



| |                                        
| | ---------------------------------------
| | Senior Unsecured Convertible Debentures



|                |                            |          |   |        |          |  |   |        | 
|--------------- | -------------------------- | -------- | - | ------ | -------- |  | - | ------ | 
|                |                            | As Filed |   |        | Adjusted | 
|                |                            |          |   |        |          | 
|March 31, 2005: |                            |          |   |        |          |  |   |       
|                | Convertible debentures     |          | $ | 9,171  |          |  | $ | 5,607  | 
|                | Total liabilities          |          |   | 28,322 |          |  |   | 24,783 | 
|                | Total shareholders equity |          |   | 12,404 |          |  |   | 15,959 | 
|June 30, 2005:  |                            |          |   |        |          |  |   |       
|                | Convertible debentures     |          | $ | 9,440  |          |  | $ | 6,006  | 
|                | Total liabilities          |          |   | 30,202 |          |  |   | 26,768 | 
|                | Total shareholders equity |          |   | 6,044  |          |  |   | 9,519  | 







| |                                    
| | -----------------------------------
| | Convertible Subordinated Debentures



F-25



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                     
|-- | ------------------------------------
|7. | Convertible Debentures  (Continued)







|   |                     
|-- | --------------------
|8. | Reorganization Costs









F-26



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                                             
|-- | ------------------------------------------------------------
|9. | Shareholders Equity (all numbers reflect Reverse
    Split)



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







| |                  
| | -----------------
| | Private Placement





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













F-27



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                                                           
|-- | --------------------------------------------------------------------------
|9. | Shareholders Equity (all numbers reflect Reverse
    Split)  (Continued)



|               |  |             |           |          |          |   |       |                 |  |  |                              | 
|-------------- |  | ----------- | --------- | -------- | -------- | - | ----- | --------------- |  |  | ---------------------------- | 
|               |  |             |           | Weighted |          |   |      
|               |  | Number of   |           |          | Average  |   |       |                
|               |  | Outstanding |           |          | Exercise |   |       |                
|Exercise Price |  | Warrants    |           |          | Price    |   |       | Expiration Date | 
|               |  |             |           |          |          |   |       |                 | 
|0.05           |  |             | 5,000     |          |          | $ | 0.05  |                 |  |  | October 2006                 | 
|$ 2.50-$ 3.60  |  |             | 3,262,400 |          |          | $ | 3.33  |                 |  |  | January 2007 - July 2010     | 
|$ 6.70-$ 9.23  |  |             | 789,792   |          |          | $ | 8.29  |                 |  |  | January 2006 - February 2011 | 
|$26.25-$30.00  |  |             | 50,000    |          |          | $ | 28.50 |                 |  |  | October 2006                 | 
|               |  |             |           |          |          |   |       |                 | 
|Total          |  |             | 4,107,192 |          |          | $ | 4.59  |                 |  |  |                              | 
|               |  |             |           |          |          |   |       |                 | 







|    |                                                         
|--- | --------------------------------------------------------
|10. | Stock Incentive Plan (all numbers reflect Reverse Split)









F-28



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                                           
|--- | --------------------------------------------------------------------------
|10. | Stock Incentive Plan (all numbers reflect Reverse
    Split)  (Continued)







F-29



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                                           
|--- | --------------------------------------------------------------------------
|10. | Stock Incentive Plan (all numbers reflect Reverse
    Split)  (Continued)





|                                                                |  |            |           |  |          |   |       |            |  |  |           |  |  |            |       |  |          |  |           |  |  |   |       | 
|--------------------------------------------------------------- |  | ---------- | --------- |  | -------- | - | ----- | ---------- |  |  | --------- |  |  | ---------- | ----- |  | -------- |  | --------- |  |  | - | ----- | 
|                                                                |  | 2005       |           |  | 2004     |   |       | 2003       | 
|                                                                |  |            |           |  |          |   |       |            | 
|                                                                |  | 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                            |  |            | 3,242,185 |  |          | $ | 10.18 |            |  |  | 2,945,553 |  |  | $          | 10.65 |  |          |  | 3,159,658 |  |  | $ | 10.65 | 
|Granted                                                         |  |            | 987,050   |  |          |   | 1.80  |            |  |  | 502,546   |  |  |            | 5.75  |  |          |  | 972,639   |  |  |   | 5.35  | 
|Exercised                                                       |  |            | 22,652    |  |          |   | 0.97  |            |  |  | 80,942    |  |  |            | 2.65  |  |          |  | 740,403   |  |  |   | 2.75  | 
|Forfeited                                                       |  |            | 1,005,487 |  |          |   | 8.41  |            |  |  | 124,972   |  |  |            | 7.70  |  |          |  | 446,341   |  |  |   | 12.60 | 
|Expired                                                         |  |            |          |  |          |   |       |            |  |  |          |  |  |            |       |  |          |  |          |  |  |   |       | 
|                                                                |  |            |           |  |          |   |       |            |  |  |           |  |  |            |       |  |          | 
|Outstanding at end of year                                      |  |            | 3,201,096 |  |          |   | 8.23  |            |  |  | 3,242,185 |  |  |            | 10.18 |  |          |  | 2,945,553 |  |  |   | 10.65 | 
|                                                                |  |            |           |  |          |   |       |            |  |  |           |  |  |            |       |  |          | 
|Exercisable at end of year                                      |  |            | 2,953,971 |  |          |   | 8.72  |            |  |  | 2,440,301 |  |  |            | 11.25 |  |          |  | 2,028,701 |  |  |   | 11.45 | 
|                                                                |  |            |           |  |          |   |       |            |  |  |           |  |  |            |       |  |          | 
|Weighted-average fair value of all options granted              |  |            |           |  |          |   | 1.25  |            |  |  |           |  |  |            | 4.40  |  |          |  |           |  |  |   | 4.25  | 
|Weighted-average remaining contractual life outstanding options |  |            |           |  |          |   | 6.58  |            |  |  |           |  |  |            | 6.41  |  |          |  |           |  |  |   | 6.99  | 



|                         |  |                      |           |  |                      |   |        |             |  |  |                |  |  |   |       | 
|------------------------ |  | -------------------- | --------- |  | -------------------- | - | ------ | ----------- |  |  | -------------- |  |  | - | ----- | 
|                         |  | Options and Warrants |           |  | Options and Warrants |  
|                         |  | Outstanding          |           |  | Exercisable          |  
|                         |  |                      |           |  |                      |  
|                         |  | Number               |           |  |                      |   | Number |             |  | 
|                         |  | Outstanding          |           |  | Wgtd. Avg.           |   |        | Exercisable |  |  | Wgtd. Avg.     | 
|Range of Exercise Prices |  | at 12/31/05          |           |  | Exercise Price       |   |        | at 12/31/05 |  |  | Exercise Price | 
|                         |  |                      |           |  |                      |   |        |             |  |  |                | 
|$ 0.95 to $ 1.45         |  |                      | 565,478   |  |                      | $ | 1.44   |             |  |  | 512,478        |  |  | $ | 1.43  | 
|$ 1.46 to $ 2.50         |  |                      | 829,495   |  |                      | $ | 2.20   |             |  |  | 677,745        |  |  | $ | 2.16  | 
|$ 2.51 to $ 7.50         |  |                      | 327,961   |  |                      | $ | 4.28   |             |  |  | 286,461        |  |  | $ | 4.40  | 
|$ 7.51 to $10.00         |  |                      | 82,338    |  |                      | $ | 8.59   |             |  |  | 82,338         |  |  | $ | 8.59  | 
|$10.01 to $12.50         |  |                      | 753,750   |  |                      | $ | 10.70  |             |  |  | 753,750        |  |  | $ | 10.70 | 
|$12.51 to $17.50         |  |                      | 264,925   |  |                      | $ | 16.12  |             |  |  | 264,050        |  |  | $ | 16.12 | 
|$17.51 to $25.00         |  |                      | 260,116   |  |                      | $ | 20.51  |             |  |  | 260,116        |  |  | $ | 20.51 | 
|$25.01 to $90.00         |  |                      | 117,033   |  |                      | $ | 33.51  |             |  |  | 117,033        |  |  | $ | 33.51 | 
|                         |  |                      |           |  |                      |   |        |             |  |  |                | 
|$ 0.19 to $18.00         |  |                      | 3,201,096 |  |                      | $ | 8.23   |             |  |  | 2,953,971      |  |  | $ | 8.72  | 
|                         |  |                      |           |  |                      |   |        |             |  |  |                | 

F-30



---



##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |             
|--- | ------------
|11. | Income Taxes



|         |  |                          |         |   |      |   |         |      |  |   |        |  
|-------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|         |  | Years Ended December 31, |        
|         |  |                          |        
|         |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|         |  |                          |         |   |      |   |         |      | 
|Domestic |  | $                        | (14,460 | ) |      | $ | (13,875 | )    |  | $ | (3,682 | )
|Foreign  |  |                          | (5,034  | ) |      |   | (4,895  | )    |  |   | (533   | )
|         |  |                          |         |   |      |   |         |      | 
|         |  | $                        | (19,494 | ) |      | $ | (18,770 | )    |  | $ | (4,215 | )
|         |  |                          |         |   |      |   |         |      | 



|              |                    |                          |                              |      |   |      |   |   |   |   |   |   |   |   | 
|------------- | ------------------ | ------------------------ | ---------------------------- | ---- | - | ---- | - | - | - | - | - | - | - | - | 
|              |                    | Years Ended December 31,
|              |                    |                         
|              |                    | 2005                     |                              | 2004 |   | 2003
|              |                    |                          |                              |      |   |     
|Income Taxes: |                    |                          |                              |      |   |      |   |   |   |   |   |  
|              | Currently Payable: |                          |                              |      |   |      |   |   |   |   |   |   |  
|              |                    | Domestic                 |                              | $    |  |      |   | $ |  |   |   | $ |  |  
|              |                    | Foreign                  |                              |      |  |      |   |   |  |   |   |   |  |  
|              |                    |                          |                              |      |   |      |   |   |  
|              |                    |                          |                             |      |   |      |  |   |   |   |  |  
|Deferred:     |                    |                          |                              |      |   |      |   |   |   |   |   |  
|              | Domestic           |                          |                              |     |   |      |   |  |   |   |   |  |  
|              | Foreign            |                          |                              |     |   |      |   |  |   |   |   |  |  
|              |                    |                          |                              |      |   |      |   |   |  
|              |                    |                          |                             |      |   |      |  |   |   |   |  |  
|              |                    |                          |                              |      |   |      |   |   |  
|              |                    |                          | Income Tax (Benefit) Expense |      | $ |     |   |   | $ |  |   |   | $ |  | 
|              |                    |                          |                              |      |   |      |   |   |  



|                                           |  |                          |       |    |      |  |       |      |  |  |       |   
|------------------------------------------ |  | ------------------------ | ----- | -- | ---- |  | ----- | ---- |  |  | ----- | --
|                                           |  | Years Ended December 31, |      
|                                           |  |                          |      
|                                           |  | 2005                     |       |    | 2004 |  |       | 2003 | 
|                                           |  |                          |       |    |      |  |       |      | 
|Statutory U.S. rate                        |  |                          | (34.0 | )% |      |  | (34.0 | )%   |  |  | (34.0 | )%
|State income taxes, net of federal benefit |  |                          | (3.0  | )  |      |  | (4.0  | )    |  |  | (3.3  | ) 
|Non-deductible charges for intangibles     |  |                          | 0.0   |    |      |  | 2.3   |      |  |  | 0.0   |   
|Effect of valuation allowance              |  |                          | 34.5  |    |      |  | 35.7  |      |  |  | 48.0  |   
|Other permanent differences                |  |                          | 0.0   |    |      |  | 0.0   |      |  |  | (33.3 | ) 
|Effect of expiring net operating loss      |  |                          | 2.5   |    |      |  | 0.0   |      |  |  | 22.5  |   
|                                           |  |                          |       |    |      |  |       |      | 
|Total income tax expense (benefit)         |  |                          | 0.0   | %  |      |  | 0.0   | %    |  |  | 0.0   | % 
|                                           |  |                          |       |    |      |  |       |      | 

F-31



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                           
|--- | --------------------------
|11. | Income Taxes  (Continued)



|                     |                                           |                        |   |         |      |  |   |         |   | 
|-------------------- | ----------------------------------------- | ---------------------- | - | ------- | ---- |  | - | ------- | - | 
|                     |                                           | December 31,           |  
|                     |                                           |                        |  
|                     |                                           | 2005                   |   |         | 2004 | 
|                     |                                           |                        |   |         |      | 
|Deferred tax assets: |                                           |                        |   |         |      |  |   |        
|                     | Net operating loss carryforwards          |                        | $ | 74,795  |      |  | $ | 69,888  |  
|                     | Capital loss carryforwards                |                        |   | 269     |      |  |   | 269     |  
|                     | Research and development credits          |                        |   | 1,248   |      |  |   | 1,248   |  
|                     | Foreign research and development expenses |                        |   | 1,532   |      |  |   | 1,879   |  
|                     | Foreign investment tax credits            |                        |   | 750     |      |  |   | 1,666   |  
|                     | Unearned revenue                          |                        |   | 746     |      |  |   | 1,121   |  
|                     | Reserves                                  |                        |   | 1,604   |      |  |   | 2,931   |  
|                     | Compensation accruals                     |                        |   | 4       |      |  |   | 422     |  
|                     | Intangible assets                         |                        |   | 2,054   |      |  |   | 597     |  
|                     | Depreciable assets                        |                        |   | 1,753   |      |  |   | 2,792   |  
|                     | Other                                     |                        |   |        |      |  |   | (494    | )
|                     | Valuation allowance                       |                        |   | (84,755 | )    |  |   | (82,319 | )
|                     |                                           |                        |   |         |      | 
|                     |                                           | Net deferred tax asset |   | $       |     |  |   | $       |  | 
|                     |                                           |                        |   |         |      | 









|    |                            
|--- | ---------------------------
|12. | Savings and Retirement Plan



F-32



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                             
|--- | ----------------------------
|13. | Employee Stock Purchase Plan





|    |                                    
|--- | -----------------------------------
|14. | Other Commitments and Contingencies



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





|      |  |              |       |  |                         |   |        |        |  |   |           |  |  |   |        |  
|----- |  | ------------ | ----- |  | ----------------------- | - | ------ | ------ |  | - | --------- |  |  | - | ------ | -
|      |  | Continuing   |       |  |                        
|      |  | Operations   |       |  | Discontinued Operations |  
|      |  | (See Note 8) |       |  | (See Note 5)            |  
|      |  |              |       |  |                         |  
|      |  | Leases       |       |  | Subleases               |   |        | Leases |  |   | Subleases | 
|      |  |              |       |  |                         |   |        |        |  |   |           | 
|2006  |  | $            | 2,132 |  |                         | $ | (311   | )      |  | $ | 1,736     |  |  | $ | (1,170 | )
|2007  |  |              | 1,839 |  |                         |   | (403   | )      |  |   | 719       |  |  |   | (394   | )
|2008  |  |              | 1,783 |  |                         |   | (411   | )      |  |   | 385       |  |  |   | (241   | )
|2009  |  |              | 1,485 |  |                         |   | (419   | )      |  |   | 393       |  |  |   | (245   | )
|2010  |  |              | 122   |  |                         |   |       |        |  |   | 33        |  |  |   | (6     | )
|      |  |              |       |  |                         |   |        |        |  |   |           | 
|Total |  | $            | 7,361 |  |                         | $ | (1,544 | )      |  | $ | 3,266     |  |  | $ | (2,056 | )
|      |  |              |       |  |                         |   |        |        |  |   |           | 



Canadian Tax Audit




F-33



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                      
|--- | -----------------------------------------------------
|14. | Other Commitments and Contingencies 
    (Continued)







|    |                    
|--- | -------------------
|15. | Segment Information





|                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Packet-based Technologies Group:      |  | The Companys Packet-based Technologies Group consists of
    the operations of the Companys softswitch, I-Master and
    NetPerformer divisions and the Companys subsidiary
    Telemate.Net. The Packet-based Technologies Group includes
    international and domestic sales of hardware and software,
    integration, applications and technical training and support.
    The Packet-based Technologies Group offers hardware and software
    based solutions 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.                                                                                                                                                                                                                                                                                                                                                                  

F-34



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                  
|--- | ---------------------------------
|15. | Segment Information  (Continued)



|                                          |                                              |              |   |        |                |  |   |        |  |  |   |        |  
|----------------------------------------- | -------------------------------------------- | ------------ | - | ------ | -------------- |  | - | ------ |  |  | - | ------ | -
|                                          |                                              | Packet-based |   |        | Advanced       |  |   |       
|                                          |                                              | Technologies |   |        | Application    |  |   |       
|                                          |                                              | Group        |   |        | Services Group |  |   | Total  | 
|                                          |                                              |              |   |        |                |  |   |        | 
|For the Years Ended December 31,
    2005 |                                              |              |   |        |                |  |   |        |  |  |   |       
|                                          | Revenue                                      |              | $ | 23,697 |                |  | $ | 9,176  |  |  | $ | 32,873 |  
|                                          | (Loss) contribution before unallocated items |              |   | (4,767 | )              |  |   | 1,700  |  |  |   | (3,067 | )
|                                          | Goodwill                                     |              |   | 1,061  |                |  |   | 1,453  |  |  |   | 2,514  |  
|                                          | Total assets                                 |              |   | 14,437 |                |  |   | 3,655  |  |  |   | 18,092 |  
|                                         
|2004                                      |                                              |              |   |        |                |  |   |        |  |  |   |       
|                                          | Revenue                                      |              | $ | 20,527 |                |  | $ | 11,736 |  |  | $ | 32,263 |  
|                                          | (Loss) contribution 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 |  



|                                                        |  |                          |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                        |  | Years Ended December 31, |        
|                                                        |  |                          |        
|                                                        |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|                                                        |  |                          |         |   |      |   |         |      | 
|(Loss) contribution before unallocated items, per above |  | $                        | (3,067  | ) |      | $ | (4,327  | )    |  | $ | 6,997  |  
|Corporate and administrative expenses                   |  |                          | (6,935  | ) |      |   | (8,958  | )    |  |   | (6,967 | )
|Corporate research and development                      |  |                          | (238    | ) |      |   | (379    | )    |  |   |       |  
|Depreciation and amortization                           |  |                          | (2,270  | ) |      |   | (2,953  | )    |  |   | (2,948 | )
|Reorganization costs  loss on sublease                 |  |                          | (2,550  | ) |      |   |        |      |  |   |       |  
|Reorganization costs                                    |  |                          | (464    | ) |      |   | (1,414  | )    |  |   | (159   | )
|Other(expense) income                                   |  |                          | (58     | ) |      |   | 259     |      |  |   | 314    |  
|Equity in income loss of investment                     |  |                          | 17      |   |      |   | 56      |      |  |   | 73     |  
|Interest expense, net                                   |  |                          | (3,929  | ) |      |   | (1,054  | )    |  |   | (1,525 | )
|                                                        |  |                          |         |   |      |   |         |      | 
|Loss from continuing operations                         |  | $                        | (19,494 | ) |      | $ | (18,770 | )    |  | $ | (4,215 | )
|                                                        |  |                          |         |   |      |   |         |      | 

F-35



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                  
|--- | ---------------------------------
|15. | Segment Information  (Continued)



|                                                 |  |              |        |  |      |   |        | 
|------------------------------------------------ |  | ------------ | ------ |  | ---- | - | ------ | 
|                                                 |  | Years Ended  |       
|                                                 |  | December 31, |       
|                                                 |  |              |       
|                                                 |  | 2005         |        |  | 2004 |  
|                                                 |  |              |        |  |      |  
|Total assets before unallocated items, per above |  | $            | 18,092 |  |      | $ | 15,131 | 
|Corporate assets:                                |  |              |        |  |      |   |        | 
|Cash and cash equivalents                        |  |              | 706    |  |      |   | 4,234  | 
|Restricted cash                                  |  |              | 1,656  |  |      |   |       | 
|Current portion of notes receivable              |  |              | 655    |  |      |   |       | 
|Other current assets                             |  |              | 1,594  |  |      |   | 1,253  | 
|Assets held for sale                             |  |              |       |  |      |   | 8,995  | 
|Property and equipment, net                      |  |              | 1,914  |  |      |   | 3,087  | 
|Investment                                       |  |              | 745    |  |      |   | 729    | 
|Notes receivable, net of current portion         |  |              | 2,736  |  |      |   |       | 
|                                                 |  |              |        |  |      |  
|                                                 |  | $            | 28,098 |  |      | $ | 33,429 | 
|                                                 |  |              |        |  |      |  



|                                         |                                              |        |   |        |               |  |   |        |   |  |   |        |  
|---------------------------------------- | -------------------------------------------- | ------ | - | ------ | ------------- |  | - | ------ | - |  | - | ------ | -
|                                         |                                              | Canada |   |        | United States |  |   | Total  |  
|                                         |                                              |        |   |        |               |  |   |        |  
|For the Year Ended December 31,
    2005 |                                              |        |   |        |               |  |   |        |   |  |   |       
|                                         | Revenue                                      |        | $ |       |               |  | $ | 32,873 |   |  | $ | 32,873 |  
|                                         | (Loss) contribution before unallocated items |        |   | (4,684 | )             |  |   | 1,617  |   |  |   | (3,067 | )
|                                         | Total Assets                                 |        |   | 715    |               |  |   | 27,383 |   |  |   | 28,098 |  
|For the Year Ended December 31,
    2004 |                                              |        |   |        |               |  |   |        |   |  |   |       
|                                         | Revenue                                      |        | $ |       |               |  | $ | 32,263 |   |  | $ | 32,263 |  
|                                         | 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 |  
|                                         | (Loss) contribution before unallocated items |        |   | (3,206 | )             |  |   | 10,203 |   |  |   | 6,997  |  
|                                         | Total Assets                                 |        |   | 1,215  |               |  |   | 62,037 |   |  |   | 63,252 |  



|    |           
|--- | ----------
|16. | Litigation



F-36



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##### Table of Contents



VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                         
|--- | ------------------------
|16. | Litigation  (Continued)

S-1




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



F-37



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















F-38



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##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS


|                                  |      |              |   |             |            |  |   |             |   |  |              |          |   |                |   |         |   |  |   |             |  
|--------------------------------- | ---- | ------------ | - | ----------- | ---------- |  | - | ----------- | - |  | ------------ | -------- | - | -------------- | - | ------- | - |  | - | ----------- | -
|                                  |      |              |   | Additions   |            |  |   |             |  
|                                  |      |              |   |             |            |  |   |             |  
|                                  |      | Balance at   |   |             | Charges to |  |   |             |   |  |              |         
|                                  |      | Beginning of |   |             | Costs and  |  |   | Allowances  |   |  | (Recoveries) |          |   | Balance at End |  
|Description                       |      | Period       |   |             | Expenses   |  |   | Acquired    |   |  | Deductions   |          |   | of Period      |  
|                                  |      |              |   |             |            |  |   |             |   |  |              |          |   |                |  
|Allowance for doubtful accounts: 
|                                  | 2005 |              | $ | (255,000    | )          |  | $ | (463,000    | ) |  | $            |         |   |                | $ | (26,000 | ) |  | $ | (744,000    | )
|                                  | 2004 |              | $ | (489,000    | )          |  | $ | (494,000    | ) |  | $            |         |   |                | $ | 728,000 |   |  | $ | (255,000    | )
|                                  | 2003 |              | $ | (84,000     | )          |  | $ | (86,000     | ) |  | $            | (360,000 | ) |                | $ | 41,000  |   |  | $ | (489,000    | )
|Deferred tax valuation allowance:
|                                  | 2005 |              | $ | (82,319,000 | )          |  | $ | (2,436,000  | ) |  | $            |         |   |                | $ |        |   |  | $ | (84,755,000 | )
|                                  | 2004 |              | $ | (70,900,000 | )          |  | $ | (11,419,000 | ) |  | $            |         |   |                | $ |        |   |  | $ | (82,319,000 | )
|                                  | 2003 |              | $ | (57,429,000 | )          |  | $ | (13,471,000 | ) |  | $            |         |   |                | $ |        |   |  | $ | (70,900,000 | )

F-39



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##### Table of Contents






SIGNATURES






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



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

| |                                
| | -------------------------------
| |                                
| | Steven A. Odom                 
| | Executive Chairman of the Board





|                                                       |  |                                                                                                                      |  |                |  | 
|------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                                   |  | Title                                                                                                                |  | Date          
|                                                       |  |                                                                                                                      |  |               
|                                                      
|/s/ Montgomery L.
    BannermanMontgomery L. Bannerman |  | Chief Executive Officer (Principal Executive Officer) and
    Director                                               |  | March 31, 2006
|                                                      
|/s/ Steven A. OdomSteven A. Odom                       |  | Executive Chairman of the Board                                                                                      |  | March 31, 2006
|                                                      
|/s/ Juliet M. ReisingJuliet M. Reising                 |  | Executive Vice President, Chief Financial Officer (Principal
    Financial Officer and Principal Accounting Officer) |  | March 31, 2006
|                                                      
|/s/ Mark H. DunawayMark H. Dunaway                     |  | Director                                                                                                             |  | March 31, 2006
|                                                      
|/s/ Paul R. GarciaPaul R. Garcia                       |  | Director                                                                                                             |  | March 31, 2006
|                                                      
|/s/ Gary H. HeckGary H. Heck                           |  | Director                                                                                                             |  | March 31, 2006
|                                                      
|/s/ James R. KanelyJames R. Kanely                     |  | Director                                                                                                             |  | March 31, 2006
|                                                      
|/s/ Amy L. NewmarkAmy L. Newmark                       |  | Director                                                                                                             |  | March 31, 2006
|                                                      
|/s/ James A. VerbruggeJames A. Verbrugge               |  | Director                                                                                                             |  | March 31, 2006



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##### Table of Contents



EXHIBIT INDEX


|            |   |         |  |                                                                                                                                                                                      |  |                                                                                                                                          
|----------- | - | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   | Exhibit |  | Method of Filing                                                                                                                                                                    
|            |   |         |  |                                                                                                                                                                                     
|            | 2 | .1      |  | 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 | .2      |  | 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 | .3      |  | 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 | .4      |  | 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 | .5      |  | 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 | .6      |  | 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 | .7      |  | 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 | .8      |  | 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 | .9      |  | 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 | .10     |  | 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 | .11     |  | 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.                 



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##### Table of Contents



|            |   |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                            
|----------- | - | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   | Exhibit |  | Method of Filing                                                                                                                                                                                                                                                                                                                                                                                                 
|            |   |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | 2 | .12     |  | 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 | .13     |  | 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 | .14     |  | 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 | .15     |  | 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 | .16     |  | 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 | .17     |  | Asset Purchase Agreement dated as of January 21, 2005 with
    respect to the Registrants disposition of its NACT
    business. (The schedules to the Asset Purchase Agreement have
    been omitted from this Report pursuant to Item 601(b)(2) of
    Regulation S-K, and the Registrant agrees to furnish copies
    of such omitted schedules supplementally to the SEC upon
    request.)                   |  | Incorporated by reference to Exhibit 2.2 to the
    Registrants Current Report on Form 8-K filed on
    January 27, 2005. 
|           
|            | 2 | .18     |  | 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. 



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##### Table of Contents



|            |   |         |  |                                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                    
|----------- | - | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   | Exhibit |  | Method of Filing                                                                                                                                                                                                                                                                                                                                                                                      
|            |   |         |  |                                                                                                                                                                                                                                                                                                                                                                                                       
|            | 2 | .19     |  | 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      |  | Amendment to Amended and Restated Articles of Incorporation.                                                                                                                                                                                                                                                                                                                                           |  | Incorporated by reference to Exhibit 3.1 to the
    Registrants Current Report on Form 8-K filed on
    October 7, 2005.                          
|           
|            | 3 | .5      |  | Registrants Amended and Restated Bylaws, adopted October
    24, 2005.                                                                                                                                                                                                                                                                                                                                |  | Incorporated by reference to Exhibit 3.1 to the
    Registrants Current Report on Form 8-K filed
    October 7, 2005.                             
|           
|            | 4 | .1      |  | 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.                          
|           
|            | 4 | .2      |  | 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 | .3      |  | 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 | .4      |  | 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 | .5      |  | 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).



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##### Table of Contents



|            |   |         |  |                                                                                                                                                                                                                        |  |                                                                                                                                                    
|----------- | - | ------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   | Exhibit |  | Method of Filing                                                                                                                                                                                                      
|            |   |         |  |                                                                                                                                                                                                                       
|            | 4 | .6      |  | 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 | .7      |  | 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 | .9      |  | 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 | .10     |  | 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 | .11     |  | 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 | .12     |  | 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.      
|           
|            | 4 | .13     |  | 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 | .14     |  | 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 | .15     |  | 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 | .16     |  | 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.     



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##### Table of Contents



|            |   |         |  |                                                                                                                                                                                                                                 |  |                                                                                                                                               
|----------- | - | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   | Exhibit |  | Method of Filing                                                                                                                                                                                                               
|            |   |         |  |                                                                                                                                                                                                                                
|            | 4 | .17     |  | 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 | .18     |  | 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 | .19     |  | 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 | .20     |  | 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 | .21     |  | Form of 7.5% Convertible Debenture issued in connection with the
    Convertible Debenture and Warrant Purchase Agreement between the
    Registrant and the Purchasers named therein (the Debenture
    Purchase Agreement). |  | Incorporated by reference to Exhibit 4.5 to the
    Registrants Current Report on Form 8-K filed
    December 6, 2000.                       
|           
|            | 4 | .22     |  | 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 | .23     |  | 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 | .24     |  | 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 | .25     |  | 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 | .26     |  | 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 | .27     |  | 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 | .28     |  | 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 | .29     |  | 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.     



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##### Table of Contents



|            |   |         |  |                                                                                                                                                                         |  |                                                                                                                                                        
|----------- | - | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   | Exhibit |  | Method of Filing                                                                                                                                                       
|            |   |         |  |                                                                                                                                                                        
|            | 4 | .30     |  | 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 | .31     |  | 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 | .32     |  | 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 | .33     |  | 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 | .34     |  | 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). 
|           
|            | 4 | .35     |  | 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 | .36     |  | 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 | .37     |  | 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 | .38     |  | 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 | .39     |  | 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 | .40     |  | 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.                            



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##### Table of Contents



|            |   |         |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                       
|----------- | - | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   | Exhibit |  | Method of Filing                                                                                                                                                                                                                                                               
|            |   |         |  |                                                                                                                                                                                                                                                                                
|            | 4 | .41     |  | 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 | .42     |  | 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 | .43     |  | 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 | .44     |  | 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 | .45     |  | 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 | .46     |  | Form of warrant to purchase the Registrants common stock
    issued to certain placement agents in connection with the
    Registrants February 2005 private placement.                                                                                                       |  | Incorporated by reference to Exhibit 4.62 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2004.
|           
|            | 4 | .47     |  | 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.               
|           
|            | 4 | .48     |  | Warrant issued July 25, 2005 to Mainfield Enterprises Inc. to
    purchase 1,500,000 shares of the Registrants common stock.                                                                                                                                                   |  | Incorporated by reference to Exhibit 4.1 to the
    Registrants Current Report on Form 8-K filed on
    July 29, 2005.               
|            | 4 | .49     |  | Warrant issued July 25, 2005 to Heimdall Investments, Ltd. to
    purchase 1,500,000 shares of the Registrants common stock.                                                                                                                                                   |  | Incorporated by reference to Exhibit 4.2 to the
    Registrants Current Report on Form 8-K filed on
    July 29, 2005.               
|           
|            | 4 | .50     |  | Warrant issued July 25, 2005 to Mainfield Enterprises Inc. to
    purchase 500,000 shares of the Registrants common stock.                                                                                                                                                     |  | Incorporated by reference to Exhibit 4.3 to the
    Registrants Current Report on Form 8-K filed on
    July 29, 2005.               
|           
|            | 4 | .51     |  | Warrant issued July 25, 2005 to Heimdall Investments, Ltd. to
    purchase 500,000 shares of the Registrants common stock.                                                                                                                                                     |  | Incorporated by reference to Exhibit 4.4 to the
    Registrants Current Report on Form 8-K filed on
    July 29, 2005.               
|           
|            | 4 | .52     |  | Registration Rights Agreement dated as of July 25, 2005, among
    the Registrant and the investors signatory thereto.                                                                                                                                                          |  | Incorporated by reference to Exhibit 4.5 to the
    Registrants Current Report on Form 8-K filed on
    July 29, 2005.               
|           
|            | 4 | .53     |  | Form of Warrant issued in the Registrants February 2006
    Private Placement.                                                                                                                                                                                                 |  | Filed herewith.                                                                                                                       



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##### Table of Contents



|            |    |         |  |                                                                                                                              |  |                                                                                                                                                        
|----------- | -- | ------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit |  | Method of Filing                                                                                                            
|            |    |         |  |                                                                                                                             
|            | 4  | .54     |  | Form of Registration Rights Agreement entered into in connection
    with the Registrants February 2006 Private Placement.  |  | Filed herewith.                                                                                                                                        
|           
|            | 10 | .1      |  | Form of Incentive Stock Option Agreement.                                                                                    |  | Incorporated by reference to Exhibit 10.6 to the
    Registrants Registration Statement on Form S-18 (File
    33-51456).                             
|            | 10 | .2      |  | Form of Non-Statutory Option Agreement.                                                                                      |  | Incorporated by reference to Exhibit 10.7 to the
    Registrants Registration Statement on Form S-18 (File
    33-51456).                             
|           
|            | 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 | .9      |  | 1999 Employee Stock Purchase Plan.                                                                                           |  | Filed herewith.                                                                                                                                        
|           
|            | 10 | .10     |  | 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 | .11     |  | 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 | .12     |  | 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).   



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##### Table of Contents



|            |    |         |  |                                                                                                                                                                                                         |  |                                                                                                                                                               
|----------- | -- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit |  | Method of Filing                                                                                                                                                                                       
|            |    |         |  |                                                                                                                                                                                                        
|            | 10 | .13     |  | 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 | .14     |  | 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 | .15     |  | 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 | .16     |  | 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 | .17     |  | 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 | .18     |  | 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.
|           
|            | 10 | .19     |  | 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 | .20     |  | 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 | .21     |  | 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 | .22     |  | 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 | .23     |  | 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 | .24     |  | 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.                       



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##### Table of Contents



|            |    |         |  |                                                                                                                                                                                                     |  |                                                                                                                                                                 
|----------- | -- | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit |  | Method of Filing                                                                                                                                                                                   
|            |    |         |  |                                                                                                                                                                                                    
|            | 10 | .25     |  | 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 | .26     |  | 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 | .27     |  | 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 | .28     |  | 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 | .29     |  | 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 | .30     |  | 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 | .31     |  | 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 | .32     |  | 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 | .33     |  | 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 | .34     |  | 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 | .35     |  | 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 | .36     |  | 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.                                       



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##### Table of Contents



|            |    |         |  |                                                                                                                                                                                     |  |                                                                                                                                          
|----------- | -- | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit |  | Method of Filing                                                                                                                                                                   
|            |    |         |  |                                                                                                                                                                                    
|            | 10 | .37     |  | 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 | .38     |  | 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 | .39     |  | 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 | .40     |  | 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 | .41     |  | 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 | .42     |  | 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 | .43     |  | Assignment of Patent Rights dated as of February 7, 2003, made
    by Clarent Corporation to the Registrant.                                                                        |  | Incorporated by reference to Exhibit 99.11 to the
    Registrants Current Report on Form 8-K filed
    February 13, 2003.               
|           
|            | 10 | .44     |  | 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 | .45     |  | 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 | .46     |  | 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 | .47     |  | 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 | .48     |  | 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 | .49     |  | 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.



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##### Table of Contents



|            |    |         |  |                                                                                                                                                                                              |  |                                                                                                                                          
|----------- | -- | ------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit |  | Method of Filing                                                                                                                                                                            
|            |    |         |  |                                                                                                                                                                                             
|            | 10 | .50     |  | 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 | .51     |  | 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 | .52     |  | 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 | .53     |  | 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 | .54     |  | 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 | .55     |  | 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 | .56     |  | 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.
|           
|            | 10 | .57     |  | 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 | .58     |  | 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 | .59     |  | 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 | .60     |  | 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 | .61     |  | 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 | .62     |  | 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.              



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##### Table of Contents



|            |    |         |  |                                                                                                                                                                                                 |  |                                                                                                                             
|----------- | -- | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit |  | Method of Filing                                                                                                                                                                               
|            |    |         |  |                                                                                                                                                                                                
|            | 10 | .63     |  | 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 | .64     |  | 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 | .65     |  | 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 | .66     |  | 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 | .67     |  | 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 | .68     |  | 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 | .69     |  | Patent Assignment Agreement dated January 21, 2005 entered into
    in connection with the Registrants disposition of its MCK
    business.                                                    |  | Incorporated by reference to Exhibit 99.11 to the
    Registrants Current Report on Form 8-K filed on
    January 27, 2005.
|           
|            | 10 | .70     |  | 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 | .71     |  | 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 | .72     |  | 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 | .73     |  | 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 | .74     |  | 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 | .75     |  | 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.



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##### Table of Contents



|            |    |         |  |                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                        
|----------- | -- | ------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit |  | Method of Filing                                                                                                                                                                                                                                                                                          
|            |    |         |  |                                                                                                                                                                                                                                                                                                           
|            | 10 | .76     |  | 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 | .77     |  | 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 | .78     |  | 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 | .79     |  | 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 | .80     |  | 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 | .81     |  | 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.                               
|           
|            | 10 | .82     |  | Non-qualified Stock Option entered into March 15, 2005 and
    effective November 3, 2004 to purchase 500,000 shares of the
    Registrants common stock granted to Lewis Jaffe.
    Represents an executive compensation plan or arrangement.                                                            |  | Incorporated by reference to Exhibit 99.5 to the
    Registrants Current Report filed on March 21, 2005
    and amended on April 28, 2005.            
|           
|            | 10 | .83     |  | Non-qualified Stock Option entered into March 15, 2005 and
    effective November 3, 2004 to purchase 250,000 shares of the
    Registrants common stock granted to Lewis Jaffe.
    Represents an executive compensation plan or arrangement.                                                            |  | Incorporated by reference to Exhibit 99.6 to the
    Registrants Current Report filed on March 21, 2005
    and amended on April 28, 2005.            
|           
|            | 10 | .84     |  | Non-qualified Stock Option entered into March 15, 2005 and
    effective November 3, 2004 to purchase 250,000 shares of the
    Registrants common stock granted to Lewis Jaffe.
    Represents an executive compensation plan or arrangement.                                                            |  | Incorporated by reference to Exhibit 99.7 to the
    Registrants Current Report filed on March 21, 2005
    and amended on April 28, 2005.            
|           
|            | 10 | .85     |  | Non-qualified Stock Option entered into March 15, 2005 and
    effective November 19, 2004 to purchase 250,000 shares of the
    Registrants common stock granted to Montgomery Bannerman.
    Represents an executive compensation plan or arrangement.                                                  |  | Incorporated by reference to Exhibit 99.8 to the
    Registrants Current Report on Form 8-K filed on
    March 21, 2005 and amended on April 28, 2005.
|           
|            | 10 | .86     |  | Amendment to Loan Documents dated March 15, 2005, among the
    Registrant, Provo Prepaid (Delaware) Corp., Telemate.Net
    Software, Inc., Needham (Delaware) Corp. and Silicon Valley Bank.                                                                                                             |  | Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed on
    March 21, 2005 and amended on April 28, 2005.



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##### Table of Contents



|            |    |         |  |                                                                                                                                                                                                                                                                            |  |                                                                                                                                                        
|----------- | -- | ------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit |  | Method of Filing                                                                                                                                                                                                                                                          
|            |    |         |  |                                                                                                                                                                                                                                                                           
|            | 10 | .87     |  | Amendment to Loan Documents (Exim Program) dated March 15, 2005,
    among the Registrant, Provo Prepaid (Delaware) Corp.,
    Telemate.Net Software, Inc. and Silicon Valley Bank.                                                                                        |  | Incorporated by reference to Exhibit 99.2 to the
    Registrants Current Report on Form 8-K filed on
    March 21, 2005 and amended on April 28, 2005.
|           
|            | 10 | .88     |  | Borrower Agreement dated March 15, 2005, among the Registrant,
    Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. and
    Silicon Valley Bank.                                                                                                                |  | Incorporated by reference to Exhibit 99.3 to the
    Registrants Current Report on Form 8-K filed on
    March 21, 2005 and amended on April 28, 2005.
|           
|            | 10 | .89     |  | Amended and Restated Secured Promissory Note dated March 15,
    2005, in principal amount of $10.0 million, made by the
    Registrant, Provo Prepaid (Delaware) Corp. and Telemate.Net
    Software, Inc. in favor of Silicon Valley Bank.                               |  | Incorporated by reference to Exhibit 99.4 to the
    Registrants Current Report on Form 8-K filed on
    March 21, 2005 and amended on April 28, 2005.
|           
|            | 10 | .90     |  | Assumption Agreement dated April 14, 2005, among the Registrant,
    Needham (Delaware) Corp., Provo Prepaid (Delaware) Corp.,
    Telemate.Net Software, Inc. and Silicon Valley Bank.                                                                                    |  | Incorporated by reference to Exhibit 10.32 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2005.             
|           
|            | 10 | .91     |  | Borrower Agreement dated April 14, 2005, among the Registrant,
    Needham (Delaware) Corp., Provo Prepaid (Delaware) Corp.,
    Telemate.Net Software, Inc. and Silicon Valley Bank.                                                                                      |  | Incorporated by reference to Exhibit 10.33 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2005.             
|           
|            | 10 | .92     |  | Amended and Restated Secured Promissory Note dated April 14,
    2005, in principal amount of $10.0 million, made by the
    Registrant, Needham (Delaware) Corp., Provo Prepaid (Delaware)
    Corp. and Telemate.Net Software, Inc. in favor of Silicon Valley
    Bank. |  | Incorporated by reference to Exhibit 10.34 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2005.             
|           
|            | 10 | .93     |  | Assumption Agreement dated April 14, 2005, among the Registrant,
    Needham (Delaware) Corp., Provo Prepaid (Delaware) Corp.,
    Telemate.Net Software, Inc. and Silicon Valley Bank.                                                                                    |  | Incorporated by reference to Exhibit 10.32 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2005.             
|           
|            | 10 | .94     |  | Borrower Agreement dated April 14, 2005, among the Registrant,
    Needham (Delaware) Corp., Provo Prepaid (Delaware) Corp.,
    Telemate.Net Software, Inc. and Silicon Valley Bank.                                                                                      |  | Incorporated by reference to Exhibit 10.33 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2005.             
|           
|            | 10 | .95     |  | Amended and Restated Secured Promissory Note dated April 14,
    2005, in principal amount of $10.0 million, made by the
    Registrant, Needham (Delaware) Corp., Provo Prepaid (Delaware)
    Corp. and Telemate.Net Software, Inc. in favor of Silicon Valley
    Bank. |  | Incorporated by reference to Exhibit 10.34 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2005.             
|           
|            | 10 | .96     |  | Sublease dated July 1, 2005, between the Registrant and Digital
    Insurance, Inc.                                                                                                                                                                                        |  | Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed on
    July 8, 2005.                                
|           
|            | 10 | .97     |  | Bill of Sale dated July 1, 2005, executed by the Registrant in
    favor of Digital Insurance, Inc.                                                                                                                                                                        |  | Incorporated by reference to Exhibit 99.2 to the
    Registrants Current Report on Form 8-K filed on
    July 8, 2005.                                



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##### Table of Contents



|            |    |         |  |                                                                                                                                                                                                                           |  |                                                                                                                                            
|----------- | -- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit |  | Method of Filing                                                                                                                                                                                                         
|            |    |         |  |                                                                                                                                                                                                                          
|            | 10 | .98     |  | Security Agreement entered into on July 1, 2005, between the
    Registrant and Digital Insurance, Inc.                                                                                                                   |  | Incorporated by reference to Exhibit 99.3 to the
    Registrants Current Report on Form 8-K filed on
    July 8, 2005.                    
|           
|            | 10 | .99     |  | Amendment to the 7.5% Convertible Debentures dated as of July
    25, 2005 among the Registrant, Mainfield Enterprises Inc. and
    Heimdall Investments, Ltd.                                                            |  | Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed on
    July 29, 2005.                   
|           
|            | 10 | .100    |  | Limited Waiver and Amendment to Loan Documents dated July 25,
    2005 between the Registrant and Silicon Valley Bank.                                                                                                    |  | Incorporated by reference to Exhibit 99.2 to the
    Registrants Current Report on Form 8-K filed on
    July 29, 2005.                   
|           
|            | 10 | .101    |  | Limited Waiver and Amendment to Loan Documents (Exim Program)
    dated July 25, 2005 between the Registrant and Silicon Valley
    Bank.                                                                                 |  | Incorporated by reference to Exhibit 99.3 to the
    Registrants Current Report on Form 8-K filed on
    July 29, 2005.                   
|           
|            | 10 | .102    |  | Security Agreement entered into on July 1, 2005, between the
    Registrant and Digital Insurance, Inc.                                                                                                                   |  | Incorporated by reference to Exhibit 99.3 to the
    Registrants Current Report on Form 8-K filed
    July 8, 2005.                       
|           
|            | 10 | .103    |  | Amendment to the 7.5% Convertible Debentures dated as of July
    25, 2005 among the Registrant, Mainfield Enterprises Inc. and
    Heimdall Investments, Ltd.                                                            |  | Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed
    July 29, 2005.                      
|           
|            | 10 | .104    |  | Limited Waiver and Amendment to Loan Documents dated July 25,
    2005 between the Registrant and Silicon Valley Bank.                                                                                                    |  | Incorporated by reference to Exhibit 99.2 to the
    Registrants Current Report on Form 8-K filed
    July 29, 2005.                      
|           
|            | 10 | .105    |  | Limited Waiver and Amendment to Loan Documents (Exim Program)
    dated July 25, 2005 between the Registrant and Silicon Valley
    Bank.                                                                                 |  | Incorporated by reference to Exhibit 99.3 to the
    Registrants Current Report on Form 8-K filed
    July 29, 2005.                      
|           
|            | 10 | .106    |  | Separation Agreement between the Registrant and Lewis Jaffe
    entered into on August 16, 2005.                                                                                                                          |  | Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed
    August 22, 2005.                    
|           
|            | 10 | .107    |  | Verso Technologies, Inc. 1999 Stock Incentive Plan, as amended
    September 22, 2005.                                                                                                                                    |  | Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed
    September 28, 2005.                 
|           
|            | 10 | .108    |  | Amendment #1 to Secured Convertible Promissory Note among the
    Registrant, CITEL Technologies Limited and CITEL Technologies,
    Inc. entered into on September 23, 2005.                                             |  | Incorporated by reference to Exhibit 99.2 to the
    Registrants Current Report on Form 8-K filed
    September 28, 2005.                 
|           
|            | 10 | .109    |  | Subordination Agreement dated as of September 23, 2005, between
    the Registrant and Bridge Bank, National Association.                                                                                                 |  | Incorporated by reference to Exhibit 99.3 to the
    Registrants Current Report on Form 8-K filed
    September 28, 2005.                 
|           
|            | 10 | .110    |  | Executive Employment Agreement executed on October 24, 2005, but
    effective as of October 1, 2005 between the Registrant and
    Montgomery Bannerman. (Represents an executive compensatory plan
    or arrangement.) |  | Incorporated by reference to Exhibit 99.2 to the
    Registrants Amendment No. 1 to Current Report on
    Form 8-K filed October 27, 2005.



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##### Table of Contents



|            |    |         |  |                                                                                                                                                                                                                                                                             |  |                                                                                                                         
|----------- | -- | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit |  | Method of Filing                                                                                                                                                                                                                                                           
|            |    |         |  |                                                                                                                                                                                                                                                                            
|            | 10 | .111    |  | Amended and Restated Executive Employment Agreement executed on
    October 24, 2005, but effective as of October 1, 2005 between
    the Registrant and Steven A. Odom. (Represents an executive
    compensatory plan or arrangement.)                                    |  | Incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on Form 8-K filed
    October 27, 2005.
|           
|            | 10 | .112    |  | Amended and Restated Executive Employment Agreement executed on
    October 24, 2005, but effective as of October 1, 2005 between
    the Registrant and Juliet M. Reising. (Represents an executive
    compensatory plan or arrangement.)                                 |  | Incorporated by reference to Exhibit 99.2 to the
    Registrants Current Report on Form 8-K filed
    October 27, 2005.
|           
|            | 10 | .113    |  | Amended and Restated Promissory Note made by the Registrant,
    Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. and
    Needham (Delaware) Corp. dated March 24, 2006.                                                                                         |  | Filed herewith.                                                                                                         
|           
|            | 10 | .114    |  | Export-Import Bank of the United States Working Capital
    Guarantee Program Borrower Agreement dated as of March 24, 2006
    among the Registrant, Provo Prepaid (Delaware) Corp.,
    Telemate.Net Software, Inc. Needham (Delaware) Corp. and Silicon
    Valley Bank. |  | Filed herewith                                                                                                          
|           
|            | 10 | .115    |  | Amendment to Loan Documents dated January 27, 2006 among the
    Registrant, Provo Prepaid (Delaware) Corp., Telemate.Net
    Software, Inc. Needham (Delaware) Corp. and Silicon Valley Bank.                                                                              |  | Filed herewith.                                                                                                         
|           
|            | 10 | .116    |  | Amendment to Loan Documents (EXIM Program) dated as of March 24,
    2006 among the Registrant, Provo Prepaid (Delaware) Corp.,
    Telemate.Net Software, Inc. Needham (Delaware) Corp. and Silicon
    Valley Bank.                                                       |  | Filed herewith.                                                                                                         
|           
|            | 10 | .117    |  | Amendment to Loan Documents dated as of March 24, 2006
    among the Registrant, Provo Prepaid (Delaware) Corp.,
    Telemate.Net Software, Inc. Needham (Delaware) Corp. and Silicon
    Valley Bank.                                                                      |  | Filed herewith.                                                                                                         
|            | 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.