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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

(Mark One)



|  |                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------
|x | Annual Report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934 for the fiscal year ended:
    April 30, 2003

OR



|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|o | Transition Report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934 for the transition period
    from                        to

Commission File
Number  0-22703

MCK Communications, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 06-1555163                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification Number)
|                                                                  
|117 Kendrick Street, Needham, MA                                   |  | 02494                                      
|(Address of principal executive
    offices)                       |  | (Zip code)                                 

Registrants telephone number, including
area code: (617) 454-6100

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

Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $0.001 par
value

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

Indicate by check mark if disclosure of
delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.          o

Indicate by check mark whether the Registrant
is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).

Yes o     No x

The aggregate market value of voting and
non-voting common stock held by non-affiliates of the registrant
as of October 31, 2002, was approximately $13,115,154 based
upon the last sales price reported for such date on The Nasdaq
National Market. For purposes of this disclosure, shares of
Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock and shares held by officers
and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is
not necessarily conclusive.

At June 3, 2003 the registrant had
outstanding 20,536,655 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

None



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TABLE OF CONTENTS



|                                                 |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
|PART I                                          
|                                                 | Item 1. Business                                                                                       
|                                                 | Item 2. Properties                                                                                     
|                                                 | Item 3. Legal Proceedings                                                                              
|                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                         
|                                                 | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters                      
|                                                 | Item 6. Selected Historical Condensed Financial Information                                            
|                                                 | 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           
|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. Controls and Procedures                                                                       
|PART IV                                         
|                                                 | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                      
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS      
|EX-10.15 Offer Letter Ann Doyle                 
|EX-21.1 Subsidiaries of the Registrant          
|EX-23.1 Consent of Ernst and Young LLP          
|EX-99.1 Section 906 Certification               
|EX-99.2 Section 906 Certification               



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TABLE OF CONTENTS

|                                                     |  |          |     |                                                                                                    |  |      |    | 
|---------------------------------------------------- |  | -------- | --- | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                     |  |          |     |                                                                                                    |  | Page
|                                                     |  |          |     |                                                                                                    |  |     
|INFORMATION REGARDING FORWARD-LOOKING
    STATEMENTS |  |          | 2   |                                                                                                   
|PART I                                               |  |          | 2   |                                                                                                   
|                                                     |  | ITEM 1.  |     | BUSINESS                                                                                           |  |      | 2  | 
|                                                     |  | ITEM 2.  |     | PROPERTIES                                                                                         |  |      | 22 | 
|                                                     |  | ITEM 3.  |     | LEGAL PROCEEDINGS                                                                                  |  |      | 22 | 
|                                                     |  | ITEM 4.  |     | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                            |  |      | 23 | 
|PART II                                              |  |          | 24  |                                                                                                   
|                                                     |  | ITEM 5.  |     | MARKET FOR THE REGISTRANTS COMMON EQUITY
    AND RELATED STOCKHOLDER MATTERS                      |  |      | 24 | 
|                                                     |  | ITEM 6.  |     | SELECTED HISTORICAL CONDENSED FINANCIAL
    INFORMATION                                            |  |      | 24 | 
|                                                     |  | ITEM 7.  |     | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |  |      | 26 | 
|                                                     |  | ITEM 7A  |     | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK                                     |  |      | 48 | 
|                                                     |  | ITEM 8.  |     | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                        |  |      | 48 | 
|                                                     |  | ITEM 9.  |     | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE           |  |      | 48 | 
|PART III                                             |  |          | 49  |                                                                                                   
|                                                     |  | ITEM 10. |     | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                 |  |      | 49 | 
|                                                     |  | ITEM 11. |     | EXECUTIVE COMPENSATION                                                                             |  |      | 51 | 
|                                                     |  | ITEM 12. |     | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  |      | 53 | 
|                                                     |  | ITEM 13. |     | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                     |  |      | 55 | 
|                                                     |  | ITEM 14  |     | CONTROLS AND PROCEDURES                                                                            |  |      | 56 | 
|PART IV                                              |  |          | 56  |                                                                                                   
|                                                     |  | ITEM 15. |     | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
    REPORTS ON FORM 8-K                                |  |      | 56 | 
|INDEX TO CONSOLIDATED FINANCIAL
    STATEMENTS       |  |          | F-1 |                                                                                                   




INFORMATION REGARDING FORWARD-LOOKING
STATEMENTS

This Annual Report on Form 10-K contains
certain forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended) that involve risks and uncertainties. Forward-looking
statements include, without limitation, statements containing
the words anticipates, believes,
expects, intends, future and
words of similar import which express managements belief,
expectations or intentions regarding the future performance of
MCK Communications, Inc. and its subsidiaries (hereafter,
collectively, we, us, our,
MCK or the Company). Actual results and
the timing of certain events could differ materially from those
projected in the forward-looking statements as a result of a
number of factors. For a discussion of important factors that
could affect the Companys results, please refer to the
Business section and to the financial statement line item and
Critical Accounting Policies discussions and Factors Affecting
Future Operating Results and Stock Price set forth in
Managements Discussion and Analysis of Financial Condition
and Results of Operations discussed elsewhere in this Annual
Report on Form 10-K.

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PART I




Item 1.     Business

Overview

MCK is a leading provider of products that
deliver distributed voice communications by enabling businesses
to extend the functionality and applications of their business
telephone systems from the main office to outlying offices,
remote call centers, teleworkers and mobile employees over
public and private networks. Business telephone systems consist
of private branch exchange (PBX) systems and key
systems (KTS). Whereas key systems are used in
medium and small businesses or smaller locations within larger
companies, PBXs are the most commonly used telephone systems in
large corporations. PBXs deliver such features as 3- or 4-digit
internal dialing, conferencing, call transfer and call
forwarding. PBXs also generally support a range of telephony
applications such as voicemail, automatic call distribution,
auto attendant, call accounting and interactive voice response.

Our EXTender and ConneX products cost-effectively
deliver a unified enterprise-wide voice network by enabling the
voice switch to function as a company-wide voice server that
transmits call function and applications to distributed
locations over the companys existing voice and/or data
networks. This enables a company to provide the same telephony
functionality to all locations while reducing their total cost
of ownership. Savings are achieved by leveraging current
investments in voice and data equipment, flexibility of network
choice for lowered communications service cost, streamlined
network administration through the utilization of industry
standard network management techniques and lowered training
costs. These products also afford service providers the
flexibility of combining the power of their network services
such as data and/or mobile services with PBX/ KTS extension to
expand the range of offers provided to their customers.

In addition, our Extender products provide
enterprises or service providers flexible choices for managing
their path to the future by leveraging their current
infrastructure investments while taking advantage of next
generation nextgen telephony systems (i.e., CPE
and/or hosted IP switches), applications (i.e., unified
messaging) and devices (i.e., Internet Protocol (IP)
phones, wireless devices) to provide employees enriched
telephony experiences.

Our embedded gateway recording products are used
within a variety of telephony-based applications (i.e., call
center, contact center, security and client services
applications) and enable our customers to convert digital PBX
signals into standard analog audio output so that calls can be
easily and cost-effectively recorded for future use. We also
provide a range of custom embedded gateway products for specific
Original Equipment Manufacturer (OEM) partners.

We market and distribute our products through an
international network of distributors, resellers, equipment
providers, system integrators, service providers and, to a
lesser extent, through direct sales. We are headquartered in
Needham, Massachusetts and have a development center in Calgary,
Canada. We also maintain a sales office in the United Kingdom
and a sales offices in Toronto and Montreal, Canada, as well as
multiple locations throughout the United States. We outsource
our manufacturing to a manufacturer that provides full turnkey
services including material procurement, final assembly, test,
shipment to our customers, and warranty services.

Our customer support efforts complement our
distribution partners offerings Our sales force and
marketing efforts are primarily directed at supporting the sales
efforts of our indirect distribution partners and developing
brand awareness.

On April 21, 2003, we entered into a
definitive Agreement and Plan of Merger with Verso Technologies,
Inc. (Verso), and Mickey Acquiring Sub, Inc., a
wholly-owed subsidiary of Verso (the Merger Sub), as
amended by the First Amendment to Agreement and Plan of Merger
dated as of April 21, 2003 and the Second Amendment to the
Agreement and Plan of Merger dated as of June 13, 2003,
pursuant to which Merger Sub will be merged with and into MCK,
with MCK to survive the merger as a wholly-owned subsidiary of
Verso. In connection with the merger, an aggregate of 18,280,000
shares of Verso common stock will be issued in exchange for all
of the shares of our common stock outstanding at the time of the
merger. In

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addition, in connection with the closing of the
merger, we will declare a dividend payable to our stockholders
of record immediately prior to the effective time of the merger.
We estimate that the aggregate amount of the dividend will be
between $28 million and $30 million, subject to
adjustment in accordance with the merger agreement, as amended.
The record date for the dividend has not yet been set. Pursuant
to the merger agreement, as amended, Verso will not assume or
substitute options for any stock options outstanding and
unexercised pursuant to our stock option plans. We will take all
necessary actions to ensure that each outstanding employee stock
option, whether vested or unvested, will, subject to
consummation of the merger, become fully vested and exercisable
and that each stock option plan will terminate as of the
effective time of the merger. The merger is expected to close in
the third quarter of 2003, after approval by our stockholders,
and the satisfaction of all other conditions to the merger.


Industry Background

Most businesses today have deployed separate
networks to support voice and data communications. As these
businesses evolve to unite their geographically distributed
locations such as branch or satellite locations and an
increasingly virtual workforce either working at home or on the
road, new demands are being placed on the traditionally
localized voice communications networks. While data networks
have evolved to meet this challenge by offering high-speed
remote data access and a high degree of interoperability among
data systems and components, telephony systems and voice
networks have remained largely centralized and switch-specific
with limited multi-vendor interoperability. Consequently,
providing cost-effective, company-wide telephony services and
applications to all locations and employees can be challenging.

Businesses depend on company-wide communication
to ensure critical internal collaboration, provide suitable
levels of customer service, and maintain operational efficiency
and productivity by sharing resources throughout the company.
The shift to a more distributed voice environment results from a
number of factors. These include extending business reach closer
to key customers, suppliers and partners, lowering the cost of
communications, complying with expanding environmental
regulations, the competition for qualified employees and
disaster preparedness and/or recovery.

In trying to address these needs, companies are
increasingly challenged by the need to integrate voice and data
networks across multiple locations. As the business environment
becomes more competitive, providing an appearance of one with
common features and applications seamlessly connecting employees
and callers into a virtual community is becoming increasingly
important.

Enterprise
Data Networks

Initially, data networks were built to
interconnect mainframe computers that served a single office
location. They were accessible by a limited number of users and
were often too costly for small organizations. Over the past 20
years, advances in open-systems, computer processing and
networking technology have altered this centralized model to
deliver cost-effective, high-speed distributed information
processing and communications by using a distributed
client-server architecture. This enables companies to deploy
equipment from multiple vendors that is interoperable across
local area networks (LANs), or wide area networks
(WANs), using standard communication protocols,
internetworking technologies, and industry-standard system
management platforms. These same developments have also
facilitated widespread data access through the deployment of
remote access equipment capable of extending the reach of data
networks beyond corporate locations over public and private
networks.

Historically, branch offices and telecommuters
accessed corporate data networks over a variety of circuit-based
networks that were designed for voice service. These
circuit-based networks are dedicated point-to-point connections
that require companies to constantly maintain sufficient
bandwidth to meet their maximum communications requirements.
Packet-based networks, deployed over the past decade, divide all
types of data, including voice, into packets that can be
simultaneously transmitted and reassembled into their original
form at their final destination. These packet-based networks
enable sharing of network resources and are more efficient in
their use of available bandwidth than traditional circuit-based
networks, thus minimizing network capacity constraints and
management requirements.

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As a result of the growing demand for
high-bandwidth applications, such as Internet and Intranet
access, service providers are migrating from existing
circuit-based networks to packet-based networks. In doing so,
they are creating new service offerings over private managed
networks and public networks using new technologies, such as
Quality of Service and firewalls, to ensure speed, quality and
security.

Deployment of packet-based networks and
widespread access is enabling companies to realize tremendous
productivity gains due to increased collaboration, internal
communication and sharing of resources. Examples of specific
benefits include company-wide e-mail capabilities, company-wide
access to files and applications that run on a corporate server
and ease of access for remote workers.

Enterprise
Voice Networks

Enterprise telephony systems are generally based
on a circuit-based architecture and telephone equipment known as
PBXs (Private Branch Exchanges). Given the mission
critical nature of voice communications and related
applications, enterprise voice systems have been architected
with numerous built-in fault tolerant and redundancy features
and are designed to deliver 99.999% up-time reliability. In
addition to delivering reliable voice service, PBXs have the
capability to serve as the platform for more than 500 critical
voice features and applications, including:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | voicemail                                                                                             
|
| |  | unified messaging that creates a single interface
    for accessing voicemail, e-mail and fax messages
|
| |  | automatic call distribution                                                                           
|
| |  | auto-attendant                                                                                        
|
| |  | directories                                                                                           
|
| |  | call accounting and/or billing                                                                        
|
| |  | least-cost routing                                                                                    
|
| |  | interactive voice response                                                                            

The PBX is also responsible for delivering
features and capabilities such as:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | phone numbering plans                                      
|
| |  | 3 or 4 digit internal dialing                              
|
| |  | call transferring, conferencing, holding and
    forwarding
|
| |  | receptionist call screening                                

Despite the reliability and functionality of
centralized circuit-based voice networks, the features,
applications and inter-connectivity of traditional PBX systems
and their switch-specific architectures make it difficult to
integrate them with other systems and applications. Furthermore,
they are not inexpensively networked to outlying offices or
teleworkers. A number of factors have created this deficiency.
PBX-based telephone systems are bandwidth constrained making
them poor at networking, not easily integrated with other
traffic types, such as data and video, and the quality of their
voice transmission degrades beyond a limited distance. In
addition, the high cost associated with deploying a PBX system
and its supported voice applications typically makes them
prohibitively expensive for smaller locations. Accordingly,
companies seeking to extend voice services to outlying locations
and/or incorporate new applications have traditionally had the
following voice options, all of which have significant
limitations:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Key Systems.KTS
    systems have functionality similar to PBXs but have been
    cost-effectively architected to service small office
    environments. They lack the full feature set and scalability of
    more expensive PBX-based telephone systems. KTS systems have
    limited interoperability with PBX systems, and consequently
    function as stand-alone voice systems with separate voice
    applications. This creates a less than professional image due to
    dissimilar functionalities, inefficiencies and network

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | management complexities in a multi-office
    environment. More recently, KTS systems have been enhanced with
    multi-site networking to enable their residing within a network
    configuration either with other like KTS systems or same vendor
    PBXs. However, typically the transparent access to the full
    range of applications is not facilitated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | IP PBXs.Recently
    introduced voice switches from voice and data networking
    vendors, such as LAN and Windows NT-server based PBXs, are based
    on data standards and tend to be more open than traditional PBX
    systems. Although providing new alternatives for medium to
    smaller locations, they lack the full feature set of the
    traditional PBXs, have limited ability to network with the
    proprietary, circuit-switched PBXs, limit business reach either
    to a LAN or nextgen network environment and provide less than
    the 99.999% service availability typically expected by the
    customer. In addition, IP based solutions require the use of IP
    phones. These are typically less reliable, less feature rich and
    more expensive than traditional phone sets. Although
    improvements are being made, most IP based solutions continue to
    fall short of business expectations.
|
| |  | IP enabled PBX.Over
    the last 12 months many main stream PBX manufacturers have
    introduced migration plans for traditional or legacy
    infrastructures. These migration strategies allow the use of
    existing handsets and applications to varying degrees. These
    upgrades tend to be expensive, and somewhat complex, for most
    enterprises to deploy, but nonetheless do supply a viable
    alternative to reach off premise facilities of the enterprise,
    and realize the cost efficiencies promised by converged networks.                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Centrex.Centrex is
    a business telephone service that is offered by local telephone
    companies from their central offices. While Centrex offers some
    of the same features as PBXs, its effectiveness is constrained
    by phone companies capacity, its lack of interoperability
    with PBXs, its geographic limitations and its reliance upon the
    local phone company for service and support. Adding new services
    for a Centrex provider is time consuming, expensive, cumbersome
    and provisioning complexity can often prohibit customer
    acceptance.                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Off-Premises Extension.An Off-Premises Extension is a
    dedicated telephone line that originates from a PBX and extends
    a subset of PBX features and applications to remote users. These
    offerings cannot support digital telephone sets, and require an
    expensive dedicated leased line or private network connection.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

The inability of most of these solutions to fully
integrate with the PBX has caused businesses to deploy separate
voice networks for their outlying offices, limiting the
effectiveness of company communications and increasing the
burden on systems administrators. In addition, companies seeking
to provide business telephony for their teleworking employees
arent provided cost-effective, full-featured solutions.

Enterprise
Voice Evolution

As business organizations decentralize,
distributed networks are becoming increasingly important. While
data networks have evolved to meet this critical business
requirement, there is a similar need for a suitable voice
solution that cost-effectively utilizes the companys voice
systems, its features and its applications to offer company-wide
voice applications to all employees. This includes employees at
smaller outlying offices, telecommuters and mobile workers.
Furthermore, in order to lower costs and simplify network
administration, companies are increasingly demanding that
distributed voice and data services be offered over the same
centrally-managed communications infrastructure. This
convergence of voice and data is made possible by technology
that can convert voice transmissions into packets of data and
advances in Quality of Service (QoS) which enable the
transmission of voice over private managed data networks and
public data networks, such as managed IP networks.

As a result of their reliability, the wide
variety of applications supported and the size of their
installed base, proprietary, circuit-switched PBXs are pervasive
in the enterprise arena and are likely to remain entrenched as
the central system delivering enterprise voice on which new
applications are developed and deployed for many years to come.
However, businesses are looking to IP-enable their present
systems to

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support taking advantage of their data networks
and lower communications costs as well as to take advantage of
emerging access networks in support of an increasingly virtual
workforce. Most PBX and KTS system manufacturers are IP enabling
their systems through IP trunk cards in order to provide
multi-site connectivity. Some vendors are developing converged
systems which support both TDM and IP backplanes.


However, this only addresses inter node
connectivity and doesnt address emerging access networks
and/or line side applications. To address these, a solution is
required that packetizes both the voice traffic and PBX
signaling information. Given that each PBX system has its own
signaling information alogorithims which must be used to deliver
features and applications to the user via the corresponding
handset, solutions for the sizeable installed base must support
the breadth of diverse signaling protocols. They must also offer
a centrally-managed interface to the main system and have the
capability of packetizing and transmitting voice and signaling
information over both traditional circuit-based voice and data
networks as well as emerging wired and wireless packet networks.

IP PBX vendors are experiencing introductory
success in targeting the smaller PBX and/or KTS environment and
smaller scale enterprise networks. However, vendors have found a
key barrier to acceptance is the inability to interoperate with
legacy environments. To address this need a solution must enable
an enterprise to leverage its existing applications and
interoperate with legacy switches and desksets while
incorporating new IP switches. This provides a company an
affordable migration path.

In taking a closer look at the enterprise
telephony application environment, applications traditionally
have sat behind the PBX and were historically switch-specific,
in that they did not operate with other PBX vendor protocols.
Over the last few years, applications have become open and sit
behind a LAN or managed Intranet. On a smaller degree, this
openness has allowed some applications to move out of the
enterprise and into a hosted model. Solutions which
support both Customer Premise Equipment (CPE) and
network based applications provide another example of enabling
an enterprise to have choices for their migration path.

Over the next five to ten years, co-existence, in
the form of hybrid or converged solutions, will likely prevail.
This will allow an enterprise to leverage their existing
infrastructures while having flexible choices for experiencing
new solutions. Resulting solutions will support new platforms
inter-working with legacy switches and applications, support
legacy and IP voice terminals, support feature richness through
digital line interfaces to preserve the user experience, as well
as support CPE and service providers network environments.

MCK Enables the Distributed
Enterprise

MCK is a player in this enterprise voice
transformation because of our unique physical position in the
network. Our systems connect to the PBX, KTS and/or IP-based
system, speaking their protocols (the systems signaling
language), and also connect to the network, speaking traditional
or nextgen IP protocols. In doing so, MCK enriches a line side
voice network while laying a solid foundation for the future by
minimizing the impact of changing technology, bridging gaps and
allowing enterprises to evolve their voice capabilities via the
path of their choice.

MCKs solutions address the access or line
side of the enterprise voice environment. MCKs solutions
support the majority of PBX and KTS systems in the industry. By
packetizing both the voice traffic and CPE signaling
information, MCKs products deliver full-featured business
telephony and applications to an end user via a range of
devices  each of which are enabled to function as
digital sets. MCKs products also offer a centrally-managed
interface to the main system and have the capability of
packetizing and transmitting voice and signaling information
over both traditional circuit-based voice and data networks as
well as emerging wired and wireless packet networks. This
enables end users to access their companys voice system
from anywhere  outlying offices, home offices,
temporary offices and while on the road  while
preserving the experience they have come to expect. This
experience includes: four digit dialing, calling party display,
call waiting/holding/forwarding/transfer/conferencing, telephony
applications, etc. over any network and thru any telephony
enabled device  whether wired, cordless or wireless.

Supporting the broadest range of protocols,
networks and devices, MCK solutions fulfill the market need for
widespread interoperability, creating a more open
enterprise by enabling business quality voice anytime,

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anywhere, over any network. Our solutions support
Alcatel, Avaya (Definity and MAGIX), Ericsson (MD110 and BP250),
Iwatsu (ADIX), NEC (NEAX, Elite), Nitsuko (I-series), Nortel
(Meridian and Norstar), Panasonic (DBS) and Toshiba (Strata
DK), representing over three quarters of the U.S. installed PBX
and KTS base. They also provide users choices in access networks
(e.g., analog, IP, ISDN, T1, E1, Frame Relay, cellular, ATM or
wireless) and devices (e.g., analog, digital, cordless, mobile
or IP phones). With the business appeal of an appearance
of one that is seamlessly connected in a virtual
community, an enterprise becomes a unified company for its
employees and callers.


In addition, MCK products have the benefit of
reducing the total cost of ownership by enabling a company to:
leverage their existing investments in voice and data equipment;
eliminate voice network charges for traffic between offices by
utilizing data networks in a toll bypass situation; streamline
network administration through the utilization of industry
standard network management techniques; simplify training and
provide enterprises the flexibility of choosing their migration
path for when and how they evolve to nextgen services, systems,
features and applications.

When many companies talk about convergence, they
refer to voice and data over a unified IP network. At MCK,
were committed to a more open enterprise by delivering
convergence along three dimensions. We:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extend enterprise voice to distant locations
    through voice over a variety of networks, not just IP, creating
    an appearance of one company-wide system meeting the telephony
    needs of:



| |   |                                              
| | - | ---------------------------------------------
| |  | Mobile workers (campus wide or over cellular)
|
| |  | Employees working at home                    
|
| |  | Branch office workers                        
|
| |  | Remote call center agents                    



| |   |                                  
| | - | ---------------------------------
| |  | Bundle with service providers to:



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | Unite CPE and network services to deliver new
    value added PBX extension services                      
|
| |  | Blend PSTN and wireless networks for greater
    portability while eliminating infrastructure restrictions



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Bridge technology gaps between existing and
    nextgen applications, switches and services to enable company
    managed migration from legacy to nextgen systems.

Key to enabling this power of convergence is the
ability to preserve end user interfaces while providing access
to the widest array of new experiences. The following are the
key attributes of our solution:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Full-Featured Remote Voice Access.Our solutions provide the features and
    applications of enterprise telephone systems to employees at
    outlying offices, which may be local or geographically
    dispersed, home workers and mobile workers over wired or
    wireless, circuit or packet networks. Our solutions allow these
    distributed workers to utilize voice switch features such as 3
    or 4 digit internal dialing, call hold, transfer and conference.
    They also give employees access to company chosen telephony
    applications such as voicemail, unified messaging, auto
    attendant, directories and automated call distribution.
    Extending these voice applications to outlying or mobile
    employees improves business reach by making them closer to
    customers, partners and suppliers, increases employee
    productivity, facilitates internal collaboration and delivers to
    external callers transparent access to all telephone extensions
    throughout an enterprise.
|
| | Digital Line Extension Technology.The features and applications of the
    voice switch reside on its digital line or user side. We have
    developed proprietary software and hardware interfaces that
    extract the voice and voice system signaling information from
    the user side of the switch. Our switch-side or gateway products
    then packetize and transmit this information to client-side or
    remote products over existing voice or data networks. Utilizing
    this captured information, our products mimic the digital line
    side of the PBX, thereby transparently connecting the
    users digital telephone set to the main voice system.
    Based on the protocol expertise and intellectual property we
    developed over the past decade, our products enable                                                                                                                                                                                                                           

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | companies to deploy effective extended voice
    solutions without significant reconfigurations or upgrades to
    their existing enterprise voice systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Similarly, our products enable employees at
    satellite or branch offices, home workers and mobile employees
    to use their digital telephone sets and existing user interfaces
    to seamlessly connect with their companys voice system.
    Using our digital line extension technology, we are also working
    with a number of companies to enable digital telephone sets to
    interface with next generation corporate voice systems such as
    IP-PBXs and network-based voice systems and applications. This
    digital line extension technology also enables us to terminate
    multiple types of telephone sets, including a variety of
    third-party digital telephone sets, analog telephone sets,
    cordless sets and IP-based telephone sets, off traditional
    and/or nextgen voice systems using MCK gateway products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Packet Voice Architecture.Our extensive experience in
    packetizing voice, voice signaling information and voice
    applications enables us to deliver a complete distributed voice
    solution over traditional circuit-based, packet-based and
    wireless networks. We have expanded our original proprietary
    Remote Voice Protocol (RVP) software platform to
    include a Common Terminal Protocol, Common Network Protocol and
    Common Switch Protocol. Using these, we packetize, compress,
    encode, transmit and decode voice, interfacing with a broad
    range of switches, to a diverse range of devices over a range of
    networks, providing enterprises and services providers broad
    business reach alternatives. Networks supported include
    asynchronous transfer mode, or (ATM), digital
    subscriber line, or DSL, fiber, frame relay, IP, integrated
    services digital network, or (ISDN), leased line,
    T-1, fractional T-1 and PSTN. Additionally, during the past
    year, we have evolved RVP to support cellular and broadband
    wireless enabling increased access portability and eliminating
    infrastructure restrictions. Our support of this broad range of
    signaling protocols creates a more open enterprise by providing
    enterprises migration alternatives.
|
| | We are evolving this technology to enable
    enterprises to incorporate new IP switches which interoperate
    with legacy switches, desksets and applications. This includes
    adding support for H.323, SIP and MGCP protocols which enable
    our products to interface with nextgen voice equipment located
    in either the enterprise or the network infrastructure or
    service providers. Our products packetize voice using industry
    standard compression algorithmns.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Lower Cost Solution.Our products provide a cost-effective
    solution, lowering costs in the following areas:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Transmission.Our
    products lower transmission costs by consolidating voice and
    data traffic over a single network, eliminating local loop
    service charges through toll bypass and enabling remote users to
    utilize volume-based, corporate long distance rates.                                                                                                                                                                                            
|
| |  | Management.Our
    products provide telecom managers the ability to centrally
    manage our remote devices using Telnet, hypertext mark-up
    language (HTML), and simple network management
    protocol (SNMP), with graphical user interfaces. Our
    customers can use these remote monitoring and diagnostic
    capabilities to solve problems on-line, thereby reducing the
    time and cost associated with dispatching a technician to a
    remote site.
|
| |  | Equipment.Our
    products enable companies to utilize their existing capital
    investment in enterprise voice systems, voice applications and
    data networks, thereby eliminating the need to expend
    significant additional capital on disparate, incompatible
    solutions such as KTS systems.                                                                                                                                                               
|
| |  | Facilities.Our
    products allow companies to reduce physical facility costs and
    infrastructure investments by enabling employees to work
    effectively outside of standard company locations.                                                                                                                                                                                                                                                                     



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Compatibility with Leading voice switch
    manufacturers.We have worked with
    Alcatel, Avaya, Ericsson, Iwatsu, NEC, Nitsuko, Nortel,
    Panasonic and Toshiba to develop interfaces between our software
    platform and their primary voice communications systems. These
    manufacturers have tested and validated in their labs that our
    platform is interoperable with their primary switching products,
    including 4400/4200 (Alcatel), DEFINITY and MAGIX (Avaya),
    MD110/ BP250 (Ericsson), ADIX (Iwatsu), NEAX 1000/2000/2400
    (NEC), 1-Series (Nitsuko), Meridian and, Norstar (Nortel), DBS
    (Panasonic) and Strata DK (Toshiba) equipment.

8



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Strategy

Overall, our strategy is to balance our need to
focus on todays revenue with the opportunity to be a
leader in nextgen environments. Our marketing, sales and service
delivery strategy is to partner with leading companies to
deliver solutions for enterprise customers. Our network of
partners include distributors, resellers, equipment providers,
system integrators and service providers. We occasionally deal
with end-users of our products on a direct basis. During the
fiscal year ended April 30, 2003, the reduction in capital
spending decreased the demand for our products with these
partners and subsequently our revenues. In response to this
reduction, we optimized our territory sales model in the U.S,
enabling us to deepen our relationships with our large channel
partners. We implemented this model across Canada and Europe as
well. We worked with partners to closely map sell-in and
sell-through, enabling tighter channel inventory management.
During the year, we strengthened our channel contribution blend
thereby decreasing our dependency on any one segment as well as
capitalized on the value of our new products, and strengthened
the mix of products our channel partners offered to customers.

We continue to strengthen our partnerships with
PBX and KTS manufacturers, developing complimentary solutions to
their product portfolios. However, we have decreased our
reliance on their distribution and branding. MCK has developed
our own brand and independent channels. Given the development in
the market for this type of solution, we believe this has better
positioned MCK to more fully develop our business potential.

Our product strategy is to create a more open
enterprise by being a leading provider of distributed voice
solutions that enable businesses to unleash the power of their
enterprise by connecting disparate voice systems and networks.
Historically, our business-quality remote voice solutions
allowed corporations to extend the features and applications of
switch-specific, circuit-based PBXs across distances to branch
offices, remote call centers, and teleworkers using circuit
networks. We have evolved this capability to work with the
majority of enterprise voice systems  PBX, KTS and IP
based systems, through our Common Switch Interface; a diverse
range of devices  digital, analog, cordless and
cellular, through our Common Terminal Interface; as well as
circuit, packet and wireless networks, through our Common
Network Interface. Utilizing these, we cost effectively develop
products which meet the needs of growing segments within
enterprise voice environments.

During the fiscal year ended April 30, 2003,
we introduced the MCK EXTender 7000 for Branch Offices,
which provides survivability and greater local dial tone access
capabilities in an extended branch office environment.

In addition to our traditional MCK EXTender
products, we introduced: the CampusConneX PBXgateway to
provide an intra facility wireless solution that provides all
the features of the PBX in campus type environments such as
warehouses, hospitals, schools, etc. The CampusConnex PBXgateway
together with our Mobile ConneX, give us a much wider offering
to address the wireless enterprise.

We will continue to evolve our products. The
strategy for our single-user solutions is to continue emphasis
on simplicity, lower cost and expanding the range of devices
supported. Our multi-user products will continue to meet the
needs of smaller offices, embracing the broadest range of
networks, including the emerging local and wide area wireless
networks, while incorporating expanded ranges of local dialing
and survivability. Our bridge-the-gap solutions break down the
closed system environments found in todays enterprise
voice infrastructures by hooking protocols together, thereby
enabling disparate systems to interoperate. Examples include
enabling KTS systems to work within legacy PBX networks and/or
with IP switches, or enabling IP switches to work with the
installed based of digital sets and/or legacy voice networks.
These solutions will be developed when requested by specific OEM
partners.

As the voice infrastructure evolves over the next
five to ten years, we believe that legacy and nextgen systems
will co-exist. However, in time, we believe that the
switch-specific, circuit-switched PBX will begin to be replaced
with nextgen IP-based CPE or network-hosted voice solutions
located on the network outside of the companys premise.
Concurrently, we envision associated voice applications
migrating from a switch-

9



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specific, customer-owned model to a
standards-based model either managed by the customer or hosted
by service providers.


As MCKs distributed voice solutions
continue to enable more openness and push control out to the
edge of the network, end users will gain access to full business
functionality from any edge device by simply dialing into a
gateway and passing authentication. Over time, users will be
provided a range of applications and services from which to
choose their own defined experience. Ultimately we believe in
voice communications enabled via an infrastructure accessible as
easily as todays internet access adaptable on an
individuals own needs.

Technology

We have developed expertise in digital line
interface emulation and the packetization of voice for
transmission over data networks to address the technology
challenges of extending the features and applications of
enterprise voice systems to distributed locations as well as
enable a more open enterprise. Another key component
of our technological advantage is the flexible software and
hardware architecture upon which we build our solutions. We will
continue to prudently invest to maintain and extend our
technological advantage.



| |                                  
| | ---------------------------------
| | Digital Line Extension Technology

The rich features and applications of enterprise
voice systems are accessed through the proprietary user or
digital line side of the voice switch. These line-side
interfaces enable the delivery of the features and applications
of enterprise voice systems to digital telephone sets. As a
result of our years of experience in working with major PBX
voice equipment, we have gained a significant understanding of
these line-side interfaces and have developed line-side software
interfaces to most of todays enterprise voice systems. In
addition to our software interfaces, we have developed a
hardware subsystem capable of duplicating the electrical
interfaces of Alcatel, Avaya, Ericsson, Iwatsu, NEC, Nitsuko,
Nortel, Panasonic and Toshiba systems. These line-side software
and hardware interfaces extract the voice and the signaling
information required to interface with PBX and KTS systems and,
using our software platform, packetize this voice and signaling
information for transmission over voice and data networks as
well as wired and wireless to our access products. We have
developed messaging software that transmits this voice and
signaling information from our access products to the digital
telephone sets of the manufacturers that we support, thereby
transparently connecting these sets to the PBX or KTS.



| |                         
| | ------------------------
| | Delivery of Packet Voice

To deliver voice over data networks, solutions
must convert voice into packet form and then transmit these
voice packets alongside data packets. Despite the advantages of
simultaneous transmission of voice and data, there are also a
number of technological challenges to delivering voice over data
networks because audio quality can be distorted by jitter and
latency associated with congestion on the data network.

Our uniquely designed software platform,
packetizes, compresses and encodes circuit voice and signaling
information for transmission over data networks. We have
implemented both industry standard and proprietary voice
prioritization and voice fragmentation techniques that use
bandwidth efficiently while also ensuring that delay sensitive
voice packets are delivered with the quality expected from
voice. Much of this technology revolves around our core
expertise in developing software that runs on standard digital
signal processors, which are required for encoding voice for
transmission over bandwidth constrained networks. In particular,
we have designed and implemented the following software features
in our products to improve the quality of packet voice
transmission, minimize system delay and jitter, and utilize
bandwidth efficiently:



| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Voice Compression.We integrate a number of industry
    standard voice coding algorithms, including G.711, G.726, G.729A
    and G.723.1, that compress voice to reduce the total bandwidth
    required for transmission.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Echo Cancellation.We deliver echoless voice by
    integrating industry standard acoustic echo cancellation
    technology, known as G.165 and G.168, to which we have made
    proprietary enhancements.                                                                                                                                                                                                  
|
| |  | Silence Detection.Our proprietary silence detection
    technology eliminates unnecessary transmission of voice packets
    during the periods of silence that occur in normal conversation,
    freeing bandwidth for other uses.                                                                                                                                                                         
|
| |  | Comfort Noise.We
    incorporate technology that inserts comfort noise during periods
    of silence so that users do not inadvertently think that the
    phone call is no longer active.                                                                                                                                                                                                                 
|
| |  | Jitter Buffering Techniques.Our products adapt to the real-time
    irregularities in network transmission and ensure all traffic
    reaches its endpoint at the appropriate time by introducing
    delay that is unrecognizable to the user.                                                                                                                                                            
|
| |  | Dual Tone Multi-Frequency or
    (DTMF) Processing Technology.Dual tone multi-frequency tones are
    generated by depressing buttons on digital telephone sets,
    enabling the digital telephone set to recognize dialed numbers
    used for outbound calls and for applications such as voicemail.
    Our proprietary technology improves the transmission of these
    tones over packet networks.

We have been awarded a United States patent for
technology developed and implemented on our MobileConneX
product. This technology allows for the translation of DTMF
tones into various PBX signals needed to control and access the
PBX from a cellular or analog phone. We also have filed
additional United States and foreign patent applications for
technology developed in the EXTender 7000 for branch offices. We
believe this patent activity enhances our technology value and
helps protect our intellectual property.

We have significant experience in transmitting
packet voice over both low-speed, traditional telephone networks
and higher speed, broadband networks. We have developed network
interfaces for the delivery of distributed voice over
traditional telephone, ISDN, wireless and broadband connections
and have incorporated third-party network devices to support
T-1, fractional T-1, leased line, frame relay, IP, ATM, DSL,
fiber, cable and broadband wireless networks. In addition, to
deliver data alongside our packet voice transmission, we have
expertise in terminating dial-up networking connections and
bridging standard data traffic.

Our software platform has the ability to extract
and translate legacy, switch-specific signaling, as well as a
number of evolving industry standard protocols, such as GR-303,
H.323, SIP and MGCP. This enables our products to not only
interface with the large and diverse installed base of voice
systems but with next generation enterprise voice systems and
applications as well as terminate analog, ADSI, digital and
IP-based telephone sets. Supporting both legacy and nextgen
protocols enable our products to foster an open enterprise
interfacing with voice CPE as well as voice equipment and
applications located in the network infrastructure of
traditional, application and nextgen service providers.



| |                     
| | --------------------
| | Product Architecture

We develop our products using a combination of
proprietary and commercial hardware and software subsystems. Our
product architecture enables these subsystems to be configured
and adapted in order to deliver a broad range of enterprise
voice product solutions, thereby minimizing product development
cycles and maximizing manufacturing efficiency. Our products are
fully compatible with the large installed base of telephone
systems from Alcatel, Avaya, Ericsson, Iwatsu, NEC, Nitsuko,
Nortel, Panasonic and Toshiba, and require no design
modifications or upgrades to these systems or their respective
digital telephone sets.

We have designed a standard hardware architecture
that serves as a common platform for our software modules. We
use industry standard digital signal processors and programmable
logic devices to build a standard hardware platform that can be
software modified to support different applications or telephone
systems without requiring a hardware change. We have also
architected our products with a variety of standard telephony
and data network interfaces to ensure that we can transmit
packet voice over the multiple network environments currently
available.

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Most of our products share a common software code
base that comprise our digital line interface software subsystem
and our software platform. Our digital line interface software
subsystem is responsible for the interface to the proprietary
software located on the digital line of the legacy and IP-based
voice switch. This software subsystem has been designed to
emulate a majority of the business markets telephone
systems without requiring a change to our hardware architecture.
This flexible software architecture also enables us to easily
add software support for new enterprise voice systems. The
software platform is responsible for packetizing voice and
signaling information, as well as conditioning these voice
packets for transmission over data networks.

All the software for our IP EXTender 4000,
EXTender 6000, EXTender 7000 for branch offices and PBXgateway
family runs on the VxWorks® real-time operating system from
Wind River Systems. This industry standard operating system
provides our engineers with a standard development environment
in which to design new proprietary software applications and
easily incorporate third-party software applications. A standard
development environment such as VxWorks allows for the rapid
prototyping and application development necessary for our
products that serve as platforms for future applications.

Products

We have worked with Alcatel, Avaya, Ericsson,
Iwatsu, NEC, Nitsuko, Nortel, Panasonic and Toshiba to develop
interfaces between the protocols of these leading enterprise
voice vendors and our standard software platform and hardware
architecture. We have entered into agreements with leading
vendors which provide us access to their protocols, to develop,
manufacture and sell products which interface with each
vendors equipment. As a result, we have developed
substantial expertise in understanding and interfacing with
their systems. We have tested and validated or had vendors
certify in their own labs that our software platform is
interoperable with a variety of their equipment. Currently, our
products are compatible with the following PBX systems:
4400/4200 (Alcatel); DEFINITY and MAGIX (Avaya); MD110/BP250
(Ericsson); ADIX (Iwatsu); NEAX and Elite (NEC); 1-Series
(Nitsuko); Meridian and Norstar (Nortel); DBS (Panasonic); and
Strata DK (Toshiba).

The MCK solution consists of the following
component parts:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gateways.Devices
    located near the voice switch, PBX or KTS, that extend the
    signaling along with the voice traffic and applications to our
    remotely located client devices; and
|
| |  | Clients.Single or
    multi-user remotely based, CPE devices that service outlying
    offices, teleworkers and mobile workers.                                                            

Our products enable companies to provide the
functionality of enterprise voice systems and all of their
supported applications to users who traditionally have not had
access to the companys telephone system and its voice
applications because of the limitations of traditional systems.
Our products enable the main telephone system to act as a server
that distributes features and applications to any and all
locations over networks such as ATM, DSL, cable, fiber, frame
relay, IP, PSTN, ISDN, leased line, T-1, fractional T-1,
cellular and broadband wireless connections. Employees can
utilize digital telephone sets identical to the sets deployed at
company headquarters or cell phones, analog sets or ADSI sets
provided by third parties and access the central voice system
for applications such as voicemail, automated call distribution,
auto attendant, directories and interactive voice response, and
features such as 3 or 4 digit internal dialing, conferencing and
call forwarding. By enabling all employees, regardless of
location, to have access to a company-wide system, our solutions
create a unified voice network.

PBXgatewaytm
Products

Our family of PBXgateway products, located at the
companys PBX/KTS site, interface with the line side of the
switch and create extensions of voice and telephony applications
to our clients or remotes.



| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PBXgatewayTMII.The PBXgateway II supports up to 24 simultaneous
    users connected via both our multi-user and single-user EXTender
    client devices. The PBXgatewayTM II will
    transmit voice over a

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | wide variety of data networks including ATM, DSL,
    fiber, frame relay, IP, ISDN, leased line, T-1 and fractional
    T-1 connections. It also has available internal network
    termination optionals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | PBXgatewayTM.The PBXgateway supports our multi-user and IP-based single user
    EXTender client devices and is available in both 8 and 12 port
    versions. Like the PBXgateway II, the PBXgateway will
    transmit voice over a wide variety of data networks including
    ATM, DSL, fiber, frame relay, IP, ISDN, leased line, T-1 and
    fractional T-1 connections.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | MobileConneX
    PBXGatewayTM.The MobileConneX PBXgateway allows a cellular handset to act as
    a fully functioning digital handset. Using a cellular handset, a
    user can send and receive calls through the PBX as well as
    access all of the companys voice applications 
    even when the user is on the road. This enables a user to handle
    a call just as if they were sitting at their desk in the office.
    This includes call hold, transfer, conferencing, 4-digit
    dialing, auto attendant, directories as well as receiving calls
    via the cellular handset. This ability to receive calls is more
    powerful than a find me capability since the PBX
    treats the cell phone as if it were a digital deskset. The
    MobileConnex PBXgateway bridges the call traffic directly to the
    cellular handset through the enterprise voice switch. For
    instance, if there is no answer, the voice mail system responds
    giving the user the convenience of one voice mailbox to check.
    This solution requires no modification to standard cell or
    service equipment.                                                                                                                                                                                                                                  
|
| |  | CampusConneXTMSystem.The CampusConneX System is an
    in-building wireless solution that operates in the Unlicensed
    Personal Communications Services (UPCS) spectrum between
    1920 and 1930 MHz allocated by the Federal Communications
    Commission (FCC) for a new generation of wireless systems
    and delivers portable voice and PBX/KTS applications over
    existing communications networks to users anywhere on campus,
    increasing employee productivity, business effectiveness and
    overall customer satisfaction. The CampusConneX System consists
    of three components: the PBXgatewayTM, base stations
    and wireless phones. The CampusConneXTM PBXgateway
    connects to digital or analog ports on the PBX/ KTS and
    processes calls to and from system users. The
    CampusConneXTM Base Stations are strategically
    located throughout the customer premises to ensure reliable
    connectivity to the CampousConneXTM Phones.                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | RemoteConneXTMPBXGatewayTM. Targeted specifically to the
    needs of casual teleworkers and tapping the power of the
    traditional corporate communications system much like the MCK
    EXTender solutions, the RemoteConneX PBXgateway and its
    associated Interactive Phone uniquely utilizes standard POTS
    connections and feature-enhanced analog phones to provide PBX or
    KTS system functionality. In doing so, MCK is able to offer one
    of the lowest price points in the industry for true PBX
    functionality over analog lines. Access to popular business
    telephony features are provided through the use of the
    screenphone menu  call hold, transfer and conference,
    four digit internal dialing, corporate directories, voice mail
    and more. Each of these are useable at the touch of a button.
    Incoming calls to the employees office phone number are
    simultaneously directed to their RemoteConneX Phone. An
    employees daily work location is transparent to callers,
    auto attendant support is maintained, if available, and
    unanswered calls continue to be routed to the corporate
    voicemail system. In addition, the employee has the added
    convenience of full accessibility when away from home by simply
    redirecting incoming calls to their cellular phone.
|
| |  | SetConneXTMPBXgatewayTM.Targeted for enterprises
    which desire manageable migration paths linking together
    heterogenous environments this gateway is initially targeted for
    enterprises looking to link their IP-based switches with legacy
    sets. This is the only gateway in the industry that bridges the
    gaps between legacy sets and next generation switches,
    applications and services. Other versions may be developed based
    upon the specific requirements of OEM partners.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

All of our Gateways can be centrally administered
over a Telnet connection, an in-band RVP connection, or with
SNMP and HTML interfaces.

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PBX Client
Devices

Our multi-user or branch office products connect
outlying users to the companys telephone system over voice
and/or data networks.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MCK
    EXTenderTM6000 for branch offices.EXTender 6000 for branch offices
    is a multi-user product that is available in both 8 and
    12 port configurations and is designed for those offices
    within the same calling area as the companys voice switch.
    The EXTender 6000 for branch offices located at the remote
    office connects to our PBXgateway I and II products located
    at the companys PBX site. The product has dual external
    network interfaces that allow for multiple connection options
    over a wide variety of data networks including ATM, DSL, fiber,
    frame relay, IP, ISDN, leased line, T-1, fractional T-1 and
    broadband wireless connections. It also provides redundancy
    capability. An optional analog card is also available, which
    provides local dialing capabilities and emergency
    911 access. The EXTender 6000 for branch offices can
    be centrally administered over a Telnet connection, an in-band
    RVP connection, or with SNMP or HTML interfaces. The
    products ability to dynamically allocate bandwidth between
    multiple users allows for flexible configurations and bandwidth
    conservation. The product is designed using a standard 19-inch,
    rack-mountable form factor so multiple units can be deployed in
    parallel to service larger outlying offices.
|
| |  | MCK
    EXTenderTM7000 for branch offices.EXTender 7000 for branch offices
    is a multi-user product that is designed for branch offices
    which are more geographically dispersed and/or larger. The
    EXTender 7000 provides additional local calling ability,
    survivability, and optional built in WAN interfaces. It is
    available in a 24 port configuration and also connect to
    our PBXgateway II product located at a companys PBX
    site over a wide variety of networks. As with the
    EXTender 6000, the EXTender 7000 can be centrally
    administered over a Telnet connection, an in-band connection or
    with SNMP or HTML interfaces. It also uses a standard 19-inch,
    rack-mountable form factor so multiple units can be deployed in
    parallel for scalability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Our EXTender single-user product line enables
teleworkers and geographically distributed call center agents to
connect to the companys main telephone system and data
network via a PBXgateway over public and private networks.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MCK
    EXTenderTM1000.The EXTender 1000 supports both voice and data
    over a single POTS telephone line. The product contains a
    built-in, industry-standard 56 kilobits per second, or
    Kbps, modem which enables the user to access the corporate data
    network and supports standard Windows-based, dial-up networking
    technology. The remote users personal computer and
    full-featured digital telephone set plug into the product, which
    terminates and multiplexes voice and data over a single
    telephone line. The EXTender 1000 unit is situated at the remote
    location and connects to another EXTender 1000 unit located at
    the companys PBX site.
|
| |  | MCK
    EXTenderTM3000.The EXTender 3000 supports both voice and data
    over an ISDN connection. An integrated services digital network
    connection is composed of two 64 Kbps channels that each
    can deliver a separate network connection. With its built-in
    network interface, the EXTender 3000 enables the remote
    user to connect a digital telephone set and a personal computer
    into the EXTender 3000. The EXTender 3000 unit
    situated at the remote location is connected to either another
    EXTender 3000 unit or a PBXgateway II located at the
    companys PBX site. There are two versions of the
    EXTender 3000:                                    
|
| |  | MCK
    EXTenderTM3000
    S/T.The EXTender 3000S/ T
    utilizes a serial data connection and offers simultaneous voice
    and data multiplexed over a single channel. The second channel
    is available for analog devices such as a fax, additional phone
    or a modem. It incorporates a standard Windows-based, dial-up
    networking technology to enable the user to set up a dial-up
    network connection to a remote access server.                                                                                                                                                                                                                                               
|
| |  | MCK
    EXTenderTM3000 E.The EXTender 3000E offers dedicated voice over one channel
    and a 64 Kbps Ethernet data connection on the second
    channel. The EXTender 3000E uses an Ethernet port and bridging
    technology to enable simultaneous voice and data network access
    capabilities. In addition,                                                                                                                                                                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | standard hardware compression technology is
    utilized to significantly enhance data throughput. When not used
    for Ethernet data, the second channel is available as an analog
    port, supporting a fax, additional phone or modem.                                                               
|
| |  | MCK
    EXTenderTM4000.The EXTender 4000 delivers voice extension
    over any IP network. The product sits behind an external
    network termination device and delivers IP-based voice over data
    networks. The IP EXTender 4000 connects to a
    PBXgateway product located at the corporate site.

Other
Products



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recording Interface.Our Recording Interface products
    convert digital voice from proprietary PBXs into a standard
    audio output so that voice calls can be recorded on any voice
    logger or recording device. They are used in a variety of
    applications such as call center, contact center, voice security
    and test verification applications. We offer
    3 configurations that support from 2 to 48 lines, and
    are modular in nature, allowing for easy expansion to
    accommodate more users. Our Recording Interface is compatible
    with the following voice systems: 4400/4200 (Alcatel); DEFINITY
    (Avaya); ADIX (Iwatsu); Meridian (Nortel); Norstar (Nortel); DMS
    Centrex (Nortel); CallCenter (Aspect); NEAX (NEC); and HiCom
    (Siemens).

Sales and Marketing

We primarily sell our products through an
indirect distribution system that includes the following
channels: Distributors, OEMs, Teleco resellers, systems
integrators, telecom and datacom VARs, and service providers.
Over the past 12  18 months, we have
migrated to the use of Distributors as our primary distribution
channel. We support our sales channels with our own internal
sales professionals as well as marketing programs, lead
generation, educational programs, field technical support and
telephone technical support. Our multi-channel strategy enables
us to create end-user demand for our products and services, and
access corporate opportunities identified by our channel
partners, while also allowing the enterprise customers to choose
the reseller that is most appropriate for delivering those
products and services to them. Our primary distribution channels
include:

|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|OEMs                                 |  | Alcatel, Ascom, Verint (formerly Comverse),
    Dictaphone, Ericsson, Iwatsu, NEC, Nice, Nortel, Panasonic,
    Toshiba                                                                                                                                                                                                                                                                                                   
|Teleco Resellers                     |  | Ameritech/ SBC and Southwestern Bell, Bell
    Canada, Bell Mobility, Bellsouth, Cingular, Nextel, Sprint,
    Verizon, Telus                                                                                                                                                                                                                                                                                             
|Systems Integrators and Distributors |  | Anixter, Catalyst, Dacon, DT Asia, GBH,
    Graybar Electronic, Optus, NextiraONE, Sprint North Supply,
    VodaOne, Williams, WestCon                                                                                                                                                                                                                                                                                    
|Value Added Resellers                |  | 1Nation Technology, Affiliated Telephony,
    All-Mode Communications, All-Tel Communications, Cartel
    Communications, Datapulse PLC, Digital Techniques Asia, Doe
    Technologies, Dynametric, Dyncorp Information Systems, IPC
    Information Systems, Newsouth Communications, PB Exchange,
    Ronco, Shared Technologies, Sound Communications, Symon
    Communications, Tantacom Systems, TeleSwitch, Telecorp

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During the fiscal year ended April 30, 2003,
we focused a majority of our internal resources on distributor
partners. As the same time, we established a team focused on the
OEMs and ILECs/ RBOCs. This approach has
enabled MCK to gain resource efficiencies while at the same time
strengthening relationships with our primary partners by
increasing their revenue stream and sell-through for MCK
products.

Our channel sales managers work at both a
corporate level and a local level with our channel partners to
develop sales and marketing plans that are implemented at the
field level. Our channel managers are regionally deployed and
are located across the United States, Canada and Europe.

Channel sales managers provide support to the
channels in their geographic territory. They work closely with
our channel partners, participating in end user briefings,
proposals, product training sessions, end user seminars, trade
shows and other demand generating activities. In addition, they
are involved in generating and qualifying end user leads that
are closed in partnership with our channel partners.

Our field-based systems engineers provide our
channels with technical training and perform pre- and post-sale
technical support for our distribution partners and end user
customers. These sales engineers have in-depth industry
experience and product expertise. They assist our channel
partners with proposals, configurations, requests for quotations
and executive briefings, and perform other consultative duties.
Our territory managers and sales engineers regularly visit our
distribution partners offices to conduct product and
technical training.

Our distribution channels are responsible for
identifying potential business customers, selling our products
as part of complete solutions, and installing and supporting the
equipment at end-user sites. We generally establish
relationships with our most significant distribution channels
through written distribution agreements that provide pricing,
discounts, and terms and conditions under which they may
purchase our products for resale. These agreements are generally
non-exclusive, may be terminated at will and do not prevent our
resellers from carrying competing lines. Many of these
agreements are based on attaining specific sales levels.
However, a number of our distribution partners resell our
products without written agreements, with terms determined on a
purchase order basis.

Sales outside of the United States accounted for
18%, 20%, and 12% of sales in the fiscal years ended
April 30, 2001, 2002, and 2003 respectively. We sell
primarily products which interface with Alcatel, Avaya,
Ericsson, Nortel and Toshiba systems, globally.

We focus our marketing efforts on brand
awareness, lead generation, sales tools, promotions and sales
support activities. Our marketing audience includes existing and
prospective customers, channel partners, trade and business
press, industry analysts and others who are influential in the
industry.

We selectively participate in trade shows, taking
advantage of joint marketing opportunities with our channel
partners whenever possible. Trade show efforts may include shows
in the telecommunications, teleworking, CTI, networking, call
center and service provider industries. We participate in many
seminars, dealer and user group events, and industry-related
conferences with our channel partners. We use direct marketing
programs, including electronic methods, to generate awareness
and qualified leads. Most campaigns are executed in conjunction
with our channel partners, customized with their messages and
contact information and then mailed to their prospect and
customer lists. Additionally, our marketing resources also
support public relations activities, including joint press
releases with our partners, editorial coverage and speaking
opportunities, as well as create by-lined articles, product
reviews, customer success stories, competitive assessments and
white papers.

To support our sales channels, we prepare
training materials, presentations, collateral,
cost-justification tools, competitive analysis, case studies,
product configurations, fact sheets, product introduction kits
and customer solution success guides. Our web site serves as an
information source for end users, prospects and channel
partners, as well as provides a lead generation, configuration
tool, and customer service resource.

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Customer Support

A high level of customer support and service is
critical to developing long-term relationships with our major
distribution channels and end user customers. The majority of
our service and support activities are related to installation
support and initial network configuration issues. In North
America, we also offer a variety of comprehensive and flexible
maintenance and support programs including basic product
warranty, installation services, 24 hour a day, seven days a
week remote telephone support and onsite maintenance services.
Our products are architected with support in mind. For example,
our products are engineered with remote monitoring, management
and diagnostic capabilities so that problems can be diagnosed
on-line, thereby reducing the time and costs associated with
dispatching a technician to a remote site.

A number of our distribution partners provide
customer support offerings for our products. These distribution
partners provide installation, onsite maintenance and telephone
support services to our end users. To complement this service
infrastructure, we have engaged Vital Network Services, an
outsourced technical support and customer services organization,
to provide fee-based telephone support, installation and onsite
maintenance services. We sell these services indirectly and
sometimes directly, to end users. To date, our revenues
attributable to customer service and support services have been
immaterial. We provide high-level, back-up technical support and
engineering assistance for our distribution partners, and Vital
Network Services. We have established certification and
escalation guidelines with our channel partners, and Vital
Network Services to ensure that the appropriate technical
resources and management attention within our company are
focused on problems that are not solved in a timeframe
commensurate with the problems priority. At April 30,
2003, we employed six people in customer support.

In 2003, we added a pay for service
capability, offering support for our customers for Network wide
issues where our expertise can add value for issues outside of
MCK products. Examples include edge routers and various
PBXs. This pay for service capability has
resulted in a small growth to our service revenue stream, but
more importantly, has provided a value added service for our
customers.

Customers

We sell substantially all of our products through
independent channel partners. The following is a representative
list of our indirect channel partners who have repeatedly
purchased products from us during the fiscal year ending
April 30, 2003:

|                                                                                                            |  |                                                                                                                   |  |                                                                                                                                      
|----------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|Alcatel
    Anixter
    ASCOM
    Avaya
    Bell Canada
    BellSouth
    Catalyst
    Dacon
    Dictaphone |  | Digital Techniques Asia
    Ericsson
    GBH
    Groupe Imeco
    Iwatsu
    NEC
    Nitsuko
    Nortel
    Optus |  | SBC/ Ameritech
    Sprint North Supply
    TCS West
    Teleswitch
    Toshiba
    Verint
    Verizon/GTE
    VodaOne
    White Radio

Through these channel partners, we continue to
target medium to large enterprises. More than 400,000 ports of
our products have been shipped to corporations such as 3M,
Alberta Energy Company, American Express, Avis, BancOne, Bank of
America, Bear Stearns, Bloomberg, Caisse Populaire, Canadian
Auto Association, Carlson Wagonlit, Continental Airlines,
Circuit City, CNN, Compaq, Deloitte and Touche, Fairmont Hotels,
Federal Bureau of Investigation, Fidelity Investments, General
Electric, Merrill Lynch, Morgan Stanley, Oracle, Pan Canadian,
Petro Canada, Pepsico, Promus Hotels, Prudential Securities,
Raytheon, TD Waterhouse Group, Thrifty Car Rental, United
Airlines, US Postal Service, Whirlpool and Xerox, among
others. We will work with our existing and new partners to
increase the market opportunity for, and drive market acceptance
of, our products. For the fiscal year ended April 30, 2003,
sales to Catalyst and GBH represented more than 10% of our
revenues.

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Research and Development

To maintain our technology leadership position,
we focus our research and development efforts on improving the
functionality and performance of our existing products and
designing new products that address customer needs and changes
in the marketplace. We have assembled a team of experienced
software and hardware engineers with capabilities in both voice
and data networking. Our engineering expertise includes a
significant understanding of:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | the digital line or user side of proprietary
    enterprise voice systems               
|
| |  | digital audio technology, such as echo
    cancellation and voice compression algorithms
|
| |  | voice enabling signaling                                                                
|
| |  | voice over packet networks including IP telephony                                       
|
| |  | data network and telephony interfaces                                                   
|
| |  | network diagnostic and management frameworks                                            

At April 30, 2003, we employed
27 people in our engineering organization, and intend to
continue to expand all functional areas of the engineering
organization as revenues increase or market competitiveness
demands. We perform research and product development activities
primarily in our Calgary, Alberta development facilities.

Our research and development process is driven by
market demand. Product development begins with a comprehensive
functional product specification based on input from all
functional groups and levels within our company. In addition, we
value feedback from our end-user customers and distribution
channel partners, and have incorporated a significant amount of
customer-requested functionality in our products. We utilize
information from industry standards committees organizations in
our product development process. Finally, we have maintained an
ongoing dialogue and established technology relationships with a
number of PBX and KTS manufacturers, internetworking vendors,
broadband equipment suppliers and service providers. We will
continue to focus our efforts with these companies to develop
products that meet specific market requirements in growth
sectors.

We intend to continue enhancing the functionality
of our existing EXTender, ConneX and PBXgateway systems by
expanding the range of products and client devices supported,
including the emerging wireless devices, and expanding support
of remote management and provisioning. We also will enhance our
product offering to more fully provide the international market
requirements. This will further differentiate our products from
the competition while broadening our addressable market. We will
focus our new products efforts on mobile environments and
bridging the gap between different switch environments such as,
legacy and nextgen switches, devices and applications.
Specifically for the later, we will enable IP switch and
telephony application providers, whether CPE or network based,
to distribute their systems functionality to the broadest
installed base of endpoints. This will not only give vendors a
stronger solution equation, but provide enterprises more
flexibility in managing their path to nextgen environments.

Product Validation Laboratory

Over the past few years, we have hired the
personnel and purchased the equipment necessary to build and
improve our product validation laboratory. Of the 27 people
in our engineering organization, six are dedicated full time to
our product validation efforts. Their efforts are focused on
ensuring world class product quality. At our Calgary, Alberta
development facility, we have constructed a state of the art
laboratory with equipment from such vendors as ADC Kentrox,
Alcatel, Broadsoft, Cisco, Ericsson, IBM, Iwatsu, Avaya, NEC,
Netopia, Newbridge, Nitsuko, Nortel Networks, Packeteer,
Panasonic, Paradyne, Sonus, Sylantro and Toshiba.

Our Calgary, Alberta facility system tests the
product line and validates our products integration with
the major voice switches, applications and desksets that we
support. We conduct extensive product testing to ensure that our
equipment meets the high standards for voice quality and
reliability associated with mission

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critical systems such as PBXs and KTS systems. We
also conduct extensive tests on the embedded systems within our
product line, as well as on all the features and functions.


Our Calgary facility also tests system
interoperability. The ability to deliver traffic within multiple
network environments and to interoperate with equipment from
numerous vendors has become a key component to the success of
communications equipment companies. Because no communications
equipment product can be validated independently of the network
within which it operates, or independently from the equipment
with which it interfaces, this lab conducts extensive tests of
our product line operating within multiple network environments
and interacting with equipment from numerous equipment vendors.
We conduct extensive tests that measure device performance,
quality of service and voice prioritization within multiple
network environments, and across a range of network conditions.
Our facilities contain extensive telephony and data equipment
and network circuits to conduct these tests.

We have implemented a product validation
procedure that enables us to deliver high quality voice
equipment that works within multiple network environments, is
compatible with most widely deployed network equipment, and is
capable of adapting to a wide range of network conditions.
Furthermore, the engineers in our product validation laboratory
work continually with validation engineers at other equipment
companies in order to compile feedback and recommendations to
improve our products.

Manufacturing

We outsource our manufacturing to OEM Worldwide
in Watertown, South Dakota. OEM Worldwide is ISO 9002
certified and provides full turnkey services, including material
procurement, final assembly, testing, shipment to our customers
and warranty repair. During the fiscal year ended April 30,
2003, we reduced the number of subcontractors from two to one to
realize product cost reductions.

We design and develop the key components,
including printed circuit boards and software, for all of our
products. In addition, we determine the components that are
incorporated in our products and select the appropriate
suppliers of these components. The contract manufacturer must
use the parts and suppliers we identify. Any variation from
these rules requires our written approval. We design the tests
and specify the testing equipment for the product testing
performed by OEM Worldwide.

We use a rolling six-month forecast, based upon
anticipated product orders, to determine our material
requirements. Lead times for the materials and components that
we order vary significantly and depend on factors such as
specific supplier, contract terms and demand for a component at
a given time. We, along with our contract manufacturer, may
terminate our contract without cause with an agreed upon
120 day notice. At that time, the terminating party must
honor all open purchases.

Competition

We compete in a new, rapidly evolving and highly
competitive and fragmented industry that is subject to
increasing product, market and technology changes brought about
by the introduction of new technologies, the deployment of
broadband networks and changes in the regulatory environment. We
believe that the main competitive factors in our market are the
following:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | technology partnerships, particularly among major
    PBX manufacturers and service providers
|
| |  | network enabled KTS systems                                                                  
|
| |  | end to end IP based solutions                                                                
|
| |  | system reliability and performance                                                           
|
| |  | sales and distribution capability                                                            
|
| |  | price/ performance characteristics                                                           
|
| |  | access to third-party technology                                                             
|
| |  | conformance to industry standards                                                            

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| |   |                                    
| | - | -----------------------------------
| |  | brand name recognition             
|
| |  | ease of deployment and use         
|
| |  | timeliness of product introductions
|
| |  | product features and breadth       
|
| |  | customer relationships             
|
| |  | technical support and service      
|
| |  | pace of enterprise voice evolution 

We believe our success in competing with other
manufacturers of communications products depends primarily on:



| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to enter into and maintain key
    technology, business development and distribution relationships
    with third-party manufacturers, distributors, resellers, system
    integrators and service providers in our market segment
|
| |  | our engineering, marketing and sales skills                                                                                                                                                                                                   
|
| |  | the price, quality and reliability of our products                                                                                                                                                                                            
|
| |  | our delivery and service capabilities                                                                                                                                                                                                         

Historically our principal competitors included
large telecommunications manufacturers such as Nortel and Avaya.
Nortels 6150 product line competes against our
Gateway and EXTender 6000 and 7000 products and their Home
Office II product competes against our EXTender 3000
product line. Avayas R300 Remote Office Communicator
product competes against our Gateway and EXTender 6000
products. Over the past year many of our partners, and others,
have introduced IP-enabled PBX products or strategies. These
systems allow for networking together of multiple locations of
an enterprise, a principal MCK value propostion. These
announcements have also served to ligitimize the marketplace for
IP telephony, thus accelerating its adoption. It is likely
that a number of other public and private companies are
developing next generation network access products that target
the branch office and telecommuting marketplaces. For example,
Intel® offers its iPOD product line to provide PBX
extension capabilities to branch offices. We expect competition
to intensify in the future and new competitors to emerge. Our
recently introduced Campus ConneX competes with in-facility
enterprise solutions offered by Spectralink, Ascom, NEC, and
Iwatsu, and others. During MCKs fiscal year 2003, several
vendors announced plans to move out of this space, namely Avaya
and Nortel. These and other vendors are also expected to
introduce enterprise voice systems built on the developing
802.11 standard. These systems may erode the market for
CampusConneX and similar products.

Many of our competitors are substantially larger
than we are and have significantly greater financial, sales and
marketing, technical, manufacturing and other resources, more
established distribution channels and stronger relationships
with service providers. These competitors may be able to respond
more rapidly to new or emerging technologies and changes in
customer requirements or devote greater resources to the
development, promotion and sale of their products than we can.
Furthermore, we believe some of our competitors may offer
aggressive sales terms, including financing alternatives, which
we may not be able to match. These competitors may enter our
existing or future markets with solutions that may be less
expensive, provide higher performance or additional features or
be introduced earlier than our solutions. Given the market
opportunity, we expect that other companies may enter our market
with better products and technologies. If any technology that is
competing with ours is more reliable, has better quality, is
less expensive or has other advantages over our technology, the
demand for our products could decrease.

We expect our competitors to continue to improve
the performance of their current products and introduce new
products or new technologies. Successful new product
introductions or enhancements by our competitors could reduce
the sales or market acceptance of our products, perpetuate
intense price competition or make our products obsolete. To be
competitive, we must continue to invest significant resources in
research and development, sales and marketing and customer
support. We cannot be sure that we will have sufficient

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resources to make these investments or that we
will be able to make the technological advances necessary to
remain competitive.


Increased competition is likely to result in
price reductions, reduced gross margins and loss of market
share. Our failure to compete successfully against current or
future competitors could seriously harm our business, financial
condition and results of operations.

Intellectual Property

Our success and ability to compete is dependent
in part upon our proprietary technology. We rely on a
combination of patent, copyright, trademark, trade secret and
other intellectual property law, nondisclosure agreements and
other protective measures to protect our proprietary rights. We
also utilize unpatented proprietary knowledge and trade secrets,
and employ various methods to protect our trade secrets and
knowledge.

We believe our intellectual property rights are
significant and that the loss of all or a substantial portion of
such rights could have a material adverse effect on our
business, financial condition and results of operations. There
can be no assurance that our intellectual property protection
measures will be sufficient to prevent misappropriation of our
technology. Some of our contractual arrangements provide third
parties with access to our source code and other intellectual
property upon the occurrence of specified events. Such access
could enable these third parties to use our intellectual
property and source code to develop and manufacture competing
products, which would adversely affect our performance and
ability to compete. In addition, we cannot be certain that
others will not independently develop substantially equivalent
intellectual property, gain access to our trade secrets or
intellectual property, or disclose our intellectual property or
trade secrets. Furthermore, the laws of many foreign countries
do not protect our intellectual property to the same extent as
the laws of the United States. From time to time, we may desire
or be required to renew or to obtain licenses from others in
order to develop and market commercially viable products
effectively. There can be no assurances that any necessary
licenses will be available on reasonable terms, if at all.

The communications industry is characterized by
the existence of a large number of patents and frequent claims
and related litigation regarding patent and other intellectual
property rights. In particular, leading companies in the
communications markets have extensive patent portfolios. From
time to time, third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to
technologies and related standards that are important to us. We
expect that we may increasingly be subject to infringement
claims as the number of products and competitors in the market
for our technology grows and the functionality of products
overlaps. Although we have not been a party to any litigation
asserting claims that allege infringement of intellectual
property rights, we may be a party to litigation in the future.
Any such claims, with or without merit, could be time-consuming,
result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing
technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be
available on acceptable terms, if at all. In addition, third
parties may assert claims or initiate litigation against us or
our manufacturers, suppliers, OEMs, technology partners or
customers alleging infringement of their proprietary rights with
respect to our existing or future products. We may in the future
initiate claims or litigation against third parties for
infringement of our proprietary rights to determine the scope
and validity of our proprietary rights.

During MCK fiscal year 2003, MCK was granted its
first U.S. Patent covering our technology developed and
utilized in the MobileConnex product. U.S. Patent
No. 6,516,061 was issued on February 4, 2003. The
patent includes 60 claims, covering, among other things, a
system which acts as a Digital set proxy for a PBX, and allows
devices dialed into this proxy to communicate with and control
the PBX. We believe this patent will help protect our technology
from infringement by others, and provide a technology asset for
MCK. MCK also has patent applications pending internationally to
secure the rights to this technology in relevent geographies.
MCK also has a U.S. patent application pending on
technology developed during the EXTender 7000 for branch offices
released late in this fiscal year 2003.

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Employees

At April 30, 2003, we had a total of
65 employees, of which 27 were in research and development,
21 were in sales, marketing and business development, 8 were in
manufacturing and customer support, and 9 were in finance and
administration (HR, MIS, Legal, etc). We also have a small
number of contractors which are not included in the headcount
above. None of our employees is represented by a labor union. We
have not experienced any work stoppages and consider relations
with our employees to be good.




Item 2.     Properties

We currently lease approximately
48,000 square feet of space at our headquarters in Needham,
Massachusetts under a lease that expires in March 2007. In July
2002, we entered into a sublease with a third party for
approximately 32,000 square feet at our headquarters through the
remaining lease term. We occupy the balance of the space, or
approximately 16,000 square feet. We also lease
approximately 12,500 square feet at our development center
in Calgary, Alberta under a lease that expires in October 2005.
We previously occupied approximately 27,000 square feet for
our DTI business unit in Allen, Texas which we shut down in
January 2002. One of the properties, which is approximately
16,700 square feet is under a sublease agreement through
the remainder of the lease term of August 2004. The second
property, which is approximately 10,300 square feet has
been turned back over to the landlord with no further obligation
to the Company.




Item 3.     Legal
Proceedings

On May 3, 2000, Joan Lockhart, the
Companys former Vice President of Marketing, filed a
complaint in Massachusetts State Court against the Company. In
the complaint, captioned Joan Lockhart v. MCK Communications,
Inc., (Middlesex Superior Court), Ms. Lockhart asserts a
claim for breach of contract against the Company based on her
allegations that the Company failed to comply with the terms of
her employment agreement and a certain restricted stock
agreement executed by and between the Company and
Ms. Lockhart. On June 5, 2000, the Company filed its
answer denying the material allegations of
Ms. Lockharts complaint. On December 6, 2001,
the Massachusetts Superior Court, Middlesex County, entered
judgement against the Company and in favor of Ms. Lockhart
in the amount of approximately $1,160,000, including interest.
The Company determined not to appeal the judgement and on
December 17, 2002, the parties agreed to settle the case
for $1,100,000.

In December 2001, a complaint was filed in the
Southern District of New York seeking an unspecified amount of
damages on behalf of an alleged class of persons who purchased
shares of the Companys common stock between the date of
its initial public offering and December 6, 2000. The
complainants named as defendants the Company and certain of its
officers and other parties as underwriters of its initial public
offering (the MCK defendants). The plaintiffs
allege, among other things, that the Companys prospectus,
contained in the Registration Statement on Form S-1 filed
with the Securities and Exchange Commission, was materially
false and misleading because it failed to disclose that the
investment banks which underwrote the Companys initial
public offering of securities and others received undisclosed
and excessive brokerage commissions, and required investors to
agree to buy shares of securities after the initial public
offering was completed at predetermined prices as a precondition
to obtaining initial public offering allocations. The plaintiffs
further allege that these actions artificially inflated the
price of the Companys common stock after the initial
public offering. This case is one of many with substantially
similar allegations known as the Laddering Cases filed before
the Southern District of New York against a variety of unrelated
issuers and investment bankers and have been consolidated for
pre-trial purposes before one judge to assist with
administration. A motion to dismiss addressing issues common to
the companies and individuals who have been sued in these
actions was filed in July 2002. After a hearing on the motion to
dismiss, the Court, on February 19, 2003, denied dismissal
of the claims against the companies and individuals, including
the MCK defendants. The Company will answer the complaint and
respond to any discovery served. The Company believes that the
claims against it are meritless and that it intends to defend
the action. No provision has been recorded for this matter.

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The Company has been named a defendant in a
lawsuit filed in Norfolk County, Massachusetts by Entrata
Communications, Inc. (Entrata). Entrata
Communications, Inc. v. Superwire.com. Inc. and MCK
Communications, Inc. arises out of a dispute between Entrata
and one of its largest shareholders, Superwire.com, Inc.
(Superwire). Pursuant to a contract with Entrata,
the Company was obligated to pay Entrata $750,000 in early 2002.
In order to take advantage of a $100,000 discount offered for
early payment, the Company paid Entrata $650,000 in November
2001, in full satisfaction of its contractual obligations. The
funds were placed in escrow with Superwires California law
firm, Jeffers, Shaff & Falk, LLP (JSF), which agreed not to
disburse the funds until the dispute between Entrata and
Superwire had been resolved. Nevertheless, Entrata contends that
it never received the funds from the Company and that the funds
were diverted to Superwire and JSF. Through the lawsuit, Entrata
seeks to recover from both the Company and Superwire the full
$750,000 that the Company would have owed in 2002. The Company
has asserted counterclaims against Entrata for and cross-claims
against Superwire for fraud and breach of contract. On
October 11, 2002, Superwire and Entrata filed cross-motions
for summary judgment against each other. The Court denied both
motions on March 13, 2003, and gave the parties until
October 17, 2003 to complete discovery. Following denial of
the cross-motions for summary judgment, the Company filed a
motion to add JSF and two of its partners, Barry D. Falk and
Mark R. Ziebell, as third-party defendants. The motion is
unopposed and is likely to be allowed. As discovery has not yet
commenced, it is too soon to assess the Companys
likelihood of success in this litigation. Management intends to
defend the claims against the Company and prosecute its
counterclaims, cross-claims and third-party claims. No amounts,
other than the original payment, have been provided for this
matter in the accompanying financial statements.




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

None.

23



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##### Table of Contents






PART II




Item 5.     Market
for the Registrants Common Equity and Related Stockholder
Matters

Market Price for Common Stock.Our common stock is traded on the
NASDAQ National Market under the symbol MCKC. The
following table sets forth for the periods indicated the high
and low sales prices for the Common Stock, as reported by NASDAQ:

Fiscal Year Ended April 30,
2003

|                     |  |      |      |     |  |   |      | 
|-------------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal Quarter Ended |  | High |      | Low
|                     |  |      |      |    
|July 31, 2002        |  | $    | 1.30 |     |  | $ | 0.85 | 
|October 31, 2002     |  |      | 2.36 |     |  |   | 0.72 | 
|January 31, 2003     |  |      | 1.37 |     |  |   | 0.88 | 
|April 30, 2003       |  |      | 2.20 |     |  |   | 1.03 | 

Fiscal Year Ended April 30,
2002

|                     |  |      |      |     |  |   |      | 
|-------------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal Quarter Ended |  | High |      | Low
|                     |  |      |      |    
|July 31, 2001        |  | $    | 2.55 |     |  | $ | 1.57 | 
|October 31, 2001     |  |      | 1.70 |     |  |   | 1.00 | 
|January 31, 2002     |  |      | 1.96 |     |  |   | 1.11 | 
|April 30, 2002       |  |      | 1.70 |     |  |   | 1.21 | 

Holders of Record.As of June 3, 2003, there were
approximately 134 holders of record of our common stock and
20,536,655 shares of common stock outstanding.

Dividend Policy.To
date, we have not paid any cash dividends on our common stock.




Item 6.     Selected
Historical Condensed Financial Information

The following selected financial data should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and are qualified by reference to the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Report.
The statement of operations data set forth below for the years
ended April 30, 2001, 2002, and 2003, and the balance sheet
data at April 30, 2002 and 2003, are derived from, and are
qualified by reference to, the audited Consolidated Financial
Statements of MCK Communications, Inc. included elsewhere
herein. The statement of operations data set forth below for the
years ended April 30, 1999 and 2000 and the balance sheet
data at April 30, 1999, 2000 and 2001 are derived from
audited Consolidated Financial Statements of MCK Communications,
Inc. not included herein.

24



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##### Table of Contents



|                                                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |        |        | 
|-------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | --------- | ------- | ----- | ---- | ---------- | ------ | ------ | ---- | ---------- | ------ | ------ | - | ---------- | ------ | ------ | - | ---------- | ------ | ------ | 
|                                                                                                         |                                                                                                                                                                                    |                                      
|                                                                                                         |                                                                                                                                                                                    | Years Ended April 30,                
|                                                                                                         |                                                                                                                                                                                    |                                      
|                                                                                                         |                                                                                                                                                                                    | 1999                                  |           | 2000    |       | 2001 |            | 2002   |        | 2003
|                                                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |     
|                                                                                                         |                                                                                                                                                                                    |                                      
|                                                                                                         |                                                                                                                                                                                    | (In thousands, except per share data)
|OPERATIONS DATA:                                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       
|Revenues                                                                                                 |                                                                                                                                                                                    | $                                     | 14,270    |         |       | $    | 25,082     |        |        | $    | 38,220     |        |        | $ | 16,487     |        |        | $ | 14,579     |       
|Cost of goods sold                                                                                       |                                                                                                                                                                                    |                                       | 5,390     |         |       |      | 9,455      |        |        |      | 15,287     |        |        |   | 9,096      |        |        |   | 7,169      |       
|                                                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       
|Gross profit                                                                                             |                                                                                                                                                                                    |                                       | 8,880     |         |       |      | 15,627     |        |        |      | 22,933     |        |        |   | 7,391      |        |        |   | 7,410      |       
|Operating expenses:                                                                                      |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       
|                                                                                                         | Research and development (excluding amortization
    of stock based compensation of $175, $1,558, $829, $(52) and $53
    in 1999, 2000, 2001, 2002 and 2003, respectively)        |                                       |           | 3,349   |       |      |            | 4,876  |        |      |            | 9,232  |        |   |            | 7,124  |        |   |            | 3,199  |       
|                                                                                                         | Sales and marketing (excluding amortization of
    stock based compensation of $110, $1,853, $1,005, $(453), and $1
    in 1999, 2000, 2001, 2002 and 2003, respectively           |                                       |           | 3,888   |       |      |            | 7,817  |        |      |            | 13,820 |        |   |            | 9,397  |        |   |            | 4,674  |       
|                                                                                                         | General and administrative (excluding
    amortization of stock based compensation of $120, $1,234,
    $1,068, $202 and $89 in 1999, 2000, 2001, 2002 and 2003,
    respectively) |                                       |           | 1,617   |       |      |            | 2,475  |        |      |            | 4,646  |        |   |            | 4,478  |        |   |            | 2,891  |       
|                                                                                                         | Amortization of stock based compensation                                                                                                                                           |                                       |           | 406     |       |      |            | 4,645  |        |      |            | 2,902  |        |   |            | (303   | )      |   |            | 143    |       
|                                                                                                         | Amortization of goodwill and other intangibles(1)                                                                                                                                  |                                       |           |        |       |      |            |       |        |      |            | 4,588  |        |   |            | 2,180  |        |   |            | 1,003  |       
|                                                                                                         | Write-off of in-process research and
    development(1)(2)                                                                                                                         |                                       |           |        |       |      |            |       |        |      |            | 3,694  |        |   |            |       |        |   |            |       |       
|                                                                                                         | Impairment of goodwill and other intangibles(1)                                                                                                                                    |                                       |           |        |       |      |            |       |        |      |            |       |        |   |            | 14,063 |        |   |            | 2,600  |       
|                                                                                                         | Restructuring(3)                                                                                                                                                                   |                                       |           |        |       |      |            |       |        |      |            | 597    |        |   |            | 4,310  |        |   |            | 552    |       
|                                                                                                         | Provision for legal settlement and fees(4)                                                                                                                                         |                                       |           |        |       |      |            |       |        |      |            |       |        |   |            | 1,387  |        |   |            |       |       
|                                                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       
|                                                                                                         |                                                                                                                                                                                    | Total operating expenses              |           |         | 9,260 |      |            |        | 19,813 |      |            |        | 39,479 |   |            |        | 42,636 |   |            |        | 15,062 | 
|                                                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       
|Loss from operations                                                                                     |                                                                                                                                                                                    |                                       | (380      | )       |       |      | (4,186     | )      |        |      | (16,546    | )      |        |   | (35,245    | )      |        |   | (7,652     | )     
|Other income (expense)                                                                                   |                                                                                                                                                                                    |                                       | (207      | )       |       |      | 758        |        |        |      | 3,617      |        |        |   | 1,287      |        |        |   | 1,616      |       
|                                                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       
|Loss before income tax (provision) benefit
    and dividends on redeemable preferred stock of subsidiary |                                                                                                                                                                                    |                                       | (587      | )       |       |      | (3,428     | )      |        |      | (12,929    | )      |        |   | (33,958    | )      |        |   | (6,036     | )     
|Income tax (provision) benefit                                                                           |                                                                                                                                                                                    |                                       |          |         |       |      | (100       | )      |        |      | 1,130      |        |        |   | (60        | )      |        |   | (43        | )     
|Dividends on redeemable preferred stock of
    subsidiary                                                |                                                                                                                                                                                    |                                       | (197      | )       |       |      | (97        | )      |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       
|Net loss                                                                                                 |                                                                                                                                                                                    |                                       | (784      | )       |       |      | (3,625     | )      |        |      | (11,799    | )      |        |   | (34,018    | )      |        |   | (6,079     | )     
|Dividends on redeemable preferred stock                                                                  |                                                                                                                                                                                    |                                       | (1,966    | )       |       |      | (1,285     | )      |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       
|Net loss applicable to common shares                                                                     |                                                                                                                                                                                    | $                                     | (2,750    | )       |       | $    | (4,910     | )      |        | $    | (11,799    | )      |        | $ | (34,018    | )      |        | $ | (6,079     | )     
|                                                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       
|Basic and diluted net loss per common share                                                              |                                                                                                                                                                                    | $                                     | (0.71     | )       |       | $    | (0.44      | )      |        | $    | (0.61      | )      |        | $ | (1.69      | )      |        | $ | (0.30      | )     
|Shares used in computing basic and diluted net
    loss per common share                                 |                                                                                                                                                                                    |                                       | 3,881,526 |         |       |      | 11,144,565 |        |        |      | 19,213,239 |        |        |   | 20,126,113 |        |        |   | 20,499,108 |       
|Pro forma basic and diluted loss per common share                                                        |                                                                                                                                                                                    |                                       |           |         |       |      | (0.31      | )      |        |      |            |        |        |   |            |        |        |   |            |       
|Shares used in computing pro forma basic and
    diluted loss per common share                           |                                                                                                                                                                                    |                                       |           |         |       |      | 15,268,368 |        |        |      |            |        |        |   |            |        |        |   |            |       
|                                                                                                        
|CONSOLIDATED BALANCE SHEET DATA:                                                                         |                                                                                                                                                                                    |                                       |           |         |       |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       
|                                                                                                         | Cash and equivalents and marketable securities                                                                                                                                     |                                       |           | 3,285   |       |      |            | 75,724 |        |      |            | 54,802 |        |   |            | 44,367 |        |   |            | 41,660 |       
|                                                                                                         | Working capital                                                                                                                                                                    |                                       |           | 5,578   |       |      |            | 78,288 |        |      |            | 58,444 |        |   |            | 43,344 |        |   |            | 42,094 |       
|                                                                                                         | Total assets                                                                                                                                                                       |                                       |           | 9,428   |       |      |            | 87,194 |        |      |            | 90,397 |        |   |            | 56,225 |        |   |            | 46,989 |       
|                                                                                                         | Long term debt                                                                                                                                                                     |                                       |           | 2,500   |       |      |            |       |        |      |            |       |        |   |            |       |        |   |            |       |       
|                                                                                                         | Redeemable preferred stock                                                                                                                                                         |                                       |           | 28,205  |       |      |            |       |        |      |            |       |        |   |            |       |        |   |            |       |       
|                                                                                                         | Total stockholders (deficit) equity                                                                                                                                               |                                       |           | (24,040 | )     |      |            | 80,946 |        |      |            | 82,861 |        |   |            | 48,956 |        |   |            | 43,113 |       



---

|    |                                                                  
|--- | -----------------------------------------------------------------
|(1) | See footnote 15 to notes to consolidated
    financial statements
|   
|(2) | See footnote 16 to notes to consolidated
    financial statements
|   
|(3) | See footnote 18 to notes to consolidated
    financial statements
|   
|(4) | See footnote 13 to notes to consolidated
    financial statements

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

The following discussion should be read in
conjunction with our consolidated financial statements and the
related notes included elsewhere in this prospectus. Certain
statements in this report, including statements regarding our
business strategies, operations, financial conditions and
prospects, are forward-looking statements. Use of the words
believe, expect, anticipate,
will, contemplate, would and
similar expressions that contemplate future events may identify
forward-looking statements.

Numerous important factors, risks and
uncertainties affect our operations and could cause actual
results to differ materially from those expressed or implied by
these or any other forward-looking statements made by us or on
our behalf. Readers are urged to carefully review and consider
the various disclosures made in this report, including those
described under Factors Affecting Future Operating Results
and Stock Price, and in our other filings with the SEC,
that attempt to advise interested parties of certain risks and
factors that may affect our business. Readers are cautioned not
to place undue reliance on these forward-looking statements,
which are based on current expectations and reflect
managements opinions only as of the date thereof. We do
not assume any obligation to revise or update forward-looking
statements except as may be required by securities laws.
Finally, our historic results should not be viewed as indicative
of future performance.

Overview

MCK Communications is a leading provider of
products that enable businesses to unleash the power of their
voice communications systems by:



| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | extending the functionality and applications of
    their business telephone systems from the main office to
    outlying offices, remote call centers, teleworkers and mobile
    employees over public and private networks;                        
|
| |  | bundling with service providers to unite customer
    premise equipment (CPE) and network services to
    deliver new outsourced, value added PBXextension services; and                                                                            
|
| |  | bridging technology gaps between traditional and
    next generation (nextgen) applications (i.e.,
    unified messaging), IP switches (CPE or hosted) and devices
    (i.e., IP telephones) to enable enterprises ease of technology
    migration.

This combination enables a more open enterprise.
We market and distribute our products through an international
network of distributors, resellers, equipment providers and
service providers. We are headquartered in Needham,
Massachusetts, have a development center in Calgary, Canada, and
maintain a sales and marketing office in the United Kingdom.

From our inception in 1989 through 1993, we were
a small company based in Calgary, Canada that designed and
marketed a number of niche, voice products targeted at the oil
industry. Commencing in 1993, we altered our business focus and
began developing remote voice access products for enterprise
telephone systems by using the technology derived from this
initial business. These efforts led to the development of our
EXTender product line. During the period from 1993 through 1995,
our operating activities related primarily to establishing a
research and development organization, developing and testing
prototype designs, and developing our initial OEM relationships.
We shipped our first remote voice access product, the
EXTender 1000, in 1995. From 1995 until 2000, we focused
our research and development efforts on developing additional
single user remote voice access products and their product
enhancements as well as our initial multi-user products for use
in branch offices. In addition, we established a product
validation laboratory, built international indirect sales
channels, developed additional technology relationships, and
established our sales, marketing and customer support
organizations. Over the last year, we have expanded our product
line to include application specific gateways that support
mobile and teleworking environments and a broader range of
devices, expanded the range of networks supported with an
emphasis on wireless networks, introduced a local area wireless
product (CampusConneX), added a higher end branch product
(EXTender 7000 family of products), created technologies to
enable a more open enterprise and have expanded the
range of protocols supported across our products, including our
embedded gateway product line.

26



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##### Table of Contents



Through the fiscal year ended April 30,
1999, our revenues consisted primarily of product sales of our
single-user remote voice access products and, to a lesser
degree, our recording interface gateways products. In April
1999, we released our first multi-user remote voice access
products, the EXTender 6000 for branch offices and the
PBXgateway, and subsequently expanded the range of networks
support. For the foreseeable future, we anticipate that most of
our revenues will be attributable to sales of our access and
gateway products, with sales of recording interface gateways
continuing to represent a consistently lower percentage of our
revenues. Among our access and gateway products, we believe that
the multi-user products and next generation single-user gateways
and clients will represent a substantial and increasing
percentage of our revenues, while the sales of our traditional
single-user products may decline as a percentage of our
revenues. In fiscal year 2003, our traditional single-user
products comprised approximately 21% of revenues, our multi-user
products approximately 23% of revenues, our PBXgateways
contributed approximately 26% and our recording interfaces and
other miscellaneous products contributed the remainder. To date
we have generated minimal service and maintenance revenues. We
do not expect maintenance or service revenues to be a
significant portion of our revenues. Periodically, we have
received non-recurring engineering fees, although such fees have
not been material to date.

For the fiscal years ended April 30, 2001,
2002 and 2003, Avaya (formerly Lucent Technologies) accounted
for approximately 22.8%, 2.9% and 2.5%, respectively of our
revenues. Two customers each accounted for more than 10% of our
fiscal year 2003 revenues, for a total of 30% combined. For
fiscal year 2003, our distributor partners collectively
contributed approximately 57% of revenues, OEM partners
contributed approximately 20%, VARs approximately 13%, and
teleco partners approximately 10%.

We recognize product revenues upon shipment to
the customer. We routinely analyze and establish, as necessary,
reserves at the time of shipment for product returns and
allowances, which amounts, to date, have not been significant.
Service revenues are recognized as the services are performed.
Maintenance revenues are deferred and recognized over the period
of the contract.

Our cost of goods sold consists primarily of
purchased finished products from OEM Worldwide. Cost of goods
sold also includes certain manufacturing overhead costs,
primarily facilities and related depreciation. Additionally, our
cost of goods sold includes costs related to maintenance and
support services provided to our distribution channels and end
users through Vital Network Services, our third-party support
provider.

Research and development expenses consist
primarily of salaries and related personnel costs and contract
engineering, purchased software and prototype expenses related
to the design, development, enhancement and testing of our
products. As of April 30, 2003, research and development
costs have been expensed as incurred. We will continue to
enhance existing products and fund new product development
initiatives targeted at growth segments of the enterprise voice
arena. We expect to hold research and development expenses
proportional to revenue growth in future periods. We expect to
do likewise for our expenditures on our product validation
laboratories that test the interoperability of our products with
enterprise voice systems and other products. This competency
continues to be critical to our business as we develop
additional products that function over circuit, packet and
wireless networks in conjunction with third-party voice and data
equipment.

Sales and marketing expenses consist primarily of
salaries, commissions and related personnel expenses for those
engaged in the sales, marketing and support of products as well
as related trade show, promotional and public relations
expenses. We primarily sell our products through an indirect
distribution system that includes: distributors, OEMs and
private label partners, teleco resellers including service
providers, systems integrators, and VARs. Our sales force and
marketing efforts are primarily directed at supporting our
indirect distribution channels through sales support, sales
tools, marketing promotions and developing brand awareness. Our
sales and marketing campaigns are designed to strengthen
relationships with existing partners and selectively expand to
new distribution channels by enabling them to stimulate sales of
our product. If our revenues increase, we expect sales and
marketing headcount and associated expenses to increase
accordingly.

General and administrative expenses consist
primarily of salaries and related personnel expenses for
executive, accounting and administrative personnel, professional
fees and other general corporate expenses. We expect that
general and administrative expenses will decrease during fiscal
year 2004.

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##### Table of Contents



Stock based compensation expenses resulted from
the granting of restricted stock and stock options to employees
and directors with exercise prices per share determined to be
below the deemed fair values per share for financial reporting
purposes of our common stock at dates of grant. The deferred
compensation is being amortized to expense over the vesting
period of the individual award or options, generally four years.
At April 30, 2003, deferred compensation to be amortized in
future periods amounted to approximately $3,000.

In June 2000, we acquired all of the outstanding
stock of Digital Techniques Incorporated Holding
(DTIH) and its subsidiary Digital Techniques, Inc.
(DTI) and certain other assets for
$12.7 million in cash and stock valued at
$10.9 million. The acquisition provided us with
technologies to expand our product line, development rights to
additional protocols and an expanded customer base. In
conjunction with the acquisition, we recorded goodwill and
certain intangible assets resulting from the excess of purchase
price over the fair value of the tangible assets acquired.

Other (income) expense, net consists of
interest expense related to our subordinated debt, credit
financing fees, interest income and foreign exchange gains or
losses related to the effects of the Canadian/
U.S. exchange rate on intercompany transactions.

Critical Accounting Policies

The discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those
related to revenue recognition, bad debts, inventories, warranty
obligations, and income taxes. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe
the following critical accounting policies and the related
judgments and estimates materially affect the preparation of our
consolidated financial statements:

Revenue Recognition.Our policy is to recognize revenue
upon shipment of our products to our customers and the
fulfillment of all contractual terms and conditions, pursuant to
the guidance provided by Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB 101),
issued by the Securities and Exchange Commission. Certain
distribution partners have rights to return a contractual
percentage of sales. For sales to these partners, we defer
revenue subject to return until such rights have expired. A
significant number of our contractual arrangements contain price
protection provisions whereby we are obligated to provide
refunds or credits for any decrease in unit prices of product in
their inventory. Judgments are required in evaluating the credit
worthiness of our customers. Credit is not extended to customers
and revenue is not recognized until we have determined that the
risk of uncollectibility is minimal.

Allowance for Doubtful Accounts.Our policy is to maintain allowances
for estimated losses resulting from the inability of our
customers to make required payments. Credit limits are
established through a process of reviewing the financial history
and stability of each customer. Where appropriate, we obtain
credit rating reports and financial statements of the customer
when determining or modifying their credit limits. We regularly
evaluate the collectibility of our trade receivable balances
based on a combination of factors. When a customers
account balance becomes past due, we initiate dialogue with the
customer to determine the cause. If it is determined that the
customer will be unable to meet its financial obligation to us,
such as in the case of a bankruptcy filing, deterioration in the
customers operating results or financial position or other
material events impacting their business, we record a specific
allowance to reduce the related receivable to the amount we
expect to recover given all information presently available.

We also record an allowance for all other
customers based on certain other factors including the length of
time the receivables are past due and historical collection
experience with individual customers. As of April 30, 2003,
our accounts receivable balance of $2.6 million is reported
net of allowances for doubtful

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accounts of $250,000. We believe our reported
allowances at April 30, 2003 are adequate. If the financial
conditions of those customers were to deteriorate, however,
resulting in their inability to make payments, we may need to
record additional allowances which would result in additional
selling, general and administrative expenses being recorded for
the period in which such determination was made.


Inventory Reserves.As a designer and manufacturer of high
technology communication equipment, we are exposed to a number
of economic and industry factors that could result in portions
of our inventory becoming either obsolete or in excess of
anticipated usage. These factors include, but are not limited
to, technological changes in our markets, our ability to meet
changing customer requirements, competitive pressures in
products and prices, and the availability of key components from
our suppliers. Our policy is to establish inventory reserves
when conditions exist that suggest that our inventory may be in
excess of anticipated demand or is obsolete based upon our
assumptions about future demand for our products and market
conditions. We regularly evaluate the ability to realize the
value of our inventory based on a combination of factors
including the following: historical usage rates, forecasted
sales or usage, product end of life projections, estimated
current and future market values and new product introductions.
Purchasing requirements and alternative usage avenues are
explored within these processes to mitigate inventory exposure.
When recorded, our reserves are intended to reduce the carrying
value of our inventory to its net realizable value. As of
April 30, 2003, our inventory of $1.2 million is
stated net of inventory reserves of $1.2 million. If actual
demand for our products deteriorate or market conditions are
less favorable than those that we project, additional inventory
reserves may be required.

Product Warranties.Our products are sold with warranty
provisions that require us to remedy deficiencies in quality or
performance of our products over a specified period of time,
generally twelve months, at no cost to our customers. Our policy
is to establish warranty reserves at levels that represent our
estimate of the costs that will be incurred to fulfill those
warranty requirements at the time that revenue is recognized. We
believe that our recorded liability at April 30, 2003, is
adequate to cover our future cost of materials, labor and
overhead for the servicing of our products sold through that
date. If actual product failures, or material or service
delivery costs differ from our estimates, our warranty liability
would need to be revised accordingly.

Income Taxes.We
have recorded a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. The Company has assessed the valuation allowance based
upon our estimate of future taxable income covering a relatively
short time horizon given the volatility in the markets we serve
and our historic operating results. External market data is
considered in this evaluation. The availability of tax planning
strategies to utilize our recorded deferred tax assets is also
considered. As of April 30, 2003, the deferred tax assets
have been reduced by valuation allowances equal to the value of
the assets. If the Company is to realize the deferred tax assets
in an amount in excess of their reported net amounts, an
adjustment to the deferred tax assets would increase earnings in
the period such determination was made. Similarly, if we should
determine that we may be unable to realize our net deferred tax
assets to the extent reported, an adjustment to the deferred tax
assets would be charged to income in the period such
determination was made.

Contingencies.We
are subject to proceedings, lawsuits and other claims. We assess
the likelihood of any adverse judgments or outcomes to these
matters as well as potential ranges of probable losses. A
determination of the amount of reserves required, if any, for
these contingencies are made after careful analysis of each
individual issue. The required reserves may change in the future
due to new developments in each matter or changes in approach
such as a change in settlement strategy in dealing with these
matters. We record charges for the costs we anticipate incurring
in connection with litigation and claims against us when we can
reasonably estimate these costs.

Impaired Assets.We
review the carrying values of long-lived assets and amortizable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss for an asset to be held
and used is recognized when the fair value of the asset is less
than the carrying value of the asset, and for assets to be
disposed of, is recognized when the fair value of the asset,
less costs to dispose, is less than the carrying value of the
asset. The fair value of the assets is generally based on
discounted estimated cash flows using an annual discount rate of
25%. The estimates reflect

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our assumptions about selling prices, production
and sales volume levels, costs, and market conditions over the
estimated remaining operating period, which can range from three
months to over fifteen years. If our assumptions related to
assets to be held and used are inaccurate, additional
write-downs may be required in the future. If estimates of fair
value less costs to sell are revised, the carrying amount of the
related assets is adjusted, resulting in an increase or decrease
to earnings.


Restructuring.We
record restructuring charges incurred in connection with
consolidation or relocation of our operations, or shutdowns of
specific sites. These restructuring charges, which reflect our
commitment to a termination or exit plan that will begin within
twelve months, are based on estimates of the expected costs
associated with severance, site closure, legal matters, contract
terminations, or other costs directly related to the
restructuring. If the actual cost incurred exceeds the estimated
cost, an additional charge to earnings will result. If the
actual cost is less than the estimated cost, a credit to
earnings will be recognized.

Nonrecurring Items.It is our policy to identify as a
nonrecurring item a material charge or gain that is
not associated with on-going operations or that is caused by
unique events not reflective of our normal business activities
in the period if such items individually or in the aggregate
have a material impact on a specific line item in the
consolidated statements of operations or have a material impact
on results overall. We believe that separately reporting such
charges or gains enhances transparency and comparability of
results by removing distortion that would otherwise occur.
Examples of such items that have been separately identified in
the past under this policy include material charges or gains
resulting from asset impairments and restructuring of
operations, including employee terminations; litigation not
related to on-going operations; and acquisition charges
including those related to acquired in-process research and
development. Nonrecurring items are appropriately identified in
the consolidated statements of operations.

Results of Operations

The following table sets forth certain financial
data for the periods indicated as a percentage of revenues.

|                                           |                                                  |                          |       |      |       |      |        |      |       |  |       |      |       | 
|------------------------------------------ | ------------------------------------------------ | ------------------------ | ----- | ---- | ----- | ---- | ------ | ---- | ----- |  | ----- | ---- | ----- | 
|                                           |                                                  |                         
|                                           |                                                  | Years Ended April 30,   
|                                           |                                                  |                         
|                                           |                                                  | 2001                     |       | 2002 |       | 2003
|                                           |                                                  |                          |       |      |       |     
|Revenues                                   |                                                  |                          | 100.0 | %    |       |      | 100.0  | %    |       |  | 100.0 | %   
|Cost of goods sold                         |                                                  |                          | 40.0  |      |       |      | 55.2   |      |       |  | 49.2  |     
|                                           |                                                  |                          |       |      |       |      |        |      |       |  |       |     
|Gross profit                               |                                                  |                          | 60.0  |      |       |      | 44.8   |      |       |  | 50.8  |     
|Operating expenses:                        |                                                  |                          |       |      |       |      |        |      |       |  |       |     
|                                           | Research and development                         |                          |       | 24.2 |       |      |        | 43.2 |       |  |       | 21.9 |      
|                                           | Sales and marketing                              |                          |       | 36.1 |       |      |        | 57.0 |       |  |       | 32.1 |      
|                                           | General and administrative                       |                          |       | 12.2 |       |      |        | 27.2 |       |  |       | 19.8 |      
|                                           | Amortization of stock based compensation         |                          |       | 7.6  |       |      |        | (1.8 | )     |  |       | 1.0  |      
|                                           | Amortization of goodwill and other intangibles   |                          |       | 12.0 |       |      |        | 13.2 |       |  |       | 6.9  |      
|                                           | Write-off of in-process research and development |                          |       | 9.7  |       |      |        |     |       |  |       |     |      
|                                           | Impairment of goodwill and other intangibles     |                          |       |     |       |      |        | 85.3 |       |  |       | 17.8 |      
|                                           | Restructuring                                    |                          |       | 1.5  |       |      |        | 26.1 |       |  |       | 3.8  |      
|                                           | Provision for legal settlement and fees          |                          |       |     |       |      |        | 8.4  |       |  |       |     |      
|                                           |                                                  |                          |       |      |       |      |        |      |       |  |       |     
|                                           |                                                  | Total operating expenses |       |      | 103.3 |      |        |      | 258.6 |  |       |      | 103.3 | 
|                                           |                                                  |                          |       |      |       |      |        |      |       |  |       |     
|Loss from operations                       |                                                  |                          | (43.3 | )    |       |      | (213.8 | )    |       |  | (52.5 | )   
|Other income (expense), net                |                                                  |                          | 9.5   |      |       |      | 7.8    |      |       |  | 11.1  |     
|                                           |                                                  |                          |       |      |       |      |        |      |       |  |       |     
|Loss before income tax (provision) benefit |                                                  |                          | (33.8 | )    |       |      | (206.0 | )    |       |  | (41.4 | )   
|Income tax (provision) benefit             |                                                  |                          | 2.9   |      |       |      | (0.3   | )    |       |  | (0.3  | )   
|                                           |                                                  |                          |       |      |       |      |        |      |       |  |       |     
|Net loss                                   |                                                  |                          | (30.9 | )%   |       |      | (206.3 | )%   |       |  | (41.7 | )%  



| |                                               
| | ----------------------------------------------
| | Fiscal years ended April 30, 2002 and
    2003

Revenues.Revenues
decreased from $16.5 million for the fiscal year ended
April 30, 2002 to $14.6 million for the fiscal year
ended April 30, 2003, a decrease of $1.9 million or
11.6%. This decrease was,

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in part, due to reductions in revenues from our
OEM partners as well as decreases from our Canadian and European
partners. We believe that these reductions in revenues were due
to a slowdown in the economy which caused a reduction in capital
expenditures by our customers and consequently a decrease in
their demand for our products. We will continue to work with our
distribution channels to increase revenues. However, our
revenues and gross profit could be further decreased if we need
to reduce our prices to remain competitive.


Cost of goods sold.Our cost of goods sold decreased from
$9.1 million for the fiscal year ended April 30, 2002
to $7.2 million for the fiscal year ended April 30,
2003, a decrease of $1.9 million or 21.2%. This decrease
was primarily related to the decrease in volume of units
shipped. Gross profit increased from 44.8% for the fiscal year
ended April 30, 2002 to 50.8% for the fiscal year ended
April 30, 2003. The increase in gross profit was primarily
attributable to the closing of our operation in Texas and our
shift to a 100% subcontracting model. In May 2003, we decided to
consolidate our manufacturing to one subcontract manufacturer
and expect further improvements in our gross margin as a result
of this decision. We expect our gross profit will continue to be
under pressure due to an overall weakness in the economy and
increased market competition.

Research and development.Research and development expenses
decreased from $7.1 million for the fiscal year ended
April 30, 2002 to $3.2 million for the fiscal year
ended April 30, 2003, a decrease of $3.9 million or
55.1%. This decrease was due primarily to reductions in staffing
in our Needham facility. For the years ended April 30, 2002
and 2003, research and development expenses decreased as a
percentage of revenues from 43.2% to 21.9% primarily as a result
of expense reductions outpacing revenue declines.

Sales and marketing.Sales and marketing expenses declined
from $9.4 million for the fiscal year ended April 30,
2002 to $4.7 million for the fiscal year ended
April 30, 2003, a decrease of $4.7 million or 50.3%.
This decrease was primarily due to reductions in staffing of
both sales and marketing personnel and related expenses
attributed to our restructuring initiatives. For the fiscal year
ended April 30, 2003, sales and marketing expenses
decreased as a percentage of revenues from 57.0% to 32.1%
primarily as a result of the reduction in expenses compared to
the prior year.

General and administrative.General and administrative expenses
decreased from $4.5 million for the fiscal year ended
April 30, 2002 to $2.9 million for the fiscal year
ended April 30, 2003, a decrease of $1.6 million or
35.4%. This was mainly due to decreases in staffing and overall
expense savings following the restructuring of the business. For
the years ended April 30, 2002 and 2003, general and
administrative expenses decreased as a percentage of revenues
from 27.2% to 19.8% primarily as a result of the reduction in
expenses compared to the prior year.

Amortization of stock based compensation.In connection with the grant of
certain restricted stock awards and stock options to employees
in the fiscal year ended April 30, 2000, we recorded
deferred compensation expense of $8.5 million. The amount
recorded represents the difference between the deemed fair value
of the common stock for financial reporting purposes and the
exercise price of these options at the date of grant. Deferred
compensation is presented as a reduction of stockholders
equity and is amortized over the vesting period of the
applicable options, generally four years. In the fourth quarter
of the year ended April 30, 2002, we recorded an adjustment
to reverse approximately $1.5 million of stock-based
compensation previously recorded relating to terminated
employees, which resulted in a net benefit for the year of
approximately $300 thousand. In the fiscal year ended
April 30, 2003, we recorded expense of $143 thousand.
The increase in stock based compensation over 2002 is a result
of the one time benefit recorded in 2002 to adjust compensation
previously recognized.

Amortization of goodwill and other
intangibles.Concurrent with the
acquisition of DTIH, we recorded goodwill and certain intangible
assets resulting from the excess of purchase price over the fair
value of the tangible assets acquired. Goodwill and intangibles
were being amortized over a period of 5 years. During the
years ended April 30, 2002 and 2003, we recorded
$2.2 million and $1.0 million, respectively of
amortization expense related to goodwill and intangibles. The
decrease in amortization expense from the year ended
April 30, 2002 to the year ended April 30, 2003 was
due to the write-off of goodwill and certain identifiable
intangibles during the year ended April 30, 2002 and
subsequent write-down in the quarter ended January 31,

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2003. As a result of these charges, amortization
expense has been reduced from approximately $1.2 million
per quarter to approximately $48,000 per quarter through fiscal
2005.


Impairment of goodwill and other intangibles.During the year ended April 30,
2002, the Company evaluated the recoverability of our long-lived
assets, including intangibles related to the DTIH acquisition.
We determined that the estimated future undiscounted cash flows
were below their carrying value. Accordingly, we recorded a
special charge of $14.1 million. These special charges
relate to our $12.4 million write-off of goodwill and a
$1.7 million write-down of the carrying value of certain
identifiable intangibles to their estimated fair value of
$4.9 million at July 31, 2001. During the year ended
April 30, 2003, we evaluated the recoverability of our
long-lived assets, including intangibles related to the DTIH
acquisition. We determined that the estimated future
undiscounted cash flows were below their carrying value.
Accordingly, we recorded a $2.6 million impairment write
down of the carrying value of certain identifiable intangibles
to their estimated fair value of $400 thousand.

Restructuring.During July 2001, we consolidated the
operations of our Texas facility and reduced redundant headcount
in other areas of the Company. We continued to re-focus our
business on our core competencies and matched our staffing needs
against our strategic initiatives. The reorganization resulted
in a reduction of our workforce by approximately 15%, or 35
employees. In conjunction with this action, we recorded a charge
of approximately $450 thousand for the costs of severance,
related benefits and outplacement services.

During November 2001, we closed the Texas
operations and undertook further headcount reductions at our
Needham and Calgary facilities, which resulted in an overall
reduction of 45% of our workforce, or 75 employees. In
connection with these actions, we recorded a charge of
approximately $1 million for the cost of severance, related
benefits and outplacement services in the quarter ended
January 31, 2002. In addition, we recorded a provision of
approximately $350,000 related to anticipated costs less assumed
sublease payments of approximately $230,000 for estimated
remaining lease obligations for our Texas operations, and a
charge of approximately $200,000 related to fixed assets
previously used at those facilities.

In April 2002, we recorded a charge of
approximately $275,000 for the costs of severance, related
benefits and outplacement services related to a reduction of 17
employees or approximately 15% of the workforce then employed.
In addition, we entered into a sublease agreement for
approximately 32,000 square feet of our facility in Needham, MA,
through the remainder of the lease term of March 2007. In
connection with this, we recorded a provision of approximately
$1.54 million related to the difference between the lease
payments and sublease income which will be paid out over the
remainder of the lease term of March 2007, and the write-off of
certain fixed assets of approximately $860,000.

During October 2002, we reduced headcount at our
Needham and Calgary locations in order to align staff with lower
revenues and continue to match our staffing needs to our
strategic initiatives. The reorganization resulted in a
reduction of our workforce by approximately 20% or 15 employees.
In conjunction with this action, we recorded an aggregate charge
of approximately $325,000 for the costs of severance and related
benefits and outplacement services. In addition, we reviewed the
adequacy of our remaining reserves related to the prior
restructuring activities and determined that $59,000 of reserves
previously recorded were not required. The charges were reversed
in October 2002.

During January 2003, we announced a leadership
change within our senior management team, involving the
departure of our President and CEO, Ms. Glenda Davis, as
well as her resignation from our Board of Directors. We recorded
an aggregate charge of approximately $385,000 related to the
cost of severance and related benefits. Ms. Davis
severance costs will be paid out through January 2004.

The October 2002 and January 2003 restructuring
measures are expected to save the Company approximately
$1 million on an annual basis.

In April 2003, we reviewed the adequacy of our
remaining reserves related to the prior restructuring activities
and determined that $99,000 of reserves previously recorded were
not required. These charges were reversed in April 2003.

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Provision for legal settlement and fees.During the year ended April 30,
2002, we recorded a provision of approximately $1.4 million
related to a judgment against the Company in favor of a former
employee. The provision includes the amount of the judgment,
including interest, and associated legal fees incurred by us. In
December 2002, we determined not to appeal this judgement and
settled the matter with the former employee. The amount of the
settlement was covered by the earlier provision taken by the
Company and no further expenses or liabilities are anticipated
as a result of the matter.

Other income (expense).Other income (expense), consists
primarily of interest income, foreign exchange gains or losses
related to the effects of the Canadian/U.S. exchange rate on
inter-company transactions, and settlements from termination of
various partner agreements. Other income (expense) increased
from income of $1.3 million for the year ended
April 30, 2002 to $1.6 million for the year ended
April 30, 2003, an increase of $0.3 million. This
increase was primarily due to settlements received from the
termination of distribution and OEM partner agreements of
$0.7 million, an increase in foreign exchange gains of
$0.4 million offset by a decrease in interest income which
decreased from $1.3 million for the year ended
April 30, 2002 to $0.7 million for the year ended
April 30, 2003. This decrease was related to a reduction in
cash reserves combined with reduced short term interest rates.

Income Tax Provision.We recorded a provision of $43,000 for
the year ended April 30, 2003 compared to a provision of
$60,000 for the year ended April 30, 2002. The provision
recorded for the years ended April 30, 2003 and 2002
represents our minimum tax obligations for fiscal 2003 and 2002.

Fiscal
years ended April 30, 2001 and 2002

Revenues.Revenues
decreased from $38.2 million for the fiscal year ended
April 30, 2001 to $16.5 million for the fiscal year
ended April 30, 2002, a decrease of $21.7 million or
56.8%. This decrease was, in part, due to a reduction in
revenues from Avaya (formerly Lucent Technologies) from
$9.2 million in 2001 to $500 thousand in 2002. We believe
the reduction in Avaya revenues is directly related to a slow
down in their overall business and their introduction of
competitive products. In addition, revenues from Anixter CA
decreased from $2.4 million in 2001 to $900 thousand in
2002. We believe that reduction in revenues from Anixter CA, as
well as the reduction in revenues from our OEM and distributor
partners was due to a slowdown in the economy which caused a
reduction in capital expenditures and consequently a decrease in
their demand for our products. Our revenues and gross profit
could be further decreased if we need to reduce our prices to
remain competitive.

Cost of goods sold.Our cost of goods sold decreased from
$15.3 million for the fiscal year ended April 30, 2001
to $9.1 million for the fiscal year ended April 30,
2002, a decrease of $6.2 million or 40.5%. This decrease
was primarily related to the decrease in volume of units
shipped. Gross profit decreased from 60% for the fiscal year
ended April 30, 2001 to 44.8% for the fiscal year ended
April 30, 2002. The decrease in gross profit was primarily
attributable to the smaller revenue base over which we spread
our fixed manufacturing costs and increases in inventory
reserves due in large to our decision to close our operation in
Texas. With the closing of our operation in Texas and our shift
to a 100% subcontracting model, we expect to reduce our cost of
goods sold. However, we expect our gross profit will continue to
be under pressure due to an overall weakness in the economy and
increased market pressures.

Research and development.Research and development expenses
decreased from $9.2 million for the fiscal year ended
April 30, 2001 to $7.1 million for the fiscal year
ended April 30, 2002, a decrease of $2.1 million or
22.8%. This decrease was due primarily to decreases in staffing,
principally from the DTI development team in Texas along with
reductions to the staff in both our Needham and Calgary
facilities. For the years ended April 30, 2001 and 2002,
research and development expenses increased as a percentage of
revenues from 24.2% to 43.2% primarily as a result of the
reduction in revenues compared to the prior year.

Sales and marketing.Sales and marketing expenses decreased
from $13.8 million for the fiscal year ended April 30,
2001 to $9.4 million for the fiscal year ended
April 30, 2002, a decrease of $4.4 million or 31.9%.
This decrease was primarily due to decreases in staffing of both
sales and marketing personnel to be more aligned with our
decrease in revenues. For the fiscal year ended April 30,
2002, sales and marketing

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expenses increased as a percentage of revenues
from 36.1% to 57.0% primarily as a result of the reduction in
revenues compared to the prior year.


General and administrative.General and administrative expenses
decreased from $4.6 million for the fiscal year ended
April 30, 2001 to $4.5 million for the fiscal year
ended April 30, 2002, a decrease of $168,000 or 3.6%. For
the years ended April 30, 2001 and 2002, general and
administrative expenses increased as a percentage of revenues
from 12.2% to 27.2% primarily as a result of the reduction in
revenues compared to the prior year.

Amortization of stock based compensation.In connection with the grant of
certain restricted stock awards and stock options to employees
in the fiscal year ended April 30, 2000, we recorded
deferred compensation expense of $8.5 million. The amount
recorded represents the difference between the deemed fair value
of the common stock for financial reporting purposes and the
exercise price of these options at the date of grant. Deferred
compensation is presented as a reduction of stockholders
equity and is amortized over the vesting period of the
applicable options, generally four years. We expensed
$2.9 million of deferred stock-based compensation in the
year ended April 30, 2001. In the fourth quarter of the
year ended April 30, 2002, we recorded an adjustment to
reverse approximately $1.5 million of stock-based
compensation previously recorded relating to terminated
employees, which resulted in a net benefit for the year of
approximately $300 thousand.

Amortization of goodwill and other
intangibles.In conjunction with the
acquisition of DTIH, we recorded goodwill and certain intangible
assets resulting from the excess of purchase price over the fair
value of the tangible assets acquired. Goodwill and intangibles
were being amortized over a period of 5 years. During the
years ended April 30, 2001 and 2002, we recorded
$4.6 million and $2.2 million, respectively of
amortization expense related to goodwill and intangibles. The
decrease in amortization expense from the year ended
April 30, 2001 to the year ended April 30, 2002 was
due to the write-off of goodwill and certain identifiable
intangibles during the year ended April 30, 2002. As a
result of these charges, amortization expense has been reduced
from approximately $1.2 million per quarter to
approximately $318,000 per quarter through fiscal 2005.

Impairment of goodwill and other intangibles.During the year ended April 30,
2002, the Company evaluated the recoverability of our long-lived
assets, including intangibles related to the DTIH acquisition.
We determined that the estimated future undiscounted cash flows
were below their carrying value. Accordingly, we recorded a
special charge of $14.1 million. These special charges
relate to our $12.4 million write-off of goodwill and a
$1.7 million write-down of the carrying value of certain
identifiable intangibles to their estimated fair value of
$4.9 million at July 31, 2001.

Restructuring.In
July 2001, we consolidated our Texas operations and reduced
redundant headcount in other areas of the Company. We continued
to re-focus our business on our core competencies and matched
our staffing needs against our strategic initiatives. The
reorganization resulted in a reduction of 35 employees or
approximately 15% of the workforce then employed. In conjunction
with this action we recorded a charge of approximately $450,000
for the costs of severance, related benefits and outplacement
services. At April 30, 2002, approximately $380,000 had
been paid and approximately $70,000 was reversed. The
restructuring was completed in 2002 and we do not anticipate any
impact on future results.

In November, 2001, we undertook further
restructuring actions due to the continued downturn in the
economic environment and to accelerate our return to
profitability. These actions included the closure of the Texas
operations and personnel reductions of our Needham and Calgary
staffs, leading to an overall reduction of 75 employees or
approximately 45% of the workforce then employed in all
functional areas. In connection with this employee reduction, we
recorded a charge of approximately $1.0 million during the
three months ended January 31, 2002 for the costs of
severance, related benefits and outplacement services. At
April 30, 2002, approximately $675,000 of the employee
termination costs had been paid, approximately $120,000 had been
reversed and the balance is expected to be paid out by December
2002. In addition, we recorded a provision of approximately
$350,000 related to the estimated remaining lease obligations
for our Texas operations which will be paid out by August 2004
and recorded a charge of approximately $200,000 related to

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fixed assets previously used at those facilities
which were abandoned. At April 30, 2002 approximately
$54,000 had been paid and $100,000 was reversed.


In April 2002, we undertook further restructuring
actions, again due principally to the continued economic
downturn and to accelerate our return to profitability. These
actions included a reduction of 17 employees or approximately
15% of the workforce then employed. We recorded a charge of
approximately $275,000 for the costs of severance, related
benefits and outplacement services. The employee termination
costs will be paid out through October 2002. In addition, we
entered into a sublease agreement for approximately 32,000
square feet of our facility in Needham, MA, through the
remainder of the lease term of March 2007. In connection with
this, we recorded a provision of approximately
$1.54 million related to the difference between the lease
payments and sublease income which will be paid out over the
remainder of the lease term of March 2007, and the write-off of
certain fixed assets of approximately $860,000.

We estimate that these restructuring actions will
result in a savings of approximately $6.1 million in
salaries and wages and $1.2 million in facility related
expenses on an annual basis, although due to the current
economic environment, we anticipate that these savings may be
offset by a reduction in revenue.

Provision for legal settlement and fees.We recorded a provision of
approximately $1.4 million in fiscal 2002 related to a
judgment against the Company in favor of a former employee. The
provision includes the amount of the judgment, including
interest, and associated legal fees incurred by us.

Other income (expense).Other income (expense), consists
primarily of interest income, and foreign exchange gains or
losses related to the effects of the Canadian/U.S. exchange rate
on inter-company transactions. Other income
(expense) declined from income of $3.6 million for the
year ended April 30, 2001 to $1.3 million for the year
ended April 30, 2002, a decrease of $2.3 million. This
decrease was primarily due to a decrease in interest income
which decreased from $3.7 for the year ended April 30, 2001
to $1.4 million for the year ended April 30, 2002.
This decrease was related to a reduction in cash reserves
combined with reduced short term interest rates.

Income Tax Provision.We recorded a provision of $60,000 for
the year ended April 30, 2002 compared to an income tax
benefit of $1.1 million for the year ended April 30,
2001. The provision recorded for the year ended April 30,
2002 represents a pro-rata portion of our minimum tax
obligations for fiscal 2002. The benefit recorded for the year
ended April 2001 resulted from a reduction of the deferred tax
valuation allowance which resulted from the deferred tax
liability recognized as part of the DTI acquisition.

Liquidity and Capital Resources

As of April 30, 2003, our principal sources
of liquidity consisted of cash and equivalents of
$2.6 million and short-term investments of
$37.0 million. This represents a decrease in cash and
equivalents and short-term investments of $2.7 million
compared to April 30, 2002. We regularly invest excess
funds in short-term money market funds, commercial paper, and
government and non-government debt securities. These investments
are designed to provide current income to the Company without
exposing the principal to significant risk.

Net cash used in operating activities was
$2.5 million in the fiscal year ended April 30, 2003,
compared with net cash used in operating activities of
$10.2 million in the fiscal year ended April 30, 2002
and $4.1 million in the fiscal year ended April 30,
2001. Cash used in operating activities in the fiscal year ended
April 30, 2003 was lower than the prior year primarily due
to cost savings as a result of the restructuring initiatives.

Net cash provided by investing activities was
$0.5 million in the fiscal year ended April 30, 2003,
compared with $10.3 million in the fiscal year ended
April 30, 2002 and net cash used in investing activities of
$46.6 million in the fiscal year ended April 30, 2001.
Net cash provided by investing activities in the fiscal year
ended April 30, 2003 was used primarily to fund operating
expenses.

Net cash provided by financing activities was
$231,000 in the fiscal year ended April 30, 2003, compared
with $333,000 in the fiscal year ended April 30, 2002 and
net cash used in financing activities of $792,000 in the fiscal
year ended April 30, 2001. Net cash provided by financing
activities for the fiscal year ended

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April 30, 2003 was primarily attributable to
payments on outstanding notes receivable as well as the sale of
common stock under our employee stock purchase plan and the
exercise of stock options.


Although it is difficult to predict future
liquidity requirements with certainty, the rate at which we will
consume cash will be dependent on the cash needs of future
operations that will be directly affected by the levels of
demand for our products, the timing and rate of expansion of our
business and the resources we devote to developing our products.
We expect to devote our capital resources to continue our
research and development efforts to prudently enhance our
existing products and fund new product development initiatives
targeted at the growing telephony applications in business
markets, to hire and expand our sales, support, marketing and
product management organizations, to expand marketing programs
and for other general corporate activities. In addition, we may
utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or products. We believe
that our current cash and equivalents, short-term investments
and cash generated from operations will be sufficient to meet
our anticipated cash requirements for working capital and
capital expenditures for at least the next 12 months.

Recent Events

On April 21, 2003, we entered into a
definitive Agreement and Plan of Merger with Mickey Acquiring
Sub, a wholly-owned subsidiary of Verso, as amended by the First
Amendment to the Agreement and Plan of Merger dated as of
April 21, 2003 and the Second Amendment to the Agreement
and Plan of Merger dated as of June 13, 2003, pursuant to
which Merger Sub will be merged with and into MCK, with MCK to
survive the merger as a wholly-owned subsidiary of Verso. In
connection with the merger, an aggregate of 18,280,000 shares of
Verso common stock will be issued in exchange for all of the
shares of our common stock outstanding at the time of the
merger. In addition, in connection with the closing of the
merger, we will declare a dividend payable to our stockholders
of record immediately prior to the effective time of the merger.
We estimate that the aggregate amount of the dividend will be
between $28 million and $30 million, subject to
adjustment in accordance with the merger agreement, as amended.
The record date for the dividend has not yet been set. Verso
will not assume or substitute options for any stock options
outstanding and unexercised pursuant to our stock option plans.
Accordingly, we will take all necessary actions to ensure that
each outstanding employee stock option, whether vested or
unvested, will, subject to consummation of the merger, become
fully vested and exercisable and that each stock option plan
will terminate as of the effective time of the merger. The
merger is expected to close in the third quarter of 2003, after
approval by our stockholders, and the satisfaction of all other
conditions to the merger.

Recent Accounting Pronouncements

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. The disclosure requirements are effective for
financial reports for interim periods beginning after
December 15, 2002. The Company does not expect the
implementation of SFAS No. 148 will have a material impact
on its consolidated financial position or results of operations.

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. This issue addresses
determination of whether an arrangement involving more than one
deiverable contains more than one unit of accounting and how the
arrangement consideration should be measured and allocated to
the separate units of accounting. EITF Issue No. 00-21 will
be effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003 or the Company may
elect to report the change in accounting as a cumulative-effect
adjustment. The Company is reviewing EITF Issue No. 00-21
and has not yet determined the impact, if any, this issue will
have on its consolidated operating results and financial
position.

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In November 2002, the FASB issued FASB
Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it
assumes under a guarantee. The disclosure provisions of
FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The
provisions for initial recognition and measurement are effective
on a prospective basis for guarantees that are issued or
modified after December 31, 2002, irrespective of a
guarantors year-end. The adoption of FIN 45 did not
impact the Companys consolidated results of operations or
financial position.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulleting No. 51.
FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the
equity investors in the entitiy do not have the characteristics
of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after
June 15, 2003. The Company is reviewing FIN 46 and has
not yet determined the impact, if any, this issue will have on
its consolidated operating results and financial position.

Disclosures About Market Risk

Interest Rate Risk.The Companys cash equivalents
and marketable securities primarily consist of interest
sensitive securities with weighted average maturities of less
than six months. A 100 basis point decrease in interest rates
would not result in a material change in the fair value of these
investments due mainly to the short-term nature of these
investments. However, a 100 basis point decrease in interest
rates would increase our net loss by approximately $440,000.

Foreign Currency Exchange Rate Risk.We primarily sell our products in U.S.
dollars and therefore we are not generally exposed to foreign
currency exchange risk. However, our Canadian subsidiary sells
products to Canadian customers that it invoices in Canadian
dollars. In the fiscal year ended April 30, 2003, this
revenue accounted for 12% of revenues. Transactions with our
Canadian subsidiary, whose functional currency is the Canadian
dollar, present us with foreign currency exchange risk. The
principal transactions are buying and selling of inventory. The
intercompany balance is denominated in U.S. dollars and changes
in the foreign currency exchange rate result in foreign currency
gains and losses. Using the intercompany balance at
April 30, 2003, a 10% strengthening of the U.S. dollar
against the Canadian dollar would result in a foreign currency
transaction loss of approximately $287,000. To date foreign
exchange gains and losses have not been significant.
Transactions with our United Kingdom office, whose functional
currency is the British Pound have not been significant and have
not had a material impact on our operations. All sales outside
of North America are denominated in U.S. dollars and are not
generally exposed to foreign currency exchange risk.

At April 30, 2003 we did not own any equity
investments. Therefore, we did not have any direct equity price
risk.

Factors Affecting Future Operating Results and
Stock Price

Our Business and Stock Price may Suffer if
We do not complete the Merger with Verso.

If the merger with Verso is not completed, we
could be subject to a number of risks that may adversely affect
our business and stock price, including:



| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our day-to-day operations may be disrupted due to
    the substantial time and effort our management must devote to
    seeking to complete the merger;
|
| |  | if the merger agreement is terminated under
    certain conditions, we may be required to pay Verso a
    termination fee of $600,000;                 

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| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | our stock price would likely decline since it
    currently reflects a market assumption that the merger will be
    completed; and
|
| |  | we must pay various costs related to the merger,
    such as our legal and accounting fees.                                        

The announcement of the planned merger with
Verso, and related uncertainty concerning our future, may make
it more difficult for us to enter into long-term relationships
with distribution partners and other third parties, which could
have an adverse effect on our revenues.

If the merger agreement is terminated and our
board of directors determines to seek another merger or business
combination, we may not be able to find a partner willing to pay
an equivalent or more attractive price than the price to be paid
by Verso pursuant to the merger.

We are Exposed to General Economic and
Worldwide Political Conditions

As a result of unfavorable economic conditions,
the effects of war and acts of terrorism, reduced capital
spending by our enterprise end users, and the need of our
indirect channel partners to hold less inventory to satisfy
customer demand, our sales declined in the second half of our
fiscal year ended April 30, 2003. This economic downturn
has resulted in longer selling cycles for new equipment
purchases. We believe that our business and results of
operations will be seriously harmed if current economic
conditions do not improve. Specifically, as the rate at which
the Companys customers order its products decreases, the
more likely it is that current inventories will be exposed to
technological obsolescence, thus requiring the Company to reduce
the value of that inventory on the balance sheet. Additionally,
the slow down may impact our customers ability to pay for
products previously shipped which would require us to write-off
the associated receivables against earnings or take products
back in return.

We may be Materially and Adversely Affected
by Continued Reductions in Spending on Telecommunications
Infrastructure by Our Customers

A continued slowdown in capital spending by
enterprises may affect our revenues more than we currently
expect. Moreover, the significant slowdown in IT capital
spending has created uncertainty as to market demand. As a
result, revenues and operating results for a particular period
can be difficult to predict. In addition, there can be no
certainty as to the severity or duration of the current industry
adjustment. As a result of the recent changes in industry and
market conditions, many end user customers have reduced their
capital spending on telecommunications infrastructure. Our
revenues and operating results have been and are expected to
continue to be materially and adversely affected by the
continued reductions in capital spending on telecommunications
infrastructure by existing and potential customers.

We Derive Almost All of Our Revenues from a
Small Number of Customers and Our Revenues may Decline
Significantly if Any Major Customer Cancels or Delays a Purchase
of Our Products

We have historically derived the majority of our
revenues from a small number of customers, most of whom resell
our products to end users. Our failure to generate as much
revenue as expected from these customers or the failure of these
customers to purchase our products would seriously harm our
business.

None of our customers is obligated to purchase
additional products or services. Accordingly, present and future
customers may terminate their purchasing arrangements with us or
significantly reduce or delay their orders. Any termination,
change, reduction or delay in orders could seriously harm our
business, financial condition and results of operations.
Accordingly, unless and until we diversify and expand our
customer base, our future success will significantly depend upon
the timing and size of future purchases by our customers and, in
particular:



| |   |                                                             
| | - | ------------------------------------------------------------
| |  | market strategies of these customers                        
|
| |  | the product requirements of these customers                 
|
| |  | the financial and operational success of these
    customers

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| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | the success of the underlying products and
    services that our products support.

The loss of any one of our major customers or the
delay of significant orders from such customers, even if only
temporary, could reduce or delay our recognition of revenues,
harm our reputation in the industry and reduce our ability to
accurately predict cash flow, and, as a consequence, could
seriously harm our business, financial condition and results of
operations.

Our Inability to Develop and Maintain
Relationships with Key PBX and KTS System Vendors Would Harm Our
Ability to Sustain and Grow Our Business

Our success depends to a significant degree upon
our continued relationships with leading enterprise voice
vendors like Alcatel, Avaya, Ericsson, Iwatsu, Infrontia
(formerly known as Nitsuko), Nortel, NEC, Panasonic and Toshiba,
among others and their associated channel distribution partners.
The systems sold by these vendors account for approximately
three quarters of the U.S. market for voice equipment sales, and
substantially all of our revenues for the fiscal year ended
April 30, 2003 were attributable to products which
interoperate with enterprise voice systems offered by these
vendors. Given that our products interface with a broad range of
switches, if we have difficulty in implementing these interfaces
on new products, it could delay growing new revenues.
Furthermore, we may not have access in the future to the
switch-specific protocols for the major telephone systems
marketed by those vendors, which access may be essential to
ensure the continued interoperability of our products. Moreover,
we may not be able to develop products that interoperate with
the voice systems offered by other vendors. Additionally, the
standards for telephony equipment and data networks are evolving
and our products may not be compatible with any new technology
standards that may emerge. If we are unable to provide our
customers with interoperable solutions, they may make purchases
from vendors who provide the requisite product interoperability.
This could seriously harm our business, financial condition and
results of operations.

In addition, we currently have varying
distribution, marketing and development arrangements with the
vendors noted above. There is no assurance that we will continue
to enjoy the support and cooperation that we have historically
experienced from these parties or their associated distribution
channels. Also, there is no certainty that these parties will
continue to offer MCKs products in their sales portfolio.
It is possible that these vendors may seek to offer broader
product lines and solutions that are competitive with our
products. In addition, they may change their distribution models
which could negatively impact our revenues. Furthermore, the
Company must correctly anticipate the price, performance and
functionality requirements of the PBX and KTS partners and the
Company must successfully develop products that meet OEM
requirements and make these products available on a timely basis
and in sufficient quantities in order to sustain and grow our
business.

If We Fail to Develop and Expand Our
Indirect Distribution Channels, Our Business Could
Suffer

Our product distribution strategy focuses
primarily on strengthening our relationships with our
distribution partners and developing and maintaining our
relationships with PBX and KTS system vendors, value added
resellers, distributors, and telecom resellers and nextgen
service providers. If we fail to develop and cultivate
relationships with significant indirect distribution channels,
or if these distribution channels are not successful in their
sales efforts, our product sales may decrease and our operating
results may suffer. Many of our indirect distribution channels
also sell products that compete with our products, and none of
our strategic or reseller arrangements are exclusive. In
addition, our operating results will likely fluctuate
significantly depending on the timing and amount of orders from
our distribution partners. Our indirect distribution channels
may not market our products effectively or may cease to devote
the resources necessary to provide us with effective sales,
marketing and technical support.

If there is consolidation in any of the
Companys target markets or if a small number of vendors
dominate any of these markets, then the Companys success
will depend on its ability to establish and maintain
relationships with the market leaders. If the Company does not
anticipate trends in any of its markets or fails to meet the
requirements of PBX and KTS vendors, or if the Company does not
successfully establish and maintain relationships with them,
then its business, financial condition and results of operations
could be seriously harmed.

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Because We Sell Through Indirect
Distribution Channels, Our Visibility Into End User Demand Is
Limited

Our product distribution strategy is focused
primarily on selling to indirect distribution channels rather
than selling directly to end users. We do not typically have the
primary relationship with the end users who ultimately purchase
our products from our distribution partners. We interface with
our channel partners and rely on them for information. The
information we receive from our channel partners related to
future demand for our products is limited. While some provide us
with forecasts, pipelines and other key end user account
information, it is often not timely, can be incomplete and
cannot always be relied upon for its accuracy. As a result, it
is difficult for us to clearly understand our sales pipeline and
therefore our results may vary significantly from our internal
targets. Furthermore, if our partners change their purchasing
criteria, buying habits and/or inventory policies it will have a
significant impact on the Companys business results.

Unless We are Able to Keep Pace with the
Rapidly Changing Product Requirements of Our Customers, We Will
not be Able to Sustain or Grow Our Business

The business communications market is
characterized by rapid technological advances, evolving industry
standards, changes in end-user requirements, frequent new
product introductions, intense competition and economic
uncertainty. We believe our future success will largely depend
on our ability to anticipate or adapt to such changes and to
offer, on a timely basis, products that meet customer demands in
growing segments. Our customers could purchase competitive
products from other suppliers if we fail to produce
technologically competitive products in a cost-effective manner
or on a timely basis. Our business is differentiated by
supporting a broad range of switch, device and network types. As
new ones emerge, our growth is dependent on supporting the new
and previously existing switch, device and network types. These
rapid technological advances make it difficult for our product
validation and test center to verify all possible environments
and this may have a negative impact on our customer support,
product enhancements and new product development. This may cause
us to be unable to sustain or grow our business.

If Our Products Are Not Accepted by the
Market, Our Revenues Will Decrease

Market acceptance of our products is critical to
our future success. Factors that may affect the market
acceptance of our products include:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | continued market acceptance of traditional PBX
    and KTS technology               
|
| |  | delayed market acceptance of Nextgen switches and
    applications                  
|
| |  | the performance, price and total cost of
    ownership of our products              
|
| |  | the availability, functionality and price of
    competing products and technologies
|
| |  | the efforts and success of our indirect
    distribution channels.                  

Many of these factors are beyond our control. We
may experience failure or delays in market acceptance of our
products. Failure of our existing or future products to maintain
and achieve meaningful levels of market acceptance would reduce
the amount of revenue we receive from the sale of our products.

Because Substantially All of Our Revenues
are Derived from Sales of a Small Number of Products, Our Future
Operating Results will be Dependent on Sales of These
Products

We currently derive the majority of our revenues
from our product family of distributed voice equipment, and we
expect that this concentration will continue in the foreseeable
future. The market may not continue to demand our products, and
we may not be successful in marketing any new or enhanced
products. Any reduction in the demand for our products or our
failure to successfully develop or market new or enhanced
products could reduce the amount of revenue we receive from the
sale of our products and cause the price of our common stock to
decline. In addition, we expect our single-user products,
multi-user products, and our

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recently announced family of gateway products
will account for a substantial portion of our revenues in the
foreseeable future. Factors that could affect sales of our
products include:




| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | the demand for distributed voice solutions                                                                                            
|
| |  | the successful development, introduction and
    market acceptance of new and enhanced products that address
    customer requirements
|
| |  | product introductions or announcements by our
    competitors                                                                         
|
| |  | solution or price competition in our industry                                                                                         
|
| |  | technological change and customer acceptance                                                                                          
|
| |  | distribution changes, their business operation
    changes or they experience changes in their customer
    relationships.            

Intense Competition in the Market for
Enterprise Voice Solutions Could Prevent Us from Increasing or
Sustaining Revenue and Prevent Us from Achieving or Sustaining
Profitability

The market for enterprise voice solutions is
highly competitive. Our inability to compete effectively in this
market would materially adversely affect our revenues and future
profitability. Many of our current and potential competitors
have significantly greater sales and marketing, technical,
manufacturing, financial and other resources, more established
distribution channels and stronger relationships. For instance,
Nortel Networks, Avaya and more recently, Intel have released
products which compete directly with our products. KTS vendors
have announced network implementations. Traditional and
non-traditional vendors are offering IP or wireless based
systems which are displacing legacy environments. Moreover, our
competitors may foresee the course of market developments more
accurately than we do and could in the future develop new
technologies that compete with our products or even render our
products obsolete. Realizing and maintaining technological
advantages over our competitors will require a continued high
level of investment in research and development, sales and
marketing and customer support and may result in charges,
write-offs, etc. as we transition our product line and offer
products to address the needs of hybrid, converged and next
generation equipment manufacturers. Due to the opportunities in
and the rapidly evolving nature of the market in which we
compete, additional competitors with significant market presence
and financial resources, including large communications
equipment manufacturers, may enter our market, thereby further
intensifying competition.

We may not have sufficient resources to continue
to make the investments or achieve the technological advances
necessary to compete successfully with existing competitors or
new competitors.

Increased competition is likely to result in
price reductions, reduced gross margins, longer sales cycles and
loss of market share, any of which would seriously harm our
business and results of operations. We may not be able to
compete successfully against current or future competitors and
these competitive pressures may seriously harm our business.

The Companys Ability to Further
Reduce Costs is Limited by its Ongoing Need to Invest in
Research and Development

The Companys industry is characterized by
the need for continued investment in research and development.
If the Company failed to invest sufficiently in research and
development, the Companys products could become less
attractive to potential customers, and its business and
financial condition could be materially adversely affected. As a
result of the Companys need to maintain or increase its
spending levels in this area and the difficulty in reducing
costs associated with research and development, the
Companys operating results could be materially harmed if
its net sales fall below expectations. In addition, as a result
of the need for research and development and technological
innovation, the Companys operating costs may increase in
the future.

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Future Consolidation in the Communications
Equipment Industry May Increase Competition that Could Harm Our
Business

The markets in which we compete are characterized
by increasing consolidation both within the communications
sector and by companies combining or acquiring communications
assets. This consolidation creates uncertainty as to the nature
of our future competition. For instance, a relatively small
competitor that is acquired by a large telecommunications
company would likely have access to greater resources than us
and would accordingly be a greater competitive threat. We may
not be able to compete successfully in an increasingly
consolidated industry. Increased competition and consolidation
in our industry could require that we reduce the prices of our
products and may result in our loss of market share, which would
materially adversely affect our business, financial condition
and results of operations. Additionally, because we are now, and
may in the future be, dependent on strategic relationships with
third parties in our industry, such as PBX and KTS vendors, and
large distributors, any consolidation involving these parties
could reduce the demand for our products and otherwise harm our
business prospects.

Our Dependence on Independent Manufacturers
and Suppliers Could Result in Product Delivery
Delays

We currently use an independent manufacturer, OEM
Worldwide, to manufacture all of our products. Our reliance on
an independent manufacturer involves a number of risks,
including the absence of adequate capacity, the unavailability
of or interruptions in access to necessary manufacturing
processes and reduced control over delivery schedules. If our
manufacturer is unable or unwilling to continue manufacturing
our products and components in required volumes, we will have to
identify an acceptable alternative manufacturer, which could
take in excess of three months. Furthermore, the use of a new
manufacturer may cause significant interruptions in supply if
the new manufacturer has difficulty manufacturing products to
our specifications. Further, the introduction of a new
manufacturer may increase the variance in the quality of our
products. In addition, we rely upon third-party suppliers of
specialty components and intellectual property used in our
products. It is possible that a component needed to complete the
manufacture of our products may not be available to us at
acceptable prices or on a timely basis, if at all. For example,
the demand for flash memory chips may be strong and lead to
shortages for these components of our products. Inadequate
supplies of components, or the loss of intellectual property
rights, could affect our ability to deliver products to our
customers. Any significant interruption in the supply of our
products would result in the reduction of product sales to
customers, which in turn could permanently harm our reputation
in the industry.

If Anything Unexpected Were to Happen to
Damage the Equipment in Our Validation Laboratory Our Ability to
Develop and Test Our Products Would Be Restricted

We currently have a state of the art validation
laboratory and test center in our Calgary facility in which we
conduct product testing and system interoperability testing. If
the equipment in the validation laboratory were damaged due to a
natural disaster or other events it would take time to recreate
our unique laboratory environment and this would have a negative
impact on our customer support, product enhancements and new
product development.

Our Ability to Sustain or Grow Our Business
May Be Harmed If We Are Unable to Provide Adequate Customer
Support

Our ability to continue to grow and to retain
current and future customers depends in part upon the quality of
our customer support operations. We have entered into an
arrangement with a third-party customer support firm to provide
some of our customer support functions. Failure to offer
adequate customer support, either directly or through third
parties, or failure to properly integrate third-party services
into our customer support framework could materially and
adversely affect our reputation and cause demand for our
products to decline.

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Fluctuations in Our Quarterly Results Could
Cause the Market Price of Our Common Stock to Fall

The Companys period-to-period revenue and
operating results have varied in the past and management expects
they will continue to vary in the future, and any such
fluctuations may cause the Companys stock price to
fluctuate. Accordingly, investors should not rely on the results
of any past quarterly or annual periods as an indication of
MCKs future performance. In future periods, the
Companys operating results may fail to meet or surpass the
expectations of public market analysts or investors, which could
cause the price of MCKs common stock to decline, perhaps
significantly. A number of factors could cause our quarterly
results to fluctuate, including, but not limited to:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and amount of, or cancellation or
    rescheduling of, orders for our products, particularly large
    orders from our key customers                      
|
| |  | our ability to develop, introduce, ship and
    support new products and product enhancements, and manage
    product transitions                                    
|
| |  | new product introductions and announcements, and
    rate of adoption                                                                                                
|
| |  | reductions in the prices of products offered by
    our competitors, competition from new technologies                                                               
|
| |  | our ability to sustain our technology
    relationships, particularly with the major PBX and KTS system
    manufacturers, distributor partners and telecom resellers
|
| |  | availability and changes in the prices of
    components provided by third parties                                                                                   
|
| |  | our ability to attain and maintain production
    volume levels for our products                                                                                     
|
| |  | excess or obsolete inventory and variations in
    inventory valuation                                                                                               
|
| |  | unpredictability of life cycles of MCKs
    customers                                                                                                               
|
| |  | our ability to sustain product and customer
    support quality                                                                                                      
|
| |  | changes in our distribution partners, their
    operating models, and/or customer relationships                                                                      
|
| |  | the mix of products sold and the mix of
    distribution channels through which they are sold                                                                        
|
| |  | fluctuations in demand for our products                                                                                                                              
|
| |  | costs relating to possible acquisitions and
    integration of technologies or businesses                                                                            
|
| |  | telecommunications market conditions and economic
    conditions generally                                                                                           
|
| |  | our ability to hire, train, integrate and retain
    new personnel                                                                                                   
|
| |  | changes in the level of our operating expenses.                                                                                                                      

Given that any one or more of these or other
factors could have an adverse effect on our business, the
prediction of future quarterly results is difficult and
uncertain. In addition, some of our operating expenses are
relatively fixed in advance of any particular quarter. As a
result, we may not be able to reduce our operating costs in
response to unanticipated reductions in our revenues or the
demand for our products.

Our Stock Price Has Been, and May Continue
to be, Volatile and Investors May Not Be Able to Resell Shares
at or Above Their Purchase Price

The trading price of our common stock has been,
and may continue to be, subject to wide fluctuations in response
to factors such as:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | changes in general market conditions                               
|
| |  | actual or anticipated variations in quarterly
    operating results
|
| |  | announcements of technological innovations                         
|
| |  | general technology or economic trends                              

43



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| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | revenues and operating results failing to meet or
    surpass the expectations of securities analysts or investors in
    any quarter    
|
| |  | changes in financial estimates by securities
    analysts                                                                                
|
| |  | announcements of significant acquisitions,
    strategic partnerships, joint ventures or capital commitments by
    us or our competitors
|
| |  | additions or departures of key personnel                                                                                                 
|
| |  | the demand for our common stock                                                                                                          
|
| |  | the number of market makers for our common stock                                                                                         
|
| |  | sales of a large number of shares of our common
    stock in the public market or the perception that such sales
    could occur         
|
| |  | other events or factors, many of which are beyond
    our control.                                                                       

In addition, the stock market in general, and the
Nasdaq National Market and technology companies in particular,
have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of such companies. These broad market and industry
factors may materially adversely affect the market price of our
common stock, regardless of our actual operating performance. In
the past, following periods of volatility in the market price of
a companys securities, securities class-action litigation
has often been instituted against such companies. Such
litigation, if instituted, could result in substantial costs and
a diversion of managements attention and resources, which
would reduce the amount of resources and management time focused
on growing our business and improving operating results.

Sales to Customers Based Outside the United
States have Historically Accounted for a Significant Portion of
Our Revenues, Which Exposes Us to Risks Inherent in
International Operations

International sales represented 12% of our
revenues for the fiscal year ended April 30, 2003, and 20%
of our revenues for the fiscal year ended April 30, 2002.
While we expect sales to international markets to increase as a
percentage of revenues in the future, international sales are
subject to a number of risks, including:



| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in foreign government regulations laws,
    and communications standards                                                                                       
|
| |  | export license requirements                                                                                                                                            
|
| |  | currency fluctuations, tariffs and taxes                                                                                                                               
|
| |  | other trade barriers                                                                                                                                                   
|
| |  | difficulty in collecting accounts receivable;
    longer accounts receivable collection cycles                                                                         
|
| |  | difficulty in managing across disparate
    geographic areas                                                                                                           
|
| |  | difficulties in hiring qualified local personnel                                                                                                                       
|
| |  | difficulties associated with enforcing agreements
    and collecting receivables through foreign legal systems                                                         
|
| |  | expenses associated with localizing products for
    foreign markets                                                                                                   
|
| |  | political and economic instability, including
    disruptions of cash flow and normal business operations that may
    result from terrorist attacks or armed conflict.

If the relative value of the U.S. dollar in
comparison to the currency of our foreign customers should
increase, the resulting effective price increase of our products
to these foreign customers could result in decreased sales. In
addition, to the extent that general economic downturns impact
our customers, the ability of these customers to purchase our
products could be adversely affected. Payment cycles for
international

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customers are typically longer than those for
customers in the United States. The foreign markets for our
products may develop more slowly than currently anticipated.
Also, the Companys ability to expand the sale of its
products internationally is limited by the necessity of
obtaining regulatory approval in new countries. We anticipate
that our non-Canadian, foreign sales will generally be invoiced
in U.S. dollars, and we do not currently plan to engage in
foreign currency hedging transactions. As we expand our
international operations, however, we may allow payment in
foreign currencies, and exposure to losses in foreign currency
transactions may increase. We may choose to limit any currency
exposure through the purchase of forward foreign exchange
contracts or other hedging strategies. Our future currency
hedging strategies may not be successful.


Our Limited Ability to Protect Our
Intellectual Property May Adversely Affect Our Ability to
Compete

Our success and ability to compete is dependent
in part upon our proprietary technology. Any infringement of our
proprietary rights could result in significant litigation costs,
and any failure to adequately protect our proprietary rights
could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and
decreased revenues. We rely on a combination of patent,
copyright, trademark, trade secret and other intellectual
property laws, as well as confidentiality agreements and
licensing arrangements, to establish and protect our proprietary
rights. We presently have one issued patent relating to
technology used in our MobileConneX products. Despite our
efforts to protect our proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection.
In addition, the laws of some foreign countries do not protect
our proprietary rights to the same extent as do the laws of the
United States. The Company expects that the use of its
intellectual property will become more difficult to monitor if
MCK increases its international presence. Attempts may be made
to copy or reverse engineer aspects of our products or to obtain
and use information that we regard as proprietary. Accordingly,
we may not be able to protect our proprietary rights against
unauthorized third party copying or use. Furthermore, policing
the unauthorized use of our products is difficult. Some of our
contractual arrangements provide third parties with access to
our source code and other intellectual property upon the
occurrence of specified events. Such access could enable these
third parties to use our intellectual property and source code
to develop and manufacture competing products, which would
adversely affect our performance and ability to compete.
Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and
diversion of resources, could seriously harm our future
operating results, and may not prove successful.

Claims Alleging Infringement of a Third
Partys Intellectual Property Could Result in Significant
Expense to Us and Result in Our Loss of Significant
Rights

The telecommunications industry is characterized
by the existence of a large number of patents and frequent
litigation based on allegations of patent infringement. From
time to time, third parties may assert patent, copyright,
trademark, trade secret and other intellectual property rights
to technologies that are important to our business, and this
risk may increase as the number of entrants in our market
increases and the functionality of our products is enhanced and
overlaps with the products of other companies. Any claims
against us or any purchaser or user of our products asserting
that our products infringe or may infringe proprietary rights of
third parties, if determined adversely to us, could have a
material adverse effect on our business, financial condition or
results of operations. Any claims, with or without merit, could
be time consuming, result in costly litigation, divert the
efforts of our technical and management personnel, cause product
shipment delays, disrupt our relationships with our customers or
require us to enter into royalty or licensing agreements, any of
which could have a material adverse effect upon our operating
results. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us, if at all. Legal
action claiming patent infringement may be commenced against us
and we may not prevail in such litigation given the complex
technical issues and inherent uncertainties in patent
litigation. In the event a claim against us is successful and we
cannot obtain a license to the relevant technology on acceptable
terms, license a substitute technology or redesign our products
to avoid infringement, our business, financial condition and
results of operations would be materially adversely affected.

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In addition, because much of the ability of our
products to interoperate with the protocols of the various PBX
vendors is based upon our prior development work and/or
agreements with those vendors, it is possible that those vendors
may assert that our products infringe their trade secrets or
other intellectual property rights. Such claims may also be
precipitated by the declining product sales being experienced by
all of the major PBX vendors and the trend toward more open,
interoperable solutions that do not favor switch-specific
offerings. MCK has and would in the future defend against any
such claims vigorously.

If Our Products Contain Defects, We May be
Subject to Significant Liability Claims from Our Customers and
the End Users of Our Products and Incur Significant Unexpected
Expenses and Lost Sales

Our products have in the past contained, and may
in the future contain, undetected or unresolved errors when
first introduced or as new versions are released. Despite
extensive testing, errors, defects or failures may be found in
our current or future products or enhancements after
commencement of commercial shipments. If this happens, we may
experience delay in or loss of market acceptance and sales,
certain product returns, diversion of development resources to
alleviate such problems, injury to our reputation or increased
service and warranty costs, any of which could seriously harm
our business, financial condition and results of operations.
Moreover, because our products are designed to be deployed
within business critical communications networks, we may receive
significant liability claims. Our agreements with customers
typically contain provisions intended to limit our exposure to
liability claims. These limitations may not, however, preclude
all potential claims resulting from a defect in one of our
products. Existing or future laws or unfavorable judicial
decisions could negate any limitation of liability provisions
that are included in the Companys license agreements.

Although MCK maintains product liability
insurance covering damages arising from the implementation and
use of our products, the terms of our insurance limit the amount
and types of damages that are covered and the Company does not
guarantee that coverage under insurance policies will be
adequate to cover product liability claims. Liability claims
could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any such
claims, whether or not successful, could seriously damage our
reputation and our business.

The Adverse Resolution of Litigation
Against Us Could Negatively Impact Our Business

We are currently a defendant in a class action
lawsuit initiated on behalf of holders of MCK Communications,
Inc. common shares, which seeks damages of material and
indeterminate amounts, and other lawsuits in the normal course
of business. We are and may in the future be subject to other
litigation arising in the normal course of our business.
Litigation may be time consuming, expensive, and distracting
from the conduct of our business, and the outcome of litigation
is difficult to predict. The adverse resolution of any specific
lawsuit could have a material adverse effect on our business,
results of operations, and financial condition. In addition,
product liability insurance could become more expensive and
difficult to maintain and may not be available in the future on
commercially reasonable terms or at all. The amount and scope of
any insurance coverage may be inadequate if a product liability
claim is successfully asserted against MCK.

We May Have Difficulty Identifying the
Source of the Problem When There is a Problem in a Network Which
May Adversely Affect the Market Acceptance of Our
Products

Our products must successfully integrate with
products from other vendors, such as circuit switched and IP
PBXs, application servers, telephony sets and private and public
networks. As a result, when problems occur in a network, it may
be difficult to identify the source of the problem. The
occurrence of hardware and software errors, whether caused by
our products or another vendors products, may result in
the delay or loss of market acceptance of our products and any
necessary revisions may force us to incur significant expenses.
The occurrence of some of these types of problems may seriously
harm our business, financial condition and results of operations.

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Difficulties and Financial Burden
Associated with Acquisitions or Mergers Could Harm Our Business
and Financial Results

We have made acquisitions in the past and in the
future we may consider other selective opportunistic
acquisitions of companies or businesses with resources and
products or service offerings capable of providing us with
additional strengths. Acquisitions involve significant risks and
uncertainties. These risks and uncertainties include the risk
that any future acquisition, may not produce the revenue,
earnings or business synergies that we anticipated, and an
acquired product, service or technology might not perform as
expected. Prior to completing an acquisition, however, it is
difficult to determine if such benefits can actually be
realized. The process of integrating acquired companies into our
business may also result in unforeseen difficulties. Unforeseen
operating difficulties may absorb significant management
attention, which we might otherwise devote to our existing
business. Also, the process may require significant financial
resources that we might otherwise allocate to other activities,
including the ongoing development or expansion of our existing
operations. In addition, an acquisition might adversely effect
the business relationships with our existing suppliers and
customers and/or those of the acquired company. Acquired company
assets might become impaired as a result of technical
advancements or worse-than-expected performance by the acquired
company. The merged company may enter markets in which we have
no, or limited prior experience. If the recently completed
acquisition or any future acquisition fails to meet our
expectations or if we change the strategic focus of the company,
we may decide to sell, close, or otherwise significantly reduce
our investment in the acquired technologies which could have an
adverse effect on our operating results.

If we pursue a future acquisition, our management
could spend a significant amount of time and effort identifying
and completing the acquisition. To pay for a future acquisition,
we might use capital stock or cash. Alternatively, we might
borrow money from a bank or other lender or obtain financing on
unfavorable terms. We might incur amortization expenses related
to acquired intangible assets or incur large and immediate
write-offs. This might include write-offs related to office
closures, including costs relating to termination of employees
and facility and leasehold improvement charges relating to
vacating premises. If we use capital stock, our stockholders
would experience dilution of their ownership interests. If we
use cash or debt financing, our financial liquidity will be
reduced, as would the funds available to fund our operations or
to use for other purposes.

If We Lose Key Personnel, We May Not Be
Able to Successfully Operate Our Business

Our success depends to a significant degree upon
the continued contributions of our senior sales, engineering and
management personnel, many of whom perform important management
functions and would be difficult to replace. Within the last
year we have experienced significant changes to the management
team including the appointment of a new acting chief executive
officer and a new principal financial officer. The Senior
Management team has been reduced by 50%. The loss of the
services of any key personnel, particularly senior leadership,
sales management and key engineers, could seriously harm our
business, financial condition and results of operations,
including our success in selling our recently introduced
products and planned new products.

If We Are Unable to Retain and Hire
Additional Qualified Personnel as Necessary, We May Not Be Able
to Successfully Achieve Our Objectives

We may not be able to attract and retain the
necessary personnel to accomplish our business objectives and we
may experience constraints that will adversely affect our
ability to satisfy customer demand in a timely fashion or to
support our customers and operations. We have at times
experienced, and continue to experience, difficulty in
recruiting qualified personnel. Recruiting qualified personnel
is an intensely competitive and time-consuming process. New
sales personnel and engineering personnel will require training
and take time to achieve full productivity. In addition, the
design and installation of telephony solutions can be complex.
Accordingly, we need highly trained customer service and support
personnel. We cannot be certain that we will successfully
attract and retain additional qualified personnel.

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Control By Existing Stockholders May Limit
Your Ability to Influence the Outcome of Director Elections and
Other Matters Requiring Stockholder Approval

Our executive officers, directors and principal
stockholders and their affiliates own a significant percentage
of the outstanding shares of common stock. These stockholders,
if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other
business combination transactions. This concentration of
ownership could have the effect of delaying or preventing a
change in our control or otherwise discouraging a potential
acquiror from attempting to obtain control of us, which in turn
could have a material adverse effect on the market price of the
common stock or prevent our stockholders from realizing a
premium over the market prices for their shares of common stock.

Provisions of Delaware Law and of Our
Charter and By-Laws May Make a Takeover More
Difficult

Provisions in our certificate of incorporation
and by-laws and in Delaware corporate law may make it difficult
and expensive for a third party to pursue a tender offer, change
in control or takeover attempt that is opposed by our
management. Public stockholders who might desire to participate
in such a transaction may not have an opportunity to do so, and
the ability of public stockholders to change our management
could be substantially impeded by these anti-takeover
provisions. For example, we have a staggered board of directors
and the right under our charter documents to issue preferred
stock without further stockholder approval, which provisions
could adversely affect the holders of our common stock.






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

To date, the Company has not utilized derivative
financial instruments or derivative commodity instruments. The
Company invests cash in highly liquid investments, consisting of
highly rated U.S. and state government securities, commercial
paper and short-term money market funds. These investments are
subject to minimal credit and market risk and the Company has no
debt. Therefore, the Company believes the market risks
associated with these financial instruments are immaterial. For
additional information regarding market risk, see
Disclosures About Market Risk on page 35.






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

The information required by this item is
incorporated by reference to the Consolidated Financial
Statements set forth on pages F-1 through F-22 hereof.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.

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PART III






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

Information Regarding Directors

Set forth below is certain information regarding
the Directors of the Company, based on information furnished by
them to the Company.

|                         |  |     |    |                |  |  |                | 
|------------------------ |  | --- | -- | -------------- |  |  | -------------- | 
|Name                     |  | Age |    | Director Since
|                         |  |     |    |               
|John B. Landry(2)        |  |     | 55 |                |  |  | September 1997 | 
|Paul Severino(1)(2)      |  |     | 56 |                |  |  | July 1999      | 
|Elizabeth H. Houlihan(1) |  |     | 56 |                |  |  | July 2002      | 
|Alan B. Levine(2)        |  |     | 59 |                |  |  | July 2002      | 



---



|    |                                     
|--- | ------------------------------------
|(1) | Member of the Compensation Committee
|   
|(2) | Member of the Audit Committee       

The principal occupation and business experience
for at least the last five years of each Director of the Company
is set forth below.

John B. Landryhas
served as a Director of the Company since September 1997. In
August 2002, Mr. Landry was appointed CEO of ThinkingBytes
Technology, a software company specializing in Field Sales &
Service automation. Since 2001, Mr. Landry has been
Chairman of Lead Dog Ventures, a firm providing emerging
technology companies access to intellectual, relationship and
financial capital. From February 1995 to 2000, Mr. Landry
served as Vice President of Technology Strategy for IBM.
Mr. Landry has also served as Chairman of Anyday.com, an
Internet calendar and personal information management company,
from February 1999 to June 2000. From March 1996 to January
1999, he served as Chairman of Narrative Communications, an
Internet-based advertising and direct marketing company. From
December 1990 to June 1995, Mr. Landry served as the Senior
Vice President of Development and Chief Technology Officer for
Lotus Development Corporation, a provider of software products
and services. He also serves as a director of Lante Corporation,
a business systems integration firm and Giga Information Group,
a market research firm, as well as several private companies.
Mr. Landry holds a Bachelors degree from Babson
College.

Paul Severinohas
served as a Director of the Company since July 1999. He has been
a private venture investor since November 1996. From October
1994 to November 1996, Mr. Severino served as the Chairman
of the Board of Bay Networks, Inc., after its formation from the
merger of Wellfleet and Synoptics. From October 1986 to October
1994, he served as the President and Chief Executive Officer of
Wellfleet Communications, Inc., a company he co-founded and
which merged with Bay Networks. He is a director of Sonus
Networks, Inc., a provider of voice infrastructure products, and
Media 100, Inc., a provider of digital video systems.
Mr. Severino holds a Bachelors degree from Rensselaer
Polytechnic Institute.

Elizabeth H. Houlihanhas served as a Director of the
Company since July 2002. In November 1998, Mrs. Houlihan
established E.H. Houlihan & Associates, an executive search
and consulting firm. During the period of January 2000 to August
2000, Mrs. Houlihan served as Chief Operating Officer of CO
Space, Inc., a national collocation company. In July 1971,
Mrs. Houlihan joined New England Telephone where she held a
succession of increasingly senior management positions until her
appointment to the Senior Management Team of NYNEX Corp in 1990.
During the next seven years, she served as the Vice President
and General Manager of Operations, Vice President 
Consumer Sales and Vice President of Enterprise Markets.
Mrs. Houlihan holds a Bachelors degree from Salem
State College and completed a HBSPMD at Harvard Business School.

Alan B. Levinehas
served as a Director of the Company since July 2002.
Mr. Levine has been a consultant with ABL Associates, a
financial consulting firm, since May 2002. From April until May
of 2002, Mr. Levine served with The Van LLC, an asset
disposal firm. From September 2001 until April 2002,
Mr. Levine served as Chief Financial Officer for Virtual
Access networks, Inc., a software manufacturer. From

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October 1998 until September 2001,
Mr. Levine served as Chief Financial Officer of Marathon
Technologies Corporation, a software manufacturer. From
September 1974 until September 1998, Mr. Levine held
increasingly senior positions with Ernst & Young LLP and
became a partner in the firm in October 1986. Mr. Levine
holds a Bachelors degree from the University of Vermont
and a Masters in Accounting from the University of Arizona.


Information Regarding Executive
Officers

Set forth below is certain information regarding
each of the executive officers of the Company.

|                  |  |     |    |          |  |                                                 
|----------------- |  | --- | -- | -------- |  | ------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|Thomas M. Nolette |  |     | 46 |          |  | Vice President, Acting CEO                      
|Patrick J. Curley |  |     | 43 |          |  | Vice President, Product and Business Development
|Ann Doyle         |  |     | 45 |          |  | Vice President, Sales and Marketing             

The principal occupation and business experience
for the last five years of the Companys executive officers
is set forth below.

Thomas M. Nolettehas served as the Companys
Acting CEO since January 2003, Vice President of Finance,
Administration and Operations since November 2002 and Vice
President of Manufacturing and Quality since May 2001. From
August 1999 to May 2001, Mr. Nolette was Senior Director of
Operations for Motorola Multi Service Networks Group, a division
of Motorolas Commercial, Government Information Systems
Sector, a communications enterprise. From June 1998 to August
1999, he was Senior Director of Quality for Motorolas
Internet and Networking Group. From July 1996 to June 1998,
Mr. Nolette was Director of Operations, Customer Service
and Quality for Motorolas Modem Division and from December
1990 to July 1996 he was Director of Operations for the Wireless
Data Group at Motorola. Mr. Nolette holds a Bachelors
degree from the University of Massachusetts.

Patrick J. Curleyhas served as the Companys Vice
President of Product and Business Development since November
2002 and Vice President of Engineering since May 1998. From July
1994 to March 1998, he served as Director and Vice President of
Engineering at Windata, Inc., a wireless local area networking
company. From September 1991 to June 1994, Mr. Curley
served as Director of Engineering at PictureTel Corporation, a
video and data conferencing company. He holds a Bachelors
degree from Boston University.

Ann Doylehas served
as the Companys Vice President of Corporate Communications
and Marketing from May 2001 to April 2002 and as Vice President
of Worldwide Sales and Marketing since April 2002. From May 2000
to August 2000, Ms. Doyle was Vice President of Marketing
for CO Space, Inc. a carrier and telecom hotel for peering and
collocation. From March 2000 to April 2000, Ms. Doyle was a
marketing consultant for OneWarranty.com, a multi-manufacturer
supported warranty registration company. From June 1980 to
October 1999, she held various increasingly senior management
positions at Bell Atlantic and NYNEX, including her most recent
position as Director, Business and Services Administration at
Bell Atlantic. Ms. Doyle holds a Bachelors degree
from the University of Massachusetts and an M.B.A. from Boston
University.

Compliance with Section 16(a) of the
Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act
of 1934 requires the Companys officers and Directors, and
persons who own more than 10% of the Companys outstanding
shares of Common Stock (collectively, Section 16
Persons), to file initial reports of ownership and reports
of changes in ownership with the Commission and Nasdaq.
Section 16 Persons are required by Commission regulations
to furnish the Company with copies of all Section 16(a)
forms they file.

To the Companys knowledge, based solely on
a review of the copies of such reports furnished to the Company
by the Section 16 Persons, or written representations from
such Section 16 Persons, all Section 16(a) filing
requirements were satisfied, except that Paul Severino
inadvertently failed to file one Form 4 to report a
transaction in 1999.

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

Compensation of Directors

MCK does not currently compensate its Directors,
but they are reimbursed for out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors
or its committees. The Companys Directors are generally
eligible to participate in the 1996 Stock Option Plan and the
1999 Stock Option and Grant Plan. In addition, pursuant to the
terms of the Companys 2000 Director Stock Option Plan, as
amended December 11, 2002, each Director who becomes an
eligible Director after November 1, 2000, shall be granted
an option to purchase 50,000 shares of Common Stock on the date
that such person first becomes an eligible Director (the
Initial Grants). Initial Grants shall vest in
quarterly installments, subject to the grantees continued
service as a Director of the Company or its subsidiaries, over a
period of 3 years (1/12th of the total option shares vest
every 3 months). Additionally, grantees may immediately
exercise the Initial Grants, subject to the Companys right
to repurchase any unvested shares upon the termination of the
Directors continued service as a Director of the Company
or its subsidiaries. Further, on the date of each annual meeting
of the stockholders of the Company, each eligible Director will
automatically be granted an additional option to purchase 15,000
shares of Common Stock, if after such annual meeting of the
stockholders the Director will continue to be an eligible
Director (the Annual Grants). Annual Grants shall be
fully vested and immediately exercisable on the date of grant.
All options granted under the Director Plan shall have an
exercise price equal to 100% of the fair market value of the
Common Stock (generally determined as the closing sales price of
the Companys Common Stock) on the date of grant.

Compensation of Executive Officers

The following sections of this Annual Report on
Form 10-K set forth and describe the compensation paid or
awarded to the Companys Chief Executive Officer and the
four other most highly compensated executive officers who earned
in excess of $100,000 during the Companys fiscal year
ended April 30, 2003. These executives are referred to as
the Named Executive Officers elsewhere in this
Annual Report on Form 10-K.

Summary Compensation.The following summary compensation
table sets forth information concerning compensation for
services rendered in all capacities awarded to, earned by or
paid to the Named Executive Officers during each of fiscal years
ended April 30, 2001, April 30, 2002, and
April 30, 2003, respectively.

Summary Compensation Table

|                            |                             |                      |      |            |      |            |         |                        |         |            |        |         |        |  |         |   |   |  |         |        |        |   |         |       |     |    
|--------------------------- | --------------------------- | -------------------- | ---- | ---------- | ---- | ---------- | ------- | ---------------------- | ------- | ---------- | ------ | ------- | ------ |  | ------- | - | - |  | ------- | ------ | ------ | - | ------- | ----- | --- | ---
|                            |                             |                      |      |            |      |            |         |                        |         |           
|                            |                             |                      |      |            |      |            |         | Long Term Compensation |         |           
|                            |                             |                      |      |            |      |            |         | Awards                 |         |           
|                            |                             |                      |      |            |      |           
|                            |                             | Annual Compensation  |      | Restricted |      | Securities |         | All Other             
|                            |                             |                      |      | Stock      |      | Underlying |         | Compensation          
|Name and Principal Position |                             | Year                 |      | Salary($)  |      | Bonus($)   |         | Awards(#)              |         | Options(#) |        | ($)    
|                            |                             |                      |      |            |      |            |         |                        |         |            |        |        
|Thomas M. Nolette           |                             |                      | 2003 |            |      | $          | 158,171 |                        |         | $          |       |         |        |  |        |   |   |  | 15,000  |        |        | $ | 1,207   | (1)  
|                            | Vice President, Acting CEO  |                      |      | 2002       | (2)  |            |         | 136,451                |         |            |        |        |        |  |         |  |   |  |         | 50,000 |        |   |         | 1,071 | (1)
|                            |                             |                      | 2001 |            |      |            |        |                        |         |            |       |         |        |  |        |   |   |  |        |        |        |   |        |      
|Glenda N. Davis             |                             |                      | 2003 | (4)        |      |            | 230,576 |                        |         |            |       |         |        |  |        |   |   |  |        |        |        |   | 275,959 | (5)  
|                            | Former President and CEO    |                      |      | 2002       |      |            |         | 300,011                |         |            |        | 112,500 |        |  |         |  |   |  |         |       |        |   |         | 1,102 | (1)
|                            |                             |                      | 2001 | (6)        |      |            | 88,657  |                        |         |            | 75,000 |         |        |  | 100,000 |   |   |  | 500,000 |        |        |   | 263     | (1)  
|Patrick J. Curley           |                             |                      | 2003 |            |      |            | 140,005 |                        |         |            | 8,077  |         |        |  |        |   |   |  | 29,000  |        |        |   | 1,168   | (1)  
|                            | Vice President, Product and |                      |      | 2002       |      |            |         | 140,005                |         |            |        | 2,625   |        |  |         |  |   |  |         | 37,500 |        |   |         | 1,136 | (1)
|                            |                             | Business Development |      |            | 2001 |            |         |                        | 123,338 |            |        |         | 13,250 |  |         |   |  |  |         |        | 25,000 |   |         |       | 956 | (1)
|Ann Doyle                   |                             |                      | 2003 |            |      |            | 145,419 |                        |         |            | 57,432 |         |        |  |        |   |   |  | 15,000  |        |        |   | 1,157   | (1)  
|                            | Vice President, Sales and   |                      |      | 2002       | (3)  |            |         | 131,457                |         |            |        |        |        |  |         |  |   |  |         | 50,000 |        |   |         | 1,010 | (1)
|                            |                             | Marketing            |      |            | 2001 |            |         |                        |        |            |        |         |       |  |         |   |  |  |         |        |       |   |         |       |    |    



---



|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents premiums paid for life insurance,
    long-term disability insurance, short-term disability insurance,
    and accidental death and dismemberment insurance.

51



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Mr. Nolette began employment with the
    Company on May 29, 2001.                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | Ms. Doyle began employment with the Company
    on May 10, 2001.                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(4) | Ms. Davis served as President and Chief
    Executive Officer until January 17, 2003.                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(5) | Includes $200,100 paid to Ms. Davis as
    forgiveness of a promissory note and reimbursement for related
    taxes, and $75,003 as separation pay under the terms of a
    Severance Agreement. See Certain Relationships and Related
    Transactions. Also incudes premiums paid for life
    insurance, long-term disability insurance, short-term disability
    insurance, and accidental death and dismemberment insurance in
    an aggregate amount of $856.
|   
|(6) | Ms. Davis began employment with the Company
    on January 15, 2001.                                                                                                                                                                                                                                                                                                                                                                                                   

Option Grants.The
following table sets forth certain information concerning the
individual grant of options to purchase Common Stock of the
Company to the Named Executive Officers who received options
during the Companys fiscal year ended April 30, 2003.

Option Grants In Last Fiscal Year

|                  |  |                   |        |                      |  |          |     |                        |  |                |      |        |  |  |          |  |  |   |        |  |  |   |        | 
|----------------- |  | ----------------- | ------ | -------------------- |  | -------- | --- | ---------------------- |  | -------------- | ---- | ------ |  |  | -------- |  |  | - | ------ |  |  | - | ------ | 
|                  |  |                   |        |                      |  |         
|                  |  | Individual Grants |        |                     
|                  |  |                   |        | Potential Realizable
|                  |  | Number            |        | Percent of           |  |          |     | Value at Assumed      
|                  |  | of                |        | Total Options        |  |          |     | Annual Rates of Stock 
|                  |  | Securities        |        | Granted to           |  |          |     | Price Appreciation for
|                  |  | Underlying        |        | Employees in         |  | Exercise |     |                        |  | Option Term(1)
|                  |  | Options           |        | Fiscal               |  | Price    |     | Expiration             |  |               
|Name              |  | Granted           |        | Year(#)              |  | ($/SH)   |     | Date                   |  | 5%($)          |      | 10%($)
|                  |  |                   |        |                      |  |          |     |                        |  |                |      |       
|Thomas M. Nolette |  |                   | 15,000 |                      |  |          | 2.5 | %                      |  | $              | 1.05 |        |  |  | 11/08/12 |  |  | $ | 25,655 |  |  | $ | 40,851 | 
|Glenda N. Davis   |  |                   |       |                      |  |          |    |                        |  |                |     |        |  |  |         |  |  |   |       |  |  |   |       | 
|Patrick J. Curley |  |                   | 29,000 |                      |  |          | 4.8 |                        |  |                | 1.05 |        |  |  | 11/08/12 |  |  |   | 49,600 |  |  |   | 78,979 | 
|Ann Doyle         |  |                   | 15,000 |                      |  |          | 2.5 |                        |  |                | 1.05 |        |  |  | 11/08/12 |  |  |   | 25,655 |  |  |   | 40,851 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This column shows the hypothetical gain or option
    spreads of the options granted based on assumed annual compound
    stock appreciation rates of 5% and 10% for the exercise price of
    such options over the full 10-year term of the options. The 5%
    and 10% assumed rates of appreciation are mandated by the rules
    of the Securities and Exchange Commission and do not represent
    the Companys estimate or projection of future common stock
    prices.

Option Exercises and Option Values.The following table sets forth
information concerning the number of underlying shares and value
of unexercised options to purchase common stock held by the
Named Executive Officers as of April 30, 2003.

Aggregated Option Exercises In Last Fiscal
Year

And Fiscal Year-End Option Values


|                  |  |             |       |          |  |                       |       |                         |  |             |        |               |  |  |        |  |  |   |       |  |  |   |        | 
|----------------- |  | ----------- | ----- | -------- |  | --------------------- | ----- | ----------------------- |  | ----------- | ------ | ------------- |  |  | ------ |  |  | - | ----- |  |  | - | ------ | 
|                  |  |             |       |          |  |                       |       |                         |  |            
|                  |  |             |       |          |  | Number of             |       |                        
|                  |  |             |       |          |  | Securities Underlying |       | Value of Unexercised   
|                  |  |             |       |          |  | Unexercised Options   |       | In the Money Options   
|                  |  | Shares      |       |          |  | at April 30, 2003(#)  |       | at April 30, 2003($)(1)
|                  |  | Acquired on |       | Value    |  |                       |       |                        
|Name              |  | Exercise(#) |       | Realized |  | Exercisable           |       | Unexercisable           |  | Exercisable |        | Unexercisable
|                  |  |             |       |          |  |                       |       |                         |  |             |        |              
|Thomas M. Nolette |  |             |      |          |  |                       |      |                         |  |             | 21,875 |               |  |  | 43,125 |  |  |   |      |  |  | $ | 11,100 | 
|Glenda N. Davis   |  |             |      |          |  |                       |      |                         |  |             |       |               |  |  |       |  |  |   |      |  |  |   |       | 
|Patrick J. Curley |  |             | 2,179 |          |  | $                     | 1,530 |                         |  |             | 28,907 |               |  |  | 62,593 |  |  | $ | 5,039 |  |  |   | 32,546 | 
|Ann Doyle         |  |             |      |          |  |                       |      |                         |  |             | 21,875 |               |  |  | 43,125 |  |  |   |      |  |  |   | 11,100 | 

52



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---



|    |                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on the last reported sale price on the
    Nasdaq National Market on April 30, 2003 less the option
    exercise price. As of April 30, 2003 there were 162,500
    options held by the Named Executive Officers for which the
    exercise price of the option was in excess of the market price.

Employment Agreements with Executive
Officers

We have entered into severance agreements with
Thomas Nolette, Patrick Curley and Ann Doyle.
Mr. Nolettes severance agreement, entered into on
May 29, 2001, provides that if Mr. Nolettes
employment is terminated by the Company for any reason other
than for cause, Mr. Nolette is entitled to six (6)
months of salary continuation as a severance.
Mr. Curleys severance agreement, entered into on
December 12, 2001, provides that if Mr. Curleys
employment is terminated due to a change in control,
Mr. Curley is entitled to six (6) months salary
continuation as severance. Ms. Doyles severance
agreement, entered into on May 10, 2001 and amended on
February 5, 2003, provides that, if after six
(6) months her employment is terminated by the Company due
to a change in control, she will be entitled to
six (6) months of salary continuation as a severance.

In April of 2002 the Compensation Committee of
the Board of Directors approved an Incentive Bonus Plan (the
Bonus Plan) to provide greater incentive to the
executive officers and certain other key employees of the
Company to remain in the employ of the Company in the event of a
change of control. Under the Bonus Plan each executive officer
of the Company, except the Chief Executive Officer, is eligible
to receive a bonus if they remain in the employ of the Company
for at least six (6) months after a change in control. The
aggregate amount of the bonuses under the Bonus Plan is equal to
the lesser of 5% of the valuation of the Company or $5,000,000.
Each executive officers percentage of the aggregate bonus
amount is determined by a written resolution adopted by the
administrator of the Bonus Plan and delivered to the executive
officer. The bonus is conditioned on the executive officer
remaining an employee for six (6) months following the
change of control, unless the executive officer is terminated
without cause within such six (6) month period.

During the quarter ended January 2003, the
Company announced the departure of President and CEO
Ms. Glenda Davis, as well as her resignation from the Board
of Directors. See Certain Relationships and Related
Transactions for a discussion of the severance
arrangements entered into between the Company and Ms. Davis.

Compensation Committee Interlocks and Insider
Participation

Since October 22, 1999 all executive officer
compensation decisions have been made by the Compensation
Committee or the full Board of Directors. The Compensation
Committee reviews and makes recommendations regarding the
compensation for top management and key employees of the
Company, including salaries and bonuses. No member of the
Compensation Committee is an officer of the Company. The current
members of the Compensation Committee are Paul Severino and
Elizabeth Houlihan. Mr. Severino and Mrs. Houlihan
participated in all deliberations of the Companys Board of
Directors concerning executive compensation during the fiscal
year ended April 30, 2003.






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

The following table sets forth information
regarding the beneficial ownership of Common Stock as of
May 21, 2003 by:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | all persons who own beneficially 5% or more of
    the Companys Common Stock; 
|
| |  | the Chief Executive Officer and each of the other
    Named Executive Officers;
|
| |  | each of the Companys Directors; and                                           
|
| |  | all Directors and executive officers as a group.                               

53



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##### Table of Contents



Unless otherwise indicated, each of the
stockholders has sole voting and investment power with respect
to the shares of Common Stock beneficially owned, except to the
extent authority is shared by spouses under applicable community
property laws and shares of Common Stock subject to options held
that are currently exercisable or exercisable within
60 days of May 21, 2003. The applicable percentage of
beneficial ownership is based upon 20,535,699 shares
of Common Stock outstanding.

|                                                                    |  |                      |           |            |  |  |      |  
|------------------------------------------------------------------- |  | -------------------- | --------- | ---------- |  |  | ---- | -
|                                                                    |  |                     
|                                                                    |  | Beneficial Ownership
|                                                                    |  |                     
|Name of Beneficial Owner                                            |  | Shares               |           | Percentage
|                                                                    |  |                      |           |           
|Summit Partners(1)                                                  |  |                      | 2,142,959 |            |  |  | 10.4 | %
|Putnam Investments, Inc.(2)                                         |  |                      | 1,542,000 |            |  |  | 7.5  |  
|033 Asset Management LLC(3)                                         |  |                      | 2,834,470 |            |  |  | 13.8 |  
|Glenda N. Davis                                                     |  |                      | 4,000     |            |  |  | *    |  
|Patrick J. Curley(4)                                                |  |                      | 107,405   |            |  |  | *    |  
|Thomas M. Nolette(5)                                                |  |                      | 31,216    |            |  |  | *    |  
|Ann Doyle(6)                                                        |  |                      | 31,878    |            |  |  | *    |  
|John B. Landry(7)                                                   |  |                      | 115,891   |            |  |  | *    |  
|Calvin K. Manz(8)                                                   |  |                      | 2,703,449 |            |  |  | 13.2 |  
|Paul Severino(9)                                                    |  |                      | 115,754   |            |  |  | *    |  
|Alan B. Levine(10)                                                  |  |                      | 31,667    |            |  |  | *    |  
|Elizabeth H. Houlihan(11)                                           |  |                      | 31,667    |            |  |  | *    |  
|All executive officers and directors as a group
    (8 persons)(12) |  |                      | 402,144   |            |  |  | 1.9  |  



---



| |   |                                                   
| | - | --------------------------------------------------
| | * | Represents less than 1% of the outstanding shares.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Represents 1,964,412 shares held by Summit
    Ventures IV, L.P., 89,163 shares held by Summit
    Subordinated Debt Fund, L.P., and 89,384 shares held by
    Summit Investors II, LP. Summit Ventures IV, L.P.,
    Summit Subordinated Debt Fund, L.P., Summit Investments Holdings
    Trust, Summit Investors Holding Trust, and Summit
    Investors III, L.P. are part of an affiliated group of
    investment partnerships referred to, collectively, as Summit
    Partners. Summit Partners, LLC through an investment committee,
    has voting and dispositive authority over the shares held by
    Summit Ventures IV, L.P., Summit Debt Fund L.P., Summit
    Investments Holdings Trust, Summit Investors Holding Trust, and
    Summit Investors III, L.P. Based solely upon information
    provided by Summit Partners and affiliated entities
    Schedule 13G/A filed with the Securities and Exchange Commission
    on February 13, 2003. The address for each of these
    entities is Summit Partners, 222 Berkeley Street, 18th Floor,
    Boston, Massachusetts 02116.
|
| | (2) | Based solely upon information provided by Putnam
    Investments, Inc. and affiliated entities
    Schedule 13G/ A filed with the Securities and Exchange
    Commission on April 10, 2001. The address for Putnam
    Investments, Inc. is One Post Office Square, Boston,
    Massachusetts 02109.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (3) | Based solely upon information provided by 033
    Asset Management LLC and affiliated entities
    Schedule 13G/ A filed with the Securities and Exchange
    Commission on April 30, 2003. The address for 033 Asset
    Management LLC, 125 High Street, Suite 1405, Boston,
    Massachusetts 02110.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (4) | Includes 32,813 shares underlying options granted
    to Mr. Curley which are exercisable within 60 days of
    May 21, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (5) | Includes 25,000 shares underlying options granted
    to Mr. Nolette which are exercisable within 60 days of
    May 21 , 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (6) | Includes 25,000 shares underlying options granted
    to Ms. Doyle which are exercisable within 60 days of
    May 21, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (7) | Includes 61,454 shares underlying options granted
    to Mr. Landry which are exercisable within 60 days of
    May 21, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |     |                                                                                                                                                                                                                                               
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (8) | Represents shares held by Manz Developments, Inc,
    of which Mr. Manz holds 100% of the voting stock and 48% of
    the total equity. The address for Manz Developments, Inc. is
    Site 30, Box 1, RR12, Calgary, Alberta, Canada T3E 6W3.
|
| | (9) | Includes 81,967 shares underlying options granted
    to Mr. Severino which are exercisable within 60 days
    of May 21, 2003.                                                                                                               



|     |                                                                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 31,667 shares underlying options granted
    to Mr. Levine which are exercisable within 60 days of
    May 21, 2003.                         
|    
|(11) | Includes 31,667 shares underlying options granted
    to Mrs. Houlihan which are exercisable within 60 days
    of May 21, 2003.                      
|    
|(12) | Includes 226,234 shares underlying options
    granted to the Directors and executive officers which are
    exercisable with 60 days of May 21, 2003.

Equity Compensation Plan Information

The following table provides information as of
April 30, 2003 about our common stock that may be issued
upon the exercise of options, warrants and rights under all of
our existing equity compensation plans, including the 1996 Stock
Option Plan, the 1999 Stock Option and Grant Plan, the 2000
Director Stock Option Plan and the 2000 Employee Stock Option
Plan.

|                                                           |       |                      |           |                   |  |                         |      |      |  |  |           |           | 
|---------------------------------------------------------- | ----- | -------------------- | --------- | ----------------- |  | ----------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                           |       |                      |           |                   |  | (c)                    
|                                                           |       |                      |           | (b)               |  |                        
|                                                           |       | (a)                  |           |                   |  | Number of Securities   
|                                                           |       |                      |           | Weighted-Average  |  | Remaining Available    
|                                                           |       | Number of Securities |           | Exercise Price of |  | for Issuance Under     
|                                                           |       | to be Issued Upon    |           | Outstanding       |  | Equity Compensation    
|                                                           |       | Exercise of          |           | Options,          |  | Plans (Excluding       
|                                                           |       | Outstanding Options  |           | Warrants          |  | Securities Reflected in
|Plan Category                                              |       | Warrants and Rights  |           | and Rights        |  | Column(a)(1))          
|                                                           |       |                      |           |                   |  |                        
|Equity Compensation plans approved by Shareholders         |       |                      | 1,467,308 |                   |  | $                       | 4.53 |      |  |  | 3,148,961 |          
|Equity Compensation plans not approved by
    Shareholders |       |                      |          |                   |  | $                       |     |      |  |  |          |          
|                                                           | Total |                      |           | 1,467,308         |  |                         | $    | 4.53 |  |  |           | 3,148,961 | 



---



|    |                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 150,294 shares which may be awarded
    under the terms of our 2000 Employee Stock Purchase Plan. Our
    2000 Employee Stock Purchase Plan permits all participants to
    elect to have deductions of up to 10% of their compensation to
    purchase shares of our common stock.






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

During the quarter ended January 2003, the
Company announced a leadership change within the senior
management team, involving the departure of President and CEO
Ms. Glenda Davis, as well as her resignation from the Board
of Directors. In connection with her departure from the Company
in January 2003, the Company repurchased 100,000 shares of
restricted stock held by Ms. Davis for the fair market
value of $115,000, which was applied against the outstanding
balance of Ms. Davis promissory note to the Company.
The Company forgave the remaining balance of $138,000 due under
the promissory note and agreed to reimburse Ms. Davis for
certain income tax consequences (but not any interest, penalties
or fees) which may result from the forgiveness of the balance of
the loan. The amount paid to Ms. Davis for reimbursement
for the income tax consequences was $87,503.The stock
repurchase and partial loan forgiveness were negotiated as part
of the CEOs separation arrangements and supercede the
Companys earlier determination that the loan was not
subject to repayment. In addition, in connection with
Ms. Davis departure from the Company, the Company
agreed to pay Ms. Davis a monthly severance amount equal to
$25,000 for a twelve-month period and, if requested by
Ms. Davis, to pay the full cost of COBRA for health and
dental insurance coverage for Ms. Davis for the six
(6) month period following her departure from the Company.

55



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##### Table of Contents



Conflicts of Interest

Conflicts of interest may arise in the course of
business transactions between the Company, its officers,
Directors and principal stockholders, and their affiliates. The
Company believes that the transactions in which it was a party
as described above were at terms no less favorable than the
Company would have obtained from unaffiliated third parties. In
connection with the Companys initial public offering, the
Company adopted a policy that all future transactions between
the Company and its officers, Directors or other affiliates
(other than compensation and employment matters) be reviewed by
the Board of Directors on an on-going basis and submitted to the
Audit Committee or other comparable body for review where
appropriate. The Company intends to revise its conflict of
interests policy if necessary to comply with recent rulemaking
in the area.




Item 14.     Controls
and Procedures

Our principal executive officer and principal
financial officer have concluded, based on their evaluation
within 90 days of the filing date of this report, that our
disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information we are required to
disclose in our reports filed under the Securities Exchange Act
of 1934. There have been no significant changes in our internal
controls or in other factors that could significantly affect the
internal controls subsequent to the date of their evaluation.




PART IV




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

(a)(1) Financial Statements



| |    |                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Report of Ernst & Young LLP, independent
    auditors (see page F-2 hereof).                                                           
|
| | 2. | Consolidated Balance Sheets as of April 30,
    2002 and 2003 (see page F-3 hereof).                                                   
|
| | 3. | Consolidated Statements of Operations for the
    years ended April 30, 2001, 2002 and 2003 (see
    page F-4 hereof).                 
|
| | 4. | Consolidated Statements of Common
    Stockholders Equity for the years ended April 30,
    2001, 2002 and 2003 (see page F-5 hereof).
|
| | 5. | Consolidated Statements of Cash Flows for the
    years ended April 30, 2001, 2002 and 2003 (see
    page F-6 hereof).                 
|
| | 6. | Notes to Consolidated Financial Statements (see
    pages F-7 through F-22 hereof).                                                    

(a)(2) Financial Statement Schedules.

Schedules are not provided because of the absence
of conditions under which they are required or because the
required information is shown in the financial statements or
notes thereto.

(a)(3) Exhibits.

The following is a complete list of exhibits
filed as part of this Form 10-K. Documents identified by
footnotes are being filed herewith and, pursuant to
Rule 12b-32 of the General Rules and Regulations
promulgated by the Commission under the Securities Exchange Act
of 1934 reference is made to such documents as previously filed
as exhibits with the Commission.

|            |           |             |  |                                                                                                                                                                                                                                                         
|----------- | --------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |           | Description
|            |           |            
|            | 2.1 (1)   |             |  | Agreement and Plan of Merger, dated June 14,
    2000, by and among the Registrant, Omni Acquisition Corporation,
    Troy Holdings International, Inc., DTI Holdings, Inc., Digital
    Techniques, Inc. and certain shareholders of DTI Holdings, Inc.
|            | 2.2  (12) |             |  | Agreement and Plan of Merger dated as of
    April 21, 2003 among Verso Technologies, Inc., Mickey
    Acquiring Sub, Inc. and the Registrant
    (Exhibit No. 2.1 to Current Report on Form 8-K
    (File No. 0-22703)).                               

56



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##### Table of Contents



|            |             |             |  |                                                                                                                                                                                                                                        
|----------- | ----------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |             | Description
|            |             |            
|            | 2.3  (12)   |             |  | First Amendment to Agreement and Plan of Merger
    dated April 21, 2003, among Verso Technologies, Inc.,
    Mickey Acquiring Sub, Inc. and the Registrant
    (Exhibit No. 2.2 to Current Report on Form 8-K
    (File No. 0-22703)).
|            | 2.4  (13)   |             |  | Second Amendment to Agreement and Plan of Merger
    dated June 13, 2003, among Verso Technologies, Inc., Mickey
    Acquiring Sub, Inc. and the Registrant
    (Exhibit No. 2.1 to Current Report on Form 8-K
    (File No. 0-22703)).
|            | 3.1 (2)     |             |  | Second Amended and Restated Certificate of
    Incorporation of the Registrant (Exhibit No. 3.3 of
    Registration Statement on Form S-1 (File
    No. 333-85821)).                                                                   
|            | 3.2 (2)     |             |  | First Amended and Restated By-laws of the
    Registrant (Exhibit No. 3.5 of Registration Statement
    on Form S-1 (File No. 333-85821)).                                                                                             
|            | 4.1 (2)     |             |  | Specimen certificate for shares of common stock,
    $.001 par value, of the Registrant.                                                                                                                                               
|            | 10.1 (2)    |             |  | Amended and Restated Registration Rights
    Agreement, dated July 16, 1998, among the Registrant and
    the stockholders named therein. (Exhibit No. 10.2 of
    Registration Statement on Form S-1 (File
    No. 333-85821)).       
|            | 10.2 (2)    |             |  | Amended and Restated 1996 Stock Option Plan of
    the Registrant. (Exhibit No. 10.3 of Registration
    Statement on Form S-1 (File No. 333-85821)).                                                                                  
|            | 10.3 (3)    |             |  | 1999 Stock Option and Grant Plan of the
    Registrant.                                                                                                                                                                                
|            | 10.4 (2)   |             |  | Master Support Agreement between the Registrant
    and Vital Networks, Inc. dated June 28, 1999
    (Exhibit No. 10.16 of Registration Statement on
    Form S-1 (File No. 333-85821)).                                               
|            | 10.5 (4)    |             |  | Lease Agreement by and between the Registrant and
    Wellsford/ Whitehall Holdings, L.L.C. dated January 10,
    2000.                                                                                                                
|            | 10.5.1  (5) |             |  | First Amendment to Lease Agreement between the
    registrant and Wellsford/ Whitehall Holdings, LLC dated
    May 25, 2000. (Exhibit No. 10.13.1 of Annual
    Report on Form 10-K (File No. 0-22703)).                               
|            | 10.5.2  (5) |             |  | Second Amendment to Lease Agreement between the
    registrant and Wellsford/ Whitehall Holdings, LLC dated
    May 31, 2000. (Exhibit No. 10.13.1 of Annual
    Report on Form 10-K (File No. 0-22703)).                              
|            | 10.6 (9)    |             |  | Incentive Bonus Plan of the Registrant                                                                                                                                                                                                 
|            | 10.7 (11)   |             |  | 2000 Director Stock Option Plan of the
    Registrant, as amended.                                                                                                                                                                     
|            | 10.8 (7)    |             |  | 2000 Employee Stock Purchase Plan of the
    Registrant.                                                                                                                                                                               
|            | 10.9 (8)    |             |  | Offer letter dated January 11, 2001, between
    the Registrant and Glenda Davis (Exhibit No. 10.14 of
    Annual Report on Form 10-K (File No. 0-22703)).                                                                             
|            | 10.10 (8)   |             |  | Restricted Stock Purchase Agreement, dated
    March 13, 2001, between the Registrant and Glenda Davis
    (Exhibit No. 10.15 of Annual Report on Form 10-K
    (File No. 0-22703)).                                                   
|            | 10.11 (8)   |             |  | Non-qualified Stock Option Agreement, dated
    March 13, 2001, between the Registrant and Glenda Davis
    (Exhibit No. 10.16 of Annual Report on Form 10-K
    (File No. 0-22703)).                                                  
|            | 10.12 (9)   |             |  | Promissory Note dated March 13, 2001, issued
    by Glenda Davis to the Registrant.                                                                                                                                                    
|            | 10.13 (2)   |             |  | Form of Bonus Agreement
    (Exhibit No. 10.12 of Registration Statement on
    Form S-1 (File No. 333-85821)).                                                                                                                        
|            | 10.14 (9)   |             |  | Offer letter dated May 29, 2001 between the
    Registrant and Thomas Nolette                                                                                                                                                          
|            | 10.15       |             |  | Offer letter dated May 10, 2001 between the
    Registrant and Ann Doyle, as amended on February 5, 2003                                                                                                                               
|            | 10.16 (9)   |             |  | Offer letter dated November 26, 2001 between
    the Registrant and Gerald J. McGovern                                                                                                                                                 
|            | 10.17  (10) |             |  | Sublease between the Registrant., Sublandlord and
    UPromise, Inc., Subtenant dated as of July 2, 2002                                                                                                                               
|            | 10.18  (10) |             |  | Offer letter dated December 12, 2001 between
    the Registrant and Patrick Curley                                                                                                                                                     
|            | 21.1        |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                        
|            | 23.1        |             |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                          

57



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##### Table of Contents



|            |      |             |  |                                                                                                               
|----------- | ---- | ----------- |  | --------------------------------------------------------------------------------------------------------------
|Exhibit No. |      | Description
|            |      |            
|            | 99.1 |             |  | Certification of Acting Chief Executive Officer
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 99.2 |             |  | Certification of Corporate Controller pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.          




| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment obtained as to portions of
    this exhibit. The confidential information has been filed
    separately with the Securities and Exchange Commission.



| |     |                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to Exhibit 2.1
    filed with the Registrants Report on Form 8-K dated
    June 28, 2000.                                                                                                                                                                                
|
| | (2) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed in response to
    Item 16(a), Exhibits, of the Registrants
    Registration Statement on Form S-1, as amended (File No.
    333- 85821), which was declared effective on October 21,
    1999.
|
| | (3) | Incorporated by reference to Exhibit 10.4
    filed with the Registrants Registration Statement on
    Form S-8 dated February 4, 2000.                                                                                                                                                            
|
| | (4) | Incorporated by reference to
    Exhibit No. 10.18 of the Registrants
    Registration Statement on Form S-1, as amended (File
    No. 333-96235), which was declared effective on
    April 4, 2000.                                                                                              
|
| | (5) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended April 30, 2000, as filed with the SEC on
    July 31, 2000.                                                    
|
| | (6) | Incorporated by reference to Exhibit 99.1
    filed with the Registrants Registration Statement on
    Form S-8 dated November 14, 2000.                                                                                                                                                           
|
| | (7) | Incorporated by reference to Exhibit 99.1
    filed with the Registrants Registration Statement on
    Form S-8 dated December 4, 2000.                                                                                                                                                            
|
| | (8) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended April 30, 2001, as filed with the SEC on
    July 2, 2001.                                                     
|
| | (9) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended April 30, 2002, as filed with the SEC on
    August 13, 2002.                                                  



|     |                                                                                                                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended July 31, 2002, as filed with the SEC
    on September 16, 2002.  
|    
|(11) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended October 31, 2002, as filed with the
    SEC on December 16, 2002.
|    
|(12) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Current Report on Form 8-K, as filed with
    the SEC on April 22, 2003.                                                        
|    
|(13) | Incorporated by reference to Exhibit 2.1
    filed with the Registrants current Report on
    Form 8-K, as filed with the SEC on June 17, 2003.                                                                                                            

(b) Reports on Form 8-K.

(1) On April 22, 2003, the Registrant
filed a current report on Form 8-K reporting that the
Registrant had entered into a definitive Agreement and Plan of
Merger by and among the Registrant, Verso Technologies, Inc. and
a wholly-owed subsidiary of Verso (Merger Sub), as
amended by that certain First Amendment to Agreement and Plan of
Merger dated as of April 21, 2003, pursuant to which Merger
Sub will be merged with and into the Registrant, with the
Registrant to survive the merger as a wholly-owned subsidiary of
Verso.

58



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1933, as amended, the
registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
town of Needham, State of Massachusetts on the 26th day of June,
2003.



| |                         
| | ------------------------
| | MCK COMMUNICATIONS, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ THOMAS M. NOLETTE

| |                                
| | -------------------------------
| |                                
| | Thomas M. Nolette              
| | Acting Chief Executive Officer,
| | VP Operations and Finance      

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                           |  |                                                                                             |  |              
|------------------------------------------ |  | ------------------------------------------------------------------------------------------- |  | -------------
|Signature                                  |  | Title                                                                                       |  | Date         
|                                           |  |                                                                                             |  |              
|/s/ THOMAS M. NOLETTEThomas M. Nolette     |  | Acting Chief Executive Officer, VP Operations and
    Finance (Principal Executive Officer) |  | June 26, 2003
|                                          
|/s/ THERESE E. VIOLETTETherese E. Violette |  | Corporate Controller (Principal Financial Officer
    and Principal Accounting Officer)     |  | June 26, 2003
|                                          
|/s/ JOHN B. LANDRYJohn B. Landry           |  | Director                                                                                    |  | June 26, 2003
|                                          
|/s/ PAUL SEVERINOPaul Severino             |  | Director                                                                                    |  | June 26, 2003
|                                          
|/s/ ELIZABETH HOULIHANElizabeth Houlihan   |  | Director                                                                                    |  | June 26, 2003
|                                          
|/s/ ALAN LEVINEAlan Levine                 |  | Director                                                                                    |  | June 26, 2003

59



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##### Table of Contents



CERTIFICATIONS

I, Thomas M. Nolette, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of MCK Communications, Inc.;                                                                                                                                                                                                                                                           
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statement made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                      
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                      



| |    |                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in

|                                            | 
|------------------------------------------- | 
|which this annual report is being prepared; | 



| |    |                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and
|
| | c) | Presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                          



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | All significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                               
| | ------------------------------
| | /s/ THOMAS M. NOLETTE         
| |                               
| | Thomas M. Nolette             
| | Acting Chief Executive Officer
| | VP Operations and Finance     
| | (Principal Executive Officer) 

Date: June 26, 2003

60



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##### Table of Contents



I, Therese E. Violette, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of MCK Communications, Inc.;                                                                                                                                                                                                                                                           
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statement made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                      
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                      



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | Presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | All significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and



| |    |                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and



| |    |                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                              
| | -----------------------------
| | /s/ THERESE E. VIOLETTE      
| |                              
| | Therese E. Violette          
| | Corporate Controller         
| | (Principal Financial Officer)

Date: June 26, 2003

61



---



##### Table of Contents



MCK COMMUNICATIONS, INC.






INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


|                                                           |  |      |     | 
|---------------------------------------------------------- |  | ---- | --- | 
|                                                           |  | Page
|                                                           |  |     
|Report of Ernst & Young LLP, Independent
    Auditors      |  |      | F-2 | 
|Consolidated Balance Sheets                                |  |      | F-3 | 
|Consolidated Statements of Operations                      |  |      | F-4 | 
|Consolidated Statements of Common
    Stockholders Equity |  |      | F-5 | 
|Consolidated Statements of Cash Flows                      |  |      | F-6 | 
|Notes to Consolidated Financial Statements                 |  |      | F-7 | 

F-1



---



##### Table of Contents



REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS

Board of Directors and Stockholders

MCK Communications,
Inc.


We have audited the accompanying consolidated
balance sheets of MCK Communications, Inc. (the Company) as of
April 30, 2002 and 2003, and the related consolidated
statements of operations, common stockholders equity, and
cash flows for each of the three years in the period ended
April 30, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company as
of April 30, 2002 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended April 30, 2003, in conformity with
accounting principles generally accepted in the United States.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Boston, Massachusetts

June 6, 2003

F-2



---



##### Table of Contents



MCK COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except for share related
data)


|                                                                                                                                                                       |                                                                                                       |                           |         |        |        |   |         |        |        | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                                                                                       |                                                                                                       |                          
|                                                                                                                                                                       |                                                                                                       | April 30,                
|                                                                                                                                                                       |                                                                                                       |                          
|                                                                                                                                                                       |                                                                                                       | 2002                      |         | 2003  
|                                                                                                                                                                       |                                                                                                       |                           |         |       
|ASSETS                                                                                                                                                                 |                                                                                                       |                           |         |        |        |   |         |       
|Current assets:                                                                                                                                                        |                                                                                                       |                           |         |        |        |   |         |       
|                                                                                                                                                                       | Cash and equivalents                                                                                  |                           | $       | 4,554  |        |   | $       | 2,629  |       
|                                                                                                                                                                       | Restricted securities                                                                                 |                           |         | 2,000  |        |   |         | 2,000  |       
|                                                                                                                                                                       | Marketable securities                                                                                 |                           |         | 37,813 |        |   |         | 37,032 |       
|                                                                                                                                                                       | Accounts receivable (net of allowances of $500
    and $250 at April 30, 2002 and 2003, respectively) |                           |         | 3,773  |        |   |         | 2,592  |       
|                                                                                                                                                                       | Inventory                                                                                             |                           |         | 1,878  |        |   |         | 1,203  |       
|                                                                                                                                                                       | Prepaids and other current assets                                                                     |                           |         | 595    |        |   |         | 514    |       
|                                                                                                                                                                       |                                                                                                       |                           |         |        |        |   |         |       
|                                                                                                                                                                       |                                                                                                       | Total current assets      |         |        | 50,613 |   |         |        | 45,970 | 
|Fixed assets, net                                                                                                                                                      |                                                                                                       |                           | 1,529   |        |        |   | 539     |       
|Goodwill, intangibles and other long term assets                                                                                                                       |                                                                                                       |                           | 105     |        |        |   | 105     |       
|Completed technology                                                                                                                                                   |                                                                                                       |                           | 3,978   |        |        |   | 375     |       
|                                                                                                                                                                       |                                                                                                       |                           |         |        |        |   |         |       
|Total assets                                                                                                                                                           |                                                                                                       | $                         | 56,225  |        |        | $ | 46,989  |       
|                                                                                                                                                                       |                                                                                                       |                           |         |        |        |   |         |       
|LIABILITIES AND COMMON STOCKHOLDERS
    EQUITY                                                                                                                        |                                                                                                       |                           |         |        |        |   |         |       
|Current liabilities:                                                                                                                                                   |                                                                                                       |                           |         |        |        |   |         |       
|                                                                                                                                                                       | Accounts payable                                                                                      |                           | $       | 1,435  |        |   | $       | 905    |       
|                                                                                                                                                                       | Accrued liabilities                                                                                   |                           |         | 4,740  |        |   |         | 2,343  |       
|                                                                                                                                                                       | Accrued compensation and benefits                                                                     |                           |         | 672    |        |   |         | 239    |       
|                                                                                                                                                                       | Deferred revenue                                                                                      |                           |         | 422    |        |   |         | 389    |       
|                                                                                                                                                                       |                                                                                                       |                           |         |        |        |   |         |       
|                                                                                                                                                                       |                                                                                                       | Total current liabilities |         |        | 7,269  |   |         |        | 3,876  | 
|Common stockholders equity:                                                                                                                                           |                                                                                                       |                           |         |        |        |   |         |       
|Common stock, $.001 par value; authorized
    shares  40,000,000, issued and outstanding 20,421,563
    shares at April 30, 2002 and 20,528,899 at April 30,
    2003 |                                                                                                       |                           | 20      |        |        |   | 20      |       
|Additional paid-in capital                                                                                                                                             |                                                                                                       |                           | 125,122 |        |        |   | 124,912 |       
|Accumulated deficit                                                                                                                                                    |                                                                                                       |                           | (75,031 | )      |        |   | (81,110 | )     
|Deferred compensation                                                                                                                                                  |                                                                                                       |                           | (159    | )      |        |   | (3      | )     
|Accumulated other comprehensive loss                                                                                                                                   |                                                                                                       |                           | (464    | )      |        |   | (602    | )     
|Notes receivable from officers                                                                                                                                         |                                                                                                       |                           | (532    | )      |        |   | (104    | )     
|                                                                                                                                                                       |                                                                                                       |                           |         |        |        |   |         |       
|Total common stockholders equity                                                                                                                                      |                                                                                                       |                           | 48,956  |        |        |   | 43,113  |       
|                                                                                                                                                                       |                                                                                                       |                           |         |        |        |   |         |       
|Total liabilities and common stockholders
    equity                                                                                                                  |                                                                                                       | $                         | 56,225  |        |        | $ | 46,989  |       
|                                                                                                                                                                       |                                                                                                       |                           |         |        |        |   |         |       

See accompanying notes to consolidated financial
statements.

F-3



---



##### Table of Contents



MCK COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands except for share related
data)


|                                                                         |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |       |        | 
|------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ---------- | ------ | ------ | ---- | ---------- | ------ | ------ | - | ---------- | ----- | ------ | 
|                                                                         |                                                                                                                                                      |                             
|                                                                         |                                                                                                                                                      | Years Ended April 30,       
|                                                                         |                                                                                                                                                      |                             
|                                                                         |                                                                                                                                                      | 2001                         |            | 2002   |        | 2003
|                                                                         |                                                                                                                                                      |                              |            |        |        |     
|Revenues                                                                 |                                                                                                                                                      | $                            | 38,220     |        |        | $    | 16,487     |        |        | $ | 14,579     |      
|Cost of goods sold                                                       |                                                                                                                                                      |                              | 15,287     |        |        |      | 9,096      |        |        |   | 7,169      |      
|                                                                         |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      
|Gross profit                                                             |                                                                                                                                                      |                              | 22,933     |        |        |      | 7,391      |        |        |   | 7,410      |      
|Operating expenses:                                                      |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      
|                                                                         | Research and development (excluding amortization
    of stock based compensation of $829, $(52), and $53 in 2001,
    2002 and 2003, respectively)   |                              |            | 9,232  |        |      |            | 7,124  |        |   |            | 3,199 |       
|                                                                         | Sales and marketing (excluding amortization of
    stock based compensation of $1,005, $(453) and $1 in 2001, 2002
    and 2003, respectively)       |                              |            | 13,820 |        |      |            | 9,397  |        |   |            | 4,674 |       
|                                                                         | General and administrative (excluding
    amortization of stock based compensation of $1,068, $202 and $89
    in 2001, 2002 and 2003, respectively) |                              |            | 4,646  |        |      |            | 4,478  |        |   |            | 2,891 |       
|                                                                         | Amortization of stock based compensation                                                                                                             |                              |            | 2,902  |        |      |            | (303   | )      |   |            | 143   |       
|                                                                         | Amortization of goodwill and other intangibles                                                                                                       |                              |            | 4,588  |        |      |            | 2,180  |        |   |            | 1,003 |       
|                                                                         | Write-off of in-process research and development                                                                                                     |                              |            | 3,694  |        |      |            |       |        |   |            |      |       
|                                                                         | Impairment of goodwill and other intangibles                                                                                                         |                              |            |       |        |      |            | 14,063 |        |   |            | 2,600 |       
|                                                                         | Restructuring                                                                                                                                        |                              |            | 597    |        |      |            | 4,310  |        |   |            | 552   |       
|                                                                         | Provision for legal settlement and fees                                                                                                              |                              |            |       |        |      |            | 1,387  |        |   |            |      |       
|                                                                         |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      
|                                                                         |                                                                                                                                                      | Total operating expenses     |            |        | 39,479 |      |            |        | 42,636 |   |            |       | 15,062 | 
|                                                                         |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      
|Loss from operations                                                     |                                                                                                                                                      |                              | (16,546    | )      |        |      | (35,245    | )      |        |   | (7,652     | )    
|Other income (expense):                                                  |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      
|                                                                         | Interest expense                                                                                                                                     |                              |            | (36    | )      |      |            | (52    | )      |   |            | (27   | )     
|                                                                         | Interest income                                                                                                                                      |                              |            | 3,696  |        |      |            | 1,399  |        |   |            | 725   |       
|                                                                         | Other income (expense), net                                                                                                                          |                              |            | (43    | )      |      |            | (60    | )      |   |            | 918   |       
|                                                                         |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      
|                                                                         |                                                                                                                                                      | Total other income (expense) |            |        | 3,617  |      |            |        | 1,287  |   |            |       | 1,616  | 
|                                                                         |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      
|Loss before provision for income taxes                                   |                                                                                                                                                      |                              | (12,929    | )      |        |      | (33,958    | )      |        |   | (6,036     | )    
|Income tax (provision) benefit                                           |                                                                                                                                                      |                              | 1,130      |        |        |      | (60        | )      |        |   | (43        | )    
|                                                                         |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      
|Net loss                                                                 |                                                                                                                                                      | $                            | (11,799    | )      |        | $    | (34,018    | )      |        | $ | (6,079     | )    
|                                                                         |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      
|Basic and diluted net loss per common share                              |                                                                                                                                                      | $                            | (0.61      | )      |        | $    | (1.69      | )      |        | $ | (0.30      | )    
|                                                                         |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      
|Shares used in computing basic and diluted net
    loss per common share |                                                                                                                                                      |                              | 19,213,239 |        |        |      | 20,126,113 |        |        |   | 20,499,108 |      
|                                                                         |                                                                                                                                                      |                              |            |        |        |      |            |        |        |   |            |      

See accompanying notes to consolidated financial
statements.

F-4



---



##### Table of Contents



MCK COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF COMMON
STOCKHOLDERS EQUITY

(In thousands except for share related
data)


|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|-------------------------------------------- |  | ------------- | ------- | --------- |  | --------- | ---------- | ---------- |  | ----------- | -- | ------------ |  | ------------- | ------- | ---------- |  | ------------- | ------- | - |  | - | ------ | - |  | - | ---- | - |  | - | ---- | - |  | - | ------- | -
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  | Accumulated   |         |            |  |              
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  | Other         |         | Notes      |  | Total        
|                                             |  |               |         | Shares of |  | Common    |            | Additional |  |             |    |              |  | Comprehensive |         | Receivable |  | Common       
|                                             |  | Comprehensive |         | Common    |  | Stock at  |            | Paid-In    |  | Accumulated |    | Deferred     |  | Income        |         | From       |  | Stockholders
|                                             |  | Loss          |         | Stock     |  | Par Value |            | Capital    |  | Deficit     |    | Compensation |  | (Loss)        |         | Officers   |  | Equity       
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |              
|Balance at April 30, 2000                    |  |               |         |           |  |           | 19,357,369 |            |  | $           | 19 |              |  | $             | 115,803 |            |  | $             | (29,214 | ) |  | $ | (4,624 | ) |  | $ | (345 | ) |  | $ | (693 | ) |  | $ | 80,946  |  
|Foreign currency translation adjustment      |  | $             | (241    | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | (241 | ) |  |   |     |   |  |   | (241    | )
|Unrealized gain on marketable securities     |  |               | 39      |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | 39   |   |  |   |     |   |  |   | 39      |  
|Amortization of deferred compensation        |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   | 2,612  |   |  |   |     |   |  |   |     |   |  |   | 2,612   |  
|Sale of restricted stock                     |  |               |         |           |  |           | 35,307     |            |  |             |    |              |  |               | 41      |            |  |               |         |   |  |   | 323    |   |  |   |      |   |  |   | (147 | ) |  |   | 217     |  
|Acquisition of DTI                           |  |               |         |           |  |           | 364,601    |            |  |             | 1  |              |  |               | 10,939  |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   | 10,940  |  
|Stock options exercised net of cancellations |  |               |         |           |  |           | 357,801    |            |  |             |    |              |  |               | 69      |            |  |               |        |   |  |   | 74     |   |  |   |     |   |  |   |     |   |  |   | 143     |  
|Payment on notes receivable                  |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   | 4    |   |  |   | 4       |  
|Net loss                                     |  |               | (11,799 | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               | (11,799 | ) |  |   |       |   |  |   |     |   |  |   |     |   |  |   | (11,799 | )
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Total comprehensive income (loss)            |  | $             | (12,001 | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   |        |  
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Balance at April 30, 2001                    |  |               |         |           |  |           | 20,115,078 |            |  |             | 20 |              |  |               | 126,852 |            |  |               | (41,013 | ) |  |   | (1,615 | ) |  |   | (547 | ) |  |   | (836 | ) |  |   | 82,861  |  
|Foreign currency translation adjustment      |  | $             | 94      |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | 94   |   |  |   |     |   |  |   | 94      |  
|Unrealized loss on marketable securities     |  |               | (11     | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | (11  | ) |  |   |     |   |  |   | (11     | )
|Amortization of deferred compensation        |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   | 1,147  |   |  |   |     |   |  |   |     |   |  |   | 1,147   |  
|Stock options exercised net of cancellations |  |               |         |           |  |           | 250,239    |            |  |             |   |              |  |               | (1,791  | )          |  |               |        |   |  |   | 309    |   |  |   |     |   |  |   |     |   |  |   | (1,482  | )
|Cancellation of restricted stock             |  |               |         |           |  |           | (95,347    | )          |  |             |   |              |  |               | (178    | )          |  |               |        |   |  |   |        |   |  |   |     |   |  |   | 178  |   |  |   |        |  
|Sale of Common Stock                         |  |               |         |           |  |           | 151,593    |            |  |             |    |              |  |               | 239     |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   | 239     |  
|Payment on notes receivable                  |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   | 126  |   |  |   | 126     |  
|Net loss                                     |  |               | (34,018 | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               | (34,018 | ) |  |   |       |   |  |   |     |   |  |   |     |   |  |   | (34,018 | )
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Total comprehensive income (loss)            |  | $             | (33,935 | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   |        |  
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Balance at April 30, 2002                    |  |               |         |           |  |           | 20,421,563 |            |  |             | 20 |              |  |               | 125,122 |            |  |               | (75,031 | ) |  |   | (159   | ) |  |   | (464 | ) |  |   | (532 | ) |  |   | 48,956  |  
|Foreign currency translation adjustment      |  | $             | (196    | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | (196 | ) |  |   |     |   |  |   | (196    | )
|Unrealized gain on marketable securities     |  |               | 58      |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | 58   |   |  |   |     |   |  |   | 58      |  
|Repurchase of Restricted Stock               |  |               |         |           |  |           | (100,000   | )          |  |             |   |              |  |               | (115    | )          |  |               |        |   |  |   |       |   |  |   |      |   |  |   | 115  |   |  |   |        |  
|Forgiveness of Note Receivable               |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   | 22   |   |  |   | 22      |  
|Amortization of deferred compensation        |  |               |         |           |  |           |           |            |  |             |   |              |  |               | (66     | )          |  |               |        |   |  |   | 156    |   |  |   |     |   |  |   | 53   |   |  |   | 143     |  
|Stock options exercised net of cancellations |  |               |         |           |  |           | 233,863    |            |  |             |   |              |  |               | 36      |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   | 36      |  
|Cancellation of restricted stock             |  |               |         |           |  |           | (76,388    | )          |  |             |   |              |  |               | (117    | )          |  |               |        |   |  |   |       |   |  |   |     |   |  |   | 117  |   |  |   |        |  
|Sale of common stock                         |  |               |         |           |  |           | 49,861     |            |  |             |   |              |  |               | 52      |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   | 52      |  
|Payment on note receivable                   |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |      |   |  |   | 121  |   |  |   | 121     |  
|Net loss                                     |  |               | (6,079  | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               | (6,079  | ) |  |   |       |   |  |   |     |   |  |   |     |   |  |   | (6,079  | )
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Total comprehensive income (loss)            |  | $             | (6,217  | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   |        |  
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Balance at April 30, 2003                    |  |               |         |           |  |           | 20,528,899 |            |  | $           | 20 |              |  | $             | 124,912 |            |  | $             | (81,110 | ) |  | $ | (3     | ) |  | $ | (602 | ) |  | $ | (104 | ) |  | $ | 43,113  |  
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

F-5



---



##### Table of Contents



MCK COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                            |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |        |        |        |  
|------------------------------------------- | ------------------------------------------------------- | --------------------------------- | ---------------------------------------------------- | ------- | ------ | ------- | ----- | ------- | ------ | ------- | ------ | ------ | ------ | ------ | -
|                                            |                                                         |                                  
|                                            |                                                         | Years Ended April 30,            
|                                            |                                                         |                                  
|                                            |                                                         | 2001                              |                                                      | 2002    |        | 2003   
|                                            |                                                         |                                   |                                                      |         |        |        
|Cash flow from operating activities:        |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |       
|                                            | Net loss                                                |                                   | $                                                    | (11,799 | )      |         | $     | (34,018 | )      |         | $      | (6,079 | )     
|                                            | Depreciation                                            |                                   |                                                      | 1,664   |        |         |       | 2,121   |        |         |        | 1,181  |       
|                                            | Amortization of goodwill and other intangibles          |                                   |                                                      | 4,589   |        |         |       | 2,180   |        |         |        | 1,003  |       
|                                            | Impairment of goodwill and other intangibles            |                                   |                                                      |        |        |         |       | 14,063  |        |         |        | 2,600  |       
|                                            | Write down of fixed assets to net realizable value      |                                   |                                                      |        |        |         |       | 1,064   |        |         |        | 57     |       
|                                            | Stock based compensation                                |                                   |                                                      | 2,902   |        |         |       | (303    | )      |         |        | 143    |       
|                                            | In-process research and development                     |                                   |                                                      | 694     |        |         |       |        |        |         |        |       |       
|                                            | Deferred income taxes                                   |                                   |                                                      | (1,502  | )      |         |       |        |        |         |        |       |       
|                                            | Change in operating assets and liabilities:             |                                   |                                                      |         |        |         |       |         |        |         |        |        |       
|                                            |                                                         | Accounts receivable               |                                                      |         | 969    |         |       |         | 1,377  |         |        |        | 1,181  |       
|                                            |                                                         | Inventory                         |                                                      |         | (1,240 | )       |       |         | 2,459  |         |        |        | 675    |       
|                                            |                                                         | Prepaids and other current assets |                                                      |         | 665    |         |       |         | 1,129  |         |        |        | 81     |       
|                                            |                                                         | Accounts payable                  |                                                      |         | (1,718 | )       |       |         | (2,049 | )       |        |        | (530   | )     
|                                            |                                                         | Accrued liabilities               |                                                      |         | 1,573  |         |       |         | 1,876  |         |        |        | (2,397 | )     
|                                            |                                                         | Accrued compensation and benefits |                                                      |         | (1,052 | )       |       |         | (507   | )       |        |        | (433   | )     
|                                            |                                                         | Deferred revenue                  |                                                      |         | (62    | )       |       |         | 413    |         |        |        | (33    | )     
|                                            |                                                         | Other long-term assets            |                                                      |         | 227    |         |       |         | (35    | )       |        |        |       |       
|                                            |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |       
|                                            |                                                         |                                   | Net cash provided (used) by operating
    activities |         |        | (4,090  | )     |         |        | (10,230 | )      |        |        | (2,551 | )
|Cash flows from investing activities:       |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |       
|                                            | Purchase of fixed assets                                |                                   |                                                      | (3,100  | )      |         |       | (645    | )      |         |        | (234   | )     
|                                            | (Purchases) and sales of marketable securities,
    net |                                   |                                                      | (30,887 | )      |         |       | 10,954  |        |         |        | 781    |       
|                                            | Acquisition of business, net of cash acquired           |                                   |                                                      | (12,650 | )      |         |       |        |        |         |        |       |       
|                                            |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |       
|                                            |                                                         |                                   | Net cash provided (used) by investing
    activities |         |        | (46,637 | )     |         |        | 10,309  |        |        |        | 547    |  
|Cash flows from financing activities:       |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |       
|                                            | Forgiveness of notes receivable                         |                                   |                                                      |        |        |         |       |        |        |         |        | 22     |       
|                                            | Payments on notes receivable                            |                                   |                                                      |        |        |         |       |        |        |         |        | 121    |       
|                                            | Decrease in short-term borrowings                       |                                   |                                                      | (866    | )      |         |       |        |        |         |        |       |       
|                                            | Issuance of common stock, net                           |                                   |                                                      | 4       |        |         |       | 302     |        |         |        | 52     |       
|                                            | Proceeds from exercise of stock options                 |                                   |                                                      | 70      |        |         |       | 31      |        |         |        | 36     |       
|                                            |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |       
|                                            |                                                         |                                   | Net cash provided (used) by financing
    activities |         |        | (792    | )     |         |        | 333     |        |        |        | 231    |  
|Effect of exchange rate changes on cash     |                                                         |                                   | (290                                                 | )       |        |         | 107   |         |        |         | (152   | )     
|                                            |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |       
|Net increase (decrease) in cash             |                                                         |                                   | (51,809                                              | )       |        |         | 519   |         |        |         | (1,925 | )     
|Cash and equivalents at beginning of period |                                                         |                                   | 55,844                                               |         |        |         | 4,035 |         |        |         | 4,554  |       
|                                            |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |       
|Cash and equivalents at end of period       |                                                         | $                                 | 4,035                                                |         |        | $       | 4,554 |         |        | $       | 2,629  |       
|                                            |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |       
|Non-cash transactions:                      |                                                         |                                   |                                                      |         |        |         |       |         |        |         |        |       
|                                            | Sale of restricted stock, net of cancellations          |                                   | $                                                    | 147     |        |         | $     |        |        |         | $      |       |       
|                                            | Issuance of common stock in acquisition                 |                                   |                                                      | 10,939  |        |         |       |        |        |         |        |       |       

See accompanying notes to consolidated financial
statements.

F-6



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##### Table of Contents



MCK COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Fiscal Years Ended April 30, 2001, 2002
and 2003


1. Nature of Operations

MCK Communications, Inc. (MCK or the Company)
develops and markets products that enable businesses to unleash
the power of their voice communications by



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | extending the functionality and applications of
    their business telephone systems from the main office to
    outlying offices, remote call centers, teleworkers and mobile
    employees over public and private networks;
|
| |  | bundling with service providers to unite CPE and
    network services to deliver new outsourced, value added
    services; and                                                                                                
|
| |  | bridging technology gaps between existing and
    nextgen applications, switches and devices to enable enterprises
    ease of technology migration.                                                                          

Sales are made to original equipment
manufacturers (OEMs) and private label partners, independent
local exchange carriers (ILECs), systems integrators and
distributors, telecom and datacom value added resellers (VARs),
and broadband service providers. The Company operates in one
business segment. In the fiscal year ended 2001, sales to one
customer represented approximately 23% of consolidated
revenues. In fiscal year 2002, no customer accounted for 10% or
more of revenues. In fiscal 2003, sales to two customers
represented approximately 30% of consolidated revenues.

In April 2003, the Company entered into a
definitive merger agreement with Verso Technologies, Inc.
(Verso). Under the terms of the agreement, MCK will
become a wholly-owned subsidiary of Verso. In connection with
the merger, MCK estimates that it will declare a dividend
payable to its stockholders of record immediately prior to the
effective time of the merger. MCK estimates the aggregate amount
of the dividend will be between $28 million and
$30 million, subject to adjustment according to the merger
agreement. In addition, an aggregate of 18,280,000 shares of
Verso common stock will be issued in exchange for all of the
shares of MCK outstanding at the time of the merger. The deal is
subject to a number of closing conditions including regulatory
and MCK shareholder approval. The deal is expected to close in
the third calendar quarter of 2003.



|   |                                
|-- | -------------------------------
|2. | Significant Accounting Policies



| |                                
| | -------------------------------
| | (a) Principles of Consolidation

The consolidated financial statements include the
accounts of MCK Communications, Inc. and its wholly-owned
subsidiaries. All significant intercompany accounts and
transactions are eliminated.



| |                     
| | --------------------
| | (b) Cash Equivalents

Cash equivalents are defined as short-term,
highly-liquid investments having an original maturity of three
months or less.

F-7



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |              
| | -------------
| | (c) Inventory

Inventory is valued at the lower of cost
(first-in, first-out) or market.



| |                 
| | ----------------
| | (d) Fixed Assets

Fixed assets are stated at cost and depreciated
on a straight-line basis over the following estimated useful
lives:

|                       |  |                                           
|---------------------- |  | ------------------------------------------
|Equipment              |  | 3 years                                   
|Furniture and fixtures |  | 3 years                                   
|Purchased software     |  | 2 years                                   
|Leasehold improvements |  | The lesser of seven years or term of lease



| |                                            
| | -------------------------------------------
| | (e) Fair Value of Financial
    Instruments

The Companys cash, cash equivalents,
accounts receivable and accounts payable are carried at cost,
which approximates fair value due to their relative short term
to maturity.



| |                        
| | -----------------------
| | (f) Revenue Recognition

Revenues from product sales are recognized upon
shipment of the Companys products to its customers and the
fulfillment of all contractual terms and conditions, pursuant to
guidance provided by Staff Accounting Bulletin, No. 101,
Revenue Recognition in Financial Statements (SAB 101),
issued by the Securities and Exchange Commission. Certain
distribution partners have rights to return a contractual
percentage of sales. For sales to these partners, the Company
defers revenue subject to return until such rights have expired.
A significant number of the Companys contractual
arrangements contain price protection provisions whereby the
Company is obligated to provide refunds or credits for any
decrease in unit prices of product in our customers
inventory. The Company routinely analyzes and establishes, as
necessary, reserves at the time of shipment for product returns
and allowances and warranty costs. To date these amounts have
not been significant.

The Company recognizes service revenues including
revenues under non-recurring engineering agreements as the
service is provided. Maintenance revenues are deferred and
recognized ratably over the contract period. Service and
maintenance revenues have not been material.



| |                                                            
| | -----------------------------------------------------------
| | (g) Earnings per Share and Pro Forma
    Earnings per Share

Statement of Financial Accounting Standard
(SFAS) NO. 128 requires entities to present both
basic earnings per share (EPS) and diluted EPS.
Basic EPS excludes dilution and is computed by dividing income
(loss) available to common stockholders by the
weighted-average number of common shares outstanding during the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock.



| |                     
| | --------------------
| | (h) Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Significant estimates include the collectibility of accounts
receivable, the carrying value of inventory and the
recoverability of long-lived assets. Actual results could differ
from those estimates.

F-8



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                          
| | -----------------------------------------
| | (i) Translation of Foreign
    Currencies

All assets and liabilities of the Companys
foreign subsidiaries are translated into U.S. dollars using
the rate of exchange in effect at the balance sheet date.
Revenue and expense accounts are translated into
U.S. dollars using the weighted-average exchange rate
during the period. The gains or losses resulting from such
translation are reported in a separate component of
stockholders equity. Gains or losses resulting from
foreign currency transactions, which are included in results of
operations, were losses of $34,000 and $138,000 in 2001 and
2002, and a gain of $218,000 in 2003, respectively.



| |                 
| | ----------------
| | (j) Income Taxes

The Company provides deferred taxes to recognize
temporary differences between the financial and tax bases of
assets and liabilities. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts
expected to be realized.

(k) Comprehensive
Income

Comprehensive income includes all changes in
equity during a period except those resulting from investments
by and distributions to owners. Other comprehensive income is
comprised of net income, currency translation adjustments and
available-for-sale securities valuation adjustments. At April
30, 2003, the Companys accumulated currency translation
loss and accumulated unrealized gain on marketable securities
was $660,000 and $58,000, respectively.

(l) Concentration
of Credit Risk

Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of
cash equivalents, marketable securities and trade accounts
receivable. The Company invests its cash equivalents in deposits
with two financial institutions with strong credit ratings and
or in marketable securities. The Company sells its products to
customers in the telecommunications industry, primarily in the
United States and Canada. The Company performs periodic credit
evaluations of its customers financial condition and
collateral is generally not required. The Company maintains
reserves for potential credit losses and such losses have been
within managements expectations.

(m) Marketable
Securities

The Companys investments consist primarily
of commercial paper and money market instruments of which
$32,471,000 matures in less than one year and $4,561,000 matures
beyond one year. These securities are classified as
available-for-sale. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses reported in
other comprehensive income. The cost of securities sold is based
on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in
interest income. Realized gains and losses and declines in value
judged to be other-than temporary on available-for-sale
securities are included in interest income.

(n) Stock-Based
Compensation

The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock options.
Under APB 25, no compensation expense is recorded when the
exercise price of the options granted equals the market price of
the underlying stock on the date of grant. The Company has
adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. In those
instances where stock options were granted with exercise prices
less than the fair value of the common stock at the date of
grant, expense is being recognized over the vesting period.
Because the stock options vest on a pro-rata basis the

F-9



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company follows the guidance included in
Financial Accounting Standards Board Interpretation Nos. 28
and 44 to determine compensation expense for the period.

The following table illustrates the assumptions
used and the effect on net loss and net loss per share if the
Company had applied the fair value recognition provisions of
SFAS No. 123 to employee stock-based compensation. The
Company has computed the pro forma disclosures required under
SFAS No. 123 and SFAS No. 148 for all employee stock
options granted using the Black-Scholes option pricing model
prescribed by SFAS No. 123. The Company used the following
weighted-average assumptions for options granted in 2001, 2002
and 2003: risk-free interest rate of 5.6%, 4.5% and 3.5%,
respectively; a weighted-average expected life of the option of
between five and six years; expected volatility of 1.5 in 2001,
1.4 in 2002, and 1.3 in 2003; and no dividends.

If the Company had used the fair value-based
method of accounting for its stock option and incentive plans
and charged compensation cost against income, over the vesting
period, based on the fair value of options at the date of grant,
then the net loss and net loss per common share would have been
increased to the following pro forma amounts (in thousands,
except for per share amounts):

|                                                                                                                  |           |      |         |       |   |      |         |       |   |   |        |       |  
|----------------------------------------------------------------------------------------------------------------- | --------- | ---- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------ | ----- | -
|                                                                                                                  |           | 2001 |         | 2002  |   | 2003
|                                                                                                                  |           |      |         |       |   |     
|Net loss as reported                                                                                              |           | $    | (11,799 | )     |   | $    | (34,018 | )     |   | $ | (6,079 | )    
|Add: Stock-based compensation expense included in
    net loss                                                    |           |      | 2,902   |       |   |      | (303    | )     |   |   | 143    |      
|Less: Total stock-based employee compensation
    expense determined under fair value based method for all awards |           |      | (6,166  | )     |   |      | (3,318  | )     |   |   | (2,435 | )    
|                                                                                                                  |           |      |         |       |   |      |         |       |   |   |        |      
|Pro forma net loss                                                                                                |           | $    | (15,063 | )     |   | $    | (37,639 | )     |   | $ | (8,371 | )    
|                                                                                                                  |           |      |         |       |   |      |         |       |   |   |        |      
|Net loss per common share As reported                                                                             |           | $    | (0.61   | )     |   | $    | (1.69   | )     |   | $ | (0.30  | )    
|                                                                                                                  | Pro forma |      |         | (0.78 | ) |      |         | (1.87 | ) |   |        | (0.42 | )

The Companys stock option grants vest over
several years and the Company intends to grant varying levels of
stock options in future periods. Therefore, the pro forma
effects on 2001, 2002, and 2003 net loss and net loss per common
share of expensing the estimated fair value of the stock options
and common shares pursuant to the stock option plan are not
necessarily representative of the effects on reported results
from operations for future years.

(o) Accounting
for Impairment of Long-Lived Assets

The Company reviews its long-lived assets and
goodwill for impairment when impairment indicators are present.
In the event that undiscounted cash flows are not sufficient to
recover the associated asset, the Company adjusts the carrying
amount to fair value determined by using a discounted cash flow
methodology. Also, on an on-going basis, the Company reviews the
periods of depreciation and amortization for continued
appropriateness.

(p)     Research
and Development Costs

Research and development costs are charged to
expense as incurred.

(q) Recent
Accounting Pronouncements

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. The disclosure requirements

F-10



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

are effective for financial reports for interim
periods beginning after December 15, 2002. The Company does
not expect the implementation of SFAS No. 148 will have a
material impact on its consolidated financial position or
results of operations.

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. This issue addresses
determination of whether an arrangement involving more than one
deliverable contains more than one unit of accounting and how
the arrangement consideration should be measured and allocated
to the separate units of accounting. EITF Issue No. 00-21
will be effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003 or the Company
may elect to report the change in accounting as a
cumulative-effect adjustment. The Company is reviewing EITF
Issue No. 00-21 and has not yet determined the impact, if
any, this issue will have on its consolidated operating results
and financial position.

In November 2002, the FASB issued FASB
Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it
assumes under a guarantee. The disclosure provisions of
FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The
provisions for initial recognition and measurement are effective
on a prospective basis for guarantees that are issued or
modified after December 31, 2002, irrespective of a
guarantors year-end. The adoption of FIN 45 did not
impact the Companys consolidated results of operations or
financial position.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulleting No. 51.
FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics
of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after
June 15, 2003. The Company is reviewing FIN 46 and has
not yet determined the impact, if any, this issue will have on
its consolidated operating results and financial position.

(r) Warranty
and Guaranties

The Company offers a one-year basic limited
warranty for all its products, including parts and labor. The
Company estimates the costs that may be incurred under its basic
limited warranty and records a liability in the amount of such
costs at the time product revenue is recognized. Factors that
affect the Companys warranty liability include the number
of installed units, historical and anticipated rates of warranty
claims and the cost per claim. The Company periodically assesses
the adequacy of its recorded warranty liabilities and adjusts
the amounts as necessary.

Warranty activity for the year ended
April 30, 2003 is as follows (in thousands):

|                             |  |   |     |  
|---------------------------- |  | - | --- | -
|Balance, April 30, 2002      |  | $ | 153 |  
|Provision for warranty costs |  |   | 46  |  
|Warranty expenditures        |  |   | (39 | )
|                             |  |   |     |  
|Balance, April 30, 2003      |  | $ | 160 |  
|                             |  |   |     |  

The Company offers service contracts that may be
purchased after a standard warranty has expired. Service
contracts may be purchased for periods from one to five years.
The Company recognizes service contract revenue ratably over the
life of the contract. Actual service contract expenses incurred
and charged to

F-11



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

cost of sales during an interim period may be
more or less than the amount of amortized service contract
revenue recognized in that period.

3. Inventory

Inventory consisted of (in thousands):

|               |  |           |       |      |  |   |       | 
|-------------- |  | --------- | ----- | ---- |  | - | ----- | 
|               |  |          
|               |  | April 30,
|               |  |          
|               |  | 2002      |       | 2003
|               |  |           |       |     
|Raw materials  |  | $         | 1,594 |      |  | $ | 933   | 
|Finished goods |  |           | 284   |      |  |   | 270   | 
|               |  |           |       |      |  |   |       | 
|               |  | $         | 1,878 |      |  | $ | 1,203 | 
|               |  |           |       |      |  |   |       | 

4. Fixed Assets

Fixed assets consisted of (in thousands):

|                         |  |           |        |      |  |   |        |  
|------------------------ |  | --------- | ------ | ---- |  | - | ------ | -
|                         |  |          
|                         |  | April 30,
|                         |  |          
|                         |  | 2002      |        | 2003
|                         |  |           |        |     
|Equipment                |  | $         | 2,650  |      |  | $ | 2,118  |  
|Purchased software       |  |           | 1,452  |      |  |   | 1,233  |  
|Leasehold improvements   |  |           | 140    |      |  |   | 155    |  
|Furniture and fixtures   |  |           | 199    |      |  |   | 178    |  
|                         |  |           |        |      |  |   |        |  
|                         |  |           | 4,441  |      |  |   | 3,684  |  
|Accumulated depreciation |  |           | (2,912 | )    |  |   | (3,145 | )
|                         |  |           |        |      |  |   |        |  
|                         |  | $         | 1,529  |      |  | $ | 539    |  
|                         |  |           |        |      |  |   |        |  

5. Credit Agreements

During the fiscal year ended April 30, 2002,
the Company maintained a revolving credit agreement that
provided for borrowings up to the lesser of $5 million or
80% of qualifying receivables. No amounts were outstanding under
this agreement at April 30, 2002. The agreement bore
interest at the banks base rate and the debt was
collateralized by substantially all assets of the Company. The
Company terminated the agreement in April 2002.

The Company paid interest and fees of
approximately $36,000, $53,000 and $28,000 for the years ended
April 30, 2001, 2002 and 2003, respectively.

At April 30, 2003, restricted securities
include approximately $2 million pledged to secure a letter
of credit, which expires in January 2004, in favor of the
landlord of the Companys headquarters in Needham, MA.

6. Income Taxes

Pre-tax income (loss) is summarized by
country as follows (in thousands):

|              |  |           |         |      |  |      |         |   |  |   |        |  
|------------- |  | --------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|              |  |          
|              |  | April 30,
|              |  |          
|              |  | 2001      |         | 2002 |  | 2003
|              |  |           |         |      |  |     
|Canada        |  | $         | 24      |      |  | $    | (614    | ) |  | $ | (804   | )
|United States |  |           | (12,953 | )    |  |      | (33,344 | ) |  |   | (5,232 | )
|              |  |           |         |      |  |      |         |   |  |   |        |  
|Total         |  | $         | (12,929 | )    |  | $    | (33,958 | ) |  | $ | (6,036 | )
|              |  |           |         |      |  |      |         |   |  |   |        |  

F-12



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The provision (benefit) for income taxes
consisted of (in thousands):

|          |               |           |        |        |        |      |    |    |    |  |    |    |    | 
|--------- | ------------- | --------- | ------ | ------ | ------ | ---- | -- | -- | -- |  | -- | -- | -- | 
|          |               |          
|          |               | April 30,
|          |               |          
|          |               | 2001      |        | 2002   |        | 2003
|          |               |           |        |        |        |     
|Current:  |               |           |        |        |        |      |    |    |    |  |    |   
|          | Canada        |           | $      | 254    |        |      | $  |   |    |  | $  |   |   
|          | United States |           |        | 118    |        |      |    | 60 |    |  |    | 43 |   
|          |               |           |        |        |        |      |    |    |    |  |    |   
|          |               |           | 372    |        |        |      | 60 |    |    |  | 43 |   
|Deferred: |               |           |        |        |        |      |    |    |    |  |    |   
|          | Canada        |           |        | (33    | )      |      |    |   |    |  |    |   |   
|          | United States |           |        | (1,469 | )      |      |    |   |    |  |    |   |   
|          |               |           |        |        |        |      |    |    |    |  |    |   
|          |               |           | (1,502 | )      |        |      |   |    |    |  |   |   
|          |               |           |        |        |        |      |    |    |    |  |    |   
|          |               | Total     |        | $      | (1,130 | )    |    | $  | 60 |  |    | $  | 43 | 
|          |               |           |        |        |        |      |    |    |    |  |    |   

The provision (benefit) for income taxes
differed from the amount computed by applying the U.S. federal
statutory rate as follows (in thousands):

|                                                     |       |           |        |        |   |      |         |    |  |   |        |    | 
|---------------------------------------------------- | ----- | --------- | ------ | ------ | - | ---- | ------- | -- |  | - | ------ | -- | 
|                                                     |       |          
|                                                     |       | April 30,
|                                                     |       |          
|                                                     |       | 2001      |        | 2002   |   | 2003
|                                                     |       |           |        |        |   |     
|Income tax provision (benefit) at statutory
    rate |       | $         | (4,525 | )      |   | $    | (11,885 | )  |  | $ | (2,113 | ) 
|Tax loss with no current benefit                     |       |           | 1,524  |        |   |      | 9,269   |    |  |   | 3,159  |   
|Utilization of foreign net operating losses          |       |           |       |        |   |      |        |    |  |   |       |   
|Foreign tax differential                             |       |           | 2      |        |   |      | (59     | )  |  |   | (77    | ) 
|Non-deductible expenses                              |       |           | 1,878  |        |   |      | 4,024   |    |  |   | (21    | ) 
|Tax credits                                          |       |           |       |        |   |      | (512    | )  |  |   | (676   | ) 
|State taxes, net of federal benefit                  |       |           | (332   | )      |   |      | (1,079  | )  |  |   | (253   | ) 
|Other, net                                           |       |           | 323    |        |   |      | 302     |    |  |   | 24     |   
|                                                     |       |           |        |        |   |      |         |    |  |   |        |   
|                                                     | Total |           | $      | (1,130 | ) |      | $       | 60 |  |   | $      | 43 | 
|                                                     |       |           |        |        |   |      |         |    |  |   |        |   

The components of the Companys deferred tax
assets and liabilities are as follows (in thousands):

|                          |                                  |                                |   |         |        |   |   |         |        |  
|------------------------- | -------------------------------- | ------------------------------ | - | ------- | ------ | - | - | ------- | ------ | -
|                          |                                  |                               
|                          |                                  | April 30,                     
|                          |                                  |                               
|                          |                                  | 2002                           |   | 2003   
|                          |                                  |                                |   |        
|Deferred tax assets:      |                                  |                                |   |         |        |   |   |        
|                          | Reserves and accruals            |                                | $ | 2460    |        |   | $ | 1,641   |       
|                          | Fixed assets                     |                                |   | 1,096   |        |   |   | 1,513   |       
|                          | Tax credits                      |                                |   | 667     |        |   |   | 1,342   |       
|                          | Net operating loss carryforwards |                                |   | 8,161   |        |   |   | 9,681   |       
|                          |                                  |                                |   |         |        |   |   |        
|                          |                                  | Total deferred tax assets      |   |         | 12,384 |   |   |         | 14,177 |  
|Deferred tax liabilities: |                                  |                                |   |         |        |   |   |        
|                          | Intangible assets                |                                |   | (1,591  | )      |   |   | (224    | )     
|                          |                                  |                                |   |         |        |   |   |        
|                          |                                  | Total deferred tax liabilities |   |         | (1,591 | ) |   |         | (224   | )
|                          | Valuation allowance              |                                |   | (10,793 | )      |   |   | (13,953 | )     
|                          |                                  |                                |   |         |        |   |   |        
|                          | Net deferred taxes               |                                | $ |        |        |   | $ |        |       
|                          |                                  |                                |   |         |        |   |   |        

F-13



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has incurred cumulative losses for
the three year period ended April 30, 2003. Consequently,
the Company is unable to conclude that it is more likely than
not the Company will generate taxable income in the foreseeable
future. Accordingly, the Company has provided a valuation
allowance covering its net deferred tax asset.

At April 30, 2003 and 2002, the Company had
$1,156,755 and $480,696 of Canadian investment tax credits
earned as a result of government incentive programs which begin
to expire in 2009. At April 30, 2003 , the Company had
$135,757 of United States research credits which begin to expire
in 2013 and net operating loss carryforwards of approximately
$22,077,701 which begin to expire in 2019. The Company paid
income taxes of approximately $207,000, $161,000 and $43,000 in
2001, 2002, and 2003 respectively.

7. Stock Plans

In June 1996, the Company adopted the 1996 Stock
Option Plan (the 1996 Plan), which provides for the
issuance of up to 1,959,081 shares of common stock of the
Company as either incentive stock options or non-qualified stock
options. The 1996 Plan is administered by the Compensation
Committee of the Board of Directors. Both incentive stock
options and non-qualified stock options are generally granted at
the fair market value, although as disclosed herein, certain
options were granted below fair market value. Options granted
under the 1996 Plan generally vest as to 25% of the underlying
shares on the first anniversary of the date of grant and ratably
over the remaining thirty-six months and expire five and ten
years from date of grant for incentive stock options and
non-qualified stock options, respectively. At April 30,
2003, 413,622 shares were available for future grant. At
April 30, 2001, 2002 and 2003, there were 334,493, 317,525
and 99,309 options exercisable under the 1996 Plan, at a
weighted average exercise price of $0.42, $0.40 and $0.85 per
share, respectively.

In August 1999, the Company adopted the 1999
Stock Option and Grant Plan (the 1999 Plan). The
1999 Plan provides for the issuance of up to
3,560,000 shares of common stock of the Company as either
incentive stock options or non-qualified stock options. The 1999
Plan is administered by the Compensation Committee of the Board
of Directors. Options granted under the 1999 Plan generally vest
as to 25% of the underlying shares on the first anniversary of
the date of grant and ratably over the remaining twelve quarters
and expire ten years from the date of grant. At April 30,
2003, 2,358,790 shares were available for future grant. At
April 30, 2001, 2002 and 2003 there were 445,507, 552,948
and 332,116 options exercisable under the 1999 Plan at a
weighted average exercise price of $13.44, $10.42 and $ 8.82 per
share, respectively.

On August 15, 2000 the Board of Directors of
the Company adopted the 2000 Director Stock Option Plan (The
Director Plan). The Director Plan provides for the
issuance of up to 500,000 shares of common stock of the
Company as non-qualified stock options. The Director Plan is
administrated by a committee of the Board of Directors. Initial
options granted under the Director Plan generally vest ratably
over twelve quarters. Annual options granted are fully vested
and are immediately exercisable at the date of grant. All
options granted under the Director Plan expire upon the
termination date of the participant. At April 30, 2003,
226,255 shares were available for future grant. At
April 30, 2001, 2002 and 2003, there were 15,624, 59,060
and 175,309 options exercisable at a weighted average
exercise price of $16.50, $11.25 and $7.21 per share,
respectively.

F-14



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes option activity
over the life of the 1996 Plan, the 1999 Plan and the Director
Plan:

|                              |           |             |           |                  |   |   |      |       | 
|----------------------------- | --------- | ----------- | --------- | ---------------- | - | - | ---- | ----- | 
|                              |           | Options     |           | Weighted Average
|                              |           | Outstanding |           | Exercise Price  
|                              |           |             |           |                 
|Outstanding at April 30, 2000 |           |             | 2,124,167 |                  |   | $ | 8.57 |      
|                              | Granted   |             |           | 3,127,779        |   |   |      | 10.21 | 
|                              | Exercised |             |           | (357,801         | ) |   |      | 0.19  | 
|                              | Canceled  |             |           | (895,798         | ) |   |      | 16.76 | 
|                              |           |             |           |                  |   |   |      |      
|Outstanding at April 30, 2001 |           |             | 3,998,347 |                  |   | $ | 9.02 |      
|                              | Granted   |             |           | 937,679          |   |   |      | 1.55  | 
|                              | Exercised |             |           | (250,239         | ) |   |      | 0.11  | 
|                              | Canceled  |             |           | (2,351,439       | ) |   |      | 9.64  | 
|                              |           |             |           |                  |   |   |      |      
|Outstanding at April 30, 2002 |           |             | 2,334,348 |                  |   | $ | 5.94 |      
|                              | Granted   |             |           | 601,325          |   |   |      | 1.04  | 
|                              | Exercised |             |           | (227,487         | ) |   |      | 0.11  | 
|                              | Canceled  |             |           | (1,240,878       | ) |   |      | 6.13  | 
|                              |           |             |           |                  |   |   |      |      
|Outstanding at April 30, 2003 |           |             | 1,467,308 |                  |   | $ | 4.53 |      
|                              |           |             |           |                  |   |   |      |      

The following table presents certain information
about options outstanding as of April 30, 2003:

|                    |  |           |  |                       |      |             |  |                |         |  |  |   |       | 
|------------------- |  | --------- |  | --------------------- | ---- | ----------- |  | -------------- | ------- |  |  | - | ----- | 
|                    |  |           |  |                       |      |             |  | Weighted      
|                    |  |           |  |                       |      |             |  | Average       
|                    |  |           |  | Weighted Average      |      | Number of   |  | Exercise Price
|                    |  | Number of |  | Remaining Contractual |      | Options     |  | of Options    
|Exercise Price      |  | Options   |  | Life (Yrs.)           |      | Exercisable |  | Exercisable   
|                    |  |           |  |                       |      |             |  |               
|$0.098  $1.01      |  | 166,993   |  |                       | 6.49 |             |  |                | 132,079 |  |  | $ | 0.64  | 
|$1.05               |  | 351,275   |  |                       | 9.53 |             |  |                |        |  |  |   |      | 
|$1.08  $1.13       |  | 253,818   |  |                       | 8.89 |             |  |                | 64,602  |  |  |   | 1.11  | 
|$1.15  $2.03       |  | 249,229   |  |                       | 7.09 |             |  |                | 121,719 |  |  |   | 1.64  | 
|$2.03125  $2.25    |  | 86,250    |  |                       | 8.01 |             |  |                | 39,876  |  |  |   | 2.15  | 
|$3.125  $4.4375    |  | 53,250    |  |                       | 7.68 |             |  |                | 30,503  |  |  |   | 4.38  | 
|$5.8125  $16.5     |  | 196,380   |  |                       | 7.34 |             |  |                | 139,573 |  |  |   | 12.74 | 
|$18.0625  $33.9375 |  | 110,113   |  |                       | 7.09 |             |  |                | 78,382  |  |  |   | 24.58 | 
|                    |  |           |  |                       |      |             |  |                |         |  |  |   |       | 
|                    |  | 1,467,308 |  |                       |      |             |  |                | 606,734 |  |  | $ | 7.05  | 
|                    |  |           |  |                       |      |             |  |                |         |  |  |   |       | 

The Company recorded deferred compensation
charges of approximately $8,464,000 related to stock options and
restricted stock granted with exercise prices below market
prices during the fiscal year ended April 30, 2000. The
deferred compensation is being amortized to expense over the
vesting period of the individual options, generally four years.
In the fourth quarter of the fiscal year ended April 30,
2002, the Company recorded an adjustment to reverse
approximately $1.5 million of stock-based compensation
expense previously recorded relating to terminated employees

The weighted-average per share fair value of
stock options granted was $9.98, $1.56 and $0.98 in 2001, 2002
and 2003, respectively. The weighted average remaining
contractual life for all stock options outstanding at
April 30, 2003 was 8.03 years.

The Company issued 100,000 shares of restricted
common stock having a fair value of $2.5312 per share in March
2001, 22,950 shares of restricted common stock at $3.27 per
share which was less than the fair value in September 1999,
374,850 shares of restricted common stock at $1.63 per
share which was less than fair

F-15



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value in July 1999, 114,750 shares of
restricted common stock having a fair value of $0.098 per share
in June 1998 and 1,538,178 shares of restricted common
stock having a fair value of $0.098 per share in January 1998 to
certain executives and a member of the Board of Directors in
exchange for promissory notes totaling $1,102,672. The
promissory notes are non-interest bearing to employees insofar
as the Company is required to reimburse the employees for any
interest on the promissory notes that is payable to the Company.
The face values of the promissory notes approximate their fair
market value. Upon termination for any reason other than for
cause or in the event of the merger, consolidation or sale of
substantially all of the Companys assets or voting
securities, the Company must repurchase all the non-vested
restricted stock of the executives at the original issue price.
If an executive is terminated for cause, the Company must
repurchase such executives vested and non-vested
restricted stock

The Company has a right of first refusal prior to
any transfer of restricted stock. The restricted stock generally
vests over four years and the promissory notes have a five-year
maturity. The outstanding balance of the promissory notes at
April 30, 2002 and 2003 is $532,145 and $103,978,
respectively. During the year ended April 30, 2003, the
Company repurchased the 100,000 shares issued in March 2001
for the fair market value of $115,000, which was applied against
the outstanding balance of the note receivable. The Company
forgave the remaining balance due under the promissory note as
part of the separation agreement which superceded the
Companys earlier determination that the loan was not
subject to repayment.

At April 30, 2003, the Company had reserved
4,465,975 shares of common stock for issuance under the
1996 and 1999 Stock Option plans and the Director plan.

8. Employee Stock Purchase Plan

The Company has an employee stock purchase plan
(the Stock Purchase Plan) under which eligible
employees may purchase common stock at a price per share equal
to 85% of the lower of the fair market value of the common stock
at the beginning or end of each offering period. Participation
in the offering is limited to 10% of an employees
compensation (not to exceed amounts allowed under
section 423 of the Internal Revenue Code), may be
terminated at any time by the employee and automatically ends on
termination of employment with the Company. A total of
250,000 shares of common stock have been reserved under the
Stock Purchase Plan.

In addition, on each May 1, the aggregate
number of shares of common stock reserved for issuance under the
Stock Purchase Plan will be increased automatically by a number
of shares equal to 0.5% of the total number of outstanding
shares on the immediately preceding April 30, subject to
the ability of the Compensation Committee to reduce the amount
of the increase in any particular year; provided that the
aggregate number of shares that may be issued over the term of
the Stock Purchase Plan shall not exceed 500,000 shares.
The Company suspended the Stock Purchase Plan effective
May 31, 2003 pending the merger transaction with Verso
Technologies.

9. Employee Savings Plans

The Company maintains a retirement savings plan
under section 401(k) of the Internal Revenue Code. The plan
covers substantially all U.S. employees and allows
participants to defer a portion of their annual compensation on
a pre-tax basis. The Company also maintains a Registered
Retirement Savings Plan for its Canadian employees, which allows
participants to defer a portion of their annual compensation on
a pre-tax basis. The Company made no contributions to either
plan during 2001, 2002 or 2003.

10. Commitments and
Contingencies

The Company leases office space in the United
States, Canada, and the United Kingdom under non-cancelable
operating leases.

F-16



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Total rent expense under all operating leases for
2001, 2002 and 2003 was approximately $478,000, $1,331,000, and
$1,318,000, respectively. At April 30, 2003, future minimum
lease commitments were approximately $1,597,000 in 2004,
$1,514,000 in 2005, $1,425,000 in 2006 and $1,238,000 in 2007.
Future minimum lease payments have not been reduced by future
minimum sublease rentals of $686,000 in each of 2004, 2005, 2006
and 2007.

11. Earnings Per Share and Pro Forma
Earnings Per Share

The calculations of earnings per share are as
follows (in thousands, except for share related amounts):

|                                 |                                                                                                  |                       |       |            |   |      |       |            |   |   |       |            |  
|-------------------------------- | ------------------------------------------------------------------------------------------------ | --------------------- | ----- | ---------- | - | ---- | ----- | ---------- | - | - | ----- | ---------- | -
|                                 |                                                                                                  |                      
|                                 |                                                                                                  | Years Ended April 30,
|                                 |                                                                                                  |                      
|                                 |                                                                                                  | 2001                  |       | 2002       |   | 2003
|                                 |                                                                                                  |                       |       |            |   |     
|Numerator:                       |                                                                                                  |                       |       |            |   |      |       |            |   |   |       |           
|                                 | Net loss                                                                                         |                       | $     | (11,799    | ) |      | $     | (34,018    | ) |   | $     | (6,079     | )
|                                 |                                                                                                  |                       |       |            |   |      |       |            |   |   |       |           
|                                 | Numerator for basic and diluted earnings per
    share  income available to common stockholders |                       | $     | (11,799    | ) |      | $     | (34,018    | ) |   | $     | (6,079     | )
|                                 |                                                                                                  |                       |       |            |   |      |       |            |   |   |       |           
|Denominator:                     |                                                                                                  |                       |       |            |   |      |       |            |   |   |       |           
|                                 | Denominator for basic and diluted earnings per
    share  weighted-average shares               |                       |       | 19,213,239 |   |      |       | 20,126,113 |   |   |       | 20,499,108 |  
|                                 |                                                                                                  |                       |       |            |   |      |       |            |   |   |       |           
|Basic and diluted loss per share |                                                                                                  | $                     | (0.61 | )          |   | $    | (1.69 | )          |   | $ | (0.30 | )         
|                                 |                                                                                                  |                       |       |            |   |      |       |            |   |   |       |           

The following potential common shares have been
excluded from the computation of diluted net loss per share for
all periods presented because the effect would have been
anti-dilutive (in thousands):

|                                     |  |                      |       |      |  |      |       |  |  |  |       |  |  | 
|------------------------------------ |  | -------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- |  |  | 
|                                     |  |                     
|                                     |  | Year Ended April 30,
|                                     |  |                     
|                                     |  | 2001                 |       | 2002 |  | 2003
|                                     |  |                      |       |      |  |     
|Shares issuable under stock options  |  |                      | 3,998 |      |  |      | 2,334 |  |  |  | 1,537 | 
|                                     |  |                      |       |      |  |      |       |  |  |  |       |  |  | 
|Shares of nonvested restricted stock |  |                      | 381   |      |  |      | 88    |  |  |  | 8     | 
|                                     |  |                      |       |      |  |      |       |  |  |  |       |  |  | 

12. Valuation and Qualifying
Accounts

Accounts Receivable Reserves and Allowances (in
thousands):

|                          |  |              |     |             |  |            |     |              |  |            |      |   |  |   |      |   |  |   |     | 
|------------------------- |  | ------------ | --- | ----------- |  | ---------- | --- | ------------ |  | ---------- | ---- | - |  | - | ---- | - |  | - | --- | 
|                          |  |              |     |             |  | Additions  |     |              |  |           
|                          |  | Balance at   |     | Balance     |  | Charged to |     | Deductions   |  | Balance at
|                          |  | Beginning of |     | Acquired in |  | Income     |     | (Principally |  | End of    
|Period                    |  | Year         |     | Acquisition |  | Statement  |     | Write-Offs)  |  | Year      
|                          |  |              |     |             |  |            |     |              |  |           
|Year ended April 30, 2001 |  | $            | 154 |             |  | $          | 151 |              |  | $          | 808  |   |  | $ | (517 | ) |  | $ | 596 | 
|Year ended April 30, 2002 |  | $            | 596 |             |  | $          |    |              |  | $          | (289 | ) |  | $ | 193  |   |  | $ | 500 | 
|Year ended April 30, 2003 |  | $            | 500 |             |  |            |    |              |  | $          | (204 | ) |  | $ | (46  | ) |  | $ | 250 | 

13. Legal Proceedings

On May 3, 2000, Joan Lockhart, the
Companys former Vice President of Marketing, filed a
complaint in Massachusetts State Court against the Company. In
the complaint, captioned Joan Lockhart v. MCK Communications,
Inc., (Middlesex Superior Court), Ms. Lockhart asserts a
claim for breach of contract against the Company based on her
allegations that the Company failed to comply with the terms of
her employment agreement and a certain restricted stock
agreement executed by and between the Company and
Ms. Lockhart. On June 5, 2000, the Company filed its
answer denying the material allegations of
Ms. Lockharts complaint. On December 6, 2001,
the Massachusetts Superior Court, Middlesex County,

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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

entered judgement against the Company and in
favor of Ms. Lockhart in the amount of approximately
$1,160,000, including interest which amount was charged to
operations in 2002. The Company determined not to appeal the
judgement and on December 17, 2002, the parties agreed to
settle the case for $1,100,000.

In December 2001, a complaint was filed in the
Southern District of New York seeking an unspecified amount of
damages on behalf of an alleged class of persons who purchased
shares of the Companys common stock between the date of
its initial public offering and December 6, 2000. The
complainants named as defendants the Company and certain of its
officers and other parties as underwriters of its initial public
offering (the MCK defendants). The plaintiffs
allege, among other things, that the Companys prospectus,
contained in the Registration Statement on Form S-1 filed
with the Securities and Exchange Commission, was materially
false and misleading because it failed to disclose that the
investment banks which underwrote the Companys initial
public offering of securities and others received undisclosed
and excessive brokerage commissions, and required investors to
agree to buy shares of securities after the initial public
offering was completed at predetermined prices as a precondition
to obtaining initial public offering allocations. The plaintiffs
further allege that these actions artificially inflated the
price of the Companys common stock after the initial
public offering. This case is one of many with substantially
similar allegations known as the Laddering Cases filed before
the Southern District of New York against a variety of unrelated
issuers and investment bankers and have been consolidated for
pre-trial purposes before one judge to assist with
administration. A motion to dismiss addressing issues common to
the companies and individuals who have been sued in these
actions was filed in July 2002. After a hearing on the motion to
dismiss, the Court, on February 19, 2003, denied dismissal
of the claims against the companies and individuals, including
the MCK defendants. The Company will answer the complaint and
respond to any discovery served. The Company believes that the
claims against it are meritless and that it intends to defend
the action. No provision has been recorded for this matter.

The Company has been named a defendant in a
lawsuit filed in Norfolk County, Massachusetts by Entrata
Communications, Inc. (Entrata). Entrata Communications, Inc. v.
Superwire.com. Inc. and MCK Communications, Inc. arises out of a
dispute between Entrata and one of its largest shareholders,
Superwire.com, Inc. (Superwire). Pursuant to a contract with
Entrata, the Company was obligated to pay Entrata $750,000 in
early 2002. In order to take advantage of a $100,000 discount
offered for early payment, the Company paid Entrata $650,000 in
November 2001, in full satisfaction of its contractual
obligations. The funds were placed in escrow with
Superwires California law firm, Jeffers, Shaff &
Falk, LLP (JSF), which agreed not to disburse the funds until
the dispute between Entrata and Superwire had been resolved.
Nevertheless, Entrata contends that it never received the funds
from the Company and that the funds were diverted to Superwire
and JSF.Through the lawsuit, Entrata seeks to recover from both
the Company and Superwire the full $750,000 that the Company
would have owed in 2002. The Company has asserted counterclaims
against Entrata for and cross-claims against Superwire for fraud
and breach of contract. On October 11, 2002, Superwire and
Entrata filed cross-motions for summary judgment against each
other. The Court denied both motions on March 13, 2003, and
gave the parties until October 17, 2003 to complete
discovery. Following denial of the cross-motions for summary
judgment, the Company filed a motion to add JSF and two of its
partners, Barry D. Falk and Mark R. Ziebell, as
third-party defendants. The motion is unopposed and is likely to
be allowed. As discovery has not yet commenced, it is too soon
to assess the Companys likelihood of success in this
litigation. Management intends to defend the claims against the
Company and prosecute its counterclaims, cross-claims and
third-party claims. No amounts, other than the original payment,
have been provided for this matter in the accompanying financial
statements.

F-18



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14. Segments

Information about the Companys revenue and
long-lived assets by geographic area is as follows (in
thousands):

|                                  |       |           |        |        |  |      |        |        |  |   |        |        | 
|--------------------------------- | ----- | --------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                  |       |          
|                                  |       | April 30,
|                                  |       |          
|                                  |       | 2001      |        | 2002   |  | 2003
|                                  |       |           |        |        |  |     
|Revenues from external customers: |       |           |        |        |  |      |        |        |  |   |        |       
|United States                     |       | $         | 31,200 |        |  | $    | 13,179 |        |  | $ | 12,855 |       
|Canada                            |       |           | 4,027  |        |  |      | 1,931  |        |  |   | 705    |       
|Rest of world                     |       |           | 2,993  |        |  |      | 1,377  |        |  |   | 1,019  |       
|                                  |       |           |        |        |  |      |        |        |  |   |        |       
|                                  | Total |           | $      | 38,220 |  |      | $      | 16,487 |  |   | $      | 14,579 | 
|                                  |       |           |        |        |  |      |        |        |  |   |        |       

|                   |       |           |       |       |  |   |     |       | 
|------------------ | ----- | --------- | ----- | ----- |  | - | --- | ----- | 
|                   |       |          
|                   |       | April 30,
|                   |       |          
|                   |       | 2002      |       | 2003 
|                   |       |           |       |      
|Long-lived assets: |       |           |       |       |  |   |     |      
|United States      |       | $         | 5,144 |       |  | $ | 745 |      
|Canada             |       |           | 461   |       |  |   | 272 |      
|Rest of world      |       |           | 7     |       |  |   | 2   |      
|                   |       |           |       |       |  |   |     |      
|                   | Total |           | $     | 5,612 |  |   | $   | 1,019 | 
|                   |       |           |       |       |  |   |     |      

15. Acquisition of DTI

In June, 2000, the Company acquired all of the
outstanding stock of DTI Holdings, Inc. (DTIH), its
wholly owned subsidiary Digital Techniques, Inc (together
DTI) for $12.7 million in cash, including
transaction costs, and 364,601 shares of common stock and
101,916 stock options with a fair market value of
$10.9 million. The Company engaged an independent firm to
determine the value of certain tangible and intangible assets
owned by DTIH for the purpose of allocating the total purchase
price. The Company allocated approximately $1.6 million of
the purchase price to tangible liabilities, $16.8 million
to goodwill and other intangibles, $8.0 million to
completed technology, and $694,000 to in-process development.
During the year ended April 30, 2002, the Company
terminated substantially all the DTI staff, which was not
contemplated at the date of acquisition. As a result, the
Company determined that impairment indicators were evident. The
Company evaluated the recoverability of its long-lived assets,
including intangibles related to the DTI acquisition and wrote
off all remaining unamortized goodwill of $12.4 million and
reduced the carrying value of certain identifiable intangibles
by $1.7 million to their estimated fair value of
$4.9 million at July 31, 2001.

In the quarter ended January 31, 2003, based
upon current economic conditions, the Companys operating
results, and the termination of the distribution agreement with
one of the Companys customers, the Company determined that
impairment indicators were present. The Company evaluated the
recoverability of its long-lived assets including those related
to the DTI acquisition and determined the estimated future
undiscounted cash flows were below their carrying value at
January 31, 2003. Undiscounted cash flows were determined
at an enterprise level as the operations and technology of DTI
had been integrated with those of the Company. Accordingly, the
Company reduced the intangible assets by $2.6 million to
their estimated fair value of $0.4 million. The estimated
fair value was based on anticipated future cash flows discounted
at a rate of 25%, which is commensurate with the risk involved.
The Company anticipates that this intangible asset will be fully
amortized by July 31, 2005.

The consolidated results of operations for the
year ended April 30, 2001 include DTIs results from
June 14, 2000. Assuming the acquisition of DTI occurred on
May 1, 2000, on a pro-forma basis, the Company

F-19



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

would have reported revenues of
$39.6 million, a net loss of $14.2 million and basic
net loss per common share of $0.74 for the year ended
April 30, 2001. The unaudited pro-forma financial
information is presented for illustrative purposes and is not
necessarily indicative of the combined results of operations in
future periods or the results that actually would have been
realized had MCK and DTIH been a combined company during the
specified periods.

Effective May 1, 2002, the Company adopted
the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 affects the Companys
treatment of goodwill and other intangible assets. SFAS
No. 142 requires that intangible assets be assessed and
classified within the statements criteria. Intangible
assets with finite useful lives will continue to be amortized
over those periods. Amortization of goodwill and intangible
assets with indefinite lives ceased. The adoption of this
standard did not have a significant impact on the Company since
all goodwill was previously written off in fiscal 2002 and the
Company has no intangible assets with indefinite lives.

At April 30, 2003, the components of
intangible assets subject to amortization, which consist
principally of purchased technology, are as follows (in
thousands):

|                         |  |   |        |  
|------------------------ |  | - | ------ | -
|Gross carrying value     |  | $ | 2,332  |  
|Accumulated amortization |  |   | (1,957 | )
|                         |  |   |        |  
|                         |  | $ | 375    |  
|                         |  |   |        |  

Aggregate amortization expense for the years
ended April 30, 2001, 2002, and 2003 was $4,588,000,
$2,180,000, and $1,003,000, respectively.

16. Entrata License Agreement

During the year ended April 30, 2001, the
Company entered into an agreement with Entrata providing MCK
with a royalty free, non-exclusive, perpetual, worldwide license
to use, install, and modify Entratas LoopBuilder 50 and
100 series integrated access device technology. This technology
was to have been integrated into certain MCK products and
solutions and resold or sublicensed under MCKs name and
trademarks. In consideration for the license and related
training, MCK agreed to pay $3.0 million, of which
$2,250,000 was advanced to Entrata under the terms of the
agreement. In order to take advantage of a $100,000 discount
offered for early payment, the Company paid Entrata $650,000 in
November 2001, in full satisfaction of its contractual
obligations. The Company received the source code and all
deliverables in February 2001. Training was completed during the
Companys fourth quarter of fiscal 2001. The entire
$3.0 million was expensed during the fourth quarter of
fiscal 2001 as in-process research and development.

17. Other Income

In fiscal 2003, the Company recorded Other Income
of $918,000 in the Statement of Operations. Included in Other
Income for the year are a gain of $218,000 from foreign currency
transactions, and settlements received from OEM partners. The
Company agreed to terminate an OEM Development and Supply
agreement with one of its partners and received $500,000 from
the partner as consideration for the release from its
contractual obligations under the original agreement. In
addition, the Company received $180,000 from another OEM partner
as settlement of all claims related to the original OEM
agreement, which had been terminated.

18. Restructuring

During the year ended April 30, 2001, the
Company reorganized various operating functions of its business,
re-focusing the business on core competencies and matching
staffing needs to strategic initiatives. The reorganization and
refocusing resulted in a reduction of the Companys
workforce by approximately 10%

F-20



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

or 25 employees. In conjunction with this action
the Company recorded a charge of approximately $597,000 for the
costs of severance, related benefits and outplacement services.

During the year ended April 30, 2002, due to
the continued downturn in the economic environment and to
accelerate the Companys return to profitability, the
Company instituted a number of actions to streamline operations.
These actions included closing the Companys Texas
operations and personnel reductions at the Companys
Needham and Calgary locations. In connection with these actions,
the Company recorded aggregate charges of approximately
$1.5 million related to the costs of severance, related
benefits and outplacement services. The consolidation and
reorganization resulted in aggregate reductions of our workforce
by approximately 126 employees, or 66% of our workforce. The
employee termination costs were paid out through December 2002.
In addition, the Company recorded a provision of approximately
$250,000 related to remaining lease obligations for its Texas
operations and recorded a charge of approximately $200,000
related to fixed assets previously used at those facilities and
abandoned. The Texas facility lease obligations expire in August
2004. The Company recorded a charge of approximately
$1.5 million in connection with a sublease of part of its
space at the Needham location through the remaining lease term.
In addition, the Company recorded a charge of approximately
$800,000 related to fixed assets and leasehold improvements at
that facility. The Needham facility lease obligation expires in
February 2007. During October 2002, the Company reviewed the
adequacy of the remaining reserves related to these
restructuring accruals and determined that $59,000 of reserves
previously recorded were not required. The charges were reversed
in the quarter ended October 31, 2002.

During October 2002, we reduced headcount at our
Needham and Calgary locations in order to align staff to lower
revenues and continue to match our staffing needs to our
strategic initiatives. The reorganization resulted in a
reduction of our workforce by approximately 20% or 15 employees.
In conjunction with this action, we recorded an aggregate charge
of approximately $325,000 for the costs of severance and related
benefits and outplacement services.

During January 2003, we announced a leadership
change within our senior management team, involving the
departure of our President and CEO Ms. Glenda Davis, as
well as her resignation from our Board of Directors. We recorded
an aggregate charge of approximately $385,000 related to the
cost of severance and related benefits. Ms. Davis
severance costs will be paid out through January 2004.

In April 2003, we reviewed the adequacy of our
remaining reserves related to the prior restructuring activities
and determined that $99,000 of reserves previously recorded were
not required. These charges were reversed in April 2003.

F-21



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the restructuring
activity for the year ended April 30, 2003:

|                                        |  |                   |        |            |  |               |       |   |  |   |        |  
|--------------------------------------- |  | ----------------- | ------ | ---------- |  | ------------- | ----- | - |  | - | ------ | -
|                                        |  | Employee          |        | Facility   |  | Write-down of
|                                        |  | Termination Costs |        | Exit Costs |  | Fixed Assets 
|                                        |  |                   |        |            |  |              
|Balance April 30, 2001                  |  | $                 | 380    |            |  | $             |      |   |  | $ |       |  
|Restructuring provision                 |  |                   | 1,465  |            |  |               | 1,781 |   |  |   | 1,064  |  
|Non-cash charges                        |  |                   |       |            |  |               |      |   |  |   | (1,044 | )
|Paid to date                            |  |                   | (1,370 | )          |  |               | (44   | ) |  |   |       |  
|                                        |  |                   |        |            |  |               |       |   |  |   |        |  
|Balance April 30, 2002                  |  |                   | 475    |            |  |               | 1,737 |   |  |   | 20     |  
|Restructuring provision (reversal), net |  |                   | 562    |            |  |               |      |   |  |   | (10    | )
|Non-cash charges                        |  |                   |       |            |  |               |      |   |  |   | (10    | )
|Paid to date                            |  |                   | (820   | )          |  |               | (680  | ) |  |   |       |  
|                                        |  |                   |        |            |  |               |       |   |  |   |        |  
|Balance April 30, 2003                  |  | $                 | 217    |            |  | $             | 1,057 |   |  | $ |       |  
|                                        |  |                   |        |            |  |               |       |   |  |   |        |  

19. Quarterly Results of Operations
(Unaudited)

|                      |  |                                      |         |        |  |       |        |        |  |   |        |   |  |   |        |  
|--------------------- |  | ------------------------------------ | ------- | ------ |  | ----- | ------ | ------ |  | - | ------ | - |  | - | ------ | -
|                      |  |                                     
|                      |  | Quarter                             
|                      |  |                                     
|2002                  |  | First                                |         | Second |  | Third |        | Fourth
|                      |  |                                      |         |        |  |       |        |       
|                      |  |                                     
|                      |  | (In thousands except per share data)
|Revenues              |  | $                                    | 3,403   |        |  | $     | 4,433  |        |  | $ | 4,051  |   |  | $ | 4,600  |  
|Gross profit          |  |                                      | 1,378   |        |  |       | 2,015  |        |  |   | 1,897  |   |  |   | 2,100  |  
|Net loss              |  |                                      | (21,028 | )      |  |       | (5,000 | )      |  |   | (5,170 | ) |  |   | (2,820 | )
|Loss per common share |  | $                                    | (1.06   | )      |  | $     | (0.25  | )      |  | $ | (0.26  | ) |  | $ | (0.14  | )

|                      |  |                                      |       |        |  |       |        |        |  |   |        |   |  |   |       |  
|--------------------- |  | ------------------------------------ | ----- | ------ |  | ----- | ------ | ------ |  | - | ------ | - |  | - | ----- | -
|                      |  |                                     
|                      |  | Quarter                             
|                      |  |                                     
|2003                  |  | First                                |       | Second |  | Third |        | Fourth
|                      |  |                                      |       |        |  |       |        |       
|                      |  |                                     
|                      |  | (In thousands except per share data)
|Revenues              |  | $                                    | 4,511 |        |  | $     | 3,475  |        |  | $ | 3,172  |   |  | $ | 3,421 |  
|Gross profit          |  |                                      | 2,299 |        |  |       | 1,858  |        |  |   | 1,671  |   |  |   | 1,583 |  
|Net loss              |  |                                      | (852  | )      |  |       | (1,324 | )      |  |   | (3,581 | ) |  |   | (322  | )
|Loss per common share |  | $                                    | (0.04 | )      |  | $     | (0.06  | )      |  | $ | (0.17  | ) |  | $ | (0.02 | )

F-22



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##### Table of Contents



EXHIBIT INDEX

|            |            |             |  |                                                                                                                                                                                                                                                         
|----------- | ---------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |            | Description
|            |            |            
|            | 2.1 (1)    |             |  | Agreement and Plan of Merger, dated June 14,
    2000, by and among the Registrant, Omni Acquisition Corporation,
    Troy Holdings International, Inc., DTI Holdings, Inc., Digital
    Techniques, Inc. and certain shareholders of DTI Holdings, Inc.
|            | 2.2 (12)   |             |  | Agreement and Plan of Merger dated as of
    April 21, 2003 among Verso Technologies, Inc., Mickey
    Acquiring Sub, Inc. and the Registrant
    (Exhibit No. 2.1 to Current Report on Form 8-K
    (File No. 0-22703)).                               
|            | 2.3 (12)   |             |  | First Amendment to Agreement and Plan of Merger
    dated April 21, 2003, among Verso Technologies, Inc.,
    Mickey Acquiring Sub, Inc. and the Registrant
    (Exhibit No. 2.2 to Current Report on Form 8-K
    (File No. 0-22703)).                 
|            | 2.4 (13)   |             |  | Second Amendment to Agreement and Plan of Merger
    dated June 13, 2003, among Verso Technologies, Inc., Mickey
    Acquiring Sub, Inc. and the Registrant
    (Exhibit No. 2.1 to Current Report on Form 8-K
    (File No. 0-22703)).                 
|            | 3.1 (2)    |             |  | Second Amended and Restated Certificate of
    Incorporation of the Registrant (Exhibit No. 3.3 of
    Registration Statement on Form S-1 (File
    No. 333-85821)).                                                                                    
|            | 3.2 (2)    |             |  | First Amended and Restated By-laws of the
    Registrant (Exhibit No. 3.5 of Registration Statement
    on Form S-1 (File No. 333-85821)).                                                                                                              
|            | 4.1 (2)    |             |  | Specimen certificate for shares of common stock,
    $.001 par value, of the Registrant.                                                                                                                                                                
|            | 10.1 (2)   |             |  | Amended and Restated Registration Rights
    Agreement, dated July 16, 1998, among the Registrant and
    the stockholders named therein. (Exhibit No. 10.2 of
    Registration Statement on Form S-1 (File
    No. 333-85821)).                        
|            | 10.2 (2)   |             |  | Amended and Restated 1996 Stock Option Plan of
    the Registrant. (Exhibit No. 10.3 of Registration
    Statement on Form S-1 (File No. 333-85821)).                                                                                                   
|            | 10.3 (3)   |             |  | 1999 Stock Option and Grant Plan of the
    Registrant.                                                                                                                                                                                                 
|            | 10.4 (2)  |             |  | Master Support Agreement between the Registrant
    and Vital Networks, Inc. dated June 28, 1999
    (Exhibit No. 10.16 of Registration Statement on
    Form S-1 (File No. 333-85821)).                                                                
|            | 10.5 (4)   |             |  | Lease Agreement by and between the Registrant and
    Wellsford/ Whitehall Holdings, L.L.C. dated January 10,
    2000.                                                                                                                                 
|            | 10.5.1 (5) |             |  | First Amendment to Lease Agreement between the
    registrant and Wellsford/ Whitehall Holdings, LLC dated
    May 25, 2000. (Exhibit No. 10.13.1 of Annual
    Report on Form 10-K (File No. 0-22703)).                                                
|            | 10.5.2 (5) |             |  | Second Amendment to Lease Agreement between the
    registrant and Wellsford/ Whitehall Holdings, LLC dated May 31,
    2000. (Exhibit No. 10.13.1 of Annual Report on
    Form 10-K (File No. 0-22703)).                                               
|            | 10.6(9)    |             |  | Incentive Bonus Plan of the Registrant.                                                                                                                                                                                                                 
|            | 10.7(11)   |             |  | 2000 Director Stock Option Plan of the
    Registrant, as amended.                                                                                                                                                                                      
|            | 10.8 (7)   |             |  | 2000 Employee Stock Purchase Plan of the
    Registrant.                                                                                                                                                                                                
|            | 10.9 (8)   |             |  | Offer letter dated January 11, 2001, between
    the Registrant and Glenda Davis (Exhibit No. 10.14 of
    Annual Report on Form 10-K (File No. 0-22703)).                                                                                              
|            | 10.10 (8)  |             |  | Restricted Stock Purchase Agreement, dated
    March 13, 2001, between the Registrant and Glenda Davis
    (Exhibit No. 10.15 of Annual Report on Form 10-K
    (File No. 0-22703)).                                                                    
|            | 10.11 (8)  |             |  | Non-qualified Stock Option Agreement, dated
    March 13, 2001, between the Registrant and Glenda Davis
    (Exhibit No. 10.16 of Annual Report on Form 10-K
    (File No. 0-22703)).                                                                   
|            | 10.12 (9)  |             |  | Promissory Note dated March 13, 2001, issued
    by Glenda Davis to the Registrant.                                                                                                                                                                     
|            | 10.13 (2)  |             |  | Form of Bonus Agreement
    (Exhibit No. 10.12 of Registration Statement on
    Form S-1 (File No. 333-85821)).                                                                                                                                         
|            | 10.14 (9)  |             |  | Offer letter dated May 29, 2001 between the
    Registrant and Thomas Nolette.                                                                                                                                                                          
|            | 10.15      |             |  | Offer letter dated May 10, 2001 between the
    Registrant and Ann Doyle, as amended on February 5, 2003                                                                                                                                                
|            | 10.16 (9)  |             |  | Offer letter dated November 26, 2001 between
    the Registrant and Gerald J. McGovern.                                                                                                                                                                 



---



##### Table of Contents



|            |            |             |  |                                                                                                               
|----------- | ---------- | ----------- |  | --------------------------------------------------------------------------------------------------------------
|Exhibit No. |            | Description
|            |            |            
|            | 10.17 (10) |             |  | Sublease between the Registrant., Sublandlord and
    UPromise, Inc., Subtenant dated as of July 2, 2002.     
|            | 10.18 (10) |             |  | Offer letter dated December 12, 2001 between
    the Registrant and Patrick Curley.                           
|            | 21.1       |             |  | Subsidiaries of the Registrant.                                                                               
|            | 23.1       |             |  | Consent of Ernst & Young LLP.                                                                                 
|            | 99.1       |             |  | Certification of Acting Chief Executive Officer
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 99.2       |             |  | Certification of Corporate Controller pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.          




|  |                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment obtained as to portions of
    this exhibit. The confidential information has been filed
    separately with the Securities and Exchange Commission.



|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Exhibit 2.1
    filed with the Registrants Report on Form 8-K dated
    June 28, 2000.                                                                                                                                                                               
|   
|(2) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed in response to
    Item 16(a), Exhibits, of the Registrants
    Registration Statement on Form S-1, as amended (File
    No. 333-85821), which was declared effective on
    October 21, 1999.
|   
|(3) | Incorporated by reference to Exhibit 10.4
    filed with the Registrants Registration Statement on
    Form S-8 dated February 4, 2000.                                                                                                                                                           
|   
|(4) | Incorporated by reference to
    Exhibit No. 10.18 of the Registrants
    Registration Statement on Form S-1, as amended (File No.
    333-96235), which was declared effective on April 4, 2000.                                                                                                 
|   
|(5) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended April 30, 2000, as filed with the SEC on
    July 31, 2000.                                                   
|   
|(6) | Incorporated by reference to Exhibit 99.1
    filed with the Registrants Registration Statement on
    Form S-8 dated November 14, 2000.                                                                                                                                                          
|   
|(7) | Incorporated by reference to Exhibit 99.1
    filed with the Registrants Registration Statement on
    Form S-8 dated December 4, 2000.                                                                                                                                                           
|   
|(8) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended April 30, 2001, as filed with the SEC on
    July 2, 2001.                                                    
|   
|(9) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Annual Report on Form 10-K for the fiscal year
    ended April 30, 2002, as filed with the SEC on
    August 13, 2002.                                                 



|     |                                                                                                                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Quarterly Report on Form 10-Q for the fiscal
    quarter ended July 31, 2002, as filed with the SEC on
    September 16, 2002.  
|    
|(11) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Quarterly Report on Form 10-Q for the fiscal
    quarter ended October 31, 2002, as filed with the SEC on
    December 16, 2002.
|    
|(12) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Current Report on Form 8-K, as filed with
    the SEC on April 22, 2003.                                                        
|    
|(13) | Incorporated by reference to Exhibit 2.1
    filed with the Registrants current Report on
    Form 8-K, as filed with the SEC on June 17, 2003.