10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2005
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number 0-22190

Verso Technologies, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

400 Galleria Parkway

Suite 200

Atlanta, GA 30339

(Address of Principal Executive Offices)

678-589-3750

(Registrant’s Telephone Number, Including Area Code)

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

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

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act of 1933.     Yes o          No þ

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.     Yes o          No þ

      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 þ          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.          þ

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):

Large Accelerated filer o          Accelerated Filer o          Non-accelerated Filer þ

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).     Yes o          No þ

      As of June 30, 2005, the aggregate market value of the voting and non-voting common equity held by non-affiliates, based upon the last reported sale price of such common equity of the registrant as of such date as reported by the Nasdaq Stock Market, was $35,003,384.

      As of March 23, 2006, 32,910,078 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

TABLE OF CONTENTS

PART I
	Item 1. Business
	Item 1A. Risk Factors
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 4.5 Executive Officers of the Registrant
PART II
	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
	Item 9B. Other Information
PART III
	Item 10. Directors and Executive officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
	Item 15. Exhibits and Financial Statement Schedules
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED REPORTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES
EX-4.53 FORM OF WARRANT
EX-4.54 FORM OF REGISTRATION RIGHTS AGREEMENT
EX-10.9 1999 EMPLOYEE STOCK PURCHASE PLAN
EX-10.113 AMENDED AND RESTATED PROMISSORY NOTE
EX-10.114 EXPORT-IMPORT BANK
EX-10.115 AMENDMENT TO LOAN DOCUMENTS
EX-10.116 AMENDMENT TO LOAN DOCUMENTS
EX-10.117 AMENDMENT TO LOAN DOCUMENTS
EX-21.1 SUBSIDIARIES OF THE REGISTRANT
EX-23.1 CONSENT OF GRANT THORNTON LLP.
EX-23.2 CONSENT OF KPMG LLP.
EX-31.1 CERTIFICATION BY THE REGISTRANT'S CHIEF EXECUTIVE OFFICER
EX-31.2 CERTIFICATION BY THE REGISTRANT'S CHIEF FINANCIAL OFFICER
EX-32.1 SECTION 1350 CERTIFICATION BY REGISTRANT'S CHIEF EXECUTIVE OFFICER
EX-32.2 SECTION 1350 CERTIFICATION BY REGISTRANT'S CHIEF FINANCIAL OFFICER

PART I

Note Regarding Forward-Looking Statements

      Certain statements contained in this Annual Report on Form 10-K (this “Annual Report”), including, without limitation, in the sections herein titled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or incorporated herein by reference, that are not statements of historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “intend,” “will” and similar expressions are examples of words that identify forward-looking statements. Forward-looking statements include, without limitation, statements regarding our future financial position, business strategy and expected cost savings. These forward-looking statements are based on our current beliefs, as well as assumptions we have made based upon information currently available to us.

      Each forward-looking statement reflects our current view of future events and is subject to risks, uncertainties and other factors that could cause actual results to differ materially from any results expressed or implied by our forward-looking statements. Important factors that could cause actual results to differ materially from the results expressed or implied by any forward-looking statements include: the volatility of the price of our common stock, par value $0.01 per share (the “Common Stock”); our ability to fund future growth; our ability to become profitable; our ability to attract and retain qualified personnel; general economic conditions of the communications market; market demand for and market acceptance of our products; legal claims against us, including, but not limited to, claims of patent infringement; our ability to protect our intellectual property; defects in our products; our obligations to indemnify our customers; our exposure to risks inherent in international operations; our dependence on contract manufacturers and suppliers; general economic and business conditions; other risks and uncertainties included in the section of this Annual Report titled “Risk Factors”; and other factors disclosed in our other filings made with the Securities and Exchange Commission (the “SEC”).

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

Item 1. Business

General

      Verso Technologies, Inc., a Minnesota corporation (the “Company”), is a global technology provider of next-generation network packet-based bundled technology solutions for service providers. These products enable customers to reduce communications costs, generate additional revenue and secure and optimize network bandwidth. The Company focuses on softswitch, prepaid and compression technologies that optimize bandwidth and enable next-generation protocols such as voice over Internet protocol (“VoIP”), as well as other advanced protocols. The Company is creating open and scalable solutions that are compatible with industry standards and are in emerging high growth areas in international and domestic communications markets.

      The Company’s headquarters is located at 400 Galleria Parkway, Suite 200, Atlanta, Georgia 30339, and the Company’s telephone number at that location is (678) 589-3500. The Company maintains a worldwide web address at www.verso.com. The Company’s annual, quarterly and current reports, and amendments thereto, which the Company files with, or furnishes to, the SEC, are available free of charge in the investors section of the Company’s website at www.verso.com. Such reports and amendments are available on the Company’s website as soon as reasonably practical after the Company has filed such reports with, or furnished such reports to, the SEC.

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      The Company’s continuing operations include two separate business segments: (i) the Packet-based Technologies Group, which includes the Company’s softswitch, I-Master and NetPerformer divisions and the Company’s subsidiary Telemate.Net Software, Inc. (“Telemate.Net”); and (ii) the Advanced Applications Services Group, which includes the Company’s technical applications support group. The Packet-based Technologies Group includes domestic and international sales of hardware and software, integration, applications and technical training and support. The Packet-based Technologies Group offers software-based solutions (which include hardware) for companies seeking to build private, packet-based voice and data networks. In addition, the Packet-based Technologies Group offers software-based solutions for Internet access and usage management that include call accounting and usage reporting for Internet protocol network devices. The Advanced Applications Services Group includes outsourced technical application services and application installation and training services to outside customers, as well as customers of the Company’s Packet-based Technologies Group.

Packet-based Technologies Group

      The Packet-based Technologies Group develops softswitch, software and hardware-based converged packet solutions that use next-generation protocols such as VoIP, as well other advanced protocols for specialized applications such as a Global System for Mobile Communication (“GSM”) backhaul and voice/data over satellite transmissions. The Packet-based Technologies Group focuses on the VoIP, GSM and pre-paid sectors of the communications industry. The Packet-based Technologies Group’s solutions enable service providers to deploy highly efficient converged communication networks which are more cost-effective to operate and which enhance revenues by supporting innovative, higher margin services. The Packet-based Technologies Group differentiates its solutions portfolio from those of the Company’s competitors by providing complete, end-to-end bundled solutions that range from the central core to the edge of the network, as well as offering applications that result in revenue generating end solutions.

      In the first quarter of 2003, the Company acquired substantially all of the operating assets of Clarent Corporation, a pioneer in packet-based technology. The acquisition included Clarent Corporation’s softswitch and NetPerformer product lines. Today, the Clarent^® product line supports a variety of diverse business applications from enterprise managed services and retail calling cards to wholesale Internet protocol (“IP”) telephony, IP network clearing services, international long distance and residential dial tone services, as well as network optimization solutions for industry segments such as satellite operators. In August 2004, the Company began working with WSECI, Inc., formerly known as Jacksonville Technology Associates, Inc. (“WSECI”), to resell WSECI’s open and next-generation based pre-paid and post-paid I-Master^® solution. This solution is scalable to Tier 1 and Tier 2 carriers and is compatible with other equipment provider’s technologies, including the Company’s technologies, and as such, presents a larger market opportunity for the Company. In March 2005, the Company acquired substantially all the operating assets of WSECI.

      In 2005, the Company’s primary base of customers of the Packet-based Technologies Group consisted of emerging international service providers and domestic rural carriers, as well as a base of large, international Tier I communications carriers and Internet service providers (“ISPs”). In an effort by the Company to sell to larger customers and to close larger individual carrier sales, the Company has been bundling its products into packaged solutions, a strategy that the Company hopes will result in larger initial sales and greater long-term opportunities. The Company is leveraging its worldwide installed base of customers towards sales of the Company’s newest Edge Access solutions. In addition, the Company is focusing on building a more efficient network of larger distributors that include original equipment manufacturer (“OEM”) partners that will enable the Company to leverage these partners to better scale the growth of the business.

      For the year ended December 31, 2005, revenue from the Packet-based Technologies Group was $23.7 million, or 72%, of the Company’s consolidated revenue. Summarized financial information for the Company’s Packet-based Technologies Group is set forth in Note 15 to the Company’s consolidated financial statements for the year ended December 31, 2005, which statements are contained elsewhere in this Annual Report.

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The Market for the Packet-based Technologies Group

      In today’s competitive telecommunications marketplace, service providers are increasingly challenged to lower operating costs while enhancing service capabilities. Burdened by the high costs of continuing to build, manage and maintain separate voice and data networks, service providers have begun to combine voice and data services onto converged IP-based network infrastructures that leverage the low cost delivery of IP networks while delivering the high reliability and voice quality standards of the circuit-switched, public switched telephone network (“PSTN”). At the same time, these new infrastructures are enabling service providers to launch new, innovative services that help them differentiate themselves and enhance their revenue potential. These new applications are driving widespread adoption of converged packet-based technology among large, Tier 1 service providers in developed markets like North America and Europe, as well as in emerging carriers in Asia-Pacific and elsewhere around the developing world.

      Meanwhile, deregulation and privatization of the global telecommunications industry continues to drive demand for converged packet-based technology for small, emerging, international service providers who are not encumbered by massive, legacy time division multiplexing networks. More flexible and more agile than larger carriers, these emerging service providers are opening up large, previously untapped markets like Africa, the Middle East, and India, driving much of the worldwide VoIP spending as they launch traditional voice services through a variety of wholesale and retail business models.

      As the global business environment becomes increasingly competitive, enterprises and government entities of all shapes and sizes are driven by a common desire to lower operational costs, improve productivity, increase customer retention and speed time to market. Many enterprises depend on their technology infrastructures to help them achieve these business goals. To that end, enterprises are migrating their legacy voice and data systems into single, converged networks that enable more efficient use of resources and easier integration of distributed, disparate resources, including applications, equipment and people. As adoption of enterprise VoIP technology continues, so does demand for new IP-centric tools that enable businesses to manage and enhance the performance, utilization and efficiency of their evolving communication infrastructures.

      The market for the Packet-based Technologies Group consists of three primary segments, the VoIP, GSM and pre-paid segments. The VoIP segment is being driven by deregulation and service providers’ desire to lower operating costs. The market for wireless GSM technology is still the largest market for handsets, especially in foreign and developing countries. Verso’s NetPerformer GSM technology lowers the cost for operators by increasing the service provider’s bandwidth and ultimately increasing its efficiency. The pre-paid segment is ideal for emerging markets where credit is not readily available to consumers. Prepaid solutions include applications such as traditional telephony, prepaid wireless, and prepaid DSL.

Packet-based Technologies Group: Products and Solutions

Clarent^® Edge Access Softswitch Solution

      The Company’s Clarent^® Edge Access Softswitch Solution enables traditional and alternative communications service providers to deliver residential and advanced enterprise managed services over the “last mile” of any IP communications network, opening the door to new business and revenue opportunities. The solution supports IP connectivity via H.323, media gateway control protocol, and session initiation protocol (“SIP”) for interoperability with a wide range of access gateways as well as customer premise gateways (“CPGs”) and IP handsets. Additionally, the Company’s products support VoIP over newer access technologies such as broadband cable, xDSL and wireless local loop. Components of this solution include:

•  Clarent Class 5 Call Manager;

•  Clarent Class 4 Call Manager;

•  Clarent Command Center;

•  Clarent Element Management System;

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•  Clarent BHG Media Gateways;

•  Clarent Border Agent;

•  Clarent CPG; and

•  Clarent Connect.

      In 2005, the Company introduced Clarent Class 5 Call Manager versions 3.3 and 3.4, which further expanded the Company’s opportunity at the network edge by providing key features such as hotline, limiting simultaneous calls, private networking configurations, distinctive music on hold, do not disturb, anonymous call rejection, simultaneous ring, video edge device support, SIP and GR303 access gateways, topology hiding, local number portability, E911, lawful intercept and a radius interface to authentication, authorization and accounting servers such as I-Master, These newly-introduced features expanded the Company’s opportunity to create new revenue enhancing opportunities for its customers as well as allowed them to comply with the emerging VoIP regulatory requirements. These features are further discussed in the section of this Annual Report titled “Business-research and Development.” In 2005, the Company deployed softswitch in several emerging markets, including Slovenia, Africa, and India, where its technology was deployed in Andhra Pradesh in one of the largest broadband VoIP deployments in the world.

Clarent^® PSTN Access Softswitch Solution

      The Company’s Clarent^® PSTN Access Softswitch Solution seamlessly facilitates the migration to VoIP, allowing carriers to preserve and leverage existing telecom investments to realize lower operating costs and lower overall total cost of ownership. A significantly more cost-effective and scalable alternative to traditional tandem circuit switches, this Unix-based, software-centric, modular tandem trunking solution enables wholesale transport and termination of voice traffic over global IP networks. Components of this solution include:

•  Clarent Class 4 Call Manager;

•  Clarent Command Center;

•  Clarent Element Management System;

•  Clarent SS7 Signaling;

•  Clarent BHG Media Gateways; and

•  Clarent Connect.

      In 2005, the Company introduced Clarent Class 4 Call Manager version 2.1, which further expanded the Company’s opportunity in this market by providing key features such as local number portability, E911, private networking configurations, a radius interface to authentication, authorization and accounting servers such as I-Master and M2UA SS7 tunneling over IP.

NetPerformer^® Integrated Access VoIP Routers

      The Company’s NetPerformer^® line of integrated access routers enables multi-site enterprises to lower communications costs, alleviate bandwidth constraints, reduce network complexity and extend telecom services to remote locations with poor or non-existent telecom infrastructures. This versatile line of products enables information technology managers to integrate mission critical networks and applications across their enterprise, regardless of where they are in the VoIP migration process. In addition, NetPerformer enables enterprises to dramatically reduce telecom costs by eliminating monthly fees associated with tie lines that link remote offices to corporate headquarters and eliminate the toll charges on inter-office long distance calls.

      In 2004, the Company announced support for Global System for Mobile Communication (“GSM”) A.bis/A.ter, an industry protocol for wireless transmission. This additional functionality coupled with the existing support for the GSM A and E interfaces allows the NetPerformer to be integrated into the key

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portions of GSM networks. The NetPerformer offers GSM operators a cost effective solution for reducing the bandwidth required by their GSM network thus lowering the carrier’s operating expenses.

      In 2005, the Company released its GSM A.bis/A.ter bandwidth optimization solution for the NetPerformer Multi-Service Convergence Platform. This solution provides GSM network operators with a new way to reduce their operating costs by providing bandwidth optimization for their entire GSM backhaul network, including the data portion. The NetPerformer platform offers multiple connectivity options, including IP, easily integrating with any existing network infrastructure. NetPerformer’s GSM A.bis/A.ter option converts Time Division Multiplex (“TDM”) voice and data traffic channels to a more efficient packet-based format, which results in better bandwidth utilization without any GSM transcoding that would impact the voice quality. While optimizing the bandwidth required for GSM A.bis/A.ter up to 2:1 or greater, the NetPerformer also provides a convergence path for GSM 3G using a common network infrastructure. This reduces the cost of the introduction of both technologies and reduces the recurring costs of the facilities serving sites that are migrating to 3G.

I-Master Applications Platform

      The Company’s I-Master^® Application Solution enables service providers and carriers to launch multiple voice and next-generation revenue generating services while maintaining the revenue assurance associated with a pre-paid model. This solution also enables a significant level of personalization to the end user. Personal preferences are stored and used to enhance the end user’s experience which increases customer retention for the service provider. This pre-paid solution platform is based on open standards, meaning that it can integrate with the Company’s Clarent Softswitch products and also with many other next-generation equipment provider’s technologies, including the technologies of Cisco Systems, Inc., Veraz Networks, Inc., Gallery IP Telephony, Inc., Sonus Networks, Inc., Siemens AG, and Telica (now owned by Lucent Technologies).

      In addition to being compatible with the technologies of other equipment providers, I-Master is scalable to Tier 1 and Tier 2 carriers, and as such, presents a larger market opportunity for the Company. In combination with direct marketing campaigns, the Company plans to exploit multi-vendor interoperability by marketing this product in opportunities led by other vendors providing the customer with a complete vertical solution to increase the Company’s market penetration. The solution also offers real-time authentication for revenue enhancing voice and data services, including:

•  calling;

•  additional real-time authentication for Internet and virtual private network access via Asymmetric Digital Subscriber Line (“ADSL”) and dial-up; and

•  pre-paid broadband access.

TeleMate^® Voice Network Intelligence Software

      The Company’s TeleMate^® voice network intelligence software enables centralized management, control and cost allocation of enterprise voice network resources. TeleMate captures and consolidates data from any enterprise private branch exchange (“PBX”), IP — PBX, or telephony switching device and delivers intelligence reports that help managers improve resource allocation, identify usage trends, prevent fraud and meet regulatory reporting requirements.

NetSpective^® Internet Content Filtering Solution

      NetSpective^® enables enterprises to monitor, filter and/or report on usage of critical IP network resources. With a comprehensive set of feature functionality that tracks Internet activity and detects usage of a variety of web-based applications, including peer-to-peer, instant messaging, online chat and streaming media, NetSpective helps enterprises, governments, schools and libraries maintain control of critical network resources and facilitate compliance with filtering and communications tracking regulations.

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      In the third quarter of 2004, the Company launched its NetAuditor product for reporting and analysis of the Company’s NetSpective product in addition to analysis of log files from Cisco Systems, Inc.’s PIX firewalls, Check Point Software Technologies Ltd.’s Firewall NG, Novell, Inc.’s Boarder Manager, Symantec Corp.’s Enterprise Firewall, Juniper Networks, Inc.’s NetScreen, and Microsoft Corp.’s ISA Proxy.

      In the third quarter of 2005, the Company launched its NetSpective C — Class and M — Class products. These NEBS-3/ETSI compatible products enable carriers to screen out web traffic such as Skype^tm, instant messaging and other peer-to-peer applications that consume substantial bandwidth on carrier networks. The C — Class product is directed at wireline carriers and the M — Class product is intended for wireless providers.

Advanced Applications Services Group

      The Company’s Advanced Applications Services Group consists of the Company’s technical applications support group which provides outsourced technical application services and application installation and training services to outside customers and customers of the Company’s Packet-based Technologies Group.

      The Company’s Advanced Applications Services Group delivers full-service, custom technical support to customers that want to ensure satisfaction with each end-user technology interaction, and supports all of the Company’s product lines, allowing the Company to better leverage resources while ensuring the highest level of customer support. The Company’s Advanced Applications Services Group delivers 24 x 7 help desk support, Tier I, II and III product support, in-sourcing, on-site deployment services, hardware and software training, and project management resources in support of over 10,000 end-users and more than 2,500 internet hot spots around the world.

Customers

      In 2005, the Company’s primary base of customers in the Packet-based Technologies Group included incumbent carriers outside the United States (Tier 1) and emerging or rural domestic and international alternative carriers (Tiers 2 and 3) in the United States and abroad, particularly those service providers seeking to roll out telecommunications networks based on converged packet-based technology.

      During 2005, the Packet-based Technologies Group found demand for its softswitch solutions from incumbent carriers and competitive carriers in high-growth international markets such as Europe, Asia, India, Africa and the Middle East.

      In addition, the Company continued expanding its largely indirect domestic and international distribution channel during 2005. Demand for NetPerformer’s integrated voice and data access over satellite capability, especially with the introduction of GSM capability, strengthened the Company’s relationship with a major satellite integrator in Europe, the Middle East and Africa and drove new sales to a leading global satellite provider.

      The Company’s TeleMate voice network intelligence software and NetSpective Internet content filtering solution is used by several thousand large to mid-size enterprises as well as government agencies to manage communication costs and network efficiency, to manage network policy, and to protect their networks.

      The Company’s Advanced Applications Services Group provides services to over 10,000 end-users. The Company’s largest client of these services is InterContinental Hotels Group PLC, which has been a customer of the Company since 1992.

      During the year ended December 31, 2005, the Company had no customers which accounted for greater than 10% of its total revenue. During the year ended December 31, 2004, InterContinental Hotels Group PLC, a customer of the Company’s Advanced Application Services Group, accounted for 17% of the Company’s total revenue and Telepassport (Hellas) S.A., a customer of the Company’s Packet-based Technologies Group, accounted for 14% of the Company’s total revenue.

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Sales and Marketing

      The Company’s sales and marketing organization is responsible for building brand awareness, identifying key markets, and developing innovative products and services to meet the evolving demands of the marketplace. Another objective of the marketing effort is to stimulate the demand for services through a broad range of marketing communications and public relations activities. Primary communication vehicles include advertising, tradeshows, direct response programs, event sponsorship and websites.

      The Company seeks to achieve broader market penetration of its solutions in primarily three ways: expanding international distribution; pursuing new markets and customers, including ISPs, IP telephony service providers and pre-paid service bureaus; and selling new, next-generation communication solutions to its current base of customers.

      In the Packet-based Technologies Group, sales are accomplished primarily through an indirect channel, and to a lesser degree, a direct sales force. The are approximately 30 sales and sales support personnel located throughout the United States, Canada, the United Kingdom, India, France, Italy, China, Singapore, and the United Arab Emirates. The sales force is primarily responsible for cultivating strong relationships with systems integrators and distributors throughout the world and supporting them in the sales process. The Company has approximately 50 active value-added resellers and intends to increase that number. The Company has also developed a steering committee for its indirect channel partners in an effort to gain better awareness of its brand.

      In 2005, the Company began focusing its distribution strategy on selecting key distributors who have a strong presence in the specific product markets corresponding to the respective products of the Company. The Company’s goal in 2006 is to build on its indirect distribution channel which includes developing and securing OEM partnerships and developing key distribution relationships centered on specific products and select geographic regions.

Competition

      The Company believes that one of its competitive strengths is its ability to offer an end-to-end solution that leverages synergy across its product lines. Through both internal development efforts and strategic acquisitions, the Company continues to add intellectual property and innovative, patented technologies that deliver greater value to its worldwide base of customers.

Packet-based Technologies Group

      The market for application-based telephony services is intensely competitive, subject to rapid technological change and significantly affected by new product introductions and market entrants. In the market for the Company’s gateway solutions, the Company’s primary sources of competition include Class 4 and Class 5 solution providers, vendors of networking and telecommunications equipment, and telephony applications companies that bundle their offering with third-party equipment. Some competitors, especially networking and telecommunications equipment vendors, such as Lucent Technologies Inc., Cisco Systems, Inc., Huwaei Technologies and Nortel Networks Ltd., have significantly greater financial resources and broader customer relationships than does the Company. Other public companies, such as Tekelec and VocalTec Communications Ltd., are focusing on market opportunities similar to market opportunities on which the Company focuses, as are a number of smaller, private companies, including Nuera Communications, Inc., Voiceware Systems Corporation and iSoftel Ltd.

      The Company’s I-Master pre-paid and post-paid product line competes with Pactolus Communications Software Corporation, NACT Telecommunications, Inc., MIND CTI Ltd., and Portal Software, Inc.

      The Company’s NetPerformer product lines compete with the products of communications solutions providers such as Cisco Systems, Inc., Motorola, Inc., Vanguard Systems, Inc. and Memotec Inc., as well as telecommunications equipment manufacturers such as Avaya, Inc., Nortel Networks, Inc., Ericsson and Toshiba Corporation.

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      The Company’s TeleMate Voice Network Intelligence Software product competes with a number of products from companies such as MTS IntegraTRAK, MicroTel International, Inc., ISI Telemanagement Solutions, Inc., and Veramark Technologies, Inc.

      The Company’s NetSpective products compete with filtering products from providers such as WebTrends Corporation, 8e6 Technologies, SurfControl PLC, St. Bernard Software, Inc., and Websense, Inc.

Advanced Application Services Group

      The Company’s Advanced Applications Services Group competes with companies that provide integrated, multi-channel customer contact centers, including APAC Customer Services, Inc., ClientLogic Corporation, Convergys Corporation, and SITEL Corporation, as well as competing with in-house solutions.

Intellectual Property Rights

      The Company regards its copyrights, trade secrets and other intellectual property as critical to its success. Unauthorized use of the Company’s intellectual property by third parties may damage its brand and its reputation. The Company relies on trademark and copyright law, trade secret protection, and confidentiality, license and other agreements with its employees, customers, partners and others to protect its intellectual property rights. Despite precautions, it may be possible for third parties to obtain and use the Company’s intellectual property without the Company’s authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries are still evolving. The laws of some foreign countries do not protect intellectual property to the same extent as do the laws of the United States.

      The Company cannot be certain that its services and the finished products that it delivers do not or will not infringe valid patents, copyrights, trademarks or other intellectual property rights held by third parties. The Company may be subject to legal proceedings and claims from time to time relating to the Company’s intellectual property other than in the ordinary course of business. Successful infringement claims against the Company may result in substantial monetary liability or may materially disrupt the conduct of the Company’s business.

      On September 18, 2001, U.S. Patent No. 6,292,801 was issued to Telemate.Net, which the Company acquired in November 2001 by means of a merger. The patent covers technology developed by Telemate.Net for tracking PBX, VoIP and IP traffic from a variety of network sources and correlating communications activity with a database of user accounts. The patented techniques are employed in several of Telemate.Net’s products, including Telemate.Net’s call accounting and NetSpective Internet access management solutions. This technology allows users to combine statistics from diverse networks sources to create cohesive network information and reporting. This unique technology for aggregating and correlating network data from different vendors and device types has application to the VoIP softswitch, Operation Support System (“OSS”) and billing markets. The patented processes allow the Company’s OSS software to gather billing, reporting and maintenance from a variety of data sources and vendors’ products, in addition to its own.

      On February 12, 2003, pursuant to the Company’s acquisition of substantially all of the operating assets of Clarent Corporation on such date, the Company acquired the following U.S. Patents: Dynamic Forward Error Correction Algorithm for Internet Telephone, No. 6,167,060, issued on December 26, 2000; System and Method for Real-Time Data and Voice Transmission over an Internet Network, No. 6,477,164, issued on November 5, 2002; Internet Telephone System with Dynamically Varying Codec, No. 6,356,545, issued on March 12, 2002; and System and Method for Roaming Billing, No. 6,453,030, issued on September 17, 2002. In addition, Patent No. 6,982,985 was issued on January 3, 2006 for Interaction of VoIP Calls and Cellular Networks. This patent was based on an application filed by Clarent Corporation and obtained by the Company in connection with the acquisition of substantially all of the operating assets of Clarent Corporation.

      The Company also has several patent applications pending relating to its VoIP products and other product lines.

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Research and Development

      The Company believes that one of its competitive strengths is the synergy across its product lines, which enables the Company to accelerate the development of new technologies, the delivery of new products and expansion into new markets. Through both internal development efforts and strategic acquisitions, the Company continues to add intellectual property and innovative, patented technologies that deliver greater value to its worldwide base of customers. The Company’s research and development expenses totaled $6.8 million for the year ended December 31, 2005.

      In the Packet-based Technologies Group, the research and development initiatives centered around introducing softswitch features targeted towards increasing its customer’s revenue creation opportunities as well as regulatory compliance.

      In 2004, the Company introduced key enhancements to the Clarent Class 5 Call Manager based on market trends and key customer requirements. The newly-introduced features expanded the Company’s opportunity to lower data communications costs and create new revenue enhancing opportunities for its customers. In addition to the enhancements to the Clarent Class 5 Call Manager, the Company introduced two new products and established key partnerships to provide further value to customers. These enhancements included further standards-based compliance by adding support for SIP based endpoints with top revenue generating CLASS features. This enhancement augments the Clarent Class 5 Call Manager’s support of MGCP and H.323 VoIP protocols. Enhanced features such as pre-paid for VoIP subscribers, Integrated Voice Mail, and 3-way Conference Calling gives service providers further revenue generating opportunities while enhanced high availability improves quality of service within the service providers VoIP network.

      The Company also introduced the Subscriber Portal product which allows consumers to control their own phone account behavior from a web-based browser as well as view account and phone usage information. The introduction of this product allows service providers to offer enhanced services not currently available with PSTN phone service and reduces operational costs by putting more control into the consumers’ hands. In addition to the Company’s Subscriber Portal, the Company also introduced the Border Agent product. The Border Agent provides network address translation traversal for SIP and MGCP endpoints. This is a critical component for broadband service providers enabling them to offer residential VoIP services without enduring the expense of a traditional session border controller.

      In 2005, the Company introduced key enhancements to the Clarent Class 5 Call Manager based on market trends and key customer requirements. The newly-introduced features expanded the Company’s opportunity at the network edge with features such as hotline, distinctive music on hold, limiting simultaneous calls from groups of edge devices, do not disturb, anonymous call rejection, simultaneous ring, video edge device support, SIP and GR303 access gateways integration, topology hiding, a radius interface to authentication, authorization and accounting servers such as I-Master, private networking configurations as well as producing features needed by its customer base for regulatory compliance such as local number portability, E911, and lawful intercept.

      In 2004, the Company also introduced key enhancements to its Class 4 Call Manager, providing tandem network capabilities within the core of the service provider’s network, including international and national long distance. The key feature enhancements included integration with a service provider’s existing Intelligent Network (“IN”) infrastructure through support of the Transactional Capabilities Application Port (“TCAP”) protocol. This enables service providers to leverage their existing investment in IN services while reducing the cost associated with training existing personnel on new service platforms. In addition to IN support, a number of operational efficiency enhancements were made allowing service providers to better manage and troubleshoot problems within their VoIP network.

      In 2004, the Company introduced Clarent Class 4 Call Manager version 2.0, which further expanded the Company’s opportunity in this market by providing key features such as compatibility with the legacy PSTN Advance Intelligent Network, the BHG2500 universal gateway which quadrupled the media gateway port density as well as added Signaling System 7 (“SS7”) signaling and media server capabilities in the same chassis, and ANSI SS7 for US deployments.

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      In 2005, the Company also introduced key enhancements to its Class 4 Call Manager providing regulatory compliance features such as local number portability and E911 as well as features to support private networking configurations, a radius interface to authentication, authorization and accounting servers such as I-Master and M2UA SS7 tunneling over IP.

      These key enhancements to the Clarent Distributed Softswitch, comprised of the Clarent Class 5 Call Manager and Clarent Class 4 Call Manager, enable service providers to increase top line consumer revenues through enhanced service offerings while simultaneously increasing bottom line profitability by reducing operational expenses within the service provider network.

      In 2004, the Company announced support for GSM A.bis/ A.ter for the NetPerformer solution. This allows the NetPerformer to offer GSM operators a cost effective solution for reducing the bandwidth required by their GSM network.

      In 2005, the Company integrated the I-Master Application to the Class 4 and Class 5 Softswitch and added multiple rating features to the I-Master solution.

Employees

      As of December 31, 2005, the Company had 211 domestic employees (156 of whom are located at the Company’s headquarters in Atlanta, Georgia, including 114 in the Advanced Applications Services Group), 40 of whom are located at the Company’s Clarent operations in Littleton, Colorado and the balance of whom are located throughout the United States. As of December 31, 2005, the Company had 74 international employees, 45 of whom are located at the Company’s NetPerformer operations in Montreal, Canada and 29 of whom conduct the Company’s sales efforts throughout the rest of the world.

Background

      The Company was incorporated in Minnesota on March 20, 1984. Until 2001, the Company historically operated a value-added reseller (“VAR”) business and an associated network performance management consulting and integration practice. The Company also operated a Hospitality Services Group (“HSG”), which provided technology solutions to lodging, restaurant, and energy management customers. Over the years, the Company has moved away from these lines of business and now focuses on providing the products and services offered by its Packet-based Technologies Group and its Advanced Application Services Group. During the last six years, the Company’s business developed as described below.

      Early in 2000, the Company’s Board of Directors (the “Board”) decided to explore the sale of all or a portion of the Company’s HSG, which consisted of the Company’s lodging business, its restaurant solutions business and its energy management business. Subsequently, the operations of HSG were classified as discontinued operations, and each of the operating units of HSG was sold between late 2000 and early 2001. The sale of these operating units included all of the operations of (i) Sulcus Hospitality Technologies Corp., which the Company acquired in 1999; and (ii) Encore Systems, Inc., Global Systems and Support, Inc. and Five Star Systems, Inc. (collectively, the “Encore Group”), which the Company acquired in 1998, except for the Company’s customer response center services.

      In September 2000, the Company acquired Cereus Technology Partners, Inc. (“Cereus”) in a merger transaction. Cereus provided end-to-end e-business and business-to-business technology solutions, including e-business strategy, network consulting and hosting and application integration. In connection with the acquisition of Cereus, the Company changed its name to “Verso Technologies, Inc.”

      In November 2000, the Company acquired MessageClick, Inc. (“MessageClick”) in a merger transaction. The acquisition of MessageClick provided the Company with a propriety unified communications application delivered as an application service provider. In the second quarter of 2001, the Company decided to discontinue offering its MessageClick application and to refocus the development of the MessageClick application to be offered as a licensed software product. The Company has since focused its overall strategy on pursuing the market for next-generation communications and, therefore, the development of the MessageClick application as a licensed product is currently dormant.

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      In July 2001, the Company acquired all of the outstanding capital stock of NACT Telecommunications, Inc., now known as Provo Pre-paid (Delaware) Corp. (“NACT”). The Company’s acquisition of NACT in July 2001 was the Company’s first significant investment in proprietary communications products. The acquisition of NACT and its portfolio of products and services allowed the Company to begin to offer proprietary, integrated, switching solutions for communications service providers seeking turn-key, pre-paid telecommunications solutions. The acquisition of NACT was funded by a $15 million investment by Telemate.Net, as contemplated by the Company’s merger agreement with Telemate.Net. On January 21, 2005, the Company sold substantially all of the operating assets of its NACT business. In connection with the sale, “NACT Telecommunications, Inc.” changed its name to “Provo Pre-paid (Delaware) Corp.”

      On November 16, 2001, the Company acquired Telemate.Net by means of a merger, pursuant to which Telemate.Net became a wholly-owned subsidiary of the Company. Telemate.Net develops proprietary Internet access, voice and IP network usage management, and intelligence applications that enable businesses to monitor, analyze, and manage the use of their internal network resources. As a result of the acquisition of Telemate.Net, the Company added next-generation applications and application development competencies to the Company’s solutions portfolio.

      During the quarter ended December 31, 2001, and in keeping with the Company’s focus on providing next-generation communications solutions, the Company determined that its VAR business and associated network performance management consulting and integration practice were not strategic to the Company’s ongoing objectives and, therefore, decided to discontinue capital and human resource investment in these businesses. Accordingly, the Company elected to report its VAR and associated consulting and integration operations as discontinued operations by early adoption of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), which is intended to allow a company to more clearly communicate a change in its business that results from a decision to dispose of non-strategic operations.

      On October 1, 2002, the Company purchased a 51% interest in Shanghai BeTrue Infotech Co., Ltd. (“BeTrue”) for $100,000, with $50,000 paid at closing, $25,000 paid on December 30, 2002, and $25,000 paid on March 30, 2003. Upon closing the transaction, the Company contributed to the joint venture certain next-generation communication equipment and software valued at approximately $236,000 and $50,000, respectively. Additionally, the Company contributed to BeTrue $25,000 on December 30, 2002, and $25,000 on March 30, 2003. The remaining 49% interest in BeTrue is owned by Shanghai Tangsheng Investments & Development Co. Ltd. (“Shanghai Tangsheng”). BeTrue provides VoIP and satellite network solutions, including systems integration, project implementation, technical support, consulting and training to leading telecommunications companies in China and the Asia-Pacific region. The Company plans to leverage BeTrue’s sales channels and support infrastructure capabilities, including pre- and post- sales support. Due to shared decision-making between the Company and Shanghai Tangsheng, the results for BeTrue are recorded as an equity investment rather than consolidated in the Company’s results.

      On February 12, 2003, the Company acquired substantially all operating assets and related liabilities of Clarent Corporation. The assets purchased from Clarent Corporation include the following key products: next-generation switching and call control software; high density media gateways; multi-service access devices, signaling and announcement servers; network management systems; and high demand telephony applications based on packet-switched technology. Specifically, the Company acquired the Clarent Softswitch and NetPerformer products in connection with this acquisition.

      On September 26, 2003, the Company acquired MCK Communications, Inc., now known as Needham (Delaware) Corp. (“MCK”), by means of a merger, pursuant to which MCK became a wholly-owned subsidiary of the Company. MCK provided products that deliver distributed voice communications by enabling businesses to extend the functionality and applications of their business telephone systems from the main office to outlying offices, remote call centers, teleworkers and mobile employees over public and private networks. On January 21, 2005, the Company sold substantially all of the operating assets of its MCK business, including (i) the assets which allow legacy digital business telephone handsets to be used in a voice network using public/private IP-based, circuit-switched, frame relay or wireless technology network and

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(ii) the products that enable call recording of legacy business telephone systems in non-packet environments. In connection with the sale, “MCK Communications, Inc.” changed its name to “Needham (Delaware) Corp.”

      On March 31, 2005, the Company acquired substantially all of the operating assets of WSECI, a provider of an Internet protocol-based applications platform which enables the deployment of multiple voice and next-generation services to the carrier market.

      On October 11, 2005, the Company effected a 1-for-5 reverse stock split of the outstanding Common Stock, pursuant to which every one share of Common Stock issued and outstanding was automatically reclassified and converted into one-fifth of a share of Common Stock (the “Reverse Split”).

Item 1A. Risk Factors

The price of the Common Stock has been volatile.

      The stock market in general and the market for technology companies in particular, has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. From September 13, 2002 to January 24, 2006, the per share closing price of the Common Stock on The Nasdaq Capital Market (formerly known as The Nasdaq SmallCap Market) fluctuated from a high of $25.35 to a low of $0.85. The Company believes that the volatility of the price of the Common Stock does not solely relate to the Company’s performance and is broadly consistent with volatility experienced in the Company’s industry. Fluctuations may result from, among other reasons, responses to operating results, announcements by competitors, regulatory changes, economic changes, market valuation of technology firms and general market conditions.

      In addition, in order to respond to competitive developments, the Company may from time to time make pricing, service or marketing decisions that could harm its business. Also, the Company’s operating results in one or more future quarters may fall below the expectations of securities analysts and investors. In either case, the trading price of the Common Stock would likely decline.

      The trading price of the Common Stock could continue to be subject to wide fluctuations in response to these or other factors, many of which are beyond the Company’s control. If the market price of the Common Stock decreases, then shareholders may not be able to sell their shares of Common Stock at a profit.

The Company may be unable to fund future growth.

      The Company’s business strategy calls for growth internally as well as through acquisitions. The Company has invested substantial funds in its sales and marketing efforts in order to grow revenues. This strategy to increase sales and marketing resources as well as other strategies for growth internally which the Company may implement now or in the future will require funding for additional personnel, capital expenditures and other expenses, as well as for working capital purposes. Financing may not be available to the Company on favorable terms or at all. If adequate funds are not available on acceptable terms, then the Company may not be able to meet its business objectives for expansion. This, in turn, could harm the Company’s business, results of operations and financial condition. In addition, if the Company raises additional funds through the issuance of equity or convertible debt securities, then the percentage ownership of the Company’s shareholders will be reduced, and any new securities could have rights, preferences and privileges senior to those of the Common Stock. Furthermore, if the Company raises capital or acquires businesses by incurring indebtedness, then the Company will become subject to the risks associated with indebtedness, including interest rate fluctuations and any financial or other covenants that the Company’s lender may require. Moreover, if the Company’s strategy to invest in its sales and marketing efforts in order to grow revenues does not produce the desired result, then the Company will have incurred significant expenses for which it may or may not have obtained adequate funding to cover.

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

      The Company has a history of net losses, including net losses of $20.1 million for the 2005 fiscal year, $38.8 million for the 2004 fiscal year, $18.3 million for the 2003 fiscal year, $2.7 million for the 2002 fiscal year and $147.6 million for the 2001 fiscal year. As of December 31, 2005, the Company had an accumulated deficit of $332.0 million. Further, developing the Company’s business strategy and expanding the Company’s services will require significant additional capital and other expenditures. Accordingly, if the Company is not able to increase its revenue, then it may never generate sufficient revenues to achieve or sustain profitability.

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

      The Common Stock is currently quoted on The Nasdaq Capital Market. The Company must satisfy certain minimum listing maintenance requirements to maintain such quotation, including a series of financial tests relating to shareholders equity or net income or market value, public float, number of market makers and shareholders, market capitalization, and maintaining a minimum bid price of $1.00 per share for the Common Stock.

      On November 11, 2004, The Nasdaq Stock Market notified the Company that for the last 30 consecutive business days the bid price for the Common Stock had closed below the minimum $1.00 per share requirement for continued inclusion of the Common Stock on The Nasdaq Capital Market as required by Marketplace Rule 4310(c)(4) (the “Rule”). In accordance with Marketplace Rule 4310(c)(8)(D), the Company had 180 calendar days, or until May 10, 2005, to regain compliance with the Rule by having the bid price of the Common Stock close at $1.00 per share or more for a minimum of 10 consecutive business days at anytime before May 10, 2005. The Company did not obtain compliance with the bid price requirement of the Rule by May 10, 2005. Because the Company met all of the other Nasdaq Capital initial listing criteria set forth in Marketplace Rule 4310(c) other than the bid price requirement, the Company had an additional 180 calendar day compliance period in which to demonstrate compliance with the Rule. The Board amended the Company’s Articles of Incorporation to provide for the Reverse Split effective on October 11, 2005. Pursuant to the Reverse Split, every one share of the Common Stock issued and outstanding was automatically reclassified and converted into one-fifth of a share of Common Stock. The Reverse Split enabled the Company to maintain the minimum listing requirements to continue its quotation on The Nasdaq Capital Market without interruption. However, it is possible that the bid price of the Common Stock could again fall below $1.00 for a period of 30 consecutive business days resulting in another infraction under the Rule. If the Company is unable to satisfy the Rule or any other continued listing requirement of The Nasdaq Capital Market, then the common Stock may be subject to delisting.

      If the Common Stock is delisted from The Nasdaq Capital Market, then the Common Stock may trade on the Over-the-Counter-Bulletin Board, which is viewed by most investors as a less desirable and less liquid market place. Delisting from The Nasdaq Capital Market could make trading the Common Stock more difficult for the Company’s investors, leading to declines in share price. Delisting of the Common Stock would also make it more difficult and expensive for the Company to raise additional capital. Furthermore, delisting of the Common Stock is an event of default under the Company’s credit facility with the Company’s primary lender, the Company’s outstanding 7.5% convertible debentures and 6% senior unsecured convertible debentures and, through certain cross default provisions, the Loan and Security Agreement the Company entered into with Clarent Corporation in connection with the Company’s acquisition of substantially all of the business assets, and certain related liabilities, of Clarent Corporation on February 12, 2003.

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

      The Company believes that its success depends largely on its ability to attract and retain highly skilled and qualified technical, managerial and marketing personnel. Competition for highly skilled engineering, sales, marketing and support personnel is intense because there is a limited number of people available with the necessary technical skills and an understanding of the markets which the Company serves. Workforce reductions by the Company during recent years may adversely affect the Company’s ability to retain its

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current employees and recruit new employees. The inability to hire or retain qualified personnel could hinder the Company’s ability to implement its business strategy and harm its business.

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

      The Company’s business is subject to global economic conditions, and in particular, market conditions in the telecommunications industry. The Company’s operations could be adversely affected if capital spending from telecommunications service providers do not grow or decline. If global economic conditions worsen, or if the prolonged slowdown in the telecommunications industry continues, then the Company may experience adverse operating results.

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

      The Company’s industry is characterized by the need for continued investment in research and development. If the Company fails to invest sufficiently in research and development, then the Company’s products could become less attractive to potential customers, which could have a material adverse effect on the Company’s results of operations and financial condition. As a result of the Company’s need to maintain or increase its spending levels in this area, the Company’s operating results could be materially harmed if the Company’s 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.

The market for converged communications solutions is still in its infancy and rapidly evolving. If this market does not develop and grow as expected, then it could have a material adverse effect on the Company’s business.

      While the Company believes there is a significant growth opportunity in providing converged communications solutions to its customers, there can be no assurances that this technology will be widely accepted or that a viable market for the Company’s products will fully develop or be sustainable. If this market does not develop, or develops more slowly than expected, then the Company may not be able to sell its products in significant volume, or at all. Due to the intense competition in this market and the recent introduction of this technology, there can be no assurance that the Company will succeed in this evolving marketplace.

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

      The Company’s industry is technology intensive. As the number of competitors in the Company’s target markets increases and the functionality of the products produced by such competitors further overlaps, third parties may claim that the technology the Company develops or licenses infringes their proprietary rights. Any claims against the Company or any of its subsidiaries may affect the Company’s business, results of operations and financial conditions. Any infringement claims, even those without merit, could require the Company to pay damages or settlement amounts or could require the Company to develop non-infringing technology or enter into costly royalty or licensing agreements to avoid service implementation delays. Any litigation or potential litigation could result in product delays, increased costs or both. In addition, the cost of litigation and the resulting distraction of the Company’s management resources could have a material adverse effect on the Company’s results of operations and financial condition. If successful, a claim of product infringement could deprive the Company of the technology it needs altogether.

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

      The Company’s success depends in part upon the protection of the Company’s proprietary application software and hardware products. The Company has taken steps that it believes are adequate to establish, protect and enforce its intellectual property rights. The Company cannot assure you that these efforts will be adequate. Despite the Company’s efforts to protect the Company’s proprietary rights, unauthorized parties may attempt to copy or otherwise obtain rights to use the Company’s products or technology.

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      The Company has pending several patent applications related to its products. There can be no assurance that these patents will be issued. Even if these patents are issued, the limited legal protection afforded by patent, trademark, trade secret and copyright laws may not be sufficient to protect the Company’s proprietary rights to the intellectual property covered by these patents.

      Furthermore, the laws of many foreign countries in which the Company does business do not protect intellectual property rights to the same extent or in the same manner as do the laws of the United States. In addition, it is necessary to file for patent and trademark protection in foreign countries in order to obtain legal protection in those countries. The Company has made such international filings only on a limited basis. These efforts may not be sufficient and additional filings may be cost prohibitive. Additionally, even if the Company’s domestic and international efforts are successful, the Company’s competitors may independently develop non-infringing technologies that are substantially similar or superior to the Company’s technologies.

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

      The Company’s business strategy calls for the development of new products and product enhancements which may from time to time contain defects or result in failures that the Company did not detect or anticipate when introducing such products or enhancements to the market. In addition, the markets in which the Company’s products are used are characterized by a wide variety of standard and non-standard configurations and by errors, failures and bugs in third-party platforms that can impede proper operation of the Company’s products. Despite product testing by the Company, defects may still be discovered in some new products or enhancements after the products or enhancements are delivered to customers. The occurrence of these defects could result in product returns, adverse publicity, loss of or delays in market acceptance of the Company’s products, delays or cessation of service to the Company’s customers or legal claims by customers against the Company.

      To the extent that contractual provisions that limit the Company’s exposure to legal claims are unenforceable or such claims are not covered by insurance, a successful products liability claim could have a material adverse effect on the Company’s business, results of operations and financial condition.

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

      In the course of the Company’s business, the Company may sell certain equipment and license software to its customers, and in connection with such sale and license, may agree to indemnify these customers from claims made against them by third parties for patent infringement related to such equipment and software. If the Company is required to make any payments in respect of these indemnification obligations, then it could have a material adverse effect on its business, results of operations and financial condition.

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

      The Company focuses a large part of its sales efforts on emerging markets, including the Middle East, Africa and Latin America. These markets can be more volatile and less predictable than more developed markets. In addition, there is less of a track record for demand for communications products in these markets and both service providers and end users tend to have less capital to spend on communications products. These elements could impact the Company’s ability to meet its sales objectives.

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

      International sales represented 73% of the revenues for the Packet-based Technologies Group for the year ended December 31, 2005 and 68% of the revenues for such group for the year ended December 31, 2004. Furthermore, the Company expects 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

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

      If the relative value of the U.S. dollar in comparison to the currency of the Company’s foreign customers should increase, then the resulting effective price increase of the Company’s products to these foreign customers could result in decreased sales. In addition, to the extent that general economic downturns in particular countries or regions impact the Company’s customers, the ability of these customers to purchase the Company’s products could be adversely affected especially for some of the more significant projects. Payment cycles for international customers can be longer than those for customers in the United States. The foreign markets for the Company’s products may develop more slowly than currently anticipated. Also, the Company’s ability to expand the sale of certain of its products internationally is limited by the necessity of obtaining regulatory approval in new countries. The Company anticipates that its non-Canadian, foreign sales will generally be invoiced in U.S. dollars, and does not currently plan to engage in foreign currency hedging transactions. As the Company expands its international operations, however, it may allow payment in foreign currencies, and exposure to losses in foreign currency transactions may increase. The Company may choose to limit any currency exposure through the purchase of forward foreign exchange contracts or other hedging strategies. The Company’s future currency hedging strategies if employed may not be successful.

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

      The Company currently uses contract manufacturers to manufacture a significant portion of its NetPerformer products. The Company’s reliance on contract manufacturers involves a number of risks, including the absence of adequate capacity, the unavailability of, or interruptions in access to necessary manufacturing processes and reduced control over delivery schedules. If the Company’s manufacturers are unable or unwilling to continue manufacturing the Company’s products and components in required volumes, then the Company will have to identify one or more acceptable alternative manufacturers. Furthermore, the use of new manufacturers may cause significant interruptions in supply if the new manufacturers have difficulty manufacturing products to the Company’s specifications. Further, the introduction of new manufacturers may increase the variance in the quality of the Company’s products. In addition, the Company relies upon third-party suppliers of specialty components and intellectual property used in its products. It is possible that a component needed to complete the manufacture of the Company’s products may not be available at acceptable prices or on a timely basis, if at all. Inadequate supplies of components, or the loss of intellectual property rights, could affect the Company’s ability to deliver products to its customers. Any significant interruption in the supply of the Company’s products would result in the reduction of product sales to customers, which in turn could permanently harm the Company’s reputation in the industry.

The Company may be subject to litigation.

      The Company may be subject to claims involving how the Company conducts its business or the market for or issuance of the Common Stock or other securities. Any such claims against the Company may affect its business, results of operations and financial conditions. Such claims, including those without merit, could require the Company to pay damages or settlement amounts and would require a substantial amount of time and attention from the Company’s senior management as well as considerable legal expenses. Although the Company does not anticipate that its activities would warrant such claims, there can be no assurances that such claims will not be made.

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

      The Company uses an indirect sales model to derive a substantial portion of its revenue. Failure to generate revenue as expected from this channel could have a material adverse effect on the Company’s results of operations and financial condition.

      No channel partner or distributor is obligated to purchase additional products or services from the Company. Accordingly, present and future partners may terminate their purchasing arrangements with the Company or significantly reduce or delay their orders. Any termination, change, reduction or delay in orders could have a material adverse effect on the Company’s results of operations and financial condition. In addition, the Company currently has varying distribution, marketing and development arrangements with its partners. There is no assurance that the Company will continue to enjoy the support and cooperation that it has historically experienced from these parties or their associated distribution channels. Also, there is no certainty that these parties will continue to offer the Company’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 the Company’s products. In addition, they may change their distribution models which could negatively impact revenues of the Company. Furthermore, the Company must correctly anticipate the price, performance and functionality requirements of these partners and must successfully develop products that meet end user requirements and make these products available on a timely basis and in sufficient quantities in order to sustain and grow its business.

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

      The success of the Company depends to a significant degree upon its continued relationships with leading technology suppliers. The standards for telephony equipment and data networks are evolving, and the Company’s products may not be compatible with new technology standards that may emerge. If the Company is unable to provide its customers with interoperable solutions, then they may make purchases from vendors who provide the requisite product interoperability. This could have a material adverse effect on the Company’s results of operations and financial condition.

Item 2. Properties

      The Company is headquartered in Atlanta, Georgia, where the Company currently leases 49,000 square feet of space, 24,000 of which is used for the Company’s corporate offices, the Telemate.Net operations, and the Company’s Advanced Application Services Group. The Company is obligated to pay rent on this space of approximately $116,000 per month, plus a share of operating expenses, through January 2010. The Company has subleased 24,400 square feet of space at the Atlanta facility for $18,613 per month from January 2006 through July 2006, $33,224 per month from August 2006 through July 2007, $33,896 per month from August 2007 through July 2008, $34,568 per month from August 2008 through July 2009, and $35,260 from August 2009 though the end of the lease on January 31, 2010. Further, the Company is also obligated through January 2010 to pay rent of $30,000 per month with respect to an additional 13,000 square feet of space at the Atlanta facility, the cost of which is included in discontinued operations. The Company has subleased 13,000 square feet of this space at the Atlanta facility for $18,800 per month through November 2006 and $13,000 per month from December 2006 through January 2010.

      In connection with the Company’s disposition of its NACT business, NACT assigned to the purchaser thereof all of NACT’s interest in a lease for approximately 40,000 square feet of office space in Provo, Utah, which had been used to operate the NACT business, a component of the Company’s Packet-based Technologies Group. The purchaser has agreed to pay all amounts owed under the lease; however, NACT’s payment obligations under the lease have not been terminated and the Company’s guaranty of such obligations remains in place. The lease expires in December 2009, and the rent thereunder is $48,600 per month.

      In connection with the acquisition of substantially all of the operating assets of Clarent Corporation in February 2003, the Company assumed two leases for real property located in Quebec, Canada. Pursuant to the

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first lease, the Company leases approximately 18,000 square feet of office and laboratory space for software research and development purposes related to the Company’s operations related to the NetPerformer products. The Company is obligated to pay rent of approximately $13,600 per month through the termination of the lease in October 2006. The Company subsequently assigned the second lease to Clarent Canada Ltd., a wholly-owned subsidiary of the Company which the Company acquired pursuant to the acquisition now known as Verso Technologies Canada, Inc. (“Verso Canada”). Pursuant to the second lease, Verso Canada leases approximately 10,000 square feet of office, warehouse and storage space for commercial and manufacturing purposes also related to the Company’s operations related to the NetPerformer products. Verso Canada is obligated to pay $4,600 per month, plus a share of operating expenses, until the lease terminates in May 2007.

      Also in connection with the purchase of substantially all of the operating assets of Clarent Corporation in February 2003, the Company entered into a lease for 23,000 square feet of space in Littleton, Colorado, which space is used for office space and research and development purposes for the Company’s operations primarily related to the softswitch solution products. Pursuant to this lease, the Company was obligated to pay rent of approximately $30,900 per month, plus a share of operating expenses, through January 2006. The Company obtained a three year extension of this lease in September 2005 under which it will pay $27,135 per month plus a share of operating expenses from February 2006 through January 2009.

      The Company leases 1,623 square feet of space in Jacksonville, Florida for research and development in connection with its pre-paid and post-paid application. The monthly rent under this lease is $1,881 plus operating expenses through March 2006 and will be $1,937 plus operating expenses through March 2007.

      MCK is obligated through March 31, 2007 on a lease for 48,886 square feet of office space in Needham, Massachusetts, which served as MCK’s headquarters before it was acquired by the Company, at rent of $113,900 per month. MCK has subleased all of such space through March 31, 2007, at a rent of $78,800 per month. This lease obligation was not assigned in connection with the sale of substantially all of the operating assets of the Company’s MCK business in January 2005, and MCK remains obligated to make all payments under the lease. A $1.5 million letter of credit secures MCK’s obligations under the lease.

      The Company believes that its leased facilities are adequate to meet its current needs and that additional facilities are available to the Company to meet its expansion needs for the foreseeable future.

Item 3. Legal Proceedings

      From time to time, the Company is involved in litigation with customers, vendors, suppliers and others in the ordinary course of business, and a number of such claims may exist at any given time. All such existing proceedings are not expected to have a material adverse impact on the Company’s results of operations or financial condition. In addition, the Company or its subsidiaries are a party to the proceedings discussed below.

      In December 2001, a complaint was filed in the Southern District of New York seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of MCK’s common stock between the date of MCK’s initial public offering and December 6, 2000. The complaint named as defendants MCK and certain of its former officers and other parties as underwriters of its initial public offering (the “MCK defendants”). The plaintiffs allege, among other things, that MCK’s prospectus, contained in the Registration Statement on Form S-1 filed with the SEC, was materially false and misleading because it failed to disclose that the investment banks which underwrote MCK’s initial public offering of securities and others received undisclosed and excessive brokerage commissions, and required investors to agree to buy shares of securities after the initial public offering was completed at predetermined prices as a precondition to obtaining initial public offering allocations. The plaintiffs further allege that these actions artificially inflated the price of MCK’s common stock after the initial public offering. This case is one of many with substantially similar allegations known as the “Laddering Cases” filed before the Southern District of New York against a variety of unrelated issuers (the “Issuers”), directors and officers (the “Laddering Directors and Officers”) and underwriters (the “Underwriters”), and have been consolidated for pre-trial purposes before one judge to assist with administration. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed in July 2002. After a hearing on the motion to dismiss the Court,

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on February 19, 2003, denied dismissal of the claims against MCK as well as other Issuers. Although MCK believes that the claims asserted are meritless, MCK and other Issuers have negotiated a tentative settlement with the plaintiffs. The terms of the tentative settlement agreement provide, among other things, that (i) the insurers of the Issuers will deliver a surety undertaking in the amount of $1 billion payable to the plaintiffs to settle the actions against all Issuers and the Laddering Directors and Officers; (ii) each Issuer will assign to a litigation trust, for the benefit of the plaintiffs, any claims it may have against its Underwriters in the initial public offering for excess compensation in the form of fees or commissions paid to such Underwriters by their customers for allocation of initial public offering shares; (iii) the plaintiffs will release all claims against the Issuers and the Laddering Directors and Officers asserted or which could have been asserted in the actions arising out of the factual allegations of the amended complaints; and (iv) appropriate releases and bar orders and, if necessary, judgment reductions, will be entered to preclude the Underwriters and any non-settling defendants from recovering any amounts from the settling Issuers or the Laddering Directors and Officers by way of contribution or indemnification. Prior to the Company’s acquisition of MCK, MCK’s board of directors voted to approve the tentative settlement. On February 15, 2005, the judge presiding over the Laddering Cases granted preliminary approval of the proposed settlement, subject to some changes, which were subsequently submitted. The judge issued an order on August 31, 2005, further approving modifications to the settlement and certifying the class. Notice of the settlement has been distributed to the settlement class members. The deadline for filing objections to the settlement is March 24, 2006, and a fairness hearing has been set for April 26, 2006. No provision was recorded for this matter in the financial statements of MCK prepared prior to its acquisition by the Company because MCK believed that its portion of the proposed settlement would be paid by its insurance carrier. The Company agrees with MCK’s treatment of this matter.

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

      The Annual Meeting of Shareholders of the Company was held on December 28, 2005 in Atlanta, Georgia (the “Meeting”). At the Meeting, the shareholders of the Company voted on proposals to (i) elect a Board of eight directors to serve until the Company’s next annual meeting of shareholders and until their successors are elected and qualified; and (ii) to ratify the appointment of Grant Thornton LLP as the independent auditors of the Company for the year ending December 31, 2005. Each of the foregoing proposals was approved by the Company’s shareholders at the Meeting.

      The results of the vote on the proposal to elect directors were as follows:

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

      There were no abstentions or broker non-votes with respect to the election of any of the director nominees listed above.

      The results of the vote on the proposal to ratify the appointment of Grant Thornton LLP were as follows: 23,345,794 votes FOR, 93,068 votes AGAINST, and 45,788 votes ABSTAINED. There were no broker non-votes on the proposal to ratify the appointment of Grant Thornton LLP.

      The foregoing proposals were set forth and described in the Notice of Annual Meeting of Shareholders and Proxy Statement of the Company dated November 30, 2005.

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Item 4.5 Executive Officers of the Registrant

      Pursuant to General Instruction G (3) of Form 10-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the information regarding the Company’s executive officers required by Item 401 of Regulation S-K is hereby included in Part I of this Annual Report.

      The following table sets forth the name of each executive officer of the Company, the office held by such officer and the age, as of March 24, 2006, of such officer:

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

      Certain additional information concerning the individuals named above is set forth below:

      Montgomery L. Bannerman has served as a director and Chief Executive Officer of the Company since October 1, 2005. From August 1, 2005 to September 30, 2005, Mr. Bannerman served as President and Chief Operating Officer of the Company. From November 19, 2004 to July 31, 2005, Mr. Bannerman served as the Company’s Senior Vice President of Strategic Initiatives. From November 2003 to September 2004, Mr. Bannerman served as Vice President Strategy for Universal Access Inc., a provider of outsourced network services. From January 2000 to October 2003, Mr. Bannerman served as Senior Vice President and Chief Technology Officer of Terremark Worldwide, Inc., a network access provider of telecommunications services. Mr. Bannerman founded IXS.NET, a provider of integrated VOIP network platforms in Asia, in 1996, and DSP.NET, a commercial ISP in northern California, in 1993.

      Steven A. Odom has served as the Executive Chairman of the Board since October 1, 2005. From September 29, 2000 to September 30, 2005, Mr. Odom served as the Chief Executive Officer of the Company and as Chairman of the Board from December 2000 to September 30, 2005. From January 2000 to September 2000, Mr. Odom served as the Chairman of the Board and the Chief Executive Officer of Cereus. From 1994 until June 1998, Mr. Odom served as Chief Executive Officer of World Access, Inc., a provider of voice, data and Internet products and services around the world (“World Access”). From June 1998 until June 1999, Mr. Odom also served as Chairman of the Board of World Access. From 1990 until 1994, Mr. Odom was a private investor in several companies, including World Access and its predecessor. From 1987 until 1990, he served as President of the PCS Division of Executone Information Systems in Atlanta, Georgia, a public company that manufactured and distributed telephone systems. From 1983 until 1987, Mr. Odom was Chairman and Chief Executive Officer of Data Contract Company, Inc., a manufacturer of telephone switching equipment and intelligent pay telephones, which he founded in 1983. From 1974 until 1983, he served as the Executive Vice President of Instrument Repair Service, a private company co-founded by Mr. Odom in 1974 that repaired test instruments for local exchange carriers.

      Juliet M. Reising has served as Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Company since September 2000. She served as a director of the Company from September 29, 2000 to October 1, 2005. Ms. Reising also served as Executive Vice President, Chief Financial Officer and a director of Cereus from March 2000 to September 2000. From February 1999 to March 2000, Ms. Reising served as Chief Financial Officer of MindSpring Enterprises, Inc., an Internet service provider that merged with EarthLink, Inc. in February 2000. Ms. Reising started her career with Ernst & Young LLP in Atlanta, Georgia, where she received her certified public accountant license.

      Yves Desmet has served as Senior Vice President, Worldwide Sales of the Company since October 14, 2005. From January 2005 through October 2005, he served as the Company’s Vice President of Operations for Europe, Middle East and Africa (“EMEA”). From February 2003 through January 2005, he served as the Company’s Vice President of Sales for EMEA. From 1999 to February 2003, he served as Vice President of Original Equipment Manufacturer and Channel Sales for EMEA for Clarent Corporation, a then publicly-

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traded provider of softswitch and VoIP solutions for next-generation networks and enterprise convergent solutions.

      There are no family relationships among any of the executive officers or directors of the Company. Except as disclosed in the applicable employment agreements discussed in Item 11 of this Annual Report “Executive Compensation — Employment Agreements” and as disclosed in Item 13 of this Annual Report “Certain Relationships and Related Transactions,” no arrangement or understanding exists between any executive officer and any other person pursuant to which any executive officer was selected to serve as an executive officer. To the best of the Company’s knowledge, (i) there are no material proceedings to which any executive officer of the Company is a party, or has a material interest, adverse to the Company; and (ii) there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions that are material to the evaluation of the ability or integrity of any executive officer during the past five years. Executive officers of the Company are elected or appointed by the Board and hold office until their successors are elected and qualified, or until their death, resignation or removal, subject to the terms of applicable employment agreements.

PART II

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

      The Common Stock is currently traded on The Nasdaq Capital Market under the symbol “VRSO.” Prior to September 13, 2002, the Common Stock was traded on the Nasdaq National Market under the same symbol, and from February 17, 2000 to October 1, 2000, the Common Stock was traded on The Nasdaq National Market under the symbol “ELTX.” Prior to February 17, 2000, the Common Stock was traded on The Nasdaq Capital Market under the same symbol. The following table sets forth the quarterly high and low bid prices for the Common Stock for the periods indicated below, as reported by The Nasdaq Capital Market. The stock prices set forth below do not include adjustments for retail mark-ups, markdowns or commissions, and represent inter-dealer prices and do not necessarily represent actual transactions.

      The Board amended the Company’s Articles of Incorporation to provide for the Reverse Split effective on October 11, 2005. Pursuant to the Reverse Split, every one share of Common Stock issued and outstanding was automatically reclassified and converted into one-fifth of a share of Common Stock. This amendment also reduced the number of authorized shares of Common Stock from 300,000,000 to 60,000,000. All per share information in this document has been adjusted to reflect the Reverse Split.

		High		Low
Year ended December 31, 2005:
	First Quarter	$	3.75	$	1.60
	Second Quarter		1.95		1.10
	Third Quarter		2.55		1.25
	Fourth Quarter		1.75		1.00

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

      As of March 23, 2006, there were approximately 537 holders of record of the Common Stock.

      The Company has never declared or paid cash dividends on the Common Stock. The Company currently intends to retain any earnings for use in its operations and does not anticipate paying cash dividends on the

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Common Stock in the foreseeable future. In addition, the Company’s credit facility with Silicon Valley Bank, the Company’s primary lender, and the terms of the Company’s outstanding 6% senior unsecured convertible debentures prohibit the payment of cash dividends on the Common Stock.

      On December 14, 2005, the Company became obligated to issue to an affiliate of a provider of investment banking services (the “Provider”) 40,000 shares of Common Stock in consideration of ongoing business advisory services rendered by the Provider to the Company pursuant to an investment banking agreement between the Company and the Provider. The shares were issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. The Company based such reliance upon factual representations made to the Company by the recipient of the shares regarding the recipient’s investment intent and sophistication, among other things. The Company previously disclosed its obligation to issue such shares in that certain Current Report on Form 8-K filed by the Company on September 21, 2005.

      On March 23, 2006, the Company issued to the former shareholders of WSECI an aggregate of 43,294 shares of Common Stock constituting contingent consideration which WSECI become entitled to receive pursuant to the Asset Purchase Agreement dated as of February 23, 2005 by and among the Company, WSECI and all of the shareholders of WSECI. The shares were issued without registration under the Securities Act, in reliance upon the exemption from registration set forth in Section 4(2). The Company based such reliance upon factual representations made to the Company by the recipients of the shares regarding such recipients’ investment intent and sophistication, among other things.

      On March 22, 2006, the Company issued to an individual 25,000 shares of Common Stock in consideration of investor relations services rendered by the individual to the Company. The shares were issued without registration under the Securities Act, in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D promulgated thereunder (“Regulation D”). The Company based such reliance upon factual representations made to the Company by the individual regarding the individual’s investment intent, sophistication, and status as an “accredited investor” (as defined in Regulation D), among other things.

      On March 22, 2006, the Company issued to a service provider 50,000 shares of Common Stock in consideration of the financial advisory services rendered by the service provider to the Company. The shares were issued without registration under the Securities Act, in reliance upon the exemption from registration set forth in Section 4(2). The Company based such reliance upon factual representations made to the Company by the service provider regarding the service provider’s investment intent and sophistication, among other things.

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Item 6. Selected Financial Data

      The following selected financial data should be read in conjunction with the Company’s financial statements and related notes thereto, set forth in Item 15 hereof, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in Item 7 hereof. The statement of operations data and the balance sheet data have been derived from the audited consolidated financial statements of the Company. The historical results are not necessarily indicative of future results. All amounts in thousands except per share data.

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

(1)	Includes the continuing operations of Telemate.Net (since its acquisition on November 16, 2001), the continuing operations of assets acquired by the Company from Clarent Corporation since its acquisition on February 12, 2003, and the continuing operations of substantially all the operating assets of WSECI beginning October 1, 2004.
(2)	The fiscal year 2005 loss from continuing operations includes $809,000 of intangibles amortization, $7,000 in amortization of deferred compensation, $2.9 million in non-cash interest related to the amortization of the discount on notes payable and convertible subordinated debentures and loan fees and $2.6 million of reorganization costs — loss on sublease.
(3)	The fiscal year 2004 loss from continuing operations includes $514,000 of intangibles amortization, $435,000 in amortization of deferred compensation and $517,000 in non-cash interest related to the amortization of the discount on notes payable and convertible subordinated debentures and loan fees.
(4)	The fiscal year 2003 loss from continuing operations includes $407,000 of intangibles amortization, $780,000 in amortization of deferred compensation and $561,000 in non-cash interest related to the amortization of the discount on notes payable and convertible subordinated debentures and loan fees.
(5)	The fiscal year 2002 loss from continuing operations includes $1.2 million in amortization of deferred compensation and $601,000 in non-cash interest expense related to the amortization of the discount on convertible subordinated debentures and loan fees.
(6)	The fiscal year 2001 loss from continuing operations includes $1.3 million of intangibles amortization, $1.8 million in amortization of deferred compensation and $606,000 in non-cash interest expense related to the amortization of the discount on convertible subordinated debentures and loan fees, and a $1,640,000 loss on debt conversion.
(7)	Includes $3.4 million of notes receivable as of December 31, 2005 related to the sale of assets of discontinued operations. Includes $9.0 million, $33.4 million, $27.4 million and $26.1 million of assets of discontinued operations, as of December 31, 2004, 2003, 2002 and 2001, respectively. The assets of discontinued operations as of December 31, 2004 were reduced by the loss on disposal of discontinued operations totaling $14.8 million.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

      The Company is a communications technology and solutions provider for communications service providers and enterprises seeking to implement application-based telephony services, Internet usage management tools and outsourced customer support services. The Company’s continuing operations include two separate business segments: (i) the Packet-based Technologies Group, which includes the Company’s softswitch division, the Company’s I-Master division, the Company’s NetPerformer division, and the Company’s subsidiary Telemate.Net; and (ii) the Advanced Applications Services Group, which includes the Company’s technical applications support group. The Packet-based Technologies Group includes domestic and international sales of hardware and software, integration, applications and technical training and support. The Packet-based Technologies Group offers hardware and software for companies seeking to build private, packet-based voice and data networks. Additionally, the Packet-based Technologies Group offers software-based solutions for Internet access and usage management that include call accounting and usage reporting for Internet protocol network devices. The Advanced Applications Services Group includes outsourced technical application services and application installation and training services to outside customers, as well as customers of the Company’s Packet-based Technologies Group.

      Since 2001, the Company has been selling products to the carrier market and focusing its strategic direction on developing and marketing next-generation communications products. The Company’s current business was built on acquisitions made by the Company by leveraging the economic downturn in the telecommunications area. In the first quarter of 2003, the Company acquired substantially all of the operating assets of Clarent Corporation, which provided the Company with VoIP technologies primarily serving international markets and significantly increased the Company’s market share in the worldwide softswitch market.

      The Company’s strategy through 2003 was to add next-generation communications products to its suite of products through strategic acquisitions and to leverage these operations through cost reductions to enhance cash flow. With the acquisition of substantially all of the operating assets of Clarent Corporation, the Company moved its growth strategy toward international markets. International revenue increased from 0% of the Company’s consolidated revenues in 2002 to 53% of the Company’s consolidated revenues for 2005. As the acquisition of substantially all of the operating assets of Clarent Corporation was funded primarily by short-term seller financing, generating cash flow from operations during 2003 was required to meet the debt repayment obligations. As such, the Company leveraged its combined operations, reducing sales, general and administrative costs (as compared to costs prior to the acquisition), while preserving the research and development expenditures which are vital to the Company’s long-term growth and viability.

      In 2004, the Company began moving toward an open standards platform. In 2004 and 2005, the Company significantly increased its expenditures for research and development and sales and marketing to focus on long-term sustainable revenue growth. In the first quarter of 2004, the Company completed a private placement raising approximately $16.5 million, net of expenses, to fund the increased research and development efforts and expanded sales and marketing programs. In the first quarter of 2005, the Company completed a private placement of senior unsecured convertible debentures raising an additional $12.8 million. As expected, these additional expenditures significantly increased the operating loss from continuing operations in 2005 and 2004 as compared to 2003.

      In January 2005, the Company sold substantially all of the operating assets of its NACT and MCK businesses to better focus the Company’s capital and management resources on areas which the Company believes have greater potential given its strategy to focus on next-generation network and solutions. In addition, the Company disposed of its NACT business because the Company wanted to move toward an open-standards, pre-paid next-generation solution that could better address growing market opportunities and enable the Company to offer a competitive product for Tier 1 and Tier 2 carriers. The Company believes that the I-Master platform, which the Company acquired in March 2005 after forming a strategic partnership with WSECI in the latter half of 2004, permits the Company to offer a better solution. Further, the Company disposed of its MCK business because the Company intends to focus on next-generation solutions for service

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providers and the products of the MCK business did not fit that profile. The operations of the NACT and MCK businesses have been reclassified as discontinued operations in the Company’s consolidated financial statements.

      On October 11, 2005, the Company effected the Reverse Split of the outstanding Common Stock, pursuant to which every five (5) shares of common stock outstanding on such date were converted into one (1) share of common stock.

      The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including Telemate.Net and Verso Canada, and those of MCK and NACT which are reflected in discontinued operations. The Company does not engage in off-balance sheet activities and therefore none are disclosed in the financial statements.

      The Company believes that the foregoing events significantly affect the comparability of the Company’s results of operations from year to year. You should read the following discussion of the Company’s results of operations and financial condition in conjunction with the Company’s consolidated financial statements and related notes thereto included in Item 15 of this Annual Report.

Results of Operations

Fiscal Year 2005 Compared with Fiscal Year 2004

      For the year ended December 31, 2005, the Company’s net loss totaled $20.1 million, or $0.74 per share, compared with a net loss of $38.8 million, or $1.47 per share, for the same period in 2004. The 2005 results included $3.0 million in reorganization costs and a loss from discontinued operations of $566,000. The 2004 results included $1.4 million in reorganization costs and a loss from discontinued operations of $20.0 million.

Continuing Operations

      For the year ended December 31, 2005, the Company’s net loss from continuing operations totaled $19.5 million, or $0.72 per share, compared with a net loss of $18.8 million, or $0.71 per share, for 2004. The 2005 results included $3.0 million in reorganization costs. The 2004 results included $1.4 million in reorganization costs.

      Total revenue was $32.9 million in the year ended December 31, 2005, reflecting a 2% increase from 2004. Product revenue increased from $15.5 million in 2004 to $18.3 million in 2005. The increase in product revenue in the Packet-based Technologies Group was attributable to the addition of the I-Master platform product revenue related to WSECI, which was acquired by the Company on March 31, 2005, as well as an increase in the Company’s NetPerformer product sales. In 2005, the increase in product revenue came from five new products, most notably the I-Master server and the NetPerformer GSM A.bis product. Services revenue was $14.6 million in the year ended December 31, 2005, reflecting a 13% decrease from the same period in 2004, primarily due to revenue from the Advanced Application Services Group. The decrease in revenue from the Advanced Application Services Group was attributable primarily to a decline in revenue from its largest customer due to that customer’s conversion to a new software platform, the support of which is primarily handled by the software vendor.

      Gross profit decreased by $261,000 in the year ended December 31, 2005, and was 45% of revenue in 2005, compared with 47% of revenue for 2004. The decrease in gross profit resulted from the increase in amortization of intangibles related to the acquisition of WSECI in March 2005 and lower margin in the Advanced Application Services Group.

      Total operating expenses incurred in continuing operations for the year ended December 31, 2005 were $30.4 million, a decrease of $2.8 million compared to the same period in 2004. The decrease is primarily attributable to the following items: decreases in general and administrative expenses of $2.2 million, sales and marketing expenses of $1.4 million and depreciation and amortization expense of $683,000 offset by an increase in reorganization costs of $1.6 million.

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      The decrease in general and administrative expenses resulted from a decrease in professional fees, the vast majority of which related to the elimination of non-recurring costs incurred in 2004 related to the implementation of Section 404 of the Sarbanes-Oxley Act of 2002, reduction of bad debt expense primarily in the Advanced Application Services Group, reduction in rent and occupancy costs related to the sublease (see reorganization costs — loss on sublease discussion below), and reductions of corporate personnel and related costs associated with the disposal of NACT and MCK in January 2005.

      The decrease in sales and marketing expenses resulted from the reduction of personnel costs primarily for sales management overhead and marketing and personnel related costs, including travel.

      The decrease in depreciation and amortization expense is comprised of a decrease in depreciation expense of $255,000 and a decrease in amortization of deferred compensation of $428,000. The decrease in depreciation expense is related to lower capital expenditures during 2005 of approximately $1.2 million compared to 2004 and decreases related to fully-depreciated assets. Capital expenditures are primarily depreciated on a straight-line basis over an estimated useful life of three years. The decrease in amortization of deferred compensation primarily related to the final vesting of options outstanding since the Company’s acquisitions of Telemate.Net in November 2001 and Cereus in September 2000.

      In the third quarter of 2005, the Company terminated a senior executive. As a result of this action, the Company recorded reorganization costs of $340,000 during the year ended December 31, 2005.

      In the second quarter of 2005, the Company entered into a sublease agreement with an unrelated party to sublease excess office space at its facility in Atlanta, Georgia. The excess space arose primarily due to reductions in corporate staffing over the past year. As a result of the sublease, the Company recorded an accrual of $1.7 million, equaling the difference between the remaining payments due on this lease ($3.3 million) and the amounts to be paid by the sublessor ($1.6 million). The Company recorded reorganization costs of $2.6 million during the year ended December 31, 2005, which included the $1.7 million difference between the lease and the sublease for the entire remaining term, as well as write-offs for furniture and leasehold improvements. The Company expects to save approximately $1.6 million over the remaining term of the original lease, which expires January 31, 2010.

      In the first quarter of 2005, as a result of the sale of substantially all of the operating assets of the MCK and NACT businesses, the Company initiated a reorganization and eliminated six corporate positions. As a result of these actions, the Company recorded reorganization costs of $124,000 during the year ended December 31, 2005.

      In the first quarter of 2004, the Company terminated the employment of a senior executive. In the fourth quarter of 2004, the Company initiated a restructuring plan to improve operational efficiencies and financial performance and eliminated 20 positions held by employees. As a result of these actions, the Company recorded reorganization costs of $1.4 million during the year ended December 31, 2004, including $570,000 of non-cash stock compensation expense. Annualized savings beginning in the first quarter of 2005 are expected to be approximately $1.9 million.

      As a percentage of revenue, operating expenses from continuing operations were 92% during the year ended December 31, 2005, down from 103% for the same period in 2004.

      Other expense was $58,000 during the year ended December 31, 2005, compared with other income of $259,000 for the same period in 2004. Other expense during the year ended December 31, 2005 was primarily related to expenses paid to third parties associated with the restructuring of the Company’s 7.5% convertible debentures. Other income during the year ended December 31, 2004 was primarily related to the sale of non-operating assets.

      Equity in income of investment was $17,000 during the year ended December 31, 2005, compared to $56,000 in 2004. These amounts represent the Company’s portion of BeTrue’s income for each of these years. Due to the shared decision making between the Company and its equity partner, the results of BeTrue are treated as an equity investment rather than being consolidated.

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      Net interest expense was $3.9 million during the year ended December 31, 2005, an increase of $2.9 million compared to the same period in 2004. The increase was primarily attributable to interest on the $13.5 million senior unsecured convertible debentures issued in February 2005, the amortization of the discount and loan origination fees on the $13.5 million senior unsecured convertible debentures, as well as increased amortization of the discount on the 7.5% convertible subordinated debentures that were restructured during the year ended December 31, 2005.

Business Unit Performance

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

Packet-based Technologies Group

      Total revenue from the Company’s Packet-based Technologies Group was $23.7 million in the year ended December 31, 2005, a 15% increase from the same period in 2004. The increase in product revenue in the Packet-based Technologies Group was attributable to the addition of the I-Master platform product revenue related to the assets acquired from WSECI, which occurred on March 31, 2005, as well as an increase in the Company’s NetPerformer product sales. In 2005, the increase in product revenue came from five new products, most notably the I-Master server and the NetPerformer GSM A.bis product.

      Gross profit increased by $1.2 million in the year ended December 31, 2005, and was 52% of revenue, a decrease from 54% of revenue in the same period in 2004. The increase in gross profit dollars is attributable to the increase in revenue. The decrease in gross margin is due to an increase in amortization of intangibles related to the acquisition of substantially all of the operating assets of WSECI in March 2005 and increased costs relative to revenue.

      Allocated operating expenses incurred in the Packet-based Technologies Group for the year ended December 31, 2005 were $17.1 million, a decrease of $1.2 million compared to the same period in 2004. The increase in general and administrative expenses is due to the expenses related to the WSECI acquisition. The

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decrease in sales and marketing expenses resulted from the reduction of personnel costs primarily for sales management overhead and marketing and personnel related costs including travel. Research and development cost remained relatively constant compared to 2004. As a percent of revenue, operating expenses for the Packet-based Technologies Group were 72% during the year ended December 31, 2005, down from 89% during the same period in 2004. The decrease in the percentage is attributable to the decrease in sales and marketing spending coupled with higher revenue.

Advanced Applications Services Group

      Total revenue for the Company’s Advanced Applications Services Group was $9.2 million in the year ended December 31, 2005, a 22% decrease from the same period in 2004. The decrease in revenue from the Advanced Application Services Group was attributable primarily to a decline in revenue from its largest customer due to that customer’s conversion to a new software platform, the support of which is primarily handled by the software vendor, net of new customers added.

      Gross profit decreased by $1.4 million in the year ended December 31, 2005, and was 28% of revenue, compared with 34% of revenue in the same period in 2004. The decrease in gross profit dollars and gross margin is due to decreased revenues and a change in revenue mix from support revenue related to a proprietary software product to general call center support.

      Allocated operating expenses incurred in Advanced Applications Services Group for the year ended December 31, 2005 were $841,000, a decrease of $344,000 compared to the same period in 2004. The decrease in general and administrative expenses primarily relates to a decrease in personnel and related costs, occupancy costs and bad debt expense.

Discontinued Operations

      In January 2005, the Company sold substantially all of the operating assets of its NACT and MCK businesses to better focus the Company’s capital and management resources on areas which the Company believes have greater potential given its strategy to focus on next-generation network and solutions to improve cash utilization. In addition, the Company disposed of its NACT business because the Company wanted to move toward an open-standards, pre-paid next-generation solution that could better address growing market opportunities and enable the Company to offer a competitive product for Tier 1 and Tier 2 carriers. The Company believes that the I-Master platform, which the Company acquired from WSECI in March 2005, permits the Company to offer a better solution. Further, the Company disposed of its MCK business because it intends to focus on next-generation solutions for service providers and the products of the MCK business did not fit that profile. The operations of the NACT and MCK businesses have been reclassified as discontinued operations in the Company’s consolidated financial statements.

      Summary operating results of the discontinued operations (in thousands) are as follows:

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

      The operating loss from discontinued operations for the year ended December 31, 2005 includes depreciation and amortization of $114,000. The operating loss from discontinued operations for the year ended December 31, 2004 includes depreciation and amortization of $2.6 million.

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Fiscal Year 2004 Compared with Fiscal Year 2003

      For the year ended December 31, 2004, the Company’s net loss totaled $38.8 million, or $1.47 per share, compared with a net loss of $18.3 million, or $0.92 per share, for the same period in 2003. The 2004 results included $1.4 million in reorganization costs and a loss from discontinued operations of $20.0 million. The 2003 results included $159,000 in reorganization costs and a loss from discontinued operations of $14.1 million.

Continuing Operations

      For the year ended December 31, 2004, the Company’s net loss from continuing operations totaled $18.8 million, or $0.71 per share, compared with a net loss of $4.2 million, or $0.21 per share, for 2003. The 2004 results included $1.4 million in reorganization costs. The 2003 results included $159,000 in reorganization costs.

      Total revenue was $32.3 million in the year ended December 31, 2004, reflecting a 15% decrease from 2003. Product revenue decreased from $19.3 million in 2003 to $15.5 million in 2004, primarily due to a decrease in the Company’s softswitch and NetPerformer product sales. In 2004, the Company restructured its sales force, including the sales leadership, to facilitate a cross product line selling strategy at a time when the telecommunication market was soft in many of the emerging telecommunication markets that the Company was targeting and was moving from upgrading class 4 tandem switches to revenue generating applications and class 5 line side switching. In addition, the Company moved from selling products to selling a complete solution to address the changes in the telecommunication market. These solution sales require longer sales cycles than the Company previously anticipated, which had an impact on 2004 revenue performance. Despite an increase in sales opportunities, actual revenues decreased for 2004. Services revenue was $16.7 million in the year ended December 31, 2004, reflecting an 11% decrease from the same period in 2003, primarily due to revenue from the Advanced Application Services Group and the Telemate products. The decrease in revenue from the Advanced Application Services Group was attributable primarily to a decline in revenue from its largest customer due to that customer’s conversion to a new software platform, the support of which is primarily handled by the software vendor, net of new customers added. Gross profit decreased by $6.1 million in the year ended December 31, 2004, and was 47% of revenue in 2004, compared with 56% of revenue for 2003. The decrease in gross profit dollars resulted from the decrease in revenues with certain fixed product costs and increased service costs in the Advanced Application Services Group due to transition costs related to its largest customer moving to new software and to adding new customers.

      Total operating expenses incurred in continuing operations for the year ended December 31, 2004 were $33.2 million, an increase of $8.9 million compared to the same period in 2003. The increase is primarily attributable to the following items: increases in general and administrative expenses of $2.8 million, sales and marketing expenses of $2.8 million, research and development expenses of $2.1 million and reorganization costs of $1.3 million.

      The increase in general and administrative expenses resulted primarily from the increase in professional fees, the vast majority of which related to the implementation of Section 404 of the Sarbanes-Oxley Act of 2002, bad debt expense primarily related to one customer in the Packet-based Technology Group, a full year of expenses for the centralized accounting function, and insurance and telecommunications costs.

      The increase in sales and marketing expenses resulted from the Company’s expansion of its sales force and marketing programs in 2004.

      The increase in research and development is related to the planned increase in research and development activities in the Company’s softswitch and NetPerformer divisions.

      Depreciation and amortization expense remained relatively constant. Depreciation expense increased by $350,000 primarily related to capital expenditures of approximately $2.0 million and $801,000 during 2004 and 2003, respectively, offset by decreases related to fully-depreciated assets. Capital expenditures are primarily depreciated on a straight-line basis over an estimated useful life of three years. Intangible amortization remained constant at $240,000 and is related to the amortization of the customer relationship costs related to

29

the 1998 acquisition of Encore Group. Amortization of deferred compensation decreased by $345,000 primarily related to the termination of certain options and full vesting of other options outstanding since the Company’s acquisitions of Telemate.Net in November 2001 and Cereus in September 2000. The deferred compensation represents the intrinsic value of the Telemate.Net and Cereus unvested options outstanding at the date of the acquisitions of Telemate.Net and Cereus and is amortized over the remaining vesting period of the options.

      In the first quarter of 2004, the Company terminated the employment of a senior executive. In the fourth quarter of 2004, the Company initiated a restructuring plan to improve operational efficiencies and financial performance and eliminated 20 positions held by employees. As a result of these actions, the Company recorded reorganization costs of $1.4 million during the year ended December 31, 2004, including $570,000 of non-cash stock compensation expense. Annualized savings beginning in the first quarter of 2005 are expected to be approximately $1.9 million.

      In the first and third quarters of 2003, the Company announced reorganizations to accommodate the acquisition of substantially all of the operating assets of Clarent Corporation and, as a part of its effort to consolidate functions and improve operational efficiencies, the Company eliminated eight positions held by employees. As a result of these actions, the Company recorded reorganization costs of $159,000 during the year ended December 31, 2003. The reorganization costs consist of severance costs and non-cash stock compensation expense related primarily to the acceleration of vesting of options. Annualized savings were expected to be approximately $755,000.

      As a percentage of revenue, operating expenses from continuing operations were 103% during the year ended December 31, 2004, up from 64% for the same period in 2003.

      Other income was $259,000 during the year ended December 31, 2004, compared with $314,000 for the same period in 2003. Other income during the years ended December 31, 2004 and 2003 was primarily related to the sale of non-operating assets.

      Equity in income of investment was $56,000 during the year ended December 31, 2004, compared to $73,000 in 2003. These amounts represent the Company’s portion of BeTrue’s income for each of these years. Due to the shared decision making between the Company and its equity partner, the results of BeTrue are treated as an equity investment rather than being consolidated.

      Net interest expense was $1.1 million during the year ended December 31, 2004, a decrease of $471,000 compared to the same period in 2003. The decrease was attributable to the repayment of the short-term notes related to the acquisition of substantially all of the operating assets from Clarent Corporation.

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Business Unit Performance

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

Packet-based Technologies Group

      Total revenue from the Company’s Packet-based Technologies Group was $20.5 million in the year ended December 31, 2004, an 18% decrease from the same period in 2003. The net decrease in revenue is attributable to softswitch and NetPerformer product sales. In 2004, the Company restructured its sales force, including the sales leadership, to facilitate a cross product line selling strategy at a time when the telecommunication market was soft in many of the emerging telecommunication markets that the Company was targeting and was moving from upgrading class 4 tandem switches to revenue generating applications and class 5 line side switching. In addition, the Company moved from selling products to selling a complete solution to address the changes in the telecommunication market. These solution sales require longer sales cycles than the Company previously anticipated, which had an impact on 2004 revenue performance. Despite a rise in sales opportunities, actual revenues declined in 2004.

      Gross profit decreased by $4.0 million in the year ended December 31, 2004, and was 54% of revenue, a decrease from 60% of revenue in the same period in 2003. The decrease in gross profit is attributable to the decrease in revenue. The decrease in gross margin is due to a decline in revenues in relation to fixed

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departmental costs (primarily personnel and related costs) related to the production and support departments, inventory obsolescence adjustments and the addition of international support personnel and related expenses.

      Allocated operating expenses incurred in the Packet-based Technologies Group for the year ended December 31, 2004, were $18.3 million, an increase of $5.1 million compared to the same period in 2003. The increase in general and administrative expenses reflects a full year’s expense since the Company’s acquisition of substantially all of the operating assets of Clarent Corporation in February 2003 and an increase in bad debt expense primarily attributable to one customer. The increase in sales and marketing expenses resulted from the Company’s expansion of its sales force and marketing programs in 2004. The increase in research and development related to the planned increase in research and development activities at the Company’s softswitch and NetPerformer divisions. As a percent of revenue, operating expenses for the Packet-based Technologies Group were 89% during the year ended December 31, 2004, up from 52% during the same period in 2003. The increase in the percentage is attributable to the increase in sales and marketing and research and development spending coupled with lower revenue.

Advanced Applications Services Group

      Total revenue for the Company’s Advanced Applications Services Group was $11.7 million in the year ended December 31, 2004, a 10% decrease from the same period in 2003. The decrease in revenue is related to a decrease in installation services, rebillable travel and outsourced services for hospitality related customers.

      Gross profit decreased by $2.0 million in the year ended December 31, 2004, and was 34% of revenue, compared with 46% of revenue in the same period in 2003. The decrease in gross profit and gross margin is due to increased personnel and related costs related to the Advanced Applications Services Group’s performance of consulting work to assist its largest customer in its conversion to a new software platform.

      Allocated operating expenses incurred in Advanced Applications Services Group for the year ended December 31, 2004, were $1.2 million, an increase of $169,000 compared to the same period in 2003. The increase in general and administrative expenses primarily relates to an increase in personnel and related costs and bad debt expense.

Discontinued Operations

      In January 2005, the Company sold substantially all of the operating assets of its NACT and MCK businesses to better focus the Company’s capital and management resources on areas which the Company believes have greater potential given its strategy to focus on next-generation network and solutions to improve cash utilization. In addition, the Company disposed of its NACT business because the Company wanted to move toward an open-standards, pre-paid next-generation solution that could better address growing market opportunities and enable the Company to offer a competitive product for Tier 1 and Tier 2 carriers. The Company believes that the I-Master platform, which the Company signed a definitive agreement to acquire from WSECI in February 2005 after forming a strategic partnership with WSECI in the latter half of 2004, permits the Company to offer a better solution. The Company acquired substantially all of the operating assets of WSECI, including the I-Master platform, in March 2005. Further, the Company disposed of its MCK business because the Company intends to focus on next-generation solutions for service providers and the products of the MCK business did not fit that profile. The operations of the NACT and MCK businesses have been reclassified as discontinued operations in the Company’s consolidated financial statements.

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      Summary operating results of the discontinued operations (in thousands) are as follows:

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

      The operating loss from discontinued operations for the year ended December 31, 2004 includes depreciation and amortization of $2.6 million. The operating loss from discontinued operations for the year ended December 31, 2003 includes depreciation and amortization of $1.9 million and write-down of goodwill of $10.9 million.

      The write-down of goodwill relates to the Company’s acquisition of MCK in September 2003. In April 2003, the Company negotiated the original agreement to purchase MCK in which the MCK stockholders would be entitled to receive approximately 4.0 million shares of Common Stock which was valued at $13.0 million, based on the volume weighted average closing price per share of Common Stock as reported on The Nasdaq Capital Market for the 20 trading day period beginning March 19, 2003 and ending April 15, 2003. As part of the original agreement, the Company was to receive $7.5 million in cash. The terms of the agreement were amended on June 13, 2003. Under the amended terms, MCK stockholders were entitled to receive approximately 3.7 million shares of Common Stock and the cash MCK was required to have at the closing of the merger was reduced from $7.5 million to approximately $6.4 million. Although the number of shares of Common Stock to be issued in the merger was reduced by the amendment, the amendment changed the measurement date for valuing such shares. As a result of the increase in the price of Common Stock, prior to June 13, 2003, the revised valuation for the shares of Common Stock to be issued in the merger increased to $24.1 million. As a result of this increase in value, the goodwill recorded in the merger was impaired upon closing the merger. The Company completed an impairment analysis in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Based upon this analysis, the Company recorded a write-off of approximately $10.9 million during the year ended December 31, 2003.

Critical Accounting Policies

      The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Factors that could affect the Company’s future operating results and cause actual results to vary from expectations include, but are not limited to, lower than anticipated growth from existing customers, an inability to attract new customers, an inability to successfully integrate acquisitions and technology changes, or a decline in the financial stability of the Company’s customers. Negative developments in these or other risk factors could have a material adverse affect on the Company’s financial position and results of operations.

      A summary of the Company’s critical accounting policies follows:

Revenue Recognition

      The Company recognizes revenue when persuasive evidence of an agreement exists, delivery has occurred, the fee is fixed and determinable, and collection of the resulting receivable is reasonably assured. The determination of whether the collectibility is reasonably assured is based upon an assessment of the creditworthiness of the customers. In instances where the collection of a receivable is not reasonably assured, the revenue and related costs are deferred.

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      Deferred revenue generally represents amounts collected for which revenue has not yet been recognized. It is principally comprised of deferred maintenance revenue.

      The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” as updated by SAB No. 104 and in accordance with Emerging Issues Task Force (“EITF”) 00-21, “Revenue Arrangements with Multiple Deliverables”, Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” (“SOP No. 97-2”) and SOP No. 98-9, “Software Revenue Recognition with Respect to Certain Transactions” (“SOP No. 98-9”).

      SOP No. 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on the evidence that is specific to the vendor. License revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance is recognized ratably over the maintenance term which is typically twelve months and revenue allocated to training and other service elements, such as implementation and training, are recognized as the services are performed.

      Under SOP No. 98-9 if evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element and recognized as revenue.

      The Company routinely analyzes and establishes, as necessary, reserves at the time of shipment for product returns and allowances and warranty costs.

Allowance for Doubtful Accounts

      The Company is required to estimate the collectibility of its trade receivables. Considerable judgment is required in assessing the ultimate realization of these receivables, including the creditworthiness of each customer. The evaluation is based on credit information and collection history concerning the customer up and through the determination date. The Company determines the allowance for doubtful accounts based on a specific review of outstanding customer balances and a general reserve based upon aging of customer accounts and write-off history. Significant changes in required reserves have been recorded in recent periods and may occur in the future due to the current telecommunications and general economic environments and updates to the customer credit information and collection activity.

Inventory Obsolescence

      The Company is required to state its inventories at the lower of cost or market. In assessing the ultimate realization of inventories, the Company makes judgments as to future demand requirements based on recent historical usage and compares that with the current inventory levels. The Company has recorded changes in net realizable values in recent periods due to impact of current and future technology trends and changes in strategic direction, such as discontinuances of product lines, as well as, changes in market conditions due to changes in demand requirements. It is possible that changes in the net realizable value of inventory may continue to occur in the future due to the current market conditions.

Liabilities of Discontinued Operations

      In January 2005, the Company disposed of substantially all of the operating assets of its NACT and MCK businesses. As a result of these sales, certain liabilities of MCK are now classified as discontinued operations, including a liability for one lease with total payments remaining through March 31, 2007 of $1.7 million, discounted at 6%, which has been sub-leased for approximately 66% of the total lease liability over the remaining term of the lease.

      During 2001, the Company initiated certain restructuring plans and discontinued operations of its VAR business. In conjunction with these restructuring plans, the Company established a restructuring reserve

34

account for the estimated costs related to the plans. These costs primarily related to facilities closings, severance costs and other businesses exiting costs. For the facilities closings cost, a reserve was established for all remaining lease payments due on buildings and equipment that were no longer being utilized in continuing operations, less assumptions for sub-leases. The accrual for one of the leases with total payments remaining through January 31, 2010 of $1.7 million is offset by sublease receipts totaling $712,000 through the end of the lease term and assumes an amount of $240,000 for the extension of one of the subleases through the end of the lease term.

      As of December 31, 2005, the Company had a remaining balance of approximately $2.5 million in liabilities of discontinued operations. The Company currently believes that this remaining estimated balance is appropriate to cover future obligations associated with the restructurings; however, changes in these estimates could occur based on changes in the financial condition of the subleases.

Deferred Tax Asset Valuation Allowance

      The Company currently has significant deferred tax assets, which are subject to periodic recoverability assessment. Realization of the Company’s deferred tax assets is principally dependant upon achievement of projected future taxable income. The Company’s judgments regarding future profitability may change due to market conditions, its ability to continue to successfully execute its strategic plan and other factors. These changes, if any, may require possible material adjustments to these deferred tax asset balances. Due to the uncertainty of the Company’s ability to recognize the entire tax benefit, the Company established an offsetting provision for the tax assets.

Litigation and Related Contingencies

      The Company is subject to proceedings, lawsuits and other claims related to labor, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as, potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made by the Company with assistance of its legal counsel after careful analysis of each individual issue based upon the then-current facts and circumstances and discussions with legal counsel. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

Goodwill, Intangible Assets and Long-Lived Assets

      Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with provisions of SFAS No. 142. Significant estimates are made with respect to the impairment testing. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144.

      In accordance with SFAS No. 144, long-lived assets, such as property, plant and equipment and purchased assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Significant estimates are made with respect to recoverability and fair value assessments.

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Liquidity and Capital Resources

Summary

      Liquidity is the measurement of the Company’s ability to have adequate cash or access to cash at all times in order to meet financial obligations when due, as well as to fund corporate expansion and other activities. Historically, the Company has met its liquidity requirements through a combination of cash provided by debt from third party lenders, issuances of debt and equity securities, purchases of other businesses and the sale of discontinued businesses.

      At December 31, 2005, the Company had a positive working capital position (excess of current assets over current liabilities) of $1.9 million compared to a positive working capital position of $7.6 million at December 31, 2004. The Company’s cash and cash equivalents totaled $1.1 million at December 31, 2005, and $4.2 million at December 31, 2004. Total long-term debt, net of discount, was $8.4 million at December 31, 2005 and $2.7 million at December 31, 2004. At December 31, 2005, the Company had $1.3 million and at December 31, 2004, the Company had no borrowings under its credit facility with Silicon Valley Bank. The Company’s borrowing availability under its credit facility at December 31, 2005 was $8.1 million. The Company has an outstanding stand-by letter of credit in the amount of $1.6 million at December 31, 2005 which would reduce borrowing capacity under the credit facility.

      In March 2005, the Company and Silicon Valley Bank renewed, and in June and July 2005 further amended, the credit facility in connection with the disposition of the MCK and NACT businesses, the sublease of the Company’s facilities in Atlanta, Georgia and the restructuring of the Company’s 7.5% convertible subordinated debentures. In January 2006, the minimum cash on hand covenant of the credit facility was amended so that such covenant could be satisfied using not just the Company’s unrestricted cash and cash equivalents in accounts maintained at Silicon Valley Bank but also by using the Company’s excess availability under the credit facility. The credit facility provided for a credit line of $7.5 million through September 30, 2005 at which time it increased to $10.0 million after the Company met certain financial criteria. The credit facility includes an EX-IM facility that provides for working capital based on the Company’s international accounts receivable and inventories related to export sales. Under the terms of the credit facility, the Company must maintain a minimum amount of cash on hand, computed monthly, and may not declare dividends or incur any additional indebtedness without the consent of Silicon, and must comply with other financial covenants. Although the Company was not in compliance with the minimum cash on-hand covenant at December 31, 2005, the Company had more than sufficient excess borrowing capacity and the Silicon Valley Bank waived compliance with such covenant. In March 2006, the credit facility was extended to March 2007, with similar terms and conditions.

      On February 12, 2003, the Company acquired substantially all the business assets and assumed certain related liabilities of Clarent Corporation for $9.8 million in notes. At December 31, 2005, a $3.0 million secured note due February 12, 2008, which bears interest at 5% per annum, remains outstanding. The assets the Company purchased from Clarent Corporation secure the note.

      On February 4, 2005, the Company completed a private placement of senior unsecured convertible debentures and warrants pursuant to a securities purchase agreement with certain institutional investors. The Company issued $13.5 million of 6% senior unsecured convertible debentures, Series A warrants exercisable for 2.2 million shares of Common Stock and Series B warrants exercisable for 2.0 million shares of Common Stock. The 6% senior unsecured convertible debentures bear interest at 6% per annum and are due February 2009 and are convertible into approximately 5.4 million shares of the Company’s common stock at an initial conversion price of $2.50 per share, subject to anti-dilution adjustments and certain limitations. Interest is payable on a quarterly basis beginning April 2005 and principal is payable on a quarterly basis beginning August 2006. The Series A warrants issued in connection with the private placement are exercisable for a period of five years commencing on February 4, 2005 and at an exercise price of $3.60 per share. The Series B warrants issued in connection with the private placement were exercisable for a period of 90 days, commencing on June 16, 2005 and had an exercise price of $3.90 per share. The Series B warrants expired in September 2005. The Company received net proceeds of approximately $12.5 million, including $1.6 million in restricted cash, net of expenses.

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Cash Flow

      Cash used in the Company’s continuing operations in the year ended December 31, 2005 totaled approximately $14.9 million compared with cash used by continuing operations of $16.8 million for 2004. The Company’s use of cash in continuing operations during 2005 resulted primarily from cash used for changes in current operating assets and liabilities of approximately $4.2 million and cash used by continuing operations of $10.7 million (net loss from continuing operations of $19.5 million reduced by non-cash charges totaling $8.8 million, including depreciation and amortization of $5.8 million, provision for doubtful accounts of $463,000 and reorganization costs — loss on sublease of $2.6 million). The Company’s use of cash in continuing operations during 2004 resulted primarily from cash used for changes in current operating assets and liabilities of approximately $2.9 million and cash used by continuing operations of $13.9 million (net loss from continuing operations of $18.8 million reduced by non-cash charges totaling $4.9 million, including depreciation and amortization of $3.7 million, provision for doubtful accounts of $494,000 and reorganization costs — stock-related of $570,000).

      Cash used in the Company’s discontinued operations in the year ended December 31, 2005, totaled $1.6 million compared with cash provided by discontinued operations of $1.4 million for 2004.

      Cash used in investing activities for continuing operations totaled approximately $2.7 million in the year ended December 31, 2005, compared to cash provided by investing activities for continuing operations of $269,000 in the same period of 2004. During the year ended December 31, 2005 restricted cash increased by $1.7 million compared to a decrease of $2.3 million for 2004. The Company spent $820,000 and $2.0 million on capital expenditures in the year ended December 31, 2005 and 2004, respectively. In 2005, the Company spent $273,000 related to the acquisition of substantially all of the operating assets of WSECI.

      Cash provided by investing activities for discontinued operations totaled approximately $4.3 million in the year ended December 31, 2005, compared to cash used in investing activities for discontinued operations of $4.6 million in the same period of 2004. The Company received $4.0 million from the sale of discontinued operations and $300,000 from notes receivable during the year ended December 31, 2005. The Company spent $321,000 on capital expenditures in the year ended December 31, 2004. During 2004, the Company paid $4.3 million in cash related to the acquisition of MCK.

      Cash provided by financing activities totaled approximately $11.8 million in the year ended December 31, 2005, compared to $16.3 million for 2003. Net proceeds from convertible debentures of $12.8 million, net borrowings on the line of credit of $1.3 million and proceeds from the issuance of the Common Stock related to the exercise of options of $65,000 were offset by a payment of $2.3 million on the Company’s 7.5% convertible debentures. In 2004 net proceeds from a private placement of $16.5 million and proceeds from the issuance of the Common Stock related to the exercise of options of $175,000 were offset by a payment of $350,000 on the notes payable for the purchase of substantially all of the operating assets of Clarent Corporation.

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Contractual Obligations and Commercial Commitments

      The following summarizes the Company’s future contractual obligations at December 31, 2005 (in thousands):

		Payments Due By Period
				Less Than						After
Contractual Obligations		Total		1 Year		1-3 Years		4-5 Years		5 Years
Line of credit		$	1,269	$	1,269	$	—	$	—	$	—
Additional payments for the acquisition of Encore Group			229		179		50		—		—
Notes payable			3,000		—		3,000		—		—
Convertible subordinated debentures			2,250		2,250		—		—		—
Senior unsecured convertible debentures			13,500		1,406		9,281		2,813		—
Operating Leases:
	Continuing operations		7,361		2,132		3,622		1,607		—
	Discontinued operations		3,266		1,736		1,104		426		—
Total contractual cash obligations			30,875	$	8,972	$	17,057	$	4,846	$	—

      This foregoing table excludes interest expense and sublease rentals and assumes that leases are not renewed. The Company remains a guarantor on a lease through December 2009 used in the operations of the NACT business, which the Company sold in January 2005. The total commitment related to this lease is approximately $2.4 million. The Company has one outstanding stand-by letter of credit totaling $1.6 million at December 31, 2005.

Sources of Cash

      For 2006, the Company expects that its primary sources of cash will be from issuances of equity or debt securities, cash on hand, borrowings under its credit facility with Silicon Valley Bank and other sources. In February 2006, the Company issued in a private placement 5.4 million shares of its Common Stock and warrants to purchase 5.4 million shares of its Common Stock for an aggregate purchase price of $7.1 million, or $1.30 per share. The Company received approximately $6.8 million, net of expenses.

      In March, 2006, the Company amended its credit facility with Silicon Valley Bank to extend the Company’s credit facilities into March 2007. The credit facility with Silicon Valley Bank is subject to certain financial covenants (including a minimum excess availability covenant) and limitations on the Company’s ability to access funds under the credit facility. If the Company is in violation of the credit facility, or does not have sufficient eligible accounts receivable and inventory to support the level of borrowings it may need, then the Company may be unable to draw on the credit facility to the extent necessary. To the extent the Company does not have borrowing availability under the credit facility, the Company may be required to obtain additional sources of capital, sell assets, obtain an amendment to the credit facility or otherwise restructure its outstanding indebtedness. Additional borrowings other than pursuant to the credit facility must be approved by Silicon Valley Bank. If the Company is unable to obtain additional capital, sell assets, obtain an amendment to the credit facility or otherwise restructure its outstanding indebtedness, then the Company may not be able to meet its obligations.

      The Company has sustained losses in prior years and does not expect that its current operations will generate positive income from continuing operations before interest, taxes, depreciation, amortization of intangibles and amortization of deferred compensation for the next year as the Company continues to invest in sales and marketing and research and development costs. However, the company has taken steps that the Company believes could not only increase revenues and gross margins but also could make the Company more efficient on the expense side. In 2005, the Company restructured its sales organization in order to have a better targeted geographic and product focus; introduced new products including product bundles comprised of two or more of the Company’s proprietary technology products; and shifted resources to focus on fewer but larger

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and more strategic OEM and distributor relationships. Although gross margins are dependent on many different factors including revenue volume, product mix and discounting, the Company believes that in general, gross margins should improve with revenue increases by leveraging departmental and other non-variable costs and that it could receive greater margins from higher value solution sales such as the product bundles. The Company intends to continue its on-going review and diligence on expenses. Part of this effort has focused on developing collaborative relationships with off-shore outsourced services for service and support functions as well as research and development functions that have resulted in a reduced cost base. This cost advantage can be further leveraged as the Company’s needs grow. The Company believes that it will have sufficient liquidity from its cash on-hand, the cash raised in the private placement and its unused credit facility to meet its current financial obligations during 2006.

      The Company’s short-term cash needs are for working capital, including cash operating losses, capital expenditures, payments on the 7.5% convertible subordinated debentures of approximately $2.3 million and payments on the 6% senior unsecured convertible debentures of $1.4 million in the next twelve months, interest payments on debt outstanding, payments of the accrued loss on sublease and payments related to discontinued operations. At December 31, 2005, accrued loss on sublease totaled $1.7 million. The Company expects to pay out approximately $454,000 related to lease payments, net of sublease rental in the next twelve months. At December 31, 2005, liabilities of discontinued operations included $1.7 million in lease payments related to discontinued operations. The Company expects to pay out approximately $663,000 related to lease payments net of sublease rentals for discontinued operations in the next twelve months.

      The Company’s long-term cash needs are related to the costs of growing its current business as well as prospective businesses to be acquired, including capital expenditures and working capital. In addition, the Company will make required payments on its senior unsecured convertible debentures, the accrued loss on sublease, liabilities of discontinued operations and the secured note payable made by the Company in connection with the acquisition of substantially all of the operating assets of Clarent Corporation which is due February 2008. The Company expects to meet these cash needs through cash from operations, if any, cash on hand, borrowings under the credit facility or other debt facilities, if available, as well as through possible issuances of equity or debt securities. If sufficient borrowing capacity under a working capital line of credit is unavailable (or if the Company is unable to restructure its existing credit facility in the event that the Company requires additional borrowing capacity), or if the Company is otherwise unable to obtain additional capital or sell assets, then the Company may not be able to meet its obligations and growth plans.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

      The Company is exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company has also not entered into financial instruments to manage and reduce the impact of changes in interest rates and foreign currency exchange rates although the Company may enter into such transactions in the future.

Interest Rate Risks

      The Company’s notes payable and convertible subordinated debentures at December 31, 2005, carry interest rates which are fixed or with set increases. The interest rate on the Company’s 6% senior convertible debentures increased to 6.75% on February 4, 2006 in accordance with the terms thereof. The Company’s line of credit with Silicon Valley Bank carries interest rates which vary with the prime rate. Accordingly, if the Company has any indebtedness outstanding under its line of credit with Silicon Valley Bank, then any increases in Silicon Valley Bank’s prime rate will reduce the Company’s earnings. A 1% increase in the prime rate on the $1.3 million outstanding under the Company’s line of credit at December 31, 2005 would result in an annual interest expense increase of approximately $13,000.

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Foreign Currency Risks

      Products sold outside of the United States of America are transacted in U.S. dollars and, therefore, the Company is not exposed to foreign currency exchange risk. Transactions with Verso Canada and Verso Technologies (UK) Limited, an indirect, wholly owned subsidiary of the Company, present foreign currency exchange risk. The principal transactions are personnel and related costs. The intercompany balance is denominated in U.S. dollars and changes in foreign currency rates would result in foreign currency gains and losses. Using the intercompany balance at December 31, 2005, a 10% strengthening of the U.S. dollar against the Canadian dollar and the British pound would result in a foreign currency transaction loss of approximately $35,000. To date, foreign exchange gains and losses have not been significant.

Item 8. Financial Statements and Supplementary Data

      The financial statements required to be filed with this Annual Report are filed under Item 15 hereof and are listed on the “Index to Consolidated Financial Statements” on page F-1 hereof.

Quarterly Financial Data (Unaudited)

      The following table presents unaudited quarterly statements of operations data for each quarter of the Company’s last two completed fiscal years. The unaudited quarterly financial statements have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this Annual Report. In the opinion of the Company’s management, the unaudited financial statements include all adjustments, consisting only of normal recurring adjustments that management considers to be necessary to fairly present this information when read in conjunction with the Company’s consolidated financial statements and related

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notes appearing elsewhere in this Annual Report. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.

			First			Second			Third			Fourth
			Quarter			Quarter(1)			Quarter			Quarter			Total Year
			(In thousands, except per share amounts)
2005
	Revenue		$	6,606		$	8,513		$	8,281		$	9,473		$	32,873
	Gross profit			2,863			3,754			3,718			4,523			14,858
	General and administrative			2,586			2,468			2,592			2,574			10,220
	Sales and marketing			2,146			2,049			1,948			1,903			8,046
	Research and development			1,684			1,737			1,655			1,756			6,832
	Operating income (loss) from continuing operations			(4,337	)		(5,630	)		(3,344	)		(2,213	)		(15,524	)
	Income (loss) from continuing operations			(4,934	)		(6,400	)		(4,599	)		(3,561	)		(19,494	)
	Income (loss) from discontinued operations			(566	)		—			—			—			(566	)
		Net loss	$	(5,500	)	$	(6,400	)	$	(4,599	)	$	(3,561	)	$	(20,060	)
Net loss per common share — basic and diluted:(2)
	Loss from continuing operations		$	(0.18	)	$	(0.24	)	$	(0.17	)	$	(0.13	)	$	(0.72	)
	Loss from discontinued operations			(0.02	)		—			—			—			(0.02	)
		Net loss per common share	$	(0.20	)	$	(0.24	)	$	(0.17	)	$	(0.13	)	$	(0.74	)
2004
	Revenue		$	11,099		$	6,631		$	6,966		$	7,566		$	32,262
	Gross profit			5,913			2,934			3,049			3,223			15,119
	General and administrative			2,836			2,983			3,284			3,290			12,393
	Sales and marketing			1,956			2,409			2,583			2,479
	Research and development			1,581			1,806			1,754			1,822			6,963
	Operating income (loss) from continuing operations			(2,383	)		(4,941	)		(5,318	)		(5,390	)		(18,032	)
	Loss from continuing operations			(2,645	)		(5,150	)		(5,557	)		(5,419	)		(18,771	)
	Loss from discontinued operations			(1,091	)		(1,130	)		(1,764	)		(1,243	)
	Loss on disposal of discontinued operations												(14,788	)		(14,788	)
		Net loss	$	(3,736	)	$	(6,280	)	$	(7,321	)	$	(21,450	)	$	(38,787	)
Net loss per common share — basic and diluted:(2)
	Loss from continuing operations		$	(0.10	)	$	(0.20	)	$	(0.20	)	$	(0.20	)	$	(0.71	)
	Loss from discontinued operations			(0.05	)		(0.05	)		(0.05	)		(0.05	)		(0.20	)
	Loss on disposal of discontinued operations												(0.55	)		(0.56	)
	Net loss per common share		$	(0.15	)	$	(0.25	)	$	(0.25	)	$	(0.80	)	$	(1.47	)

(1)	Second quarter 2005 net loss includes reorganizations costs — loss on sublease totaling $2.6 million included in loss from continuing operations.
(2)	Per common share amounts for the quarters and full years have been calculated separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average common shares outstanding during each period.

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

      None.

Item 9A. Controls and Procedures

      The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act), as of the end of the period covered by this Annual Report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this Annual Report, the Company’s disclosure controls and procedures are effective.

      During the quarter ended December 31, 2005, there was not any change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s control over financial reporting.

Item 9B. Other Information

      On January 27, 2006, the Company amended its credit facility with Silicon Valley Bank to modify the covenant which requires that the Company keep a certain minimum amount of unrestricted cash (and cash equivalents) in accounts maintained at Silicon Valley Bank to provide that such minimum amount may be satisfied by including the Company’s excess availability under the credit facility in addition to amounts maintained in such accounts.

      In March of 2006, the Company amended its credit facility with Silicon Valley Bank by entering into an Amendment to Loan Documents and an Amendment to Loan Documents (Exim Program) among Silicon Valley Bank, the Company and certain of the Company’s subsidiaries (collectively, the “Amendments”). The Amendments extend the Company’s credit facility with Silicon Valley Bank into March of 2007. The interest rate for borrowing under the credit facility increased under the Amendments by one-quarter of a percentage point from the rates charged by Silicon Valley Bank prior to the Amendments.

      On March 7, 2006, the Canada Revenue Agency (the “CRA”) notified 38098 Yukon Inc. (formerly known as MCK Telecommunications Inc.), a corporation organized under the laws of the Yukon Territory (“MCK Canada”) and an indirect wholly owned subsidiary of the Company, that the CRA had completed its international income tax audit of MCK Canada for the period from May 1, 1998 to April 30, 2000 (the “Audit”). As a result of the Audit, the CRA has issued income tax reassessments to MCK Canada. The Company also expects that the Alberta Tax and Revenue Administration (the “ATR”) will issue reassessments for each year of the Audit.

      The key issue under dispute in the audit is the valuation of certain intellectual property that was transferred from MCK Canada to its U.S. parent company, MCK Communications, Inc. (“MCK US”) in fiscal 1998. MCK US consulted with outside valuation advisors to establish the value of the intellectual property transferred. The CRA disagrees with such value. The Company and its advisors disagree with the reassessments, and the Company intends to file notices of objection with respect thereto with the CRA and the ATR and, if necessary, to exhaust all of its rights of appeal in connection therewith.

      Although the Company has not received income tax reassessments from the ATR, the Company estimates that, as of March 13, 2006, (i) the amount of taxes allegedly due in respect of the CRA reassessment was approximately U.S. $7.7 million (plus penalties and interest thereon of approximately U.S. $7.8 million); and (ii) the amount of taxes allegedly due in respect of the expected ATR reassessment was approximately U.S. $3.3 million (plus penalties and interest thereon of approximately U.S. $3.1 million). The Company has been advised by its Canadian and U.S. counsel that no such amounts should be collectible by the CRA or the ATR against the Company or any of its other subsidiaries (other than MCK Canada) and that the ability of the CRA and the ATR to collect such amounts should be limited to the assets of MCK Canada, which have little or no value. Accordingly, no provision for this matter has been recorded in the

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Company’s financial statements because the Company believes that it will not have a financial statement impact.

      On December 31, 2005, the Board amended the Company’s 1999 Employee Stock Purchase Plan to reduce the discount at which participants in such plan could purchase shares of Common Stock pursuant to such plan from 15% to 5% and to change the date on which the purchase price for such shares is determined.

      See Item 5 of this Annual Report for disclosure with respect to the Company’s sale of unregistered equity securities.

PART III

Item 10. Directors and Executive officers of the Registrant

Board of Directors

      Set forth below is certain information, as of March 20, 2006, concerning each of the directors of the Company. Each of the individuals listed below shall serve as a director of the Company until the next annual meeting of the Company’s shareholders and until their successors have been elected and qualified, or until their resignation, death or removal.

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

      Certain additional information concerning the individuals named above is set forth below:

      Mark H. Dunaway, age 60, has served as a director of the Company and member of the Company’s audit committee (the “Audit Committee”) since June 1, 2005. Since October 2003, Mr. Dunaway has served as Chairman and Chief Executive Officer of Composite Materials Technology, LLC, a provider of engineering products.

      Paul R. Garcia, age 53, has served as a director of the Company and a member of the Audit Committee since April 2003 and as a member of the Company’s compensation committee (the “Compensation Committee”) since February 24, 2004. Mr. Garcia has served as a director, President and Chief Executive Officer of Global Payments Inc. since February 2001. Mr. Garcia also currently serves as Chairman of the Board of Global Payments Inc. From June 1999 to January 2001, he served as Chief Executive Officer of NDC eCommerce. From March 1997 to September 1998, he served as President and Chief Executive Officer of Productivity Point International. From 1995 to 1997, he served as Group President of First Data Card Services.

      Gary H. Heck, age 61, has served as a director of the Company since September 29, 2000. From February 23, 2004 to November 3, 2004, Mr. Heck also served as the Company’s President and Chief Operating Officer. Mr. Heck also served as a member of the Compensation Committee from September 29, 2000 until February 24, 2004. From January 2000 to September 2000, Mr. Heck served as a director of Cereus. Mr. Heck has been a consultant since 1989, most recently serving as a Managing Partner and a co-founder of PacifiCom, a consulting services company. From 1987 until 1989, Mr. Heck was President and Chief Executive Officer of Telematics Products, Inc., a telecommunications products company. From 1983 until 1987, he held various executive positions at Pacific Telesis Corporation, one of the nation’s largest

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Regional Bell Operating Companies, and completed his tenure as a corporate officer of several subsidiaries of Pacific Telesis and as Chief Executive Officer of PacTel Products Corporation. From 1977 until 1983, Mr. Heck was a Division Manager and District Manager at AT&T Corporation, where he was responsible for sales and marketing programs. From 1967 until 1977, Mr. Heck held various positions at Pacific Telephone & Telegraph. He is a member of the board of directors of RRT Global, Limited.

      James R. Kanely, age 64, has served as a director of the Company since August 17, 2005. Since August 1993, Mr. Kanely has served as a member of the board of directors and chairman of the audit committee of The Alpine Group, Inc., a publicly-traded industrial holding company. He is also on the board of directors of two privately-held companies, Taco, Inc., a manufacturer of pumps, valves and control systems for residential and commercial hydronic systems, and PPC Insulators, a manufacturer of porcelain insulators for the electrical utility industry

      Amy L. Newmark, age 48, has served as a director of the Company and a member of the Compensation Committee since September 29, 2000. From January 2000 to September 2000, Ms. Newmark served as a director of Cereus. Ms. Newmark is a private investor in the technology, Internet and telecommunications fields. From 1995 to 1997, she served as Executive Vice President of Strategic Planning at Winstar Communications, Inc. Prior to 1995, Ms. Newmark served as the general partner of Information Age Partners, L.P., a hedge fund investing primarily in technology and emerging growth companies. Before that, Ms. Newmark was a securities analyst specializing in telecommunications and technology companies.

      Dr. James A. Verbrugge, age 65, has served as a director of the Company since November 9, 2004 and a member of the Audit Committee since January 28, 2005. Dr. Verbrugge is Emeritus Professor of Finance in the Terry College of Business at the University of Georgia. From 1976 to 2001, he was the Chairman of the Department of Banking and Finance in the Terry College of Business, and he held the Chair of Banking from 1992-2002. He is a member of the Board of Directors of each of One Travel Holdings, Inc., Crown Crafts, Inc. and Tri-S Security Corporation, and also serves on the boards of one private company. Dr. Verbrugge also serves as a member of Tri-S Security Corporation’s audit committee and compensation committee.

      The biographical information for Mr. Bannerman and Mr. Odom is set forth in Item 4.5 of Part I of this Annual Report.

      There are no family relationships among any of the executive officers or directors of the Company. No arrangement or understanding exists between any director and any other person pursuant to which any director was selected to serve as a director. To the best of the Company’s knowledge, (i) there are no material proceedings to which any director of the Company is a party, or has a material interest, adverse to the Company; and (ii) there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions that are material to the evaluation of the ability or integrity of any of the directors during the past five years.

Executive Officers

      The information with respect to the Company’s executive officers is set forth in Item 4.5 of Part I of this Annual Report.

Audit Committee and Audit Committee Financial Expert

      The Company has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Messrs. Dunaway and Garcia and Dr. Verbrugge.

      The Board has determined that the Audit Committee’s chairperson, Mr. Dunaway, is an “audit committee financial expert” as such term is defined in Item 401(h) of Regulation S-K. Mr. Dunaway meets the independence requirements of Rule 4200(a)(15) of the National Association of Securities Dealers’ listing standards.

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      Pursuant to the regulations of the SEC, a person who is determined to be an audit committee financial expert will not be deemed an expert for any purpose, including, without limitation, for purposes of Section 11 of the Securities Act, as a result of being designated or identified as an audit committee financial expert pursuant to Item 401 of Regulation S-K. Furthermore, the designation or identification of a person as an audit committee financial expert pursuant to Item 401 of Regulation S-K does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit Committee or the Board in the absence of such designation or identification. Moreover, the designation or identification of a person as an audit committee financial expert pursuant to Item 401 of Regulation S-K does not affect the duties, obligations or liability of any other member of the Audit Committee or Board.

Code of Ethics

      The Board has adopted a Code of Ethics and Conduct that applies to all of the Company’s employees, including the Company’s Executive Chairman of the Board, Chief Executive Officer, Chief Financial Officer and Corporate Controller. The Company shall provide to any person without charge, upon request, a copy of the Company’s Code of Ethics and Conduct. Such requests should be directed to the Secretary of Verso Technologies, Inc. at 400 Galleria Parkway, Suite 200, Atlanta, Georgia 30339.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and all persons (“Reporting Persons”) who beneficially own more than 10% of the outstanding shares of Common Stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the Common Stock and other equity securities of the Company. Reporting Persons are also required to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, based solely upon a review of the copies of such forms furnished to the Company for the year ended December 31, 2005, and the information provided to the Company by Reporting Persons of the Company, no Reporting Person failed to file the forms required by Section 16(a) of the Exchange Act on a timely basis.

Item 11. Executive Compensation

Director Compensation

      The Company reimburses directors for out-of-pocket expenses incurred in attending Board or committee meetings. In addition, non-employee directors are eligible to receive grants of stock options under the Company’s 1999 Stock Incentive Plan, as amended (the “Incentive Plan”).

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Executive Compensation

      The following table sets forth the cash and non-cash compensation for each of the last three fiscal years awarded to or earned by each person who served as the Chief Executive Officer of the Company during the year ended December 31, 2005, as well as for other executive officers of the Company and its subsidiaries whose salary and bonus exceeded $100,000 during the year ended December 31, 2005 (the “Named Executive Officers”).

Summary Compensation Table

									Long-Term
									Compensation
				Annual Compensation					Securities
									Underlying			All Other
Name and Principal Position		Year		Salary ($)			Bonus ($)		Options (#)(1)			Compensation
Steven A. Odom			2005		405,000			—		—			—
	Executive Chairman of the		2004		442,500			—		—			—
	Board and former Chief		2003		435,000			—		100,000	(2)		—
	Executive Officer									—
Montgomery L. Bannerman			2005		263,750			—		100,000	(3)		—
	Chief Executive Officer, former		2004		25,102			—		50,000	(3)		—
	President and former Senior Vice		2003		—			—		—			—
	President, Strategic Initiatives
Lewis Jaffe			2005		295,416	(4)		—		—			—
	Former President and former		2004		40,017	(4)		—		200,000	(5)		—
	Chief Operating Officer		2003		—			—		—			—
Gary Heck			2005		—			—					—
	Former President and former		2004		224,891	(6)		—		20,000	(7)		30,000	(8)
	Chief Operating Officer		2003		—			—		22,000	(7)		—
James A. Logsdon			2005		270,000	(9)		—		—			—
	Former President and former		2004		275,711	(9)		—		60,924	(10)		—
	Chief Operating Officer		2003		261,000			—		—			—
Juliet M. Reising			2005		250,000
	Executive Vice President and		2004		266,667			—		—			—
	Chief Financial Officer		2003		261,000			—		47,745	(11)		—
Yves Desmet			2005		183,859			—		62,000	(12)		86,459	(13)
	Senior Vice President,		2004		184,149			—		—			84,548	(13)
	Worldwide Sales and former		2003		150,621			—		3,500	(12)		42,338	(13)
	Director of Sales

(1)	The exercise prices of all options granted to the Named Executive Officers are equal to or greater than the fair market value of the Common Stock on the dates such options were granted. All options to purchase shares of Common Stock and the exercise prices thereof have been adjusted to reflect the Reverse Split.
(2)	The amount of 2001 bonus earned by Mr. Odom was previously reported by the Company as $225,000. Of such amount, only $168,750 was paid to Mr. Odom in cash and the remainder was paid to Mr. Odom in the form of a stock option to purchase 49,755 shares of Common Stock at an exercise price of $2.30 per share granted to Mr. Odom on January 3, 2003 and exercisable in its entirety on the date thereof. On February 12, 2003, the Company also granted to Mr. Odom an option to purchase 50,245 shares of Common Stock at an exercise price of $2.10 per share, exercisable in its entirety on the date of grant. Mr. Odom served as Chief Executive Officer of the Company from September 29, 2000 until October 1, 2005, when he began serving as the Company’s Executive Chairman of the Board. See the section of this Annual Report titled “Executive Compensation — Employment Agreements.”
(3)	The Company granted to Mr. Bannerman (i) on November 19, 2004 an option to purchase 50,000 shares of Common Stock at an exercise price of $3.45 per share, exercisable as to

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	twenty-five percent (25%) of the underlying shares of Common Stock on November 19, 2005, November 19, 2006, November 19, 2007 and November 19, 2009, in connection with his appointment as Senior Vice President, Strategic Initiatives of the Company; and (ii) on August 1, 2005 an option to purchase 100,000 shares of Common Stock at an exercise price of $2.50 per share, exercisable as to fifty percent (50%) of the underlying shares on the date of grant and as to the remaining fifty percent (50%) on August 1, 2006, August 1, 2007, August 1, 2008 and August 1, 2009, in connection with his appointment to President and Chief Operating Officer of the Company. See the section of this Annual Report titled “Executive Compensation — Employment Agreements.”
(4)	Represents amounts paid to Mr. Jaffe pursuant to his employment agreement with the Company while serving as President and Chief Operating Officer of the Company, and amounts paid to him under the Separation Agreement he entered into with the Company on August 16, 2005 (the “Separation Agreement”) after he ceased serving as the President and Chief Operating Officer of the Company on August 1, 2005. See the section of this Annual Report titled “Certain Relationships and Related Transactions.”
(5)	The Company granted to Mr. Jaffe on November 2, 2004 (i) an option to purchase 100,000 shares of Common Stock at an exercise price of $2.65 per share; (ii) an option to purchase 50,000 shares of Common Stock at an exercise price of $3.75 per share; and (iii) an option to purchase 50,000 shares of Common Stock at an exercise price of $6.25, in connection with his appointment to President and Chief Operating Officer of the Company. Mr. Jaffe’s employment with the Company terminated on August 1, 2005 (the “Separation Date”). On August 16, 2005, the Company entered into a Separation Agreement with Mr. Jaffe. Pursuant to the Separation Agreement, the Company agreed that twenty-five percent (25%) of the shares of the Company’s common stock underlying the options granted to Mr. Jaffe vested as of the Separation Date and such vested options could be exercised at any time and from time to time until the one year anniversary of the Separation Date.
(6)	Mr. Heck served as President and Chief Operating Officer of the Company from February 23, 2004 to November 3, 2004. Salary earned during 2004 was compensation for such service.
(7)	The Company granted to Mr. Heck (i) on March 1, 2004 an option to purchase 20,000 shares of Common Stock at an exercise price of $9.10 per share, exercisable in its entirety on September 1, 2004, in connection with his appointment as President and Chief Operating Officer of the Company; (ii) on February 7, 2003, an option to purchase 20,000 shares of Common stock at an exercise price of $2.15 per share, exercisable in its entirety on February 7, 2004, in exchange for his services as a director of the Company; (iii) on January 3, 2003, an option to purchase 10,000 shares of Common Stock at an exercise price of $0.46 per share, exercisable in its entirety on the date of grant, in exchange for consulting services rendered to the Company by PacifiCom, a consulting firm in which Mr. Heck is a partner.
(8)	Represents amounts paid to PacifiCom, a consulting firm in which Mr. Heck is a partner, in connection with consulting services rendered by PacifiCom to the Company.
(9)	Represents amounts paid to Mr. Logsdon pursuant to his employment agreement with the Company while serving as the President and Chief Operating Officer of the Company, and amounts paid to him under such agreement after he ceased serving as the President and Chief Operating Officer of the Company on February 23, 2004. See the section of this Annual Report titled “Executive Compensation — Employment Agreements.”

(10)  The amount of 2001 bonus earned by Mr. Logsdon was previously reported by the Company as $85,000. Of such amount, only $63,750 was paid to Mr. Logsdon in cash and the remainder was paid to Mr. Logsdon in the form of a stock option to purchase 20,924 shares of Common Stock at an exercise price of $2.30 per share granted to Mr. Logsdon on January 3, 2003 and exercisable in its entirety on the date thereof. The Company also granted to Mr. Logsdon an option to purchase 40,000 shares of Common Stock at an exercise price of $2.10 per share, exercisable with respect to fifty percent (50%) of the underlying shares on the date of grant and all of the underlying shares as of February 12, 2004. Mr. Logsdon ceased serving as the President, Chief Operating Officer and a director of the Company

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	effective February 23, 2004. See the section of this Annual Report titled “Executive Compensation — Employment Agreements.”
(11)	On January 3, 2003, the Company granted to Ms. Reising an option to purchase 7,745 shares of Common Stock at an exercise price of $2.30 per share, exercisable in its entirety on the date of grant. The Company granted this option to Ms. Reising in lieu of payments of cash salary and bonus earned by Ms. Reising in the years ended 2002 and 2001, respectively. On February 12, 2003, the Company also granted to Ms. Reising an option to purchase 40,000 shares of Common Stock at an exercise price of $2.10 per share, exercisable in its entirety on the date of grant. See the section of this Annual Report titled “Executive Compensation — Employment Agreements.”
(12)	The Company granted to Mr. Desmet (i) on February 11, 2003 an option to purchase 2,000 shares of Common Stock at an exercise price of $2.20 per share, exercisable as to twenty-five percent (25%) of the underlying shares of Common Stock on the date of grant and as to the remaining seventy-five percent (75%) on June 30, 2003, September 30, 2003 and December 31, 2003; (ii) on August 25, 2003 an option to purchase 1,500 shares of Common Stock at an exercise price of $16.75 per share, exercisable as to twenty-five percent (25%) of the underlying shares of Common Stock on the date of grant and as to the remaining seventy-five percent (75%) on August 25, 2004, August 25, 2005 and August 25, 2006; (iii) on January 3, 2005 an option to purchase 4,000 shares of Common Stock at an exercise price of $3.55 per share, exercisable as to twenty-five percent (25%) on January 3, 2006, January 3, 2007, January 3, 2008 and January 3, 2009; (iv) on June 17, 2005 an option to purchase 15,000 shares of Common Stock at an exercise price of $1.55 per share, exercisable as to twenty-five percent (25%) on June 17, 2006, June 17, 2007, June 17, 2008 and June 17, 2009; (v) on July 8, 2005 an option to purchase 3,000 shares of Common Stock at an exercise price of $1.45 per share, exercisable as to twenty-five percent (25%) on January 8, 2006, July 8, 2006, January 8, 2007 and July 8, 2007; and (vi) on October 14, 2005 an option to purchase 40,000 shares of Common Stock at an exercise price of $1.45 per share, exercisable as to twenty-five percent (25) on October 14, 2006, October 14, 2007, October 14, 2008 and October 14, 2009 or subject to acceleration upon meeting quarterly performance criteria as established by the Chief Executive Officer, in connection with his appointment to Senior Vice President, Worldwide Sales of the Company.
(13)	Represents amounts paid to Mr. Desmet for commissions on sales.

Option Grants in Last Fiscal Year

      The following table sets forth information with respect to options granted under Incentive Plan to the Named Executive Officers for the year ended December 31, 2005.

	Individual Grants									Potential Realizable
										Value at Assumed
	Number of		Percent of Total							Annual Rates of Stock
	Securities		Options							Price Appreciation for
	Underlying		Granted to							Option Term(1)
	Options		Employees in			Exercise Price		Expiration
Name	Granted		2005			(per share)		Date		5%		10%
Montgomery L. Bannerman(2)		100,000		10	%	$	2.50		8/1/2015	$	157,224	$	398,436
Yves Desmet(3)		4,000		*			3.55		1/3/2015		8,930		22,631
		15,000		2			1.55		6/17/2015		14,622		37,055
		3,000		*			1.45		7/8/2015		2,736		6,933
		40,000		4			1.45		10/14/2015		36,476		92,437

* represents less than 1%

(1)  Amounts represent certain assumed rates of appreciation as set forth by the rules of the SEC. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock and overall market conditions. The amounts reflected in this table may not necessarily be achieved. All

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

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

      The following table sets forth information concerning the value at December 31, 2005, of the unexercised options held by each of the Named Executive Officers. The value of unexercised options reflects the increase in market value of the Common Stock from the date of grant through December 31, 2005. No Named Executive Officer exercised any options during the year ended December 31, 2005.

	Number of Securities				Value of Unexercised In-
	Underlying Unexercised				The-Money Options at Fiscal
	Options at Fiscal Year-End(1)				Year-End(2)
Name	Exercisable		Unexercisable		Exercisable		Unexercisable
Steven A. Odom(3)		700,000		0	$	0	$	0
Montgomery L. Bannerman		62,500		87,500		0		0
Lewis Jaffe		50,000		0		0		0
Gary Heck		107,500		0		0		0
James M. Logsdon(4)		293,925		0		0		0
Juliet M. Reising(5)		267,746		0		0		0
Yves Desmet		14,875		50,625		0		0

(1)	The number of shares of Common Stock underlying the unexercised options held by each of the Named Executive Officers at December 31, 2005 have been adjusted to reflect the Reverse Split.
(2)	Value of the Company’s unexercised, in-the-money options based on the average of the high and low price of a share of the Common Stock as of December 30, 2005, which was $1.00.
(3)	Includes options and warrants originally issued by Cereus prior to September 29, 2000, which were converted into options or warrants to acquire an aggregate of 455,000 shares of Common Stock.
(4)	Includes options and warrants originally issued by Cereus prior to September 29, 2000 which were converted into options or warrants to acquire 210,000 shares of Common Stock.
(5)	Includes options and warrants originally issued by Cereus prior to September 29, 2000, which were converted into options or warrants to acquire an aggregate of 122,500 shares of Common Stock.

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Employment Agreements

      On September 29, 2000, the Company entered into an Executive Employment Agreement with Mr. Odom, pursuant to which Mr. Odom has agreed to serve as the Chief Executive Officer of the Company for a term of three years (the “Original Odom Employment Agreement”). The agreement provides for: (i) a term which will be automatically renewed for an additional one-year term unless either party gives notice to the other of its intention not to so renew at least 90 days prior to the termination of the then-current term; (ii) the payment of a specified base salary and an annual bonus in the discretion of the Board; (iii) a prohibition against Mr. Odom’s disclosure of confidential information for a period of two years following termination; and (iv) continuation of Mr. Odom’s salary and the benefits for the 24 months following his termination by the Company without cause or by him for “good reason.” Effective January 16, 2001, Mr. Odom’s base salary under the agreement was increased to $450,000. Effective November 1, 2002, Mr. Odom’s base salary under the agreement was reduced to $405,000 until May 1, 2003, when his base salary under the agreement returned to $450,000. Effective November 1, 2004, Mr. Odom agreed voluntarily to reduce his base salary to $405,000 per year. On October 24, 2005, the Company entered into an Amended and Restated Executive Employment Agreement with Mr. Odom effective as of October 1, 2005 (the “Amended Odom Employment Agreement”), which amended and restated the Original Odom Employment Agreement. The Amended Odom Employment Agreement provides that (i) Mr. Odom shall no longer serve as the Company’s Chief Executive Officer for a stated term with automatic renewals thereof but shall serve as the Company’s Executive Chairman of the Company’s Board until the termination of Mr. Odom’s employment with the Company pursuant to the terms of the Amended Odom Agreement; (ii) in addition to the termination provisions already provided in the Original Odom Employment Agreement, Mr. Odom’s employment with the Company shall terminate immediately if Mr. Odom is not re-elected to serve as a member of the Board; (iii) Mr. Odom is entitled to receive his base salary and benefits for a period of two years after such termination; (iv) if Mr. Odom’s employment under the Amended Odom Employment Agreement is terminated for any reason pursuant to the terms thereof, then Mr. Odom is entitled to receive, in addition to any other amounts provided in the Original Odom Employment Agreement, a pro rata portion of the annual bonus (if any) which Mr. Odom otherwise would have received for the calendar year in which such termination occurs; (v) Mr. Odom’s base salary is no longer required to be increased annually by a percentage at least equal to the percentage increase in the consumer price index for the prior year; and (vi) termination for cause requires a determination of all of the non-employee members of the Board instead of two-thirds of the members of the Board. Other than the foregoing modifications to the Original Odom Employment Agreement affected by the Amended Odom Employment Agreement, the material terms of Mr. Odom’s employment with the Company remain unchanged.

      In connection with Mr. Bannerman’s appointment as the Company’s President and Chief Operating Officer, effective as of August 1, 2005, and its Chief Executive Officer effective as of October 1, 2005, on October 24, 2005, the Company entered into an Executive Employment Agreement, with Mr. Bannerman pursuant to which he has agreed to serve as the Chief Executive Officer of the Company until the termination of his employment pursuant thereto. Mr. Bannerman’s Executive Employment Agreement provides for: (i) the payment to Mr. Bannerman of a specified base salary, which is $325,000 per year as of October 1, 2005, and an annual bonus in the discretion of the Board; (ii) a prohibition against Mr. Bannerman’s (a) disclosure of confidential information during the term of the agreement and for the two-year period immediately following any termination of Mr. Bannerman’s employment with the Company, (b) disparagement of the Company, its affiliates and business during the term of the agreement and during the one-year period immediately following any termination of Mr. Bannerman’s employment with the Company, (c) participation in a competitive business during the term of the agreement and, if Mr. Bannerman’s employment with the Company is terminated other than by the Company without “cause” or by Mr. Bannerman for “good reason” within the one-year period immediately following a change of control of the Company, during the one-year period immediately following such termination, and (d) solicitation of the Company’s employees, interference with the Company’s customers and interference with the control of the Company during the one-year period immediately following the termination of Mr. Bannerman’s employment with the Company, if such employment is terminated other than by the Company without cause or by Mr. Bannerman for good reason within the one-year period immediately following a change of control of the

50

Company; (iii) continuation of Mr. Bannerman’s base salary and benefits for (a) 24 months immediately following the termination of Mr. Bannerman’s employment with the Company if terminated by Mr. Bannerman for “good reason” within the one-year period immediately following a change of control of the Company or if terminated by the Company without “cause” after a change of control of the Company; and (b) 12 months immediately following the termination of Mr. Bannerman’s employment with the Company if terminated by the Company without cause prior to a change of control of the Company; and (iv) the availability to Mr. Bannerman of all benefits and conditions of employment provided by the Company to its executive officers. In addition, pursuant to Mr. Bannerman’s Executive Employment Agreement, on March 15, 2006, the Company granted to Mr. Bannerman under the Incentive Plan, a ten-year, non-qualified stock option to purchase 50,000 shares of the Company’s common stock, par value $0.01 per share, at an exercise price equal to the higher of $6.25 per share or the Fair Market Value (as defined in the Incentive Plan) of the Common Stock on such date. This option shall vest and first become exercisable with respect to 12,500 shares of the underlying Common Stock on each of August 1, 2006, August 1, 2007, August 1, 2008 and August 1, 2009. In connection with Mr. Bannerman’s promotions to the offices described above, on August 1, 2005, the Company issued to Mr. Bannerman pursuant to the Incentive Plan a ten-year, non-qualified stock option to purchase 100,000 shares of Common Stock, at an exercise price of $2.50 per share, exercisable with respect to 50,000 of the underlying shares as of August 1, 2005 and, with respect to the remaining 50,000 shares, over a four-year period.

      On September 29, 2000, the Company entered into an Executive Employment Agreement with Ms. Reising (the “Original Reising Employment Agreement”), pursuant to which Ms. Reising has agreed to serve as the Executive Vice President and Chief Financial Officer of the Company for a term of three years for a base salary at an annual rate per year of $175,000 through and including March 23, 2001, and at an annual rate per year of $200,000 thereafter. The agreement provides for: (i) a term which will be automatically renewed for an additional one-year term unless either party gives notice to the other of its intention not to so renew at least 90 days prior to the termination of the then-current term; (ii) the payment of a specified base salary and an annual bonus in the discretion of the Board; (iii) a prohibition against Ms. Reising’s disclosure of confidential information for a period of two years following termination; and (iv) continuation of Ms. Reising’s salary and the benefits for the 24 months following her termination by the Company without cause or by her for “good reason.” Effective January 1, 2001, and March 1, 2002, Ms. Reising’s base salary under the agreement was increased to $225,000 and $270,000, respectively. Effective November 1, 2002, Ms. Reising’s base salary under the agreement was reduced to $243,000 until May 1, 2003, when her base salary under the agreement returned to $270,000. Effective November 1, 2004, Ms. Reising agreed voluntarily to reduce her base salary to $250,000 per year. On October 24, 2005, the Company entered into an Amended and Restated Executive Employment Agreement with Ms. Reising effective as of October 1, 2005 (the “Amended Reising Employment Agreement”). The Amended Reising Employment Agreement amends the Original Reising Employment Agreement (i) to eliminate the stated term and automatic renewals thereof and to provide that Ms. Reising shall continue to serve as the Company’s Chief Financial Officer, Executive Vice President and Secretary until the termination of Ms. Reising’s employment with the Company pursuant to the terms of the Amended Reising Employment Agreement; and (ii) to provide that Ms. Reising’s base salary is no longer required to be increased annually by a percentage at least equal to the percentage increase in the consumer price index for the prior year. Other than the foregoing modifications to the Original Reising Employment Agreement effected by the Amended Reising Employment Agreement, the material terms of Ms. Reising’s employment with the Company remain unchanged.

      On September 29, 2000, the Company entered into an Executive Employment Agreement with Mr. Logsdon, pursuant to which Mr. Logsdon agreed to serve as the President and Chief Operating Officer of the Company for a term of three years for a base salary at an annual rate per year of $175,000 through and including February 1, 2001, and at an annual rate per year of $225,000 thereafter. The agreement provides for: (i) a term which will be automatically renewed for an additional one-year term unless either party gives notice to the other of its intention not to so renew at least 90 days prior to the termination of the then-current term; (ii) the payment of a specified base salary and an annual bonus in the discretion of the Board; (iii) a prohibition against Mr. Logsdon’s disclosure of confidential information for a period of two years following termination; and (iv) continuation of Mr. Logsdon’s salary and the benefits for 24 months following his

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termination by the Company without cause or by him for “good reason.” Effective January 1, 2001, Mr. Logsdon’s base salary under the agreement was increased to $270,000. Effective November 1, 2002, Mr. Logsdon’s base salary under the agreement was reduced to $243,000 until May 1, 2003, when his base salary under the agreement returned to $270,000. Effective as of February 23, 2004, Mr. Logsdon ceased serving as President, Chief Operating Officer and a director of the Company. Consequently, Mr. Logsdon is entitled to receive certain payments and benefits in accordance with section 10.1(ii) of his Executive Employment Agreement with the Company.

      From November 3, 2004 through August 1, 2005, Mr. Jaffe served as the Company’s President and Chief Operating Officer. The Company and Mr. Jaffe did not enter into a written employment agreement with respect to such service, but the Company and Mr. Jaffe entered into a Separation Agreement in connection with the cessation of such services. See the section of this Annual Report titled “Certain Relationships and Related Transactions” for a discussion of Mr. Jaffe’s employment and separation arrangements with the Company.

Compensation Committee Interlocks and Insider Participation

      From January 1, 2005 through December 31, 2005, the Compensation Committee of the Board was comprised of non-employee directors Ms. Newmark and Mr. Garcia.

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

Equity Compensation Plan Information

      The following table sets forth information regarding equity compensation plans under which the Common Stock is authorized for issuance as of December 31, 2005.

	Number of Securities to be			Weighted Average			Number of Securities
	Issued Upon Exercise of			Exercise Price of			Remaining Available
	Outstanding			Outstanding			for Future Issuance
	Options, Warrants			Options, Warrants			Under Equity
Plan Category	and Rights			and Rights			Compensation Plans
Equity compensation plans approved by security holders:(1)		2,634,411		$	6.02			366,660
Equity compensation plans not approved by security holders:		474,067	(2)(3)	$	6.33	(2)(3)		—
Total		3,108,478		$	6.07			366,660

(1)	Represents options granted pursuant to the Incentive Plan.
(2)	Does not include (i) options to purchase 151,453 shares of Common Stock with a weighted average exercise price of $7.80 per share, which were originally granted as options to purchase shares of Telemate.Net’s common stock pursuant to the Telemate Stock Incentive Plan and the Telemate.Net Software, Inc. 1999 Stock Incentive Plan and which were assumed by the Company in connection with the Company’s acquisition of Telemate.Net; and (ii) options and warrants to purchase 1,016,048 shares of Common Stock with a weighted average exercise price of $12.60 per share, which were originally granted as options and warrants to purchase shares of Cereus’ common stock pursuant to the Cereus’ Outside Director Warrant Plan, Directors’ Warrant Plan and 1997 Stock Option Plan and which were assumed by the Company in connection with the Company’s acquisition of Cereus. The Company has not made, and will not make, any grants under the stock option or warrant plans of Telemate.Net or Cereus.
(3)	Includes options and warrants to purchase Common Stock granted under plans not approved by the Company’s shareholders. The material features of such plans are set forth below.

(a) On March 16, 2005, the Company issued warrants to purchase an aggregate of 302,400 shares of Common Stock to two placement agents and 16 employees of the placement agents as compensation

52

for placement agent services rendered to the Company by such agents. The warrants are exercisable over a four-year period commencing on February 4, 2006 at an initial exercise price of $3.60 per share.

(b) On November 3, 2004, the Company issued to Mr. Jaffe in connection with his appointment as President and Chief Operating Officer of the Company a ten-year option to purchase 100,000 shares of the Common Stock at an exercise price of $2.65 per share; (ii) a ten-year option to purchase 50,000 shares of Common Stock at an exercise price of $3.75 per share; and (iii) a ten-year option to purchase 50,000 shares of Common Stock at an exercise price of $6.25 per share. Each option was to vest with respect to twenty-five percent (25%) of the underlying shares on each of November 3, 2005, November 3, 2006, November 3, 2007 and November 3, 2008. Pursuant to the Separation Agreement, the Company agreed that twenty-five percent (25%) of the shares of the Company’s common stock underlying the options granted to Mr. Jaffe vested as of the Separation Date and such vested options could be exercised at any time and from time to time until the one year anniversary of the Separation Date.

(c) On November 19, 2004, the Company issued to Mr. Bannerman in connection with his appointment as Senior Vice President, Strategic Initiatives of the Company a ten-year option to purchase 50,000 shares of Common Stock at an exercise price of $3.45 per share exercisable with respect to twenty-five percent (25%) of the underling shares on each of November 19, 2005, November 19, 2006, November 19, 2007 and November 19, 2008.

(d) On January 30, 2001, the Company issued a warrant to purchase 16,666 shares of Common Stock at an exercise price of $7.50 per share to PNC Bank, National Association, a former lender to the Company (“PNC”), in consideration of PNC consenting to certain transactions engaged in by the Company. The warrant expired on January 30, 2006.

(e) On October 16, 2001, the Company issued a warrant to purchase 5,000 shares of Common Stock to PNC in consideration of PNC consenting to certain transactions engaged in by the Company. The warrant is exercisable until October 16, 2006, at an exercise price of $0.05 per share.

(f) On October 31, 1996, the Company issued warrants to purchase an aggregate of 30,000 shares of Common Stock to three individuals as compensation for consulting services rendered by such individuals to the Company. The warrants are exercisable until October 30, 2006, at an exercise price of $30.00 per share.

(g) On September 19, 1997, the Company issued warrants to purchase an aggregate of 20,000 shares of Common Stock to two individuals as compensation for consulting services rendered by such individuals to the Company. The warrants are exercisable until October 30, 2006, at an exercise price of $26.25 per share.

53

Beneficial Ownership

      The following table sets forth information regarding the beneficial ownership of Common Stock as of March 23, 2006, by (i) each shareholder who is known by the Company to own beneficially more than 5% of the outstanding Common Stock; (ii) each director; (iii) each Named Executive Officer; and (iv) all executive officers and directors of the Company as a group. All beneficial ownership information reported below is based upon publicly available information and certain additional information known to the Company.

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

†	Director of the Company
‡	Officer of the Company

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

(1)	Unless otherwise noted, all of the shares shown are held by individuals or entities possessing sole voting and investment power with respect to such shares. Shares not outstanding but deemed beneficially owned by virtue of the right of a person or member of a group to acquire them within 60 days of March 23, 2006, are treated as outstanding only when determining the amount and percentage owned by such individual or group.
(2)	In accordance with regulations of the SEC, the percentage calculations are based on 32,910,078 shares of Common Stock issued and outstanding as of March 23, 2006, plus shares of Common Stock which may be acquired within 60 days of March 23, 2006, by each individual or group listed.
(3)	On January 30, 2006, a Schedule 13G was filed with the SEC by Prescott Group Capital Management, L.L.C. (“Prescott”) reporting that Prescott is the beneficial owner of 1,408,552 shares of Common Stock. In addition, Prescott purchased 769,231 units from the Company in the private placement closed by the Company on February 17, 2006. Each unit consists of one share of Common Stock and one warrant to purchase one share of Common Stock at an exercise price of $1.56 per share exercisable for a period of five years beginning six months after the close of the private placement. The figure in this table includes the shares of Common stock purchased by Prescott in the private placement, but not the shares exercisable under the warrants.
(4)	Includes (i) 260 shares of Common Stock held by Mr. Odom’s wife as to which Mr. Odom may be deemed to share voting and investment power; (ii) 2,920 shares of Common Stock held by Mr. Odom’s son as to which Mr. Odom may be deemed to share voting and investment power; and

54

	(iii) 700,000 shares of Common Stock issuable pursuant to options or warrants exercisable within 60 days of March 23, 2006.
(5)	Includes (i) 28,616 shares of Common Stock held in an account owned by Ms. Reising’s husband as to which Ms. Reising may be deemed to share voting and investment power; and (ii) 267,746 shares of Common Stock issuable pursuant to options or warrants exercisable within 60 days of March 23, 2006.
(6)	Includes 293,925 shares of Common Stock issuable pursuant to options or warrants exercisable within 60 days of March 23, 2006.
(7)	Includes 107,500 shares of Common Stock issuable pursuant to options or warrants exercisable within 60 days of March 23, 2006.
(8)	Includes 107,500 shares of Common Stock issuable pursuant to options or warrants exercisable within 60 days of March 23, 2006.
(9)	Includes 92,400 shares of Common Stock issuable pursuant to options or warrants exercisable within 60 days of March 23, 2006.

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

Item 13. Certain Relationships and Related Transactions

      Descriptions of the employment agreements between the Company and each of Messrs. Odom, Bannerman and Logsdon and Ms. Reising are set forth in Item 11 of this Annual Report “Executive Compensation — Employment Agreements.”

      In exchange for serving as the Company’s President and Chief Operating Officer, the Company paid Mr. Jaffe a base salary at a rate of $250,000 per year through December 31, 2004 and at a rate of $300,000 per year from January 1, 2004, through August 1, 2005, when he ceased serving as the Company’s President and Chief Operating Officer. On August 16, 2005, the Company entered into the Separation Agreement with Mr. Jaffe, pursuant to which the Company agreed (i) to pay to Mr. Jaffe from the Separation Date through the one-year anniversary thereof (the “Continuation Period”) his base salary at the rate of $300,000 per year in accordance with the Company’s standard payroll practices, subject to all withholdings required pursuant to any applicable local, state or Federal law and his compliance with the restrictive covenants set forth in the Separation Agreement; and (ii) to provide Mr. Jaffe during the Continuation Period with the health insurance benefits provided to him immediately prior to the Separation Date. Pursuant to the Separation Agreement the Company also agreed that twenty-five percent (25%) of the shares of the Company’s common stock underlying the options granted to Mr. Jaffe vested as of the Separation Date and such vested options could be exercised at any time and from time to time until the one year anniversary of the Separation Date.

      There are no material relationships between the Company and its directors or executive officers except as previously discussed herein. In the ordinary course of business and from time to time, the Company and its affiliates and subsidiaries may do business with each other.

55

Item 14. Principal Accountant Fees and Services

Audit Fees

      Grant Thornton LLP billed $460,100 and $382,600 for fiscal years 2005 and 2004, respectively. for professional services rendered by such firms for the audit of the Company’s annual consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports, and services that are normally provided by such firms in connection with statutory and regulatory filings or engagements.

Audit-Related Fees

      Grant Thornton LLP billed for no audit-related services for fiscal years 2005 and 2004, respectively.

Tax Fees

      Grant Thornton LLP billed for no professional services for tax compliance, tax advice and tax planning.

All Other Fees

      Grant Thornton LLP did not bill for, nor rendered professional services to the Company during, fiscal years 2005 or 2004 for any services that are not included in the above classifications.

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

      The Audit Committee is required to pre-approve the audit and non-audit services performed by the Company’s independent auditors. The Audit Committee has adopted a policy which provides for general pre-approval of specified audit, audit-related, tax and other services that do not exceed enumerated dollar amounts. The policy also provides that, unless a type of service to be provided by the independent auditors has received general pre-approval, it will require specific pre-approval by the Audit Committee.

      The Audit Committee has determined the audit, audit-related, tax and other services that are the basis for general pre-approval by the Audit Committee. The enumerated dollar amounts at which such general pre-approval will apply are currently under consideration by the Audit Committee. Until the Audit Committee has determined such enumerated dollar amounts, all services performed by the Company’s independent auditors will require the specific pre-approval of the Audit Committee.

Item 15. Exhibits and Financial Statement Schedules

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

      (i) A list of the consolidated financial statements required to be filed as a part of this Annual Report is shown in the “Index to Consolidated Financial Statements” on page F-1.

      (ii) Except for Financial Statement Schedule II, “Valuation and Qualifying Accounts,” which is filed herewith, the financial statement schedules required to be filed as a part of this Annual Report are omitted from this Annual Report because the information required by such schedules is either not applicable or is included in the consolidated financial statements and notes thereto, which statements and notes are listed on the “Index to Consolidated Financial Statements” on page F-1 and filed herewith.

      (iii) A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Annual Report is shown on the “Exhibit Index” filed herewith.

56

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED REPORTS

      The following consolidated financial statements, financial statement schedule and reports of independent registered public accounting firm are included herein on the pages indicated:

	Page
Reports of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2005 and 2004		F-4
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003		F-5
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003		F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2005 2004 and 2003		F-7
Notes to Consolidated Financial Statements		F-9
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule		F-38
Schedule II — Valuation and Qualifying Accounts		F-39

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors

Verso Technologies, Inc.

      We have audited the accompanying consolidated balance sheets of Verso Technologies, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years then ended. 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 Verso Technologies, Inc. as of December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the two years then ended in conformity with accounting principles generally accepted in the United States of America.

      Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II for the years ended December 31, 2005 and 2004, is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/ Grant Thornton LLP

Atlanta, Georgia

March 3, 2006

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Verso Technologies, Inc.:

      We have audited the accompanying consolidated statements of operations, shareholders’ equity and cash flows of Verso Technologies, Inc. and subsidiaries (“the Company”) for the year ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

      We conducted our audit in accordance with the standards of the Public Accounting Oversight Board (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 audit provides a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of Verso Technologies, Inc. and subsidiaries for the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Atlanta, Georgia

February 27, 2004,

Except as to note 5,

which is as of March 16, 2005

F-3

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

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

F-4

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

F-5

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

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

													Notes
			Common Stock				Additional						Receivable									Foreign
							Paid-in			Stock			from			Accumulated			Deferred			Currency
			Shares		Amount		Capital			Payable			Shareholders			Deficit			Compensation			Translation			Total
			In thousands, except share data)
BALANCES,
December 31, 2002				17,815,568	$	178	$	275,753		$	—		$	(1,623	)	$	(254,857	)	$	(1,797	)	$	(20	)	$	17,634
Comprehensive loss:
	Net loss			—		—		—			—			—			(18,287	)		—			—			(18,287	)
	Foreign currency translation adjustment			—		—		—			—			—			—			—			118			118
		Comprehensive loss																								(18,169	)
Amortization of deferred compensation				—		—		—			—			—			—			780			—			780
Exercise of stock options and warrants				2,941,738		29		6,557			—			—			—			—			—			6,586
Reduction of deferred compensation due to forfeitures				—		—		(5	)		—			—			—			5			—			—
Issuance of common stock in MCK Communications, Inc. acquisition				3,655,685		37		24,093																		24,130
Acceleration of compensatory options in reorganization				—		—		219			—			45			—			—			—			264
Shares issued in employee stock purchase plan				33,232		—		168			—			—			—			—			—			168
Shares issued in litigation settlement				110,000		1		263			—			—			—			—			—			264
Warrants issued in connection with credit facility				—		—		119			—			—			—			—			—			119
Stock payable for consulting services											130															130
Accrued interest on notes receivable from shareholders				—		—		—			—			(84	)		—			—			—			(84	)
Payment received on notes receivable from shareholders				—		—		109			—			1,662			—			—			—			1,771
BALANCES,
December 31, 2003				24,556,223	$	245	$	307,276		$	130		$	—		$	(273,144	)	$	(1,012	)	$	98		$	33,593
Comprehensive loss:
	Net loss			—		—		—			—			—			(38,787	)		—			—			(38,787	)
	Foreign currency translation adjustment			—		—		—			—			—			—			—			49			49
		Comprehensive loss																								(38,738	)
Amortization of deferred compensation				—		—		—			—			—			—			435			—			435
Exercise of stock options and warrants				80,942		1		12			—			—			—			—			—			13
Reduction of deferred compensation due to reorganization				—		—		—			—			—			—			570			—			570
Shares issued in employee stock purchase plan				35,468		—		162			—			—			—			—			—			162
Shares issued in exchange for services				9,988		—		133			(133	)		—			—			—			—			—
Issuance of shares and warrants in private placement, net of associated fees				1,966,020		20		16,454			—			—			—			—			—			16,474
Stock payable for consulting services											131															131
BALANCES,
December 31, 2004				26,648,641	$	266	$	324,037		$	128		$	—		$	(311,931	)	$	(7	)	$	147		$	12,640
Comprehensive loss:
	Net loss			—		—		—			—			—			(20,060	)		—			—			(20,060	)
	Foreign currency translation adjustment			—		—		—			—			—			—			—			(307	)		(307	)
		Comprehensive loss																								(20,367	)
Amortization of deferred compensation				—		—		—			—			—			—			7			—			7
Exercise of stock options and warrants				25,160		—		21			—			—			—			—			—			21
Issuance of shares in WSECI acquisition				467,099		5		722			—			—			—			—			—			727
Warrants issued in conjunction with convertible debentures				—		—		5,084			—			—			—			—			—			5,084
Beneficial conversion on convertible debentures				—		—		3,590			—			—			—			—			—			3,590
Warrants issued in conjunction with
	convertible debenture restructuring			—		—		877			—			—			—			—			—			877
Shares issued in employee stock purchase plan				50,103		1		43			—			—			—			—			—			44
Shares issued in exchange for services				119,521		1		276			(133	)		—			—			—			—			144
Stock payable for consulting services											72															72
BALANCES,
December 31, 2005				27,310,524	$	273	$	334,650		$	67		$	—		$	(331,991	)	$	—		$	(160	)	$	2,839

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

F-6

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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

F-7

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

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

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

F-8

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

      Verso Technologies, Inc. and subsidiaries (the “Company”) is a communications technology and solutions provider for communications service providers and enterprises seeking to implement application-based telephony services, Internet usage management tools and outsourced customer support services. The Company’s continuing operations include two separate business segments (i) the Packet-based Technologies Group, which includes the Company’s softswitch division, I-Master division, NetPerformer division and Telemate.Net Software, Inc. (“Telemate.Net”) the Company’s subsidiary; and (ii) the Advanced Applications Services Group, which includes the Company’s technical applications support group. The Packet-based Technologies Group includes international and domestic sales of hardware and software, integration, applications and technical training and support. The Packet-based Technologies Group offers hardware and software for companies seeking to build private, packet-based voice and data networks. Additionally, the Packet-based Technologies Group offers software-based solutions for Internet access and usage management that include call accounting and usage reporting for Internet protocol network devices. The Advanced Applications Services Group includes outsourced technical application services and application installation and training services to outside customers, as well as customers of the Packet-based Technologies Group.

      In January 2005, the Company sold substantially all of the operating assets of its NACT Telecommunications, Inc., now known as Provo Pre-Paid (Delaware) Corp. (“NACT”) and MCK Communications, Inc., now known as Needham (Delaware) Corp. (“MCK”) businesses to better focus the Company’s capital and management resources on areas which the Company believes have greater potential given its strategy to focus on next-generation network and solutions to improve cash utilization. In addition, the Company disposed of its NACT business because the Company wanted to move toward an open-standards, pre-paid next-generation solution that could better address growing market opportunities and enable the Company to offer a competitive product for Tier 1 and Tier 2 carriers. The Company acquired the I-Master platform from WSECI, Inc., a Delaware corporation formerly known as Jacksonville Technology Associates, Inc. (“WSECI”), in March 2005 after forming a strategic partnership with WSECI in the latter half of 2004. The Company believes that this platform permits it to offer a better solution. Further the Company disposed of its MCK business because the Company intends to focus on next-generation solutions for service providers and that the products of MCK business did not fit that profile. The operations of NACT and MCK businesses have been reclassified as discontinued operations in the Company’s consolidated financial statements.

      On October 11, 2005, the Company effected a 1-for-5 reverse stock split of the Company’s outstanding common stock, pursuant to which every five (5) shares of the Company’s common stock outstanding on such date were converted into one (1) share of the Company’s common stock (the “Reverse Split”). This Reverse Split has been reflected retroactively throughout the Company’s Form 10-K.

      The consolidated financial statements include the accounts of Verso Technologies, Inc. and its wholly-owned subsidiaries, Telemate.Net Software, Inc.; Clarent Canada Ltd., now known as Verso Technologies Canada Inc. (“Verso Canada”), MCK and NACT are reflected in discontinued operations. These subsidiaries were acquired and were all accounted for as purchases (see Note 3).

      Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on previously reported net loss.

2. Summary of Significant Accounting Policies and Practices

Principles of Consolidation

      The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in joint ventures, where the Company does not exercise control, are accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.

F-9

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Use of Estimates

      The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management of the Company 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

      The Company recognizes revenue when persuasive evidence of an agreement exists, delivery has occurred, the fee is fixed and determinable, and collection of the resulting receivable is reasonably assured. The determination of whether the collectibility is reasonably assured is based upon an assessment of the creditworthiness of the customers. In instances where the collection of a receivable is not reasonably assured, the revenue and related costs are deferred.

      Deferred revenue generally represents amounts collected for which revenue has not yet been recognized. It is principally comprised of deferred maintenance revenue.

      The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” as updated by Staff Accounting Bulletin No. 104 and in accordance with Emerging Issues Task Force (“EITF”) 00-21, “Revenue Arrangements with Multiple Deliverables”, Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” (“SOP No. 97-2”) and SOP No. 98-9, “Software Revenue Recognition with Respect to Certain Transactions” (“SOP No. 98-9”).

      SOP No. 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on the evidence that is specific to the vendor. License revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance is recognized ratably over the maintenance term which is typically twelve months and revenue allocated to training and other service elements, such as implementation and training, are recognized as the services are performed.

      Under SOP No. 98-9 if evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element and recognized as revenue.

      The Company routinely analyzes and establishes, as necessary, reserves at the time of shipment for product returns and allowances and warranty costs.

Cash Equivalents

      The Company considers all investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents at December 31, 2005 and 2004 of approximately $642,000 and $4.1 million, respectively, consist primarily of money market investments, which are recorded at cost, which approximates market.

F-10

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

      The Company had $1.7 million of restricted cash as December 31, 2005 and no restricted cash at December 31, 2004. At December 31, 2005, the restricted cash is equal to the aggregate amount of interest scheduled to accrue through the two year anniversary date of the senior unsecured convertible debentures.

Allowance for Doubtful Accounts

      The Company is required to estimate the collectibility of its trade receivables. Considerable judgment is required in assessing the ultimate realization of these receivables, including the creditworthiness of each customer. Significant changes in required reserves have been recorded in recent periods and may occur in the future due to the current telecommunications and general economic environments. The Company determines the allowance for doubtful accounts based on a specific review of outstanding customer balances plus a general reserve based on the aging of customer accounts and write-off history.

Credit, Customer and Vendor Concentrations

      The Company’s accounts receivable potentially subjects the Company to credit risk. While the Company has purchase-money-security-interests in its equipment sold on credit terms and generally prepares and files UCC financing statements with respect thereto, the Company does not seek to perfect or claim a security interest in international or small dollar value equipment sales and services. As of December 31, 2005, the Company’s Packet-based Technologies Group had two customers that accounted for 13% and 10%, respectively, of the Company’s gross accounts receivable. During the year ended December 31, 2005, none of the Company’s customers accounted for greater than 10% of the Company’s revenue.

      As of December 31, 2004, the Company’s Packet-based Technologies Group had two customers that accounted for 14% and 11%, respectively, of the Company’s gross accounts receivable. During the year ended December 31, 2004, one customer from the Company’s Advanced Application Services Group accounted for 17% of the Company’s total revenue and one customer from the Company’s Packet-based Technologies Group accounted for 14% of the Company’s total revenue.

      During the year ended December 31, 2003, one customer from the Company’s Advanced Application Services Group accounted for 17% of the Company’s total revenue.

Inventories

      Inventories consist primarily of purchased electronic components, and are stated at the lower of cost or market. Cost is determined by using average cost.

      Inventories as of December 31, 2005 and 2004 are comprised of the following (in thousands):

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

      The inventory amounts noted are net of allowance of $1.2 million and $2.7 million for the years ended December 31, 2005 and 2004, respectively.

F-11

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Property and Equipment

      Property and equipment, consisting principally of computer equipment, are stated at cost or, if acquired through a business acquisition, then at fair value. Depreciation is computed using the straight-line method over estimated useful lives, ranging from three to ten years. Upon retirement or disposal of furniture and equipment, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in operating income. Maintenance and repairs are charged to expense as incurred.

      Property and equipment are summarized as follows (in thousands):

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

      Purchased software represents the cost of purchased integration software tools and the cost of internal use software acquired in connection with business combinations. It also includes the cost of licenses to use, embed and sell software tools developed by others. These costs are being amortized ratably based on the projected revenue associated with these purchased or licensed tools and products or based on the straight-line method over three years, whichever method results in a higher level of annual amortization. Amortization expense related to purchased software amounted to approximately $412,000, $404,000 and $456,000 in 2005, 2004 and 2003, respectively. Accumulated amortization related to purchased software totaled approximately $1.4 million and $1.5 million at December 31, 2005 and 2004, respectively.

Goodwill and Other Intangibles

      Intangible assets represent the excess of cost over the fair value of net tangible assets acquired and identified other intangible assets which consist of current technology and a customer relationship. The current technology is amortized on a straight-line basis over its estimated useful life of three years. The customer relationship is amortized on a straight-line basis over its estimated useful life of ten years. Goodwill associated with acquisitions is not being amortized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142”).

F-12

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

      Goodwill and other intangible assets consist of the following (in thousands):

					December 31,
			Amortization
			Period in Months		2005			2004
Intangibles subject to amortization:
	Current technology			36 months	$	2,185		$	821
	Customer relationship			120 months		2,403			2,403
		Weighted average months		99 months		4,588			3,224
	Accumulated amortization:
		Current technology				(1,008	)		(440	)
		Customer relationship				(721	)		(480	)
	Net intangibles subject to amortization					2,859			2,304
Goodwill						2,514			2,514
Total goodwill and other intangibles					$	5,373		$	4,818

      There has been no change in the Company’s goodwill during the years ended December 31, 2004 and 2005.

      Estimated annual amortization expense is as follows (in thousands):

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

      The Company fully adopted SFAS No. 142 in 2002. Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization effective January 1, 2002.

Impairment of Long-Lived Assets

      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations.

      In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its

F-13

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

      Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The annual impairment test was conducted as of December 31, 2005 and no impairment was indicated.

Warranties

      The Company provides a basic limited warranty for its products for one year. 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 cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

      Warranty liability activity for the year ended December 31, 2005, 2004 and 2003 is as follows (in thousands):

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

Fair Value of Financial Instruments

      Estimates of fair value of financial instruments are made at a specific point in time, based on relevant market prices and information about the financial instrument. The estimated fair values of financial instruments are not necessarily indicative of the amounts the Company might realize in actual market transactions. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

      Cash and cash equivalents, accounts receivable, inventories, accrued expenses, accounts payable, unearned revenue and customer deposits: The carrying amounts reported in the consolidated balance sheets approximate their fair value.

      Short and long-term debt: The carrying amount of the Company’s borrowings under floating rate debt approximates its fair value. The carrying amount of the Company’s notes payable has been discounted to approximate its fair value in connection with the accounting for the acquisition of substantially all of the operating assets of Clarent. The carrying amount of convertible subordinated debentures under fixed rate debt approximates its fair value because it approximates the Company’s estimated long-term borrowing rate.

      At December 31, 2005 and 2004, the carrying amounts of all financial instruments approximate their fair values.

F-14

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Stock-Based Compensation Plan

      The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”), and related interpretations. As such, compensation expense to be recognized over the related vesting period is generally determined on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allowed entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income (loss) and pro forma income (loss) per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No. 123 through December 31, 2005.

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision of SFAS No. 123. SFAS No. 123(R) is effective for public companies for interim or annual periods beginning after June 15, 2005, supersedes APB Opinion No. 25 and amends SFAS No. 95, “Statement of Cash Flows” (“SFAS No. 95”). Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for the Company beginning January 1, 2006.

      On December 31, 2005, the Board of Directors approved the accelerated vesting of unvested stock options granted to substantially all employees. The Board of Directors did not accelerate the vesting of unvested options for certain officers and directors. Accordingly, options to purchase approximately 637,000 shares became fully-vested immediately. The closing price of the Company’s stock on December 31, 2005 was $1.00. The accelerated options, which are considered fully-vested as of December 31, 2005, have exercise prices ranging from $1.03 to $23.45 and therefore there was no expense associated with any intrinsic value associated with these options. The vesting acceleration for these certain options enables the Company to avoid recognizing in its income statement compensation expense in future periods. After the accelerated vesting of unvested options, approximately 247,000 shares remain to vest over the next four years at an approximate expense of $253,000 over the four years.

      The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

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

      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

F-15

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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):

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

Income Taxes

      Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Net Loss Per Share

      Basic and diluted net loss per share are computed in accordance with SFAS No. 128, “Earnings Per Share,” using the weighted average number of common shares outstanding. The diluted net loss per share for the twelve-month periods ended December 31, 2005, 2004 and 2003 does not include the effect of the common stock equivalents, calculated by the treasury stock method, as their impact would be antidilutive. Using the treasury stock method, excluded common stock equivalents are as follows:

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

      See Notes 9 and 10 for disclosure of all warrants to purchase common stock and shares issuable under stock options.

Comprehensive Income (Loss)

      SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of financial statements. The statement requires additional disclosures in the consolidated financial statements; it does not affect the Company’s financial position or results of operations. Comprehensive loss has been included in the Consolidated Statements of Shareholders’ Equity for the three-year period ended December 31, 2005.

F-16

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Segment and Geographic Information

      In accordance with the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company has two reportable operating segments, the Packet-based Technologies Group and the Advanced Application Services Group. Following the acquisition of substantially all the operating assets of Clarent in February 2003, the Company began conducting research and development in Canada. International sales of the Company’s products and services continue to originate only from the United States.

Recent Accounting Pronouncements

      In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than — Temporary Impairment and Its Application to Certain Investments” (“EITF No. 03-1”). EITF No. 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115’) and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. In November 2005, the FASB approved the issuance of FASB Staff Position FAS No. 115-1 and FAS No. 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP”). The FSP addresses when an investment is considered impaired, whether the impairment is other-than-temporary and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary. The FSP is effective for reporting periods beginning after December 15, 2005, and is required to be adopted by the Company on January 1, 2006. The adoption of this accounting principle is not expected to have a significant impact on the Company’s financial position or results of operations.

      In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets — an amendment of APB Opinion No. 29” (“SFAS No. 153”). SFAS No. 153 amends APB No. 29, “Accounting for Nonmonetary Transactions” (“APB No. 29”) to require that assets exchanged in a nonmonetary transaction are to be measured at fair value except for those exchanges of nonmonetary assets that lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal years beginning after June 15, 2005. The adoption of this accounting principle is not expected to have a significant impact on the Company’s financial position or results of operations.

      In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes” (“APB No. 20”) and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS No. 3”). SFAS No. 154 requires retrospective application to prior periods’ financial statement of a voluntary change in accounting principle unless it is impracticable. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle in net income in the period of change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this accounting principle is not expected to have a significant impact on the Company’s financial position or results of operations.

      In January 2004, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” (SFAS No. 155”). SFAS No. 155 amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), and No. 140, “Accounting for Transfers and Servicing of Financial Assets and

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VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Extinguishment of Liabilities” (“SFAS No. 140”). SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for reporting periods beginning after September 15, 2006. The adoption of this account principle is not expected to have a significant impact on the Company’s financial position or results of operations.

3. Mergers and Acquisitions

WSECI, Inc.

      On March 31, 2005, the Company acquired substantially all of the operating assets of WSECI pursuant to the Asset Purchase Agreement (“Asset Purchase Agreement”) dated as of February 23, 2005 by and among the Company, WSECI and all of the shareholders of WSECI. WSECI is a provider of an internet protocol-based, revenue assurance platform which enables the deployment of multiple voice and next-generation services to the carrier market. The fair value of the initial acquisition cost was approximately $1.1 million, consisting of 190,000 shares of the Company’s common stock with a fair value of $331,000, $50,000 in cash, the payment of certain liabilities of approximately $613,000 and acquisition costs of approximately $114,000. The acquisition was accounted for as a purchase.

      Pursuant to the Asset Purchase Agreement, the Company may become obligated to issue to WSECI additional contingent consideration of up to $5.0 million based on the sales of certain WSECI products and services. The initial $500,000 of such contingent consideration was earned by WSECI based upon specific customer transactions the Company completed, and the remaining $4.5 million of the contingent consideration may be earned by WSECI based on the revenue generated from the WSECI assets during the 18-month period following the acquisition, which revenue must equal a minimum of $88.0 million during such period in order for all of such remaining contingent consideration to be earned. The contingent consideration is payable in cash or shares of the Company’s common stock at the election of the Company. During the quarter ended September 30, 2005, under this provision, the Company issued an additional 251,960 shares of the Company’s common stock with a fair value of $339,000. In addition, during the quarter ended December 31, 2005, under this provision, the Company issued an additional 25,139 shares of the Company’s common stock with a fair value of $57,000. The additional shares issued were recorded as an increase in other intangibles-current technology which is being amortized over the remaining estimated life of the original purchased technology. It is not possible to estimate what, if any, additional stock payment would be due as additional contingent consideration at this time. When the additional contingent consideration is determined, it will further increase the amount of the purchase price allocated to other intangible assets and will be amortized over the remaining useful life of the asset.

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VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Mergers and Acquisitions — (Continued)

      The adjusted allocation of the costs of the acquisition of WSECI (initial cost plus contingent payments) is as follows (in thousands):

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

MCK Communications, Inc.

      On September 26, 2003, to increase capital and to enhance the Company’s ability to provide technology that allows enterprises the ability to migrate to next-generation environments, the Company acquired all of the outstanding capital stock of MCK by means of a subsidiary merger. The fair value of the acquisition cost was approximately $25.1 million, consisting of 3,655,685 shares of the Company’s common stock with a fair value of $24.1 million and acquisition costs of approximately $1.0 million. In January 2005, the Company sold substantially all of the assets of the MCK business and the net assets and operations of MCK have been reclassified to assets held for sale and discontinued operations.

      The acquisition was treated as a purchase for accounting purposes, and accordingly, the assets and liabilities were recorded at their fair value at the date of the acquisition.

      In April 2003, the Company negotiated the original agreement to purchase MCK in which the MCK stockholders would be entitled to receive approximately 4.0 million shares of the Company’s common stock which was valued at $13.0 million, based on the volume weighted average closing price per share of the Company’s common stock as reported on The Nasdaq SmallCap Market for the twenty trading day period beginning March 19, 2003 and ending April 15, 2003. As part of the original agreement, the Company was to receive $7.5 million in cash. The terms of the agreement were amended on June 13, 2003. Under the amended terms, MCK stockholders were entitled to receive approximately 3.7 million shares of the Company’s common stock and the cash MCK was required to have at the closing of the merger was reduced from $7.5 million to approximately $6.4 million. Although the number of shares of the Company’s common stock to be issued in the merger was reduced by the amendment, the amendment changed the measurement date for valuing such shares. As a result of the increase in the price of the Company’s common stock prior to June 13, 2003, the revised valuation for the shares of the Company’s common stock to be issued in the merger increased to $24.1 million. As a result of this increase in value, the goodwill recorded in the merger was impaired upon closing the merger. The Company completed an impairment analysis in accordance with SFAS No. 142. Based upon this analysis, the Company recorded a write-off of goodwill of approximately $10.9 million during the quarter ended September 30, 2003, which is included in the results of discontinued operations.

Clarent Corporation

      On February 12, 2003, to enhance the Company’s position in the next-generation networking and technology market, the Company acquired substantially all the operating assets and certain related liabilities of Clarent. The purchase consideration was approximately $10.8 million, consisting of $9.3 million in discounted seller notes issued by the Company and acquisition costs of approximately $1.5 million. At the closing of the acquisition, the Company issued three promissory notes to Clarent: a $5.0 million secured note due February 13, 2004, which bore interest at 10% per annum and a $1.8 million non-interest bearing unsecured note due February 13, 2004, which was discounted at 6.25% per annum, both of which are paid in full and a $3.0 million secured note due February 12, 2008, which bears interest at 5% per annum, discounted

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VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Mergers and Acquisitions — (Continued)

at 7.5% per annum. The unamortized discount totaled approximately $215,000 at December 31, 2005. The assets the Company purchased from Clarent secure the secured notes.

      The acquisition was treated as a purchase for accounting purposes, and accordingly, the assets and liabilities were recorded at their fair value at the date of the acquisition. Gross intangible assets acquired totaling $821,000 primarily consist of current technology and are being amortized over three years.

Allocation of Purchase Price

      The allocation of the costs of the acquisition of the net assets of Clarent was as follows (in thousands):

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

Pro Forma Effect of Clarent and WSECI, Inc. Acquisition

      The Company formed a strategic partnership with WSECI in the latter half of 2004 and, therefore, the results of WSECI were included in the Company’s consolidated results beginning October 1, 2004. The following unaudited pro forma information presents the results of continuing operations of the Company as if the acquisition of substantially all of the operating assets of Clarent and WSECI, Inc. had taken place on January 1, 2003 (in thousands, except per share amounts):

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

4. Unconsolidated Affiliates

Shanghai BeTrue Infotech Co., Ltd.

      On October 1, 2002, the Company acquired a 51% interest in Shanghai BeTrue Infotech Co., Ltd. (“BeTrue”). The remaining 49% interest in BeTrue is owned by Shanghai Tangsheng Investments & Development Co. Ltd (“Shanghai Tangsheng”). The joint venture provides the Company with a distribution channel in the China and Asia-Pacific region for the Company’s application-based Voice over Internet

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VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Unconsolidated Affiliates — (Continued)

Protocol gateway solutions, billing systems, value-added applications and web filtering solutions. Due to the shared decision making between the Company and its equity partner, the results of BeTrue are treated as an equity investment rather than being consolidated. The Company determined that since BeTrue was a business, BeTrue did not fall under the scope of the Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities” and there was no impact on the Company’s financial position or results of operations.

      The Company purchased the 51% interest in BeTrue for $100,000 from NeTrue Communications, Inc., Shanghai Tangsheng’s former joint venture partner. The Company also contributed to the joint venture certain next-generation communication equipment and software valued at approximately $236,000 and cash in the amount of $100,000.

      Summarized financial information reported by this affiliate for the years ended December 31, 2005, 2004 and 2003 (in thousands) are as follows:

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

5. Discontinued Operations

      In January 2005, the Company sold substantially all of the operating assets of its NACT and MCK businesses to better focus the Company’s capital and management resources on areas which the Company believes have greater potential given its strategy to focus on next-generation network and solutions to improve cash utilization. In addition, the Company disposed of its NACT business because the Company wanted to move toward an open-standards, pre-paid next-generation solution that could better address growing market opportunities and enable the Company to offer a competitive product for Tier 1 and Tier 2 carriers. The Company believes that the I-Master platform which the Company acquired from WSECI in March 2005, after forming a strategic partnership with WSECI in the latter half of 2004, permits the Company to offer a better solution. Further, the Company disposed of its MCK business because the Company intends to focus on next-generation solutions for service providers and the products of MCK business did not fit that profile. The operations of NACT and MCK businesses have been reclassified as discontinued operations in the Company’s consolidated financial statements.

      The loss on the sale of the NACT business totaled $11.4 million. The loss includes a reduction in net asset values of approximately $10.9 million and a provision for estimated closing costs and expenses of approximately $500,000. The loss on the sale of the MCK business totaled $3.4 million. The loss includes a reduction in net asset values of approximately $2.9 million and a provision for estimated closing costs and expenses of approximately $500,000.

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VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Discontinued Operations — (Continued)

      Summary operating results of the discontinued operations (in thousands) are as follows:

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

      The operating loss from discontinued operations in 2005 includes general and administrative costs of $97,000, sales and marketing costs of $104,000, research and development costs of $275,000 and depreciation and amortization of $61,000.

      The operating loss from discontinued operations in 2004 includes general and administrative costs of $2.9 million, sales and marketing costs of $4.0 million, research and development costs of $5.0 million, depreciation of $979,000, amortization of intangibles of $1.6 million, reorganization costs of $140,000 and other income of $27,000.

      The operating loss from discontinued operations in 2003 includes general and administrative costs of $4.7 million, sales and marketing costs of $3.0 million, research and development costs of $4.8 million, depreciation of $972,000, amortization of intangibles of $910,000, a write-down of goodwill of $10.9 million, reorganization costs of $266,000 and other income of $24,000.

      The write-down of goodwill in 2003 relates to the acquisition of MCK. In April 2003, the Company negotiated the original agreement to purchase MCK in which the MCK stockholders would be entitled to receive approximately 4.0 million shares of the Company’s common stock which was valued at $13.0 million, based on the volume weighted average closing price per share of the Company’s common stock as reported on The Nasdaq SmallCap Market for the 20 trading day period beginning March 19, 2003 and ending April 15, 2003. As part of the original agreement, the Company was to receive $7.5 million in cash. The terms of the agreement were amended on June 13, 2003. Under the amended terms, MCK stockholders were entitled to receive approximately 3.7 million shares of the Company’s common stock and the cash MCK was required to have at the closing of the merger was reduced from $7.5 million to approximately $6.4 million. Although the number of shares of the Company’s common stock to be issued in the merger was reduced by the amendment, the amendment changed the measurement date for valuing such shares. As a result of the increase in the price of the Company’s common stock, prior to June 13, 2003, the revised valuation for the shares of the Company’s common stock to be issued in the merger increased to $24.1 million. As a result of this increase in value, the goodwill recorded in the merger was impaired upon closing the merger. The Company completed an impairment analysis in accordance with SFAS No. 142. Based upon this analysis, the Company recorded a write-off of approximately $10.9 million during the year ended December 31, 2003.

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VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Discontinued Operations — (Continued)

      The assets and liabilities of NACT and MCK were classified as assets held for sale at December 31, 2004 and the significant components (in thousands) were as follows:

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

      Assets and liabilities of discontinued operations (in thousands) are as follows:

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

      In connection with the disposition of the MCK business, CITEL Technologies Limited (“Citel U.K.”) and CITEL Technologies, Inc. (“Citel U.S.” and together with CITEL U.K., “CITEL”) issued to the Company a convertible secured promissory note in principal amount of $3.5 million (the “Note”). The outstanding principal under the Note accrues interest at an annual rate of 6% and has remaining payments with all interest accrued thereon of eight monthly payments of $60,000 followed by sixteen monthly payments of $75,000, with all remaining outstanding principal and interest under the Note payable on January 21, 2008. Under certain circumstances described in the Note, all or any portion of the principal outstanding under the Note may be converted at the Company’s option into shares of the capital stock of Citel U.K. Citel U.K.’s and Citel U.S.’ obligations under the Note are secured by a security interest in certain assets sold to CITEL.

      Accrued rent relates primarily to several leases for buildings and equipment that are no longer being utilized in continuing operations. The accrual is for all remaining payments due on these leases, less estimated amounts to be paid by any sublessors. The accrual contains one lease with total payments remaining through January 31, 2010 of $1.7 million and assumes that the building will be sub-leased for approximately 57% of the total lease liability over the remaining term of the lease and one lease with total payments remaining through March 31, 2007 of $1.7 million, discounted at 6%, which has been sub-leased for approximately 66% of the total lease liability over the remaining term of the lease.

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VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Discontinued Operations — (Continued)

      The activity in the liabilities of discontinued operations (in thousands) was as follows:

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

6. Financing Arrangements

      In March 2005, the Company and Silicon Valley Bank (“Silicon”), the Company’s primary lender, renewed, and in June and July 2005 further amended, the Company’s credit facility with Silicon in connection with the disposition of the MCK and NACT businesses, the sublease of the Company’s facilities in Atlanta, Georgia and the restructuring of the Company’s 7.5% convertible subordinated debentures (as amended, the “Amended Credit Agreement”). In January 2006, the minimum cash on hand covenant of the credit facility was amended so that such covenant could be satisfied using not just the Company’s unrestricted cash and cash equivalents in accounts maintained at Silicon Valley Bank but also by using the Company’s excess availability under the credit facility. The Amended Credit Agreement provided for a credit line of $7.5 million through September 30, 2005 at which time it increased to $10.0 million after the Company met certain financial criteria. The working capital line includes and export-import (“EX-IM”) facility that will provide for working capital based on the Company’s international accounts receivable and inventories related to export sales. The Company’s borrowings under the Amended Credit Agreement are secured by substantially all of the assets of the Company. Interest on borrowings under the Amended Credit Agreement is computed at 2.25% above Silicon’s Base Rate, with a minimum Base Rate of 4.25% (9.25% at December 31, 2005). The Amended Credit Agreement provides for up to $2.5 million in letters of credit. Advances are limited by a formula based on eligible receivables, inventories, certain cash balances, outstanding letters of credit and certain subjective limitations. Interest payments are due monthly, and the Amended Credit Agreement expires in March 2006. The Amended Credit Agreement includes a loan fee of $130,000 and .375% per annum on unused available borrowings. The loan fees will be amortized to interest expense over the term of the Amended Credit Agreement. Under the terms of the Amended Credit Agreement, the Company must maintain a Minimum Cash On Hand covenant, computed monthly, and may not declare dividends or incur any additional indebtedness without the consent of Silicon, and must comply with other financial covenants, as defined in the Amended Credit Agreement. Although the Company was not in compliance with the minimum cash on-hand covenant at December 31, 2005, the Silicon Valley Bank waived compliance with such covenant. In March 2006, the credit facility was extended to March 2007, with similar terms and conditions.

      The Company had $1.3 million borrowings under the Amended Credit Agreement as of December 31, 2005. The total borrowing availability under the Amended Credit Agreement at December 31, 2005 was $8.1 million. The Company has outstanding letters of credit in the amount of $1.6 million at December 31, 2005, which would reduce borrowing capacity under the Amended Credit Agreement.

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VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. Convertible Debentures

Senior Unsecured Convertible Debentures

      On February 4, 2005, the Company completed a private placement of senior unsecured convertible debentures and warrants pursuant to a securities purchase agreement with certain institutional investors. The Company issued $13.5 million of senior unsecured convertible debentures, Series A warrants exercisable for 2.2 million shares of the Company’s common stock and Series B warrants exercisable for 2.0 million shares of the Company’s common stock. The debentures have been discounted to reflect the fair value of the warrants issued, totaling approximately $4.5 million. In addition, after allocation of the fair value of the warrants issued, the remaining fair value of the debentures resulted in a computed beneficial conversion feature with a fair value of $3.6 million. The amount was recorded as a discount in the third quarter as a result of additional analysis of the calculation of the beneficial conversion feature. The impact of this additional discount is immaterial to the statement of operations for the first and second quarters. If the entry for the additional discount would have been recorded in February 2005, the impact of this additional discount on the balance sheets as of March 31, 2005 and June 30, 2005 would have been as follows (in thousands):

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

      The discount is being amortized to interest expense over the life of the senior unsecured convertible debentures. The unamortized discount totaled approximately $6.5 million at December 31, 2005. The senior unsecured convertible debentures bear interest at a rate of 6% per annum increasing to 6.75% at February 4, 2006, and are due February 2009 and are convertible into approximately 5.4 million shares of the Company’s common stock at an initial conversion price of $2.50 per share, subject to anti-dilution adjustments and certain limitations. Interest is payable on a quarterly basis beginning April 2005 and principal is payable on a quarterly basis beginning August 2006. The Series A warrants issued in connection with the private placement are exercisable for a period of five years commencing on February 4, 2005 and at an exercise price of $3.60 per share.

      The Series B warrants issued in connection with the private placement were exercisable for a period of 90 days, commencing on June 16, 2005, and had an exercise price of $3.90 per share. The Series B warrants expired in September 2005. The Company paid certain private placement fees and attorney’s fees totaling $993,000 and issued Series A warrants, on the same terms as disclosed above, exercisable for 302,400 shares of the Company’s stock with a value of $561,000, in connection with the private placement. The fees were recorded as prepaid loan origination fees and are being amortized to interest expense over the term of the debentures. The unamortized fees totaled approximately $1.2 million at December 31, 2005. In connection with the private placement, the Company received net proceeds of approximately $12.5 million, including $1.6 million in restricted cash, net of expenses.

Convertible Subordinated Debentures

      On July 25, 2005, the Company announced that it had restructured its outstanding 7.5% convertible debenture with an aggregate principal amount of $4.5 million due November 22, 2005. Pursuant to the

F-25

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. Convertible Debentures — (Continued)

restructuring, $2.2 million of the aggregate principal amount has been paid as of December 31, 2005, and the remaining principal amount of $2.3 million will be paid in equal monthly installments starting January 2006 and continuing through October 2006. The interest rate on the unpaid principal increased to 12% at November 22, 2005 through the term of the amended debentures.

      In connection with the restructuring, the Company issued warrants to purchase an aggregate of 800,000 shares of the Company’s common stock at an exercise price of $2.50 per share exercisable beginning on November 22, 2005. Of these warrants, 600,000 expire January 1, 2007 and were cancelable if the debentures were repaid by November 22, 2005. The remaining 200,000 are not cancelable and have a five year term. Notwithstanding the foregoing, the expiration date of the warrants issued in connection with the restructuring will be extended for each day following November 22, 2005 on which a registration statement covering the resale of the shares of the Company’s common stock issuable upon exercise of such warrants has not been declared effective by the Securities and Exchange Commission. As of December 31, 2005, such registration statement has not been declared effective. The fair value of the warrants issued, totaled approximately $877,000 and was recorded as additional discount on the debentures. The discount is being amortized to interest expense over the remaining life of the debentures. The unamortized discount totaled approximately $394,000 at December 31, 2005.

8. Reorganization Costs

      In the first quarter of 2005, the Company disposed of substantially all of the operating assets of NACT and MCK, which resulted in six corporate positions being eliminated. In the third quarter of 2005, the Company terminated a senior executive. As a result of these actions, the Company recorded reorganization costs of $464,000, consisting of severance costs, during the year ended December 31, 2005.

      In the second quarter of 2005, the Company entered into a sublease agreement with an unrelated party to sublease excess office space at its facility in Atlanta, Georgia. The excess space was primarily due to reductions in the corporate staffing over the past several years. As a result of these actions, the Company recorded an accrual for all remaining payments due on this lease, less amounts to be paid by the sublessor. Total payments remaining through January 31, 2010 are $3.1 million and the sublease total payments are $1.5M over the remaining term of the lease. The Company recorded reorganization costs of $2.6 million during the year ended December 31, 2005. The charge represents the difference between the lease and the sublease for the entire remaining term, as well as write-offs for furniture and leasehold improvements. The Company expects to save approximately $1.6 million over the term of the sublease, which expires January 31, 2010. The balance of the accrued loss on sublease is $1.7 million at December 31, 2005.

      In the first quarter of 2004, the Company terminated a senior executive. In the fourth quarter of 2004, the Company initiated certain restructuring plans to improve operational efficiencies and financial performance and eliminated 20 positions held by employees. As a result of these actions, the Company recorded reorganization costs of $1.4 million during the year ended December 31, 2004, which included severance costs of $830,000 and non-cash stock compensation of $570,000.

      In the first and third quarters of 2003, the Company initiated reorganizations to accommodate the acquisition of substantially all of the operating assets of Clarent and as a part of its effort to consolidate functions and improve operational efficiencies, and the Company eliminated eight positions held by employees. As a result of these actions, the Company recorded reorganization costs of $159,000 during the year ended December 31, 2003. The reorganization costs consist of severance costs and non-cash stock compensation expense related primarily to the acceleration of vesting of options.

F-26

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9. Shareholders’ Equity (all numbers reflect Reverse Split)

Preferred Stock

      The Company has 200,000 shares of authorized preferred stock, 6,000 of which were designated as Series A Convertible Preferred Stock (“Series A Preferred Stock”). All 6,000 shares of the Series A Preferred Stock have been converted into 60,000 shares of the Company’s common stock.

      In 2001, concurrent with the acquisition of NACT, the Company issued and sold to Telemate.Net an aggregate of $15.0 million of the Company’s Series B Preferred Stock at a price of $100.00 per share. Upon the acquisition of Telemate.Net, 150,000 shares were retired. There were no outstanding shares of the Company’s preferred stock at December 31, 2005 and 2004. Currently, there are 44,000 shares of undesignated preferred stock, which are authorized but unissued.

Private Placement

      On February 24, 2004, the Company completed a private placement of securities pursuant to which it issued 2.0 million shares of its common stock and warrants to purchase 491,505 shares of its common stock for an aggregate purchase price of $17.7 million, or $9.00 per share. The warrants issued in connection with the private placement are exercisable for a period of seven years at an exercise price of $11.50 per share. The Company received approximately $16.5 million, net of expenses, from the private placement of these securities.

Stock Warrants

      In connection with various financing and acquisition transactions, and related services provided to the Company, the Company has issued warrants to purchase the Company’s common stock.

      In February 2005, the Company issued 2.2 million Series A warrants with an exercise price of $3.60 and 2.0 million Series B warrants with an exercise price of $3.90 in connection with the Company’s private placement on February 4, 2005 (see Note 7). The Series B warrants issued in connection with the private placement were exercisable for a period of 90 days after the effective date of a registration statement and expired in September 2005. The Company also issued 302,400 Series A warrants with an exercise price of $3.60 to pay certain private placement fees.

      In July 2005, the Company issued 800,000 warrants with an exercise price of $0.50 in connection with the restructuring of its outstanding 7.5% convertible debenture with an aggregate principal amount of $4.5 million due November 22, 2005 (see Note 7). Of these warrants, 600,000 expire January 1, 2007 and the remaining 200,000 have a five year term.

      During 2005, 2,506 warrants with an exercise price of $0.05 were exercised and 3.4 million expired with an exercise price range of $3.90 — $28.25.

      During 2004, the Company issued 491,505 warrants in connection with the Company’s private placement on February 24, 2004, as discussed above.

      During 2003, the Company issued 70,000 warrants in connection with the Company’s Original Credit Agreement. The warrants were exercised in 2003 resulting in the Company receiving aggregate exercise proceeds of $154,000.

F-27

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9. Shareholders’ Equity (all numbers reflect Reverse Split) — (Continued)

      A summary of warrants outstanding as of December 31, 2005, is as follows:

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

      As of December 31, 2005, all of the warrants are vested.

      The exercise price and number of outstanding warrants for certain warrants previously issued have been adjusted according to their antidilution provisions.

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

      The Company has a stock incentive plan for employees, consultants, and other individual contributors to the Company which enables the Company to grant up to 3.5 million qualified and nonqualified incentive stock options as well as other stock-based awards (the “1999 Plan”). In 2004, the 1999 Plan was amended to increase the number of shares of the Company’s stock underlying the 1999 Plan from 3.0 million to 3.5 million. The Company adopted the 1999 Plan which aggregates the Company’s prior stock option plans, in the second quarter of 1999. The qualified options granted under the 1999 Plan must be granted at an exercise price not less than the fair market value at the date of grant. Subject to certain exceptions, the aggregate number of shares of the Company’s common stock that may be granted through awards under the 1999 Plan to any employee in any calendar year may not exceed 60,000 shares. The compensation committee of the Company’s board of directors determines the period within which options may be exercised, but no option may be exercised more than ten years from the date of grant.

      The 1999 Plan also provides for stock purchase authorizations and stock bonus awards. Stock awards totaling 39,521 and 9,988 have been granted under the 1999 Plan for the year ended December 31, 2005 and 2004, respectively. None were awarded for 2003. Total awards remaining available for grant under the 1999 Plan as of December 31, 2005 were 366,660.

      In connection with the acquisition of Telemate.Net, the Company recorded deferred compensation of approximately $131,000 for the aforementioned options granted by Telemate.Net prior to its acquisition which were exchanged for the options to purchase the Company’s common stock. The Company amortized deferred compensation over three years, the weighted-average vesting period of the options. The Company amortized to non-cash compensation expense approximately $29,000 of the deferred compensation related to these option grants for the year ended December 31, 2003. The Company reduced deferred compensation due to forfeitures relating to these options totaling approximately $5,000 during the year ended December 31, 2003.

      Upon the acquisition of Cereus Technology Partners, Inc. (“Cereus”) in September 2000, the Company assumed the Cereus Technology Partners, Inc. 1997 Stock Option Plan (the “Cereus Plan”), and the options outstanding thereunder. The options outstanding under the Cereus Plan were converted at a rate of 1.75 shares of the Company’s common stock per share of Cereus’ common stock at the time of the acquisition and totaled 275,342. These options, at the time of acquisition, had an estimated fair value of $2.8 million using the Black-Scholes option pricing model based on the following weighted-average assumptions: expected volatility — 88%; expected life — five years; risk-free interest rate — 5.5%; and expected dividend yield — 0%,

F-28

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10. Stock Incentive Plan (all numbers reflect Reverse Split) — (Continued)

was included in the cost of the acquisition. The Company does not plan to issue any additional shares under the Cereus Plan.

      In connection with the acquisition of Cereus, the Company recorded deferred compensation of approximately $6.9 million for the aforementioned options granted by Cereus prior to the acquisition which were exchanged for options to purchase the Company’s common stock. The Company amortized deferred compensation over four years, the vesting period of the options. The Company amortized to non-cash compensation expense approximately $7,000, $435,000, and $750,000 of the deferred compensation related to these option grants for the years ended December 31, 2005, 2004 and 2003, respectively. The Company accelerated vesting and extended the exercise date on an option grant for a terminated senior executive (see Note 8). As a result, the Company recorded a non-cash charge of approximately $570,000 for the year ended December 31, 2004, representing the value of the accelerated vesting and extended exercise date. The expense is included in reorganization costs.

      Prior to the Company’s acquisition of Cereus, Cereus granted stock warrants totaling 736,000 in 2000 to certain employees and directors outside the Cereus Plan in addition to the warrants discussed in Note 9. These stock warrants have contractual terms of 5-10 years. The majority of these warrants have an exercise price equal to the fair market value of Cereus’ common stock at the grant date. The warrants granted in 2000 vest over various terms not to exceed seven years, beginning on the date of the grant. These warrants were assumed by the Company and converted as contemplated in the merger agreement with respect to the Company’s acquisition of Cereus to 1.3 million at the time of the Cereus acquisition. The fair value of these warrants at the time of the acquisition, estimated to be $15.5 million using the Black-Scholes option pricing model based on the following weighted-average assumptions: expected volatility — 88%; expected life — five years; risk-free interest rate — 5.5%; and expected dividend yield — 0%, was included in the cost of the acquisition.

F-29

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10. Stock Incentive Plan (all numbers reflect Reverse Split) — (Continued)

      The Company accelerated vesting and extended exercise dates on options for certain terminated individuals in connection with reorganizations during 2004 and 2003, respectively (see Note 8). As a result, the Company recorded a non-cash charge of approximately $570,000 and $71,000 for the years ended December 31, 2004 and 2003, respectively, representing the value of the accelerated vesting and extended exercise dates for certain terminated employees. The expense is included in reorganization costs.

      A summary of the status of the Company’s stock options granted to employees, and the above warrants granted by Cereus prior to its acquisition by the Company, as of December 31, 2005, December 31, 2004, and December 31, 2003 and the changes during the years ended on these dates is presented below:

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

      The following table summarizes information about employee stock options and the above warrants granted by Cereus prior to its acquisition by the Company, outstanding at December 31, 2005:

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

F-30

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11. Income Taxes

      The components of loss from continuing operations, before income taxes were (in thousands):

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

      The significant components of income taxes for continuing operations are as follows (in thousands):

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

      A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective tax was as follows:

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

F-31

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11. Income Taxes — (Continued)

      Deferred income taxes are recognized to reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets are as follows (in thousands):

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

      The valuation allowance for deferred tax assets as of December 31, 2005, was approximately $84.8 million. The increases of $2.4 million, $11.4 million and $13.5 million in the total valuation allowance for 2005, 2004 and 2003, respectively are due to increases in above described temporary differences on which a valuation allowance was provided.

      Substantially all of the Company’s deferred tax assets are attributable to acquisitions accounted for as purchase transactions. The valuation allowances associated with these deferred assets will be credited to goodwill if and when realized. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company’s management believes it is more likely than not that the Company will not realize the benefits of the deferred tax assets, net of existing valuation allowances, as of December 31, 2005 and 2004.

      At December 31, 2005, the Company had net operating loss (“NOL”) carry-forwards of approximately $194.1 million and other business tax credits of approximately $1.2 million, a substantial portion of which are subject to certain limitations under the Internal Revenue Code Section 382. If not utilized, the NOLs will begin expiring in years 2006 through 2025. In addition the Company had foreign investment tax credits totaling approximately $750,000 which begin expiring in years 2013 through 2015.

12. Savings and Retirement Plan

      The Company sponsors a 401(k) savings and retirement plan which is available to all eligible employees. Under the plan, the Company may make a discretionary matching contribution. Discretionary matching contributions less forfeitures from continuing operations were approximately $89,000, $244,000 and $174,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

F-32

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

13. Employee Stock Purchase Plan

      On November 16, 1999, the Company adopted the Verso Technologies, Inc. 1999 Employee Stock Purchase Plan (the “Stock Purchase Plan”). Under the Stock Purchase Plan, full-time or part-time employees, except persons owning 5% or more of the Company’s common stock, who have worked for the Company for at least 15 consecutive days before the beginning of the offering period are eligible to participate in the Stock Purchase Plan. Employees may elect to have withheld up to 10% of their annual salary up to a maximum of $25,000 per year to be applied to the purchase of the Company’s unissued common stock. The purchase price was generally equal to 85% of the lesser of the market price on the beginning or ending date of the offering periods up until December 31, 2005 at which time the Stock Purchase Plan was amended. The amended plan called for the purchase price to be 95% of the market price on the ending date of the offering period. In 2004, the Stock Purchase Plan was amended to increase the amount of shares of the Company’s common stock underlying the plan from 200,000 to 300,000. Shares of the Company’s common stock issued under the Stock Purchase Plan were 50,103, 35,468 and 33,232 for the years ended December 31, 2005, 2004 and 2003, respectively.

14. Other Commitments and Contingencies

Leases

      The Company leases office space and certain equipment under operating leases which expire at various dates through 2010 with some leases containing options for renewal. Rent expense for continuing operations under these leases was $2.0 million, $2.2 million and $2.3 million for the years ended December 31, 2005, 2004 and 2003, respectively.

      As of December 31, 2005, approximate future commitments under operating leases and future minimum rentals to be received under noncancelable subleases in excess of one year are as follows (in thousands):

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

      The Company remains a guarantor on a lease through December 2009 used in the operations of the NACT business, which the Company sold in January 2005. The total commitment related to this lease is approximately $2.4 million.

     Canadian Tax Audit

      On March 7, 2006, the Canada Revenue Agency (the “CRA”) notified 38098 Yukon Inc. (formerly known as MCK Telecommunications Inc.), a corporation organized under the laws of the Yukon Territory (“MCK Canada”) and an indirect wholly owned subsidiary of the Company, that the CRA had completed its international income tax audit of MCK Canada for the period from May 1, 1998 to April 30, 2000 (the “Audit”). As a result of the Audit, the CRA has issued income tax reassessments to MCK Canada. (The Company also expects that the Alberta Tax and Revenue Administration (the “ATR”) will issue reassessments for each year of the Audit.)

F-33

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14. Other Commitments and Contingencies — (Continued)

      The key issue under dispute in the audit is the valuation of certain intellectual property that was transferred from MCK Canada to its U.S. parent company, MCK Communications, Inc. (“MCK US”) in fiscal 1998. MCK US consulted with outside valuation advisors to establish the value of the intellectual property transferred. The CRA disagrees with such value. The Company and its advisors disagree with the reassessments, and the Company intends to file notices of objection with respect thereto with the CRA and the ATR and, if necessary, to exhaust all of its rights of appeal in connection therewith.

      Although the Company has not received income tax reassessments from the ATR, the Company estimates that, as of March 13, 2006, (i) the amount of taxes allegedly due in respect of the CRA reassessment was approximately U.S. $7.7 million (plus penalties and interest thereon of approximately U.S. $7.8 million); and (ii) the amount of taxes allegedly due in respect of the expected ATR reassessment was approximately U.S. $3.3 million (plus penalties and interest thereon of approximately U.S. $3.1 million). The Company has been advised by its Canadian and U.S. counsel that no such amounts should be collectible by the CRA or the ATR against the Company or any of its other subsidiaries (other than MCK Canada) and that the ability of the CRA and the ATR to collect such amounts should be limited to the assets of MCK Canada, which have little or no value. Accordingly, no provision for this matter has been recorded in the Company’s financial statements because the Company believes that it will not have a financial statement impact.

15. Segment Information

      The Company reports information for two segments, the Packet-based Technologies Group and the Advanced Applications Services Group. Previously the Company reported two segments, the Carrier Solutions Group and the Enterprise Solutions Group. Following the dispositions of the NACT and MCK businesses, the Company re-evaluated its internal reporting and decision-making and segregated the activity of the Advanced Applications Services Group and combined the remaining operations of the Carrier Solutions Group and Enterprise Solutions Group into the Packet-based Technologies Group. Management evaluates the business segment performance based on contributions before unallocated items. Inter-segment sales and transfers are not significant.

Packet-based Technologies Group:

The Company’s Packet-based Technologies Group consists of the operations of the Company’s softswitch, I-Master and NetPerformer divisions and the Company’s subsidiary Telemate.Net. The Packet-based Technologies Group includes international and domestic sales of hardware and software, integration, applications and technical training and support. The Packet-based Technologies Group offers hardware and software based solutions for companies seeking to build private, packet-based voice and data networks. Additionally, the Packet-based Technologies Group offers software-based solutions for Internet access and usage management that include call accounting and usage reporting for Internet protocol network devices.

Advanced Applications Services Group:

The Company’s Advanced Applications Services Group, consists of the Company’s technical applications support group which was previously included as part of the Enterprise Solutions Group, and includes outsourced technical application services and application installation and training services to outside customers, as well as customers of the Company’s Packet-based Technologies Group.

F-34

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15. Segment Information — (Continued)

      Summarized financial information concerning the Company’s reportable segments is shown in the following table (in thousands):

		Packet-based			Advanced
		Technologies			Application
		Group			Services Group		Total
For the Years Ended December 31, 2005
	Revenue	$	23,697		$	9,176	$	32,873
	(Loss) contribution before unallocated items		(4,767	)		1,700		(3,067	)
	Goodwill		1,061			1,453		2,514
	Total assets		14,437			3,655		18,092
2004
	Revenue	$	20,527		$	11,736	$	32,263
	(Loss) contribution before unallocated items		(7,127	)		2,800		(4,327	)
	Goodwill		1,061			1,453		2,514
	Total assets		11,104			4,027		15,131
2003
	Revenue	$	25,128		$	13,011	$	38,139
	Contribution before unallocated items		2,014			4,983		6,997
	Goodwill		1,061			1,453		2,514
	Total assets		11,622			4,366		15,988

      The following table reconciles the contribution before unallocated items to the loss before discontinued operations (in thousands):

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

F-35

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15. Segment Information — (Continued)

      The following table reconciles the segment total assets to the Company’s total assets:

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

      Following the acquisition of substantially all the operating assets along with certain liabilities of Clarent in February 2003, the Company began conducting research and development in Canada. International sales of the Company’s products and services continue to originate only from the United States. The geographic distribution of the Company’s revenue and contribution before unallocated items (in thousands) are as follows:

		Canada			United States			Total
For the Year Ended December 31, 2005
	Revenue	$	—		$	32,873		$	32,873
	(Loss) contribution before unallocated items		(4,684	)		1,617			(3,067	)
	Total Assets		715			27,383			28,098
For the Year Ended December 31, 2004
	Revenue	$	—		$	32,263		$	32,263
	Loss before unallocated items		(3,670	)		(657	)		(4,327	)
	Total Assets		704			32,725			33,429
For the Year Ended December 31, 2003
	Revenue	$	—		$	38,139		$	38,139
	(Loss) contribution before unallocated items		(3,206	)		10,203			6,997
	Total Assets		1,215			62,037			63,252

16. Litigation

      From time to time, the Company is involved in litigation with customers, vendors, suppliers and others in the ordinary course of business, and a number of such claims may exist at any given time. All such existing proceedings are not expected to have a material adverse impact on the Company’s results of operations or financial condition. In addition, the Company or its subsidiaries is a party to the proceedings discussed below.

F-36

VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16. Litigation — (Continued)

      In December 2001, a complaint was filed in the Southern District of New York seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of the MCK’s common stock between the date of MCK’s initial public offering and December 6, 2000. The complaint named as defendants MCK and certain of its former officers and other parties as underwriters of its initial public offering (the “MCK defendants”). The plaintiffs allege, among other things, that MCK’s prospectus, contained in the Registration Statement on Form S-1 filed with the SEC, was materially false and misleading because it failed to disclose that the investment banks which underwrote MCK’s initial public offering of securities and others received undisclosed and excessive brokerage commissions, and required investors to agree to buy shares of securities after the initial public offering was completed at predetermined prices as a precondition to obtaining initial public offering allocations. The plaintiffs further allege that these actions artificially inflated the price of MCK’s common stock after the initial public offering. This case is one of many with substantially similar allegations known as the “Laddering Cases” filed before the Southern District of New York against a variety of unrelated issuers (the “Issuers”), directors and officers (the “Laddering Directors and Officers”) and underwriters (the “Underwriters”), and have been consolidated for pre-trial purposes before one judge to assist with administration. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed in July 2002. After a hearing on the motion to dismiss the Court, on February 19, 2003, denied dismissal of the claims against MCK as well as other Issuers. Although MCK believes that the claims asserted are meritless, MCK and other Issuers have negotiated a tentative settlement with the plaintiffs. The terms of the tentative settlement agreement provide, among other things, that (i) the insurers of the Issuers will deliver a surety undertaking in the amount of $1 billion payable to the plaintiffs to settle the actions against all Issuers, and the Laddering Directors and Officers; (ii) each Issuer will assign to a litigation trust, for the benefit of the plaintiffs, any claims it may have against its Underwriters in the initial public offering for excess compensation in the form of fees or commissions paid to such Underwriters by their customers for allocation of initial public offering shares; (iii) the plaintiffs will release all claims against the Issuers, and the Laddering Directors and Officers asserted or which could have been asserted in the actions arising out of the factual allegations of the amended complaints; and (iv) appropriate releases and bar orders and, if necessary, judgment reductions, will be entered to preclude the Underwriters and any non-settling defendants from recovering any amounts from the settling Issuers or the Laddering Directors and Officers by way of contribution or indemnification. Prior to the Company’s acquisition of MCK, MCK’s board of directors voted to approve the tentative settlement. On February 15, 2005, the judge presiding over the Laddering Cases granted preliminary approval of the proposed settlement, subject to some changes, which were subsequently submitted. The judge issued an order on August 31, 2005, further approving modifications to the settlement and certifying the class. Notice of the settlement has been distributed to the settlement class members. The deadline for filing objections to the settlement is March 24, 2006, and a fairness hearing has been set for April 26, 2006. No provision was recorded for this matter in the financial statements of MCK prepared prior to its acquisition by the Company because MCK believed that its portion of the proposed settlement would be paid by its insurance carrier. The Company agrees with MCK’s treatment of this matter.

17. Subsequent Events

      On February 17, 2006, the Company issued, in a private placement, 5.4 million shares of its common stock and warrants to purchase 5.4 million shares of its common stock for an aggregate purchase price of approximately $7.1 million, or $1.30 per share. The warrants issued in connection with the private placement are exercisable, after six months, for a period of five years and at an exercise price of $1.56 per share. The Company received approximately $6.8 million, net of expenses.

F-37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Verso Technologies, Inc.:

      Under date of February 27, 2004, except as to note 5 which is as of March 16, 2005, we reported on the consolidated statements of operations, shareholders’ equity, and cash flows of Verso Technologies, Inc. and subsidiaries for the year ended December 31, 2003. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audit.

      In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

Atlanta, Georgia

March 16, 2005

F-38

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

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

F-39

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Verso Technologies, Inc.

By:  /s/ Steven A. Odom

Steven A. Odom

Executive Chairman of the Board

Date: March 31, 2006

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

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

EXHIBIT INDEX

Exhibit No.			Exhibit	Method of Filing
	2	.1	Agreement and Plan of Merger dated October 31, 2000, among the Registrant, MessageClick, Inc. and MCLICK Acquisition Corporation (the “MessageClick Merger Agreement”).	Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed December 6, 2000.
	2	.2	First Amendment to the Agreement and Plan of Merger dated as of November 9, 2000, among the Registrant, MessageClick, Inc. and MCLICK Acquisition Corporation.	Incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed December 6, 2000.
	2	.3	Second Amendment to the Agreement and Plan of Merger dated as of November 10, 2000, among the Registrant, MessageClick, Inc. and MCLICK Acquisition Corporation.	Incorporated by reference to Exhibit 2.3 to the Registrant’s Current Report on Form 8-K filed December 6, 2000.
	2	.4	Agreement and Plan of Merger dated as of May 4, 2001, among the Registrant, Telemate.Net Software, Inc. and Titan Acquiring Sub, Inc. (the “Telemate.Net Merger Agreement”).	Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed May 16, 2001.
	2	.5	First Amendment to the Telemate.Net Merger Agreement dated as of June 1, 2001.	Incorporated by reference to Exhibit 2.2 to Amendment No. 1 to the Registrant’s Current Report on Form 8-K/ A filed June 5, 2001.
	2	.6	Stock Purchase Agreement dated as of May 4, 2001, between the Registrant and WA Telcom Products Co., Inc.	Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed June 5, 2001.
	2	.7	Series B Preferred Stock Purchase Agreement dated as of May 4, 2001, between the Registrant and Telemate.Net Software, Inc. (the “Series B Stock Purchase Agreement”).	Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed May 16, 2001.
	2	.8	First Amendment to the Series B Stock Purchase Agreement dated as of June 1, 2001, between the Registrant and Telemate.Net Software, Inc.	Incorporated by reference to Exhibit 99.2 to Amendment No 1 to the Registrant’s Current Report on Form 8-K/ A filed June 5, 2001.
	2	.9	Second Amendment to the Series B Stock Purchase Agreement dated as of July 27, 2001, between the Registrant and Telemate.Net Software, Inc.	Incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed August 10, 2001.
	2	.10	Asset Purchase Agreement dated as of December 13, 2002, between the Registrant and Clarent Corporation.	Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed December 17, 2002.
	2	.11	First Amendment to the Asset Purchase Agreement dated as of February 4, 2003, between the Registrant and Clarent Corporation.	Incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.

Exhibit No.			Exhibit	Method of Filing
	2	.12	Agreement and Plan of Merger dated as of April 21, 2003, among the Registrant, Mickey Acquiring Sub, Inc. and MCK Communications, Inc. (The schedules to the Agreement and Plan of Merger have been omitted from this Report pursuant to Item 601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies of such omitted schedules supplementally to the SEC upon request.)	Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on April 23, 2003.
	2	.13	First Amendment to the Agreement and Plan of Merger dated as of April 21, 2003, among the Registrant, Mickey Acquiring Sub, Inc. and MCK Communications, Inc.	Incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed on April 23, 2003.
	2	.14	Second Amendment to the Agreement and Plan of Merger dated as of June 13, 2003, among the Registrant, Mickey Acquiring Sub, Inc. and MCK Communications, Inc.	Incorporated by reference to Exhibit 2.3 to the Registrant’s Current Report on Form 8-K filed on June 17, 2003.
	2	.15	Securities Purchase Agreement dated as of February 20, 2004, among the Registrant and each of the Investors signatory thereto. (The schedules to the Securities Purchase Agreement have been omitted from this Report pursuant to Item 601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies of such omitted schedules supplementally to the SEC upon request.)	Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on February 26, 2004.
	2	.16	Asset Purchase Agreement dated as of January 21, 2005 with respect to the Registrant’s disposition of its MCK business. (The schedules to the Asset Purchase Agreement have been omitted from this Report pursuant to Item 601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies of such omitted schedules supplementally to the SEC upon request.)	Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	2	.17	Asset Purchase Agreement dated as of January 21, 2005 with respect to the Registrant’s disposition of its NACT business. (The schedules to the Asset Purchase Agreement have been omitted from this Report pursuant to Item 601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies of such omitted schedules supplementally to the SEC upon request.)	Incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	2	.18	Securities Purchase Agreement dated as of February 4, 2005, among the Registrant and each of the Investors signatory thereto. (The schedules to the Securities Purchase Agreement have been omitted from this Report pursuant to Item 601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies of such omitted schedules supplementally to the SEC upon request.)	Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on February 8, 2005.

Exhibit No.			Exhibit	Method of Filing
	2	.19	Asset Purchase Agreement dated as of February 23, 2005 by and among the Registrant, WSECI, Inc. and the shareholders of WSECI, Inc. (The schedules to the Asset Purchase Agreement have been omitted from this Report pursuant to Item 601(b)(2) of Regulation S-K, and the Registrant agrees to furnish copies of such omitted schedules supplementally to the SEC upon request.)	Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on March 1, 2005.
	3	.1	Amended and Restated Articles of Incorporation of the Registrant.	Incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-18 (File No. 33-51456).
	3	.2	Amendment to the Amended and Restated Articles of Incorporation of the Registrant, as amended.	Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed October 2, 2000.
	3	.3	Amendment to the Amended and Restated Articles of Incorporation of the Registrant, as amended.	Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed November 19, 2001.
	3	.4	Amendment to Amended and Restated Articles of Incorporation.	Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on October 7, 2005.
	3	.5	Registrant’s Amended and Restated Bylaws, adopted October 24, 2005.	Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed October 7, 2005.
	4	.1	Warrant dated October 31, 1996, to purchase 106,250 shares of the Registrant’s common stock granted to Walter C. Lovett.	Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed November 12, 1996.
	4	.2	Warrant dated October 31, 1996, to purchase 106,250 shares of the Registrant’s common stock granted to Douglas L. Roberson.	Incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed November 12, 1996.
	4	.3	Registration Rights Agreement dated as of July 27, 2000, among the Registrant, Strong River Investments, Inc. and Bay Harbor Investments, Inc.	Incorporated by reference to Exhibit 4.7 to the Registrant’s Registration Statement on Form S-4 filed August 7, 2000 (File No. 333-43224).
	4	.4	Warrant dated as of July 27, 2000, to purchase 104,168 shares of the Registrant’s common stock granted to Strong River Investments, Inc.	Incorporated by reference to Exhibit 4.10 to the Registrant’s Registration Statement on Form S-4 filed August 7, 2000 (File No. 333-43224).
	4	.5	Warrant dated as of July 27, 2000, to purchase 104,168 shares of the Registrant’s common stock granted to Bay Harbor Investments, Inc.	Incorporated by reference to Exhibit 4.11 to the Registrant’s Registration Statement on Form S-4 filed August 7, 2000 (File No. 333-43224).

Exhibit No.			Exhibit	Method of Filing
	4	.6	Warrant dated as of July 27, 2000, to purchase 26,041 shares of the Registrant’s common stock granted to Strong River Investments, Inc.	Incorporated by reference to Exhibit 4.12 to the Registrant’s Registration Statement on Form S-4 filed August 7, 2000 (File No. 333-43224).
	4	.7	Warrant dated as of July 27, 2000, to purchase 26,041 shares of the Registrant’s common stock granted to Bay Harbor Investments, Inc.	Incorporated by reference to Exhibit 4.13 to the Registrant’s Registration Statement on Form S-4 filed August 7, 2000 (File No. 333-43224).
	4	.8	Warrant dated as of July 27, 2000, to purchase 52,083 shares of the Registrant’s common stock granted to Strong River Investments, Inc.	Incorporated by reference to Exhibit 4.14 to the Registrant’s Registration Statement on Form S-4 filed August 7, 2000 (File No. 333-43224).
	4	.9	Warrant dated as of July 27, 2000, to purchase 52,083 shares of the Registrant’s common stock granted to Bay Harbor Investments, Inc.	Incorporated by reference to Exhibit 4.15 to the Registrant’s Registration Statement on Form S-4 filed August 7, 2000 (File No. 333-43224).
	4	.10	Warrant dated as of September 29, 2000, to purchase 1,750,000 shares of the Registrant’s common stock granted to Steven A. Odom. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
	4	.11	Warrant dated as of September 29, 2000, to purchase 875,000 shares of the Registrant’s common stock granted to James M. Logsdon. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
	4	.12	Warrant dated as of September 29, 2000, to purchase 665,000 shares of the Registrant’s common stock granted to Juliet M. Reising. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
	4	.13	Warrant dated as of August 21, 2000, to purchase 300,000 shares of Cereus Technology Partners, Inc.’s common stock granted to Steven A. Odom. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
	4	.14	Warrant dated as of August 21, 2000, to purchase 100,000 shares of Cereus Technology Partners, Inc.’s common stock granted to James M. Logsdon. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
	4	.15	Warrant dated as of August 21, 2000, to purchase 350,000 shares of Cereus Technology Partners, Inc.’s common stock granted to Juliet M. Reising. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
	4	.16	Warrant dated as of August 21, 2000, to purchase 250,000 shares of Cereus Technology Partners, Inc.’s common stock granted to Juliet M. Reising. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.

Exhibit No.			Exhibit	Method of Filing
	4	.17	Warrant dated as of August 21, 2000, to purchase 50,000 shares of Cereus Technology Partners, Inc.’s common stock granted to Peter Pamplin. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
	4	.18	Warrant dated as of January 30, 2001, to purchase 83,334 shares of the Registrant’s common stock granted to PNC Bank, National Association.	Incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
	4	.19	Warrant dated as of January 30, 2001, to purchase 472,689 shares of the Registrant’s common stock granted to Strong River Investments, Inc.	Incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
	4	.20	Warrant dated as of January 30, 2001, to purchase 472,689 shares of the Registrant’s common stock granted to Bay Harbor Investments, Inc.	Incorporated by reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
	4	.21	Form of 7.5% Convertible Debenture issued in connection with the Convertible Debenture and Warrant Purchase Agreement between the Registrant and the Purchasers named therein (the “Debenture Purchase Agreement”).	Incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K filed December 6, 2000.
	4	.22	Purchase Agreement dated as of January 18, 2001, among the Registrant, Strong River Investments, Inc. and Bay Harbor Investments, Inc. (the “Strong River Debenture Purchase Agreement”).	Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
	4	.23	Amendment dated as of January 23, 2001, to the Strong River Debenture Purchase Agreement.	Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
	4	.24	Amendment dated as of January 25, 2001, to the Strong River Debenture Purchase Agreement.	Incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
	4	.25	Registration Rights Agreement dated as of January 30, 2001, among the Registrant, Strong River Investments, Inc. and Bay Harbor Investments, Inc.	Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
	4	.26	Form of Warrant issued in connection with the Registrant’s acquisition of Telemate.Net Software, Inc.	Incorporated by reference to Exhibit 4.42 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
	4	.27	Registration Rights Agreement dated May 15, 2002, between the Registrant and Silicon Valley Bank.	Incorporated by reference to Exhibit 4.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
	4	.28	Registration Rights Agreement dated as of February 12, 2003, between the Registrant and Silicon Valley Bank.	Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	4	.29	Form of Warrant issued in connection with the Registrant’s October 2002 private placement offering.	Incorporated by reference to Exhibit 4.45 to the Registrant’s Annual Report on Form 10-K for the period ending December 31, 2002.

Exhibit No.			Exhibit	Method of Filing
	4	.30	Form of Registration Rights Agreement entered into in connection with the Registrant’s October 2002 private placement offering.	Incorporated by reference to Exhibit 4.46 to the Registrant’s Annual Report on Form 10-K for the period ending December 31, 2002.
	4	.31	Warrant Agreement dated as of August 17, 1999 to purchase 35,250 shares of AIM Group, Inc.’s stock granted to Randall P. Stern.	Incorporated by reference to Exhibit 4.10 to the Registrants Registration Statement on Form S-1 filed September 8, 2003 (File No. 333-108613).
	4	.32	Warrant Agreement dated as of October 29, 1999 to purchase 11,750 share of AIM Group, Inc.’s common stock granted to Randall P. Stern.	Incorporated by reference to Exhibit 4.11 to the Registrants Registration Statement on Form S-1 filed September 8, 2003 (File No. 333-108613).
	4	.33	Warrant Agreement dated as of February 8, 2000 to purchase 85,500 shares of Cereus Technology Partners, Inc.’s common stock granted to Randall P. Stern.	Incorporated by reference to Exhibit 4.12 to the Registrants Registration Statement on Form S-1 filed September 8, 2003 (File No. 333-108613).
	4	.34	Warrant Agreement dated as of August 17, 1999 to purchase 35,250 shares of AIM Group, Inc.’s stock granted to Burnham Securities, Inc.	Incorporated by reference to Exhibit 4.13 to the Registrants Registration Statement on Form S-1 filed September 8, 2003 (File No. 333-108613).
	4	.35	Warrant Agreement dated as of October 29, 1999 to purchase 11,750 shares of AIM Group, Inc.’s common stock granted to Burnham Securities, Inc.	Incorporated by reference to Exhibit 4.14 to the Registrants Registration Statement on Form S-1 filed September 8, 2003 (File No. 333-108613).
	4	.36	Warrant Agreement dated as of February 8, 2000 to purchase 85,500 shares of Cereus Technology Partners, Inc.’s common stock granted to Burnham Securities, Inc.	Incorporated by reference to Exhibit 4.15 to the Registrants Registration Statement on Form S-1 filed September 8, 2003 (File No. 333-108613).
	4	.37	Warrant Agreement dated as of February 8, 2000 to purchase 5,250 shares of Cereus Technology Partners, Inc.’s common stock granted to Burnham Securities, Inc.	Incorporated by reference to Exhibit 4.16 to the Registrants Registration Statement on Form S-1 filed September 8, 2003 (File No. 333-108613).
	4	.38	Warrant Agreement dated as of February 8, 2000 to purchase 5,000 shares of Cereus Technology Partners, Inc.’s common stock granted to Jon M. Burnham.	Incorporated by reference to Exhibit 4.17 to the Registrants Registration Statement on Form S-1/A filed October 21, 2003 (File No. 333-108613).
	4	.39	Warrant Agreement dated as of February 8, 2000 to purchase 7,750 shares of Cereus Technology Partners, Inc.’s common stock granted Randall P. Stern.	Incorporated by reference to Exhibit 4.18 to the Registrants Registration Statement on Form S-1/A filed October 21, 2003 (File No. 333-108613).
	4	.40	Form of Warrant issued by the Registrant to each Investor in connection with the Registrant’s February 2004 private placement.	Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 26, 2004.

Exhibit No.			Exhibit	Method of Filing
	4	.41	Form of Registration Rights Agreement among the Registrant and the Investors entered into in connection with the Registrant’s February 2004 private.	Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on February 26, 2004.
	4	.42	Form of 6% Senior Unsecured Convertible Debenture dated February 4, 2005 issued in connection with the Registrant’s February 2005 private placement.	Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 8, 2005.
	4	.43	Form of Series A Warrant dated February 4, 2005 to purchase shares of the Registrant’s common stock issued in connection with the Registrant’s February 2005 private placement.	Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on February 8, 2005.
	4	.44	Form of Series B Warrant dated February 4, 2005 to purchase shares of the Registrant’s common stock issued in connection with the Registrant’s February 2005 private placement.	Incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on February 8, 2005.
	4	.45	Form of Registration Rights Agreement among the Registrant and the Investors signatory thereto entered into in connection with the Registrant’s February 2005 private placement.	Incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K filed on February 8, 2005.
	4	.46	Form of warrant to purchase the Registrant’s common stock issued to certain placement agents in connection with the Registrant’s February 2005 private placement.	Incorporated by reference to Exhibit 4.62 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.
	4	.47	Form of Registration Rights Agreement to be executed in connection with the closing of the transactions contemplated by the Asset Purchase Agreement dated as of February 23, 2005 by and among the Registrant, WSECI, Inc. and the shareholders of WSECI, Inc.	Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on March 1, 2005.
	4	.48	Warrant issued July 25, 2005 to Mainfield Enterprises Inc. to purchase 1,500,000 shares of the Registrant’s common stock.	Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on July 29, 2005.
	4	.49	Warrant issued July 25, 2005 to Heimdall Investments, Ltd. to purchase 1,500,000 shares of the Registrant’s common stock.	Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on July 29, 2005.
	4	.50	Warrant issued July 25, 2005 to Mainfield Enterprises Inc. to purchase 500,000 shares of the Registrant’s common stock.	Incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on July 29, 2005.
	4	.51	Warrant issued July 25, 2005 to Heimdall Investments, Ltd. to purchase 500,000 shares of the Registrant’s common stock.	Incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K filed on July 29, 2005.
	4	.52	Registration Rights Agreement dated as of July 25, 2005, among the Registrant and the investors signatory thereto.	Incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K filed on July 29, 2005.
	4	.53	Form of Warrant issued in the Registrant’s February 2006 Private Placement.	Filed herewith.

Exhibit No.			Exhibit	Method of Filing
	4	.54	Form of Registration Rights Agreement entered into in connection with the Registrant’s February 2006 Private Placement.	Filed herewith.
	10	.1	Form of Incentive Stock Option Agreement.	Incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-18 (File 33-51456).
	10	.2	Form of Non-Statutory Option Agreement.	Incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-18 (File 33-51456).
	10	.3	Form of Non-Employee Director Stock Option Agreement.	Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-KSB for the year ended March 31, 1993.
	10	.4	1992 Stock Incentive Plan.	Incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-18 (File No. 33-51456).
	10	.5	1995 Stock Incentive Plan.	Incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-KSB for the year ended March 31, 1995.
	10	.6	1997 Stock Incentive Plan.	Incorporated by reference to the Registrant’s Proxy Statement for its 1997 Annual Meeting of Stockholders
	10	.7	1998 Stock Incentive Plan.	Incorporated by reference to Exhibit 10.27 to the Registrant’s Registration Statement on Form S-4 filed February 16, 1999 (File No. 333-68699).
	10	.8	1999 Stock Incentive Plan.	Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on December 22, 2004.
	10	.9	1999 Employee Stock Purchase Plan.	Filed herewith.
	10	.10	Office Lease Agreement dated as of September 20, 1999, between the Registrant and Galleria 400 LLC.	Incorporated by reference to Exhibit 10.51 to the Registrant’s Registration Statement on Form S-4 filed August 7, 2000 (File No. 333-43224).
	10	.11	First Amendment to Office Lease Agreement dated as of March 31, 2000, between the Registrant and Galleria 400 LLC.	Incorporated by reference to Exhibit 10.52 to the Registrant’s Registration Statement on Form S-4 filed August 7, 2000 (File No. 333-43224).
	10	.12	Convertible Debenture Purchase Agreement dated as of July 27, 2000, among the Registrant, Strong River Investments, Inc.	Incorporated by reference to Exhibit 10.53 to the Registrant’s Registration Statement on Form S-4 filed August 7, 2000 (File No. 333-43224).

Exhibit No.			Exhibit	Method of Filing
	10	.13	Executive Employment Agreement dated as of September 29, 2000, between the Registrant and Steven A. Odom. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
	10	.14	Executive Employment Agreement dated as of September 29, 2000, between the Registrant and James M. Logsdon. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
	10	.15	Executive Employment Agreement dated as of September 29, 2000, between the Registrant and Juliet M. Reising. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
	10	.16	Form of Escrow Agreement entered into in connection with the MessageClick Merger Agreement.	Incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed December 6, 2000.
	10	.17	Convertible Debenture and Warrant Purchase Agreement dated as of October 31, 2000, between the Registrant and the purchasers signatory thereto.	Incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K filed December 6, 2000.
	10	.18	Cereus Technology Partners, Inc. Directors’ Warrant Incentive Plan. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10(cc) to Cereus Technology Partners, Inc.’s Annual Report on Form 10-KSB40 for the year ended December 31, 1999.
	10	.19	Cereus Technology Partners, Inc. Outside Directors’ Warrant Plan. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 10(dd) to Cereus Technology Partners, Inc.’s Annual Report on Form 10-KSB40 for the year ended December 31, 1999.
	10	.20	Loan and Security Agreement dated December 14, 2001, among the Registrant, NACT Telecommunications, Inc., Telemate.Net Software, Inc. and Silicon Valley Bank, Commercial Finance Division.	Incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
	10	.21	Lease Agreement dated as of December 30, 1999, between NACT Telecommunications, Inc. and Boggess-Riverwoods Company, L.L.C.	Incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
	10	.22	Instrument of Assumption and Substitution of Guarantor of Lease dated as of July 27, 2001, among the Registrant, World Access, Inc., Boggess Holdings, L.L.C. and NACT Telecommunications, Inc.	Incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
	10	.23	Intellectual Property Security Agreement dated as of December 14, 2001, between the Registrant and Silicon Valley Bank.	Incorporated by reference to Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
	10	.24	Intellectual Property Security Agreement dated as of December 14, 2001, between NACT Telecommunications, Inc. and Silicon Valley Bank.	Incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.

Exhibit No.			Exhibit	Method of Filing
	10	.25	Intellectual Property Security Agreement dated as of December 14, 2001, between Telemate.Net Software, Inc. and Silicon Valley Bank.	Incorporated by reference to Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
	10	.26	Telemate.Net Software, Inc. 1999 Stock Incentive Plan.	Incorporated by reference to Exhibit 10.13 to Telemate.Net Software, Inc.’s Registration Statement on Form S-1 filed June 24, 1999 (File No. 333-81443).
	10	.27	Amendment to the Telemate.Net 1999 Software, Inc. Stock Incentive Plan.	Incorporated by reference to Exhibit 10.18 to Telemate.Net Software, Inc.’s Registration Statement on Form S-1 filed June 24, 1999 (File No. 333-81443).
	10	.28	Telemate Stock Incentive Plan.	Incorporated by reference to Exhibit 10.10 to Telemate.Net Software, Inc.’s Registration Statement on Form S-1 filed June 24, 1999 (File No. 333-81443).
	10	.29	Amendment to Telemate Stock Incentive Plan.	Incorporated by reference to Exhibit 10.14 to Telemate.Net Software, Inc.’s Registration Statement on Form S-1 filed June 24, 1999 (File No. 333-81443).
	10	.30	Form of Indemnification Agreement entered into as of October 12, 2001, between the Registrant and each of its directors and non-director officers at the level of Vice-President and above.	Incorporated by reference to Appendix F-1 to the Registrant’s Registration Statement on Form S-4/A filed October 12, 2001 (File No. 333-62262).
	10	.31	Interest Purchase Agreement dated as of June 4, 2002, between the Registrant and NeTrue Communications, Inc.	Incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
	10	.32	Subordination Agreement dated April 25, 2002, among the Registrant, Telemate.Net Software, Inc., NACT Telecommunications, Inc. and Silicon Valley Bank.	Incorporated by reference to Exhibit 99.6 to the Registrant’s Current Report on Form 8-K filed May 1, 2002.
	10	.33	Amendment to Loan Documents dated February 12, 2003, among the Registrant, Telemate.Net Software, Inc., NACT Telecommunications, Inc. and Silicon Valley Bank.	Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.34	Loan and Security Agreement (Exim Program) dated February 12, 2003, among the Registrant, Telemate.Net Software, Inc., NACT Telecommunications, Inc. and Silicon Valley Bank.	Incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.35	Borrower Agreement dated February 12, 2003, among the Registrant, Telemate.Net Software, Inc., NACT Telecommunications, Inc. and Silicon Valley Bank.	Incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.36	Secured Promissory Note dated February 12, 2003, in principal amount of $4.0 million, made by the Registrant in favor of Silicon Valley Bank.	Incorporated by reference to Exhibit 99.4 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.

Exhibit No.			Exhibit	Method of Filing
	10	.37	Subordination Agreement dated February 12, 2003, among the Registrant, Clarent Corporation and Silicon Valley Bank.	Incorporated by reference to Exhibit 99.5 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.38	Loan and Security Agreement dated as of February 12, 2003, between the Registrant and Clarent Corporation.	Incorporated by reference to Exhibit 99.6 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.39	Secured Subordinated Promissory Note dated February 12, 2003, in principal amount of $5.0 million, made by the Registrant in favor of Clarent Corporation.	Incorporated by reference to Exhibit 99.7 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.40	Secured Subordinated Promissory Note dated February 12, 2003, in principal amount of $3.0 million, made by the Registrant in favor of Clarent Corporation.	Incorporated by reference to Exhibit 99.8 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.41	Unsecured Subordinated Promissory Note, dated February 12, 2003, in principal amount of $1.8 million, made by the Registrant in favor of Clarent Corporation.	Incorporated by reference to Exhibit 99.9 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.42	Bill of Sale, Assignment and Assumption Agreement, dated as of February 12, 2003, between the Registrant and Clarent Corporation.	Incorporated by reference to Exhibit 99.10 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.43	Assignment of Patent Rights dated as of February 7, 2003, made by Clarent Corporation to the Registrant.	Incorporated by reference to Exhibit 99.11 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.44	Assignment of Trademarks dated as of February 12, 2003, between the Registrant and Clarent Corporation.	Incorporated by reference to Exhibit 99.12 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.45	Intellectual Property and Security Agreement dated as of February 12, 2003, between the Registrant and Clarent Corporation.	Incorporated by reference to Exhibit 99.13 to the Registrant’s Current Report on Form 8-K filed February 13, 2003.
	10	.46	Settlement Agreement dated November 6, 2002, between the Registrant and WA Telcom Products Co., Inc.	Incorporated by reference to Exhibit 10.65 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.47	Assignment and Collection Agreement dated December 5, 2002, between the Registrant and WA Telcom Products Co., Inc.	Incorporated by reference to Exhibit 10.66 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.48	Cross-Corporate Continuing Guaranty dated as of February 12, 2003, among the Registrant, Telemate.Net Software, Inc., NACT Telecommunications, Inc. and Clarent Canada Ltd.	Incorporated by reference to Exhibit 10.67 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.49	Lease for 1221 West Mineral Avenue, dated as of February 11, 2003, between the Registrant and A.S. Burger Investments, LLC.	Incorporated by reference to Exhibit 10.68 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.

Exhibit No.			Exhibit	Method of Filing
	10	.50	Movable Hypothec dated as of February 20, 2003, between the Registrant and Silicon Valley Bank.	Incorporated by reference to Exhibit 10.69 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.51	Movable Hypothec dated as of February 20, 2003, between the Clarent Canada Ltd. and Silicon Valley Bank.	Incorporated by reference to Exhibit 10.70 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.52	Settlement Agreement and Full Release of Claims dated as of February 12, 2003, between the Registrant and John M. Good.	Incorporated by reference to Exhibit 10.71 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.53	Arbitration Award Agreement dated February 3, 2002, and among the Registrant, Clunet R. Lewis and CLR Enterprises, Inc.	Incorporated by reference to Exhibit 10.72 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.54	Arbitration Award Agreement dated February 3, 2002, among the Registrant, William P. O’Reilly and Montana Corporation.	Incorporated by reference to Exhibit 10.73 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.55	Consulting Agreement dated as of March 14, 2003, between the Registrant and William P. O’Reilly.	Incorporated by reference to Exhibit 10.74 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.56	Consulting Agreement dated as of March 14, 2003, between the Registrant and Clunet R. Lewis.	Incorporated by reference to Exhibit 10.75 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.57	Amendment to Loan Documents dated April 7, 2003, among the Registrant, Telemate.Net Software, Inc., NACT Telecommunications, Inc. and Silicon Valley Bank.	Incorporated by reference to Exhibit 10.76 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.58	Amendment to Loan Documents (Exim Program) dated April 7, 2003, among the Registrant, Telemate.Net Software, Inc., NACT Telecommunications, Inc. and Silicon Valley Bank.	Incorporated by reference to Exhibit 10.77 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
	10	.59	Assignment and Assumption Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business with respect to the U.K. assets.	Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.60	Assignment and Assumption Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business with respect to the U.S. assets.	Incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.61	Assignment and Assumption Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business with respect to the Canadian assets.	Incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.62	Bill of Sale dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business with respect to the U.K. assets.	Incorporated by reference to Exhibit 99.4 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.

Exhibit No.			Exhibit	Method of Filing
	10	.63	Bill of Sale dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business with respect to the U.S. assets.	Incorporated by reference to Exhibit 99.5 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.64	Bill of Sale dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business with respect to the Canadian assets.	Incorporated by reference to Exhibit 99.6 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.65	Secured Convertible Promissory dated January 21, 2005 issued to the Registrant in principal amount of $3.5 million in connection with the Registrant’s disposition of its MCK business.	Incorporated by reference to Exhibit 99.7 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.66	Security Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business.	Incorporated by reference to Exhibit 99.8 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.67	Copyright Assignment Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business.	Incorporated by reference to Exhibit 99.9 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.68	Domain Name Assignment Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business.	Incorporated by reference to Exhibit 99.10 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.69	Patent Assignment Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business.	Incorporated by reference to Exhibit 99.11 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.70	Trademark Assignment Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its MCK business.	Incorporated by reference to Exhibit 99.12 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.71	Bill of Sale dated January 21, 2005 entered into in connection with the Registrant’s disposition of its NACT business.	Incorporated by reference to Exhibit 99.13 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.72	Copyright Assignment Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its NACT business.	Incorporated by reference to Exhibit 99.14 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.73	Trademark Assignment Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its NACT business.	Incorporated by reference to Exhibit 99.15 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.74	Patent Assignment Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its NACT business.	Incorporated by reference to Exhibit 99.16 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.75	License Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its NACT business.	Incorporated by reference to Exhibit 99.17 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.

Exhibit No.			Exhibit	Method of Filing
	10	.76	Reciprocal Reseller Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its NACT business.	Incorporated by reference to Exhibit 99.18 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.77	Call Center Services Agreement dated January 21, 2005 entered into in connection with the Registrant’s disposition of its NACT business.	Incorporated by reference to Exhibit 99.19 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.78	Instrument of Assignment, Agreement and Consent dated January 21, 2005 entered into in connection with the Registrant’s disposition of its NACT business.	Incorporated by reference to Exhibit 99.20 to the Registrant’s Current Report on Form 8-K filed on January 27, 2005.
	10	.79	Cash Collateral Agreement dated as of February 4, 2005 between the Registrant, the Investors signatory thereto and Wachovia Bank, National Association.	Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on February 8, 2005.
	10	.80	Form of Seller Non-competition Agreement to be executed in connection with the closing of the transactions contemplated by the Asset Purchase Agreement dated as of February 23, 2005 by and among the Registrant, WSECI, Inc. and the shareholders of WSECI, Inc.	Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on March 1, 2005.
	10	.81	Form of Bill of Sale, Assignment and Assumption Agreement Seller to be executed in connection with the closing of the transactions contemplated by the Asset Purchase Agreement dated as of February 23, 2005 by and among the Registrant, WSECI, Inc. and the shareholders of WSECI, Inc.	Incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on March 1, 2005.
	10	.82	Non-qualified Stock Option entered into March 15, 2005 and effective November 3, 2004 to purchase 500,000 shares of the Registrant’s common stock granted to Lewis Jaffe. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 99.5 to the Registrant’s Current Report filed on March 21, 2005 and amended on April 28, 2005.
	10	.83	Non-qualified Stock Option entered into March 15, 2005 and effective November 3, 2004 to purchase 250,000 shares of the Registrant’s common stock granted to Lewis Jaffe. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 99.6 to the Registrant’s Current Report filed on March 21, 2005 and amended on April 28, 2005.
	10	.84	Non-qualified Stock Option entered into March 15, 2005 and effective November 3, 2004 to purchase 250,000 shares of the Registrant’s common stock granted to Lewis Jaffe. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 99.7 to the Registrant’s Current Report filed on March 21, 2005 and amended on April 28, 2005.
	10	.85	Non-qualified Stock Option entered into March 15, 2005 and effective November 19, 2004 to purchase 250,000 shares of the Registrant’s common stock granted to Montgomery Bannerman. Represents an executive compensation plan or arrangement.	Incorporated by reference to Exhibit 99.8 to the Registrant’s Current Report on Form 8-K filed on March 21, 2005 and amended on April 28, 2005.
	10	.86	Amendment to Loan Documents dated March 15, 2005, among the Registrant, Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc., Needham (Delaware) Corp. and Silicon Valley Bank.	Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on March 21, 2005 and amended on April 28, 2005.

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

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

Exhibit No.			Exhibit	Method of Filing
	10	.111	Amended and Restated Executive Employment Agreement executed on October 24, 2005, but effective as of October 1, 2005 between the Registrant and Steven A. Odom. (Represents an executive compensatory plan or arrangement.)	Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed October 27, 2005.
	10	.112	Amended and Restated Executive Employment Agreement executed on October 24, 2005, but effective as of October 1, 2005 between the Registrant and Juliet M. Reising. (Represents an executive compensatory plan or arrangement.)	Incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed October 27, 2005.
	10	.113	Amended and Restated Promissory Note made by the Registrant, Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. and Needham (Delaware) Corp. dated March 24, 2006.	Filed herewith.
	10	.114	Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement dated as of March 24, 2006 among the Registrant, Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. Needham (Delaware) Corp. and Silicon Valley Bank.	Filed herewith
	10	.115	Amendment to Loan Documents dated January 27, 2006 among the Registrant, Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. Needham (Delaware) Corp. and Silicon Valley Bank.	Filed herewith.
	10	.116	Amendment to Loan Documents (EXIM Program) dated as of March 24, 2006 among the Registrant, Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. Needham (Delaware) Corp. and Silicon Valley Bank.	Filed herewith.
	10	.117	Amendment to Loan Documents dated as of March 24, 2006 among the Registrant, Provo Prepaid (Delaware) Corp., Telemate.Net Software, Inc. Needham (Delaware) Corp. and Silicon Valley Bank.	Filed herewith.
	21	.1	Subsidiaries of the Registrant.	Filed herewith.
	23	.1	Consent of Grant Thornton LLP.	Filed herewith.
	23	.2	Consent of KPMG LLP.	Filed herewith.
	31	.1	Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Executive Officer.	Filed herewith.
	31	.2	Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Financial Officer.	Filed herewith.
	32	.1	Section 1350 Certification by the Registrant’s Chief Executive Officer.	Filed herewith.
	32	.2	Section 1350 Certification by the Registrant’s Chief Financial Officer.	Filed herewith.

EX-4.53

                                                                    Exhibit 4.53

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED.

                                     WARRANT

                TO PURCHASE [_________] SHARES OF COMMON STOCK OF

                            VERSO TECHNOLOGIES, INC.

No. [___________]                                              February 17, 2006

      THIS CERTIFIES THAT, for value received, [_________] or (subject to the
restrictions on transfer contained herein and the provisions of the Registration
Rights Agreement (as hereinafter defined)) [____________]'s registered assigns
(the "Holder") is entitled to purchase from Verso Technologies, Inc., a
Minnesota corporation (the "Company"), at any time or from time to time after
9:00 a.m., Atlanta, Georgia time, on August 18, 2006 (the "Exercise Date") and
prior to 5:00 p.m., Atlanta, Georgia time, on the date which is five (5) years
from the Exercise Date (the "Expiration Date"), at the place where the Warrant
Agency (as hereinafter defined) is located, at the Exercise Price (as
hereinafter defined), the number of shares of common stock, $.01 par value (the
"Common Stock"), of the Company specified above, subject to the terms and
conditions as hereinafter provided.

      Capitalized terms used and not otherwise defined in this Warrant shall
have the meanings set forth in Article V hereof.

                                    ARTICLE I

                              EXERCISE OF WARRANTS

      1.1. Method of Exercise. To exercise this Warrant in whole or in part, the
Holder shall deliver to the Company at the Warrant Agency: (a) this Warrant; (b)
a written notice, substantially in the form of the subscription notice attached
hereto as Annex 1, of such Holder's election to exercise this Warrant, which
notice shall specify the number of whole shares of Common Stock to be purchased,
the denominations of the share certificate or certificates desired and the name
or names of the Eligible Holder(s) in which such



certificates are to be registered; and (c) payment of the Exercise Price with
respect to such shares of Common Stock. Such payment may be made, at the option
of the Holder, by cash, money order, certified or bank cashier's check or wire
transfer.

      The Company shall, as promptly as practicable and in any event within five
(5) Business Days thereafter, execute and deliver or cause to be executed and
delivered, in accordance with such subscription notice, a certificate or
certificates representing the aggregate number of shares of Common Stock
specified in said notice. The share certificate or certificates so delivered
shall be in such denominations as may be specified in such notice (or, if such
notice shall not specify denominations, one certificate shall be issued) and
shall be issued in the name of the Holder or such other name or names of
Eligible Holder(s) as shall be designated in such notice. Such certificate or
certificates shall be deemed to have been issued, and such Holder or any other
person so designated to be named therein shall be deemed for all purposes to
have become holders of record of such shares, as of the date the aforementioned
notice is received by the Company. If this Warrant shall have been exercised
only in part, the Company shall, at the time of delivery of the certificate or
certificates, deliver to the Holder a new Warrant evidencing the right to
purchase the remaining shares of Common Stock called for by this Warrant, which
new Warrant shall in all other respects be identical with this Warrant. The
Company shall pay all expenses payable in connection with the preparation,
issuance and delivery of share certificates and new Warrants as contemplated by
Section 2.6 below (other than transfer or similar taxes in connection with the
transfer of securities), except that, if share certificates or new Warrants
shall be registered in a name or names other than the name of the Holder, funds
sufficient to pay all transfer taxes payable as a result of such transfer shall
be paid by the Holder at the time of delivering the aforementioned notice or
promptly upon receipt of a written request of the Company for payment.

      If this Warrant shall be surrendered for exercise within any period during
which the transfer books for shares of the Common Stock purchasable upon the
exercise of this Warrant are closed for any purpose, then the Company shall not
be required to make delivery of certificates for the Common Stock purchasable
upon such exercise until the date of the reopening of said transfer books.

      1.2. Shares To Be Fully Paid and Nonassessable. All shares of Common Stock
issued upon the exercise of this Warrant shall be validly issued, fully paid and
nonassessable.

      1.3. No Fractional Shares To Be Issued. The Company shall not be required
to issue fractions of shares of Common Stock upon exercise of this Warrant. The
Holder may only elect to exercise this Warrant with respect to a whole number of
shares of the Common Stock.

      1.4. Securities Laws; Share Legend. The Holder, by acceptance of this
Warrant, agrees that this Warrant and all shares of Common Stock issuable upon
exercise of this Warrant will be disposed of only in accordance with the
Securities Act of 1933, as amended, and any successor Federal statue, and the
rules and regulations of the Commission

                                       2


promulgated thereunder (the "Securities Act"). In addition to any other legend
which the Company may deem advisable under the Securities Act and applicable
state securities laws, all certificates representing shares of Common Stock (as
well as any other securities issued hereunder in respect of any such shares)
issued upon exercise of this Warrant shall be endorsed as follows:

      THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
      UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE
      STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR OFFERED FOR SALE OR
      OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
      STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN
      OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT SUCH
      REGISTRATION IS NOT REQUIRED.

      Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the
Securities Act) shall also bear such legend unless, in the opinion of counsel
(in form and substance reasonably satisfactory to the Company) selected by the
Holder of such certificate and reasonably acceptable to the Company, the
securities represented thereby need no longer be subject to restrictions on
resale under the Securities Act.

                                   ARTICLE II

                     WARRANT AGENCY; TRANSFER, EXCHANGE AND
                             REPLACEMENT OF WARRANT

      2.1. Warrant Agency. Until such time, if any, as an independent agency
shall be appointed by the Company to perform services described herein with
respect to this Warrant (the "Warrant Agency"), the Company shall perform the
obligations of the Warrant Agency provided herein at its principal office
address or such other address as the Company shall specify by prior written
notice to the Holder.

      2.2. Ownership of Warrant. The Company may deem and treat the person in
whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by any person
other than the Company) for all purposes and shall not be affected by any notice
to the contrary, until presentation of this Warrant for registration of transfer
as provided in this Article II.

      2.3. Transfer of Warrant. This Warrant may only be transferred to a
purchaser subject to and in accordance with this Section 2.3 and Section 1.4
hereof, and any attempted transfer which is not in accordance with this Section
2.3 and Section 1.4 hereof shall be null and void and the transferee shall not
be entitled to exercise any of the rights of the holder of this Warrant. The
Company agrees to maintain at the Warrant Agency books for the

                                       3


registration of such transfers of Warrants, and transfer of this Warrant and all
rights hereunder shall be registered, in whole or in part, on such books, upon
surrender of this Warrant at the Warrant Agency in accordance with this Section
2.3, together with a written assignment of this Warrant, substantially in the
form of the assignment attached hereto as Annex 2, duly executed by the Holder
or its duly authorized agent or attorney-in-fact, with signatures guaranteed by
a bank or trust company or a broker or dealer registered with the NASD, and
funds sufficient to pay any transfer taxes payable upon such transfer. Upon
surrender of this Warrant in accordance with this Section 2.3, the Company
(subject to being satisfied that such transfer is in compliance with Section 1.4
hereof) shall execute and deliver a new Warrant or Warrants of like tenor and
representing in the aggregate the right to purchase the same number of shares of
Common Stock in the name of the assignee or assignees and in the denominations
specified in the instrument of assignment, and this Warrant shall promptly be
canceled. Notwithstanding the foregoing, a Warrant may be exercised by a new
holder without having a new Warrant issued. The Company shall not be required to
pay any Federal or state transfer tax or charge that may be payable in respect
of any transfer of this Warrant or the issuance or delivery of certificates for
Common Stock in a name other than that of the registered holder of this Warrant.

      2.4. Division or Combination of Warrants. This Warrant may be divided or
combined with other Warrants, in connection with the partial exercise of this
Warrant, upon surrender hereof and of any Warrant or Warrants with which this
Warrant is to be combined at the Warrant Agency, together with a written notice
specifying the names and denominations in which the new Warrant or Warrants are
to be issued, signed by the holders hereof and thereof or their respective duly
authorized agents or attorneys-in-fact. Subject to compliance with Sections 1.4
and 2.3 hereof as to any transfer which may be involved in the division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.

      2.5. Loss, Theft, Destruction or Mutilation of Warrant Certificates. Upon
receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant and, in the case of any
such loss, theft or destruction, upon receipt of indemnity or security (in
customary form) reasonably satisfactory to the Company, or, in the case of any
such mutilation, upon surrender and cancellation of such Warrant and upon
reimbursement of the Company's reasonable incidental expenses, the Company will
make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant,
a new Warrant of like tenor and representing the right to purchase the same
aggregate number of shares of Common Stock.

      2.6. Expenses of Delivery of Warrants. Except as otherwise expressly
provided herein, the Company shall pay all expenses (other than transfer taxes
as described in Section 2.3) and other charges payable in connection with the
preparation, issuance and delivery of Warrants hereunder and shares of Common
Stock upon the exercise hereof.

                                       4


                                   ARTICLE III

                              ADJUSTMENT PROVISIONS

      3.1. Adjustments Generally. The Exercise Price and the number of shares of
Common Stock (or other securities or property) issuable upon exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events, as provided in this Article III.

      3.2. Common Share Reorganization and Stock Dividend Payments. If the
Company, at any time this Warrant is outstanding, (a) shall subdivide its
outstanding shares of Common Stock into a greater number of shares or
consolidate its outstanding shares of Common Stock into a smaller number of
shares (any such event being called a "Common Share Reorganization"), or (b) pay
a stock dividend (except scheduled dividends paid on preferred stock which
contain a stated dividend rate) or otherwise make a distribution or
distributions on shares of its Common Stock or on any other class of capital
stock payable in shares of Common Stock (any such event being called a "Stock
Dividend Payment"), then (i) the Exercise Price shall be adjusted, effective
immediately after the record date at which the holders of shares of Common Stock
are determined for purposes of a Common Share Reorganization or at which the
holders of shares of Common Stock or any other class of capital stock are
determined for purposes of a Stock Dividend Payment, as the case may be, to a
price determined by multiplying the Exercise Price in effect immediately prior
to such record date by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding on such record date before giving effect to
such Common Share Reorganization or Stock Dividend Payment, as the case may be,
and the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such Common Share Reorganization or Stock
Dividend Payment, as the case may be, and (ii) the number of shares of Common
Stock subject to purchase upon exercise of this Warrant shall be adjusted,
effective at such time, to a number determined by multiplying the number of
shares of Common Stock subject to purchase immediately before such Common Share
Reorganization or Stock Dividend Payment, as the case may be, by a fraction, the
numerator of which shall be the number of shares outstanding after giving effect
to such Common Share Reorganization or Stock Dividend Payment, as the case may
be, and the denominator of which shall be the number of shares of Common Stock
outstanding immediately before such Common Share Reorganization or Stock
Dividend Payment, as the case may be.

      3.3. Capital Reorganization. If, at any time this Warrant is outstanding,
there shall be any consolidation or merger to which the Company is a party,
other than a consolidation or a merger in which the Company is a continuing
corporation and which does not result in any reclassification of, or change
(other than a Common Share Reorganization, Stock Dividend Payment or a change in
par value) in, outstanding shares of Common Stock, or any sale or conveyance of
the property of the Company as an entirety or substantially as an entirety (any
such event being called a "Capital Reorganization"), then, effective upon the
effective date of such Capital Reorganization, the Holder shall have the right
to purchase, upon exercise of this Warrant, the kind and amount of shares of
stock and other securities

                                       5


and property (including cash) which the Holder would have owned or have been
entitled to receive after such Capital Reorganization if this Warrant had been
exercised immediately prior to such Capital Reorganization. As a condition to
effecting any Capital Reorganization, the Company or the successor or surviving
corporation, as the case may be, shall execute and deliver to the Holder and to
the Warrant Agency an agreement as to the Holder's rights in accordance with
this Section 3.3, providing for subsequent adjustments as nearly equivalent as
may be practicable to the adjustments provided for in this Article III. The
provisions of this Section 3.3 shall similarly apply to successive Capital
Reorganizations.

      3.4. Adjustment Rules. (a) Any adjustments pursuant to this Article III
shall be made successively whenever an event referred to herein shall occur.

            (b) If the Company shall set a record date to determine the holders
of shares of Common Stock or any other class of capital stock, as the case may
be, for purposes of a Common Share Reorganization, Stock Dividend Payment or
Capital Reorganization and shall legally abandon such action prior to effecting
such action, then no adjustment shall be made pursuant to this Article III in
respect of such action.

      3.5. Notice of Adjustments. The Company shall give notice to the Holder
prior to any record date or effective date, as the case may be, in respect of
any Common Share Reorganization, Stock Dividend Payment or Capital
Reorganization describing, in each case, such event in reasonable detail and
specifying such record date or effective date, as the case may be. In addition,
after the record date or effective date, as the case may be, of any Common Share
Reorganization, Stock Dividend Payment or Capital Reorganization, the Company
shall promptly give notice to the Holder of such event, describing such event in
reasonable detail and specifying the record date or effective date, as the case
may be, and, if determinable, the required adjustment and the computation
thereof. If the required adjustment is not determinable at the time of such
notice, the Company shall give notice to the Holder of such adjustment and
computation promptly after such adjustment becomes determinable.

      3.6. Adjustment by Board of Directors. If any event occurs as to which, in
the opinion of the Board of Directors of the Company, the provisions of this
Article III are not strictly applicable or if strictly applicable would not
fairly protect the rights of the holder of this Warrant in accordance with the
essential intent and principles of such provisions, then the Board of Directors
may make, in its discretion, an adjustment in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such rights as aforesaid, but in no event shall any adjustment have the
effect of increasing the Exercise Price or decreasing the number of shares of
Common Stock into which the Warrant is exercisable as otherwise determined
pursuant to any of the provisions of this Article III except in the case of a
combination of shares of a type contemplated in Section 3.2 and then in no event
to an amount larger than the Exercise Price as adjusted pursuant to Section 3.2.

                                       6


                                   ARTICLE IV

                      CALL OPTION AND TRANSFER RESTRICTIONS

      4.1. Company Right to Purchase. The Holder hereby grants to the Company
the right to purchase this Warrant (in whole only and not in part) for cash (the
"Call Option") at a purchase price equal to $0.001 per share of Common Stock for
which this Warrant is then exercisable (the "Call Price"); provided, however,
that the Call Option shall only be exercisable (a) if, at any time after the
Exercise Date, the closing price of the Common Stock for ten (10) consecutive
trading days equals or exceeds $3.12 per share and (b) if a registration
statement under the Securities Act is effective on the Call Date that registers
all the Common Stock issuable upon the exercise of this Warrant (the
"Registrable Stock"). The Company agrees (i) to prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than one hundred
twenty (120) days from the Call Date (or such lesser time as necessary to permit
each seller of Registrable Stock to complete the distribution described in such
registration statement); and (ii) to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement during such period in accordance with the intended
methods of distribution by the sellers thereof set forth in such registration
statement. In connection therewith, the Company will as expeditiously as
possible:

      (i) furnish to each seller of Registrable Stock such number of copies of
such registration statement, each amendment and supplement thereto, the
prospectus included in such registration statement (including each preliminary
prospectus) and such other documents as such seller may reasonably request in
order to facilitate the disposition of the Registrable Stock owned by such
seller;

      (ii) use its reasonable best efforts to register or qualify such
Registrable Stock under the securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Stock owned by such seller,
provided that the Company will not be required (A) to qualify generally to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this subparagraph, (B) to subject itself to taxation in any such
jurisdiction or (C) to consent to general service of process in any such
jurisdiction;

      (iii) notify each seller of such Registrable Stock, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading, and,
at the request of any such seller, the Company will prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such

                                       7


Registrable Stock, such prospectus will not contain an untrue statement of a
material fact or omit to state any fact necessary to make the statements therein
not misleading;

      (iv) cause all such Registrable Stock to be listed on each securities
exchange on which similar securities issued by the Company are then listed and
to be qualified for trading on each system on which similar securities issued by
the Company are from time to time qualified;

      (v) provide a transfer agent and registrar for all such Registrable Stock
not later than the effective date of such registration statement and thereafter
maintain such a transfer agent and registrar; and

      (vi) use its reasonable best efforts promptly to obtain the withdrawal of
any stop order that is issued suspending the effectiveness of such registration
statement, or of any order suspending or preventing the use of any related
prospectus or suspending the qualification of any Registrable Stock included in
such registration statement for sale in any jurisdiction.

      4.2 Notice to Holder. If the Company elects to exercise its Call Option
pursuant to this Article IV, then at least fifteen (15) Business Days but not
more than sixty (60) Business Days before the Call Date, the Company shall mail
or cause to be mailed a redemption notice (the "Notice") by first-class mail to
Holder at Holder's address as it appears on the books maintained by the Warrant
Agency. The Notice shall state: (a) the Call Date; (b) the Call Price; (c) the
Exercise Price; (d) that this Warrant must be presented and surrendered to the
Warrant Agency to collect the Call Price; (e) that this Warrant may be exercised
at any time before the close of business on the fifth (5th) Business Day
immediately preceding the Call Date (the "Exercise Termination Date"); (f) that,
if the Holder wishes to exercise this Warrant, the Holder must satisfy the
requirements of Article I hereof prior to the Exercise Termination Date; and (g)
that, unless the Company defaults in making the payment of the Call Price, the
only remaining right of Holder after the Exercise Termination Date shall be to
receive payment of the Call Price upon presentation and surrender of this
Warrant to the Warrant Agency.

      4.3 Payment upon Surrender of Warrant. If the Company elects to exercise
its Call Option pursuant to this Article IV, and the Holder does not exercise
this Warrant prior to the Exercise Termination Date, then the Company shall pay
the Call Price to the Holder in accordance with the Notice upon presentation and
surrender by the Holder of this Warrant to the Warrant Agency.

                                    ARTICLE V

                                   DEFINITIONS

      The following terms, as used in this Warrant, have the following
respective meanings:

      "Business Days" means each day in which banking institutions in Atlanta,
Georgia are not required or authorized by law or executive order to close.

                                       8


      "Call Date" means the Business Day fixed by the Company upon which this
Warrant shall be called in accordance with Article IV and identified in the
Notice as the Call Date.

      "Call Option" has the meaning set forth in Section 4.1.

      "Call Price" has the meaning set forth in Section 4.1.

      "Capital Reorganization" has the meaning set forth in Section 3.3

      "Commission" means the Securities and Exchange Commission.

      "Common Share Reorganization" has the meaning set forth in Section 3.2.

      "Common Stock" has the meaning set forth in the first paragraph of this
Warrant.

      "Company" has the meaning set forth in the first paragraph of this
Warrant.

      "Eligible Holder" means the Holder and any permitted transferee of the
Holder pursuant to and in accordance with this Warrant and the Registration
Rights Agreement.

      "Exercise Date" has the meaning set forth in the first paragraph of this
Warrant.

      "Exercise Price" means US $1.56 per share of Common Stock.

      "Exercise Termination Date" has the meaning set forth in Section 4.2.

      "Expiration Date" has the meaning set forth in the first paragraph of this
Warrant.

      "Holder" has the meaning set forth in the first paragraph of this Warrant.

      "NASD" means The National Association of Securities Dealers, Inc.

      "Notice" has the meaning set forth in Section 4.2.

      "Registrable Stock" has the meaning set forth in Section 4.1.

      "Registration Rights Agreement" means the Registration Rights Agreement of
even date herewith by and among the Company and the purchasers of the Warrants.

      "Securities Act" has the meaning set forth in Section 1.4.

      "Stock Dividend Payment" has the meaning set forth in Section 3.2.

      "Warrant Agency" has the meaning set forth in Section 2.1.

      "Warrants" means this Warrant and the other Warrants issued in connection
with the Company's February 2006 private equity financing.

                                       9


                                   ARTICLE VI

                                  MISCELLANEOUS

      6.1. Governing Law. This Warrant shall be governed in all respects by the
laws of the State of Georgia, without reference to its conflicts of law
principles.

      6.2. Covenants To Bind Successor and Assigns. All covenants, stipulations,
promises and agreements contained in this Warrant by or on behalf of the Company
shall bind its successors and assigns, whether or not so expressed.

      6.3. Entire Agreement. This Warrant constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof and no party shall be liable or bound to any other party in any
manner by any warranties, representations, or covenant except as specifically
set forth herein or therein.

      6.4. Waivers and Amendments. No failure or delay of the Holder in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of such right or power, or any abandonment
or discontinuance of steps to enforce such a right or power, preclude any other
or further exercise thereof or the exercise of any other right or power. The
rights and remedies of the Holder are cumulative and not exclusive of any rights
or remedies which it would otherwise have. The provisions of this Warrant may be
amended, modified or waived with (and only with) the written consent of the
Company and the Holders of a majority in interest of the Warrants then
outstanding; provided, however, that no such amendment, modification or waiver
shall, without the written consent of the Holders of any Warrant, (a) change the
number of shares of Common Stock subject to purchase upon exercise of such
Warrant, the Exercise Price or provisions for payment thereof or (b) amend,
modify or waive the provisions of Section 6.4 of such Warrant.

      Any such amendment, modification or waiver effected pursuant to this
Section shall be binding upon the Holders of all Warrants and upon the Company,
except as provided in the proviso to the last sentence of the preceding
paragraph. In the event of any such amendment, modification or waiver the
Company shall give prompt notice thereof to all holders of Warrants and, if
appropriate, notation thereof shall be made on all Warrants thereafter
surrendered for registration of transfer or exchange.

      6.5 Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be mailed by express, registered or
certified mail, postage prepaid, return receipt requested, sent by telecopy
(with confirmation of transmission received and followed by the posting of a
"hard copy" of the notice or communication by first-class U.S. mail), or by
courier service guaranteeing overnight delivery with charges prepaid, or
otherwise delivered by hand or by messenger, and shall be conclusively deemed to
have been received by a party hereto and to be effective on the day on which
delivered or telecopied to such party at its address set forth below (or at such
other address as such party shall specify to the other parties hereto in
writing), or, if sent by registered or certified mail,

                                       10


on the third business day after the day on which mailed, addressed to such party
at such address.

      In the case of the Holder, such notices and communications shall be
addressed to its address as shown on the books maintained by the Warrant Agency,
unless the Holder shall notify the Company and the Warrant Agency in writing
that notices and communications should be sent to a different address, in which
case such notices and communications shall be sent to the address specified by
the Holder. In the case of the Company, such notices and communications shall be
addressed as follows: Attention: Chief Financial Officer, Verso Technologies,
Inc., 400 Galleria Parkway, Suite 200, Atlanta, Georgia 30339.

      6.6 Survival of Agreements; Representations and Warranties, etc. All
warranties, representations and covenants made by the Company herein shall be
considered to have been relied upon by the Holder and shall survive the issuance
and delivery of the Warrant, regardless of any investigation made by the Holder,
and shall continue in full force and effect so long as this Warrant is
outstanding.

      6.7 Severability. In case any one or more of the provisions contained in
this Warrant shall be held to be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby. The
parties shall endeavor in good faith negotiations to replace the invalid,
illegal or unenforceable provisions with valid provisions the economic effect of
which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.

      6.8 Section Headings. The section headings used herein are for convenience
of reference only, do not constitute a part of this Warrant and shall not affect
the construction of or be taken into consideration in interpreting this Warrant.

      6.9 No Rights as Shareholder; No Limitations on Company Action. This
Warrant shall not entitle the Holder to any rights as a shareholder of the
Company. No provision of this Warrant and no right or option granted or
conferred hereunder shall in any way limit, affect or abridge the exercise by
the Company of any of its corporate rights or powers to recapitalize, amend its
certificate of incorporation, reorganize, consolidate or merge with or into
another corporation or to transfer all or any part of its property or assets, or
the exercise of any other of its corporate rights or powers.

      IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its duly authorized representative.

                                            VERSO TECHNOLOGIES, INC.

                                            By: ______________________________
                                                Name: Juliet M. Reising
                                                Title: Chief Financial Officer

                                       11


                                                                         Annex 1

                               SUBSCRIPTION NOTICE

                                                          Dated:________________

      The undersigned hereby irrevocably elects to exercise the right of
purchase evidenced by the attached Warrant for, and to purchase thereunder,
__________ shares of Common Stock of Verso Technologies, Inc. as provided for
therein. The undersigned tenders herewith payment of the Exercise Price for such
shares in the form of cash, money order, certified or bank cashier's check or
wire transfer. Any term with initial capital letters used herein but not defined
herein shall have the meaning ascribed to it in the attached Warrant.

                  Instructions for Registration of Common Stock

      Please issue a certificate or certificates for such shares of Common Stock
in the following name or names and denominations:

Name:_________________________________________________
         (Please typewrite or print in block letters.)

Address:______________________________________________

Denomination:_________________________________________

                         Representations and Warranties

      In connection with the exercise of the attached Warrant, the undersigned
hereby represents and warrants that:

      (i) unless registered pursuant to a Registration Rights Agreement or
otherwise, it recognizes that the shares of Common Stock issuable pursuant to
the attached Warrant have not been registered under the Securities Act, or any
applicable state securities laws, and may not transferred, sold, or offered for
sale unless registered pursuant to the Securities Act and all applicable state
securities laws or unless an exemption from such registration is available and
the Company has received an opinion to that effect from counsel reasonably
satisfactory to the Company;



      (ii) it recognizes that the shares of Common Stock issuable pursuant to
the attached Warrant are subject to, and are transferable only upon compliance
with, the provisions of the Registration Rights Agreement and the attached
Warrant;

      (iii) if the undersigned is an individual, then the undersigned is an
"accredited investor" as that term is defined in Rule 501(a)(5) or (6) of
Regulation D promulgated under the Securities Act by reason that the undersigned
is an individual (i) having an individual net worth, or a joint net worth with
the undersigned's spouse, at the time of the purchase that exceeds $1,000,000,
or (ii) who had an individual income in excess of $200,000 in each of the two
most recent years or joint income with the undersigned's spouse in excess of
$300,000 in each of those years and has a reasonable expectation of reaching the
same income level in the current year; or, if the undersigned is a corporation
or other entity, then the undersigned is an "accredited investor" as that term
is defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D promulgated under
the Securities Act; and

      (iv) it is purchasing the shares of Common Stock for investment and not
with a view to resale or distribution or any present intention to resell or
distribute, except in compliance with the Securities Act and all applicable
state securities laws.

                             Issuance of New Warrant

      If said number of shares shall not be all the shares issuable upon
exercise of the attached Warrant, a new Warrant is to be issued in the name of
the undersigned for the balance remaining of such shares.

Signature: ____________________________________________________________________
           Note: The above signature should correspond exactly with the name on
                 the face of the attached Warrant or with the name of the
                 assignee appearing in the assignment form below.

Printed Name: ______________________________

Title: _____________________________________

                                Page 2 of Annex 1



                                                                         Annex 2

                                   Assignment

      For value received, the undersigned hereby sells, assigns and transfers
unto:

Name:________________________________________________
         (Please type or print in block letters)

Address:_____________________________________________

the right to purchase Common Stock (as defined in the attached Warrant)
represented by the attached Warrant to the extent of _______________ shares as
to which such right is exercisable and does hereby irrevocably constitute and
appoint ________________________________________, attorney-in-fact, to transfer
said Warrant on the books of Verso Technologies, Inc., with full power of
substitution in the premises.

Dated:________________

Signature:__________________________________________________________________
             Note: The above signature should correspond exactly with the name
                   on the face of the attached Warrant.

Printed Name: ______________________________

Title: _____________________________________

EX-4.54

                                                                    Exhibit 4.54

                          REGISTRATION RIGHTS AGREEMENT

      This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of the 17th day of February, 2006, by and among VERSO TECHNOLOGIES,
INC., a Minnesota corporation (the "Company"), and each of the shareholders
listed on the signature pages hereto (each a "Shareholder" and, collectively,
the "Shareholders").

      IN CONSIDERATION of the mutual promises and covenants set forth herein,
and intending to be legally bound, the parties hereto hereby agree as follows:

1. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS.

      1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings set forth below:

            (a) "Common Stock" shall mean the Company's common stock, $.01 par
value per share.

            (b) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.

            (c) "Filing Deadline" shall mean April 18, 2006.

            (d) "Holder" shall mean any Shareholder who holds Registrable
Securities and any holder of Registrable Securities to whom the rights conferred
by this Agreement have been transferred in compliance with Section 1.2 hereof.

            (e) "Other Shareholders" shall mean persons who, by virtue of
agreements with the Company other than this Agreement, are entitled to include
their securities in certain registrations hereunder.

            (f) "Registrable Securities" shall mean the shares of Common Stock
held by the Shareholders listed on the signature pages hereto in the amount set
forth thereon, the Warrants held by the Shareholders listed on the signature
pages hereto and any shares of Common Stock that such Shareholder has the right
to acquire, or does acquire, upon the exercise of the Warrants or, in either
case, their permitted transferees, provided that a Registrable Security ceases
to be a Registrable Security when (i) it is registered under the Securities Act;
(ii) it is sold or transferred in accordance with the requirements of Rule 144
(or similar provisions then in effect) promulgated by the SEC under the
Securities Act ("Rule 144"); (iii) it is eligible to be sold or transferred
under Rule 144 without holding period or



volume limitations; or (iv) it is sold in a private transaction in which the
transferor's rights under this Agreement are not assigned.

            (g) The terms "register," "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder and the declaration or ordering of the effectiveness of
such registration statement.

            (h) "Registration Expenses" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company and one counsel
selected to represent the Holders, which counsel shall be reasonably
satisfactory to the Company, blue sky fees and expenses, and expenses of any
regular or special audits incident to or required by any such registration, but
shall not include (i) Selling Expenses; (ii) the compensation of regular
employees of the Company, which shall be paid in any event by the Company; and
(iii) blue sky fees and expenses incurred in connection with the registration or
qualification of any Registrable Securities in any state, province or other
jurisdiction in a registration pursuant to Section 1.3 hereof to the extent that
the Company shall otherwise be making no offers or sales in such state, province
or other jurisdiction in connection with such registration.

            (i) "Restricted Securities" shall mean any Registrable Securities
required to bear the legend set forth in Section 1.2(c) hereof.

            (j) "Rule 145" shall mean Rule 145 as promulgated by the SEC under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the SEC.

            (k) "SEC" shall mean the Securities and Exchange Commission.

            (l) "Securities Act" shall mean the Securities Act of 1933, as
amended.

            (m) "Selling Expenses" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the sale of
Registrable Securities.

            (n) "Warrantholder" shall mean any holder of a Warrant.

            (o) "Warrant Shares" shall mean the shares of Common Stock issuable
by the Company upon exercise of the Warrants.

            (p) "Warrants" shall mean the warrants to purchase shares of Common
Stock at an exercise price of $1.56 per share issued in connection with the
Company's February 2006 private equity financing.

                                       2


      1.2 RESTRICTIONS ON TRANSFER.

            (a) Each Holder agrees not to make any disposition of all or any
portion of the Registrable Securities unless and until (i) there is then in
effect a registration statement under the Securities Act covering such proposed
disposition and such disposition is made in accordance with such registration
statement; or (ii) (A) such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition and (B) if
reasonably requested by the Company, such Holder shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the
Securities Act.

            (b) Notwithstanding the provisions of subparagraphs (i) and (ii) of
paragraph (a) above, no such registration statement or opinion of counsel shall
be necessary for a transfer by a Holder which is (i) a partnership to its
partners in accordance with their partnership interests; (ii) a limited
liability company to its members in accordance with their member interests; or
(iii) to the Holder's family member or a trust for the benefit of an individual
Holder or one or more of his family members, provided that the transferee will
be subject to the terms of this Section 1.2 to the same extent as if it were an
original Holder hereunder.

            (c) Each certificate representing Registrable Securities shall
(unless otherwise permitted by the provisions of this Agreement) be stamped or
otherwise imprinted with a legend substantially similar to the following (in
addition to any legend required under applicable state securities laws):

      THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED.

            (d) The Company shall be obligated to promptly reissue unlegended
certificates at the request of any Holder thereof if the Holder shall have
obtained an opinion of counsel (which counsel may be counsel to the Company)
reasonably acceptable to the Company to the effect that the securities proposed
to be disposed of may lawfully be so disposed of in compliance with the
Securities Act without registration, qualification or legend.

            (e) Any legend endorsed on an instrument pursuant to applicable
state securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority

                                       3


authorizing such removal or if the Holder shall request such removal and shall
have obtained and delivered to the Company an opinion of counsel reasonably
acceptable to the Company to the effect that such legend and/or stop-transfer
instructions are no longer required pursuant to applicable state securities
laws.

      1.3 REGISTRATION.

            (a) Filing of Registration Statement. On or before the Filing
Deadline, the Company shall file with the SEC a registration statement on Form
S-3 as a "shelf" registration statement under Rule 415 of the Securities Act
registering the resale of one hundred percent (100%) of the Registrable
Securities.

            (b) Alternative Registration Statement. Notwithstanding the
foregoing paragraph 1.3(a), if on the Filing Deadline, the Company does not meet
the eligibility requirements for filing a registration statement on Form S-3,
then in such case the Company shall instead prepare and file with the SEC a
registration statement meeting the foregoing requirements on Form S-1 or Form
S-2.

            (c) Effectiveness. The Company shall use commercially reasonable
efforts to cause the registration filed pursuant to this Agreement to become
effective as soon as practicable following the filing thereof. The Company shall
use commercially reasonable efforts to maintain the effectiveness of the
registration filed pursuant to this Agreement until August 18, 2011, or until
the Holder or Holders have completed the distribution of the Registrable
Securities described in the registration statement relating thereto, whichever
occurs first.

            (d) Registration of Other Securities. The Company may include any
securities held by Other Shareholders on any registration statement filed by the
Company on behalf of the Holders pursuant to the terms hereof.

      1.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Section 1.3 hereof shall be borne by the Company. All Selling Expenses relating
to securities so registered shall be borne by the Holders of such securities pro
rata on the basis of the number of shares of securities so registered on their
behalf.

      1.5 REGISTRATION PROCEDURES. In the case of the registration effected by
the Company pursuant to Section 1.3 hereof, the Company will keep each Holder
advised in writing as to the initiation of the registration and as to the
completion thereof. At its expense, the Company will use its best efforts to:

            (a) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;

                                       4


            (b) furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
from time to time may reasonably request;

            (c) notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such Holder, prepare and
furnish to such Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or incomplete in the light of the circumstances then
existing; provided, however, the Company shall not be obligated to prepare and
furnish any such prospectus supplements or amendments relating to any material
nonpublic information at any such time as the Board of Directors of the Company
has determined that, for good business reasons, the disclosure of such material
nonpublic information at that time is contrary to the best interests of the
Company in the circumstances and is not otherwise required under applicable law
(including applicable securities laws);

            (d) cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange and/or included in any
national quotation system on which similar securities issued by the Company are
then listed or included;

            (e) provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration; and

            (f) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering the period of at
least twelve (12) months, but not more than eighteen months, beginning with the
first month after the effective date of the registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act.

      1.6 INDEMNIFICATION.

            (a) The Company will indemnify each Holder, each of such Holder's
officers, directors, partners, legal counsel and accountants and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
as applicable, with respect to which registration, qualification, or compliance
has been effected pursuant to this Section 1,

                                       5


and each underwriter, if any, and each person who controls within the meaning of
Section 15 of the Securities Act any underwriter, against all expenses, claims,
losses, damages, and liabilities (or actions, proceedings, or settlements in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular, or other document (including any related registration statement,
notification, or the like) incident to any such registration, qualification, or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the Securities Act or
any rule or regulation thereunder applicable to the Company or relating to
action or inaction required of the Company in connection with any such
registration, qualification, or compliance, and will reimburse each such Holder,
each of its officers, directors, partners, legal counsel and accountants and
each person controlling such Holder, each such underwriter, and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending or settling any such
claim, loss, damage, liability, or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability, or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such Holder
or underwriter and stated to be specifically for use therein. It is agreed that
the indemnity agreement contained in this Section 1.6(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld).

            (b) Each Holder will, if Registrable Securities held by him are
included in the securities as to which such registration, qualification, or
compliance is being effected, indemnify the Company, each of its directors,
officers, partners, legal counsel and accountants and each underwriter, if any,
of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, each other such Holder and Other Shareholder,
and each of their officers, directors, and partners, and each person controlling
such Holder or Other Shareholder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular, or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and such Holders, Other Shareholders,
directors, officers, partners, legal counsel, and accountants, persons,
underwriters, or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus, offering
circular or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder and stated to be
specifically for use therein; provided, however, (i) that the obligations of
such Holder hereunder shall not apply to amounts paid in settlement of any such
claims, losses, damages, or liabilities (or actions in respect thereof) if such

                                       6


settlement is effected without the consent of such Holder (which consent shall
not be unreasonably withheld) and (ii) that in no event shall any indemnity
under this Section 1.6(b) exceed the gross proceeds from the offering received
by such Holder.

            (c) Each party entitled to indemnification under this Section 1.6
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 1.6, to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
of a release to such Indemnified Party from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.

            (d) If the indemnification provided for in this Section 1.6 is held
by a court of competent jurisdiction to be unavailable to an Indemnified Party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the conduct, statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.

            (e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into by the Indemnifying Party and the Indemnified Party in connection
with the underwritten public offering are in conflict with the foregoing
provisions, the provisions in the underwriting agreement shall control.

                                       7


      1.7 INFORMATION BY HOLDER. Each Holder of Registrable Securities shall
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification, or compliance referred to in this Section 1.

      1.8 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC that may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to
use its best efforts to:

            (a) make and keep adequate public information regarding the Company
available as those terms are understood and defined in Rule 144;

            (b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and

            (c) so long as a Holder owns any Restricted Securities, furnish to
the Holder forthwith upon written request a written statement by the Company as
to its compliance with the reporting requirements of Rule 144 and of the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
as a Holder may reasonably request in availing itself of any rule or regulation
of the SEC allowing a Holder to sell any such securities without registration.

      1.9 NOTICE TO DISCONTINUE; NOTICE BY HOLDERS.

            (a) Notice to Discontinue. Each Holder agrees by acquisition of such
securities that, upon receipt of any notice from the Company of any event of the
kind described in Section 1.5(c), the Holder will discontinue disposition of
Registrable Securities until the Holder receives copies of the supplemented or
amended prospectus contemplated by Section 1.5(c). In addition, if the Company
requests, the Holder will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in the Holder's possession, of the
prospectus covering the Registrable Securities current at the time of receipt of
such notice. If the Company gives any such notice, then the time period
mentioned in Section 1.3(c) shall be extended by the number of days elapsing
between the date of notice and the date that each Holder who has included
Registrable Securities in such registration receives the copies of the
supplemented or amended prospectus contemplated in Section 1.5(c).

            (b) Notice by Holders. The Holders shall notify the Company, at any
time when a prospectus relating to the registration of the Registrable
Securities is required to be delivered under the Securities Act, of the
happening of any event, which as to any Holder is (i) to its respective
knowledge; (ii) solely within its respective knowledge; and (iii) solely as to
matters concerning that Holder, as a result of which the prospectus included in
the registration statement, then in effect, contains an untrue statement of a
material fact or omits

                                       8


to state any material fact necessary to make the statements therein, in light of
the circumstances then existing, not misleading.

2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS.

      2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to the Shareholders as follows:

            (a) The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government, the Articles of Incorporation or Bylaws of the Company, each as
amended, or any provision of any material indenture, agreement or other
instrument to which it or any of its properties or assets is bound, or conflict
with, result in a breach of or constitute (with due notice or lapse of time or
both) a default under any such material indenture, agreement or other
instrument, or result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any of the properties or assets of the
Company.

            (b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency and other similar laws affecting the
enforceability of creditors' rights generally, general equitable principles, the
discretion of courts in granting equitable remedies and public policy
considerations.

      2.2 REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. Each Shareholder
(severally and not jointly) represents and warrants to the Company as follows:

            (a) The execution, delivery and performance of this Agreement by the
Shareholder will not violate any provision of law, any order of any court or any
agency or government, or any provision of any material indenture or agreement or
other instrument to which it or any of its properties or assets is bound, or
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under any such material indenture, agreement or other
instrument, or result in the creation or imposition of any lien, charge, or
encumbrance of any nature whatsoever upon any of the properties or assets of the
Shareholder.

            (b) This Agreement has been duly executed and delivered by the
Shareholder and constitutes the legal, valid and binding obligation of the
Shareholder, enforceable against the Shareholder in accordance with its terms,
subject to applicable bankruptcy, insolvency and other similar laws affecting
the enforceability of creditors' rights generally, general equitable principles,
the discretion of courts in granting equitable remedies and public policy
considerations.

                                       9


3. MISCELLANEOUS.

      3.1 DELAY OF REGISTRATION. No Holder shall have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of Section 1 hereof.

      3.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.

      3.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement constitutes the
full and entire understanding and agreement between the parties with regard to
the subject hereof. Neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated, except by a written instrument signed by the
Company and the Holders of at least fifty-one percent (51%) of the Registrable
Securities and any such amendment, waiver, discharge or termination shall be
binding on all the Holders, but in no event shall the obligation of any Holder
hereunder be materially increased, except upon the written consent of such
Holder.

      3.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, or delivered personally by hand or nationally
recognized courier addressed (a) if to a Holder, as indicated in the stock
records of the Company or at such other address as such Holder shall have
furnished to the Company in writing, or (b) if to the Company, at 400 Galleria
Parkway, Suite 200, Atlanta, Georgia 30339, Attn: Chief Financial Officer, or at
such other address as the Company shall have furnished to each Holder in
writing, together with a copy to Rogers & Hardin LLP, 2700 International Tower,
229 Peachtree Street, Atlanta, Georgia 30303, Attn: Robert C. Hussle, Esq. All
such notices and other written communications shall be effective on the date of
mailing or delivery.

      3.5 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power
or remedy accruing to any Holder, upon any breach or default of the Company
under this Agreement shall impair any such right, power or remedy of such Holder
nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default therefore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
Holder of any breach or default under this Agreement or any waiver on the part
of any Holder of any provisions or conditions of this Agreement must be made in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any Holder, shall be cumulative and not alternative.

      3.6 RIGHTS; SEVERABILITY. Unless otherwise expressly provided herein, a
Holder's rights hereunder are several rights, not rights jointly held with any
of the other Holders. In

                                       10


case any provision of the Agreement shall be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.

      3.7 INFORMATION CONFIDENTIAL. Each Holder acknowledges that the
information received by them pursuant hereto may be confidential and for its use
only, and it will not use such confidential information in violation of the
Exchange Act or reproduce, disclose or disseminate such information to any other
person (other than its employees or agents having a need to know the contents of
such information, and its attorneys), except in connection with the exercise of
rights under this Agreement, unless the Company has made such information
available to the public generally or such Holder is required to disclose such
information by a governmental body.

      3.8 TITLES AND SUBTITLES. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.

      3.9 COUNTERPARTS. This Agreement may be executed and delivered (including
by facsimile transmission) in any number of counterparts, and by the different
parties hereto in separate counterparts, each of which when executed and
delivered shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.

      3.10 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Georgia without reference to Georgia's choice of law rules and each of the
parties hereto hereby consents to personal jurisdiction in any federal or state
court in the State of Georgia.

                            [Signature Page Follows]

                                       11


      IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
or have caused this Agreement to be duly executed on its behalf by an officer or
representative thereto duly authorized, all as of the date first above written.

                                    VERSO TECHNOLOGIES, INC.

                                    By: ______________________________________
                                             Juliet M. Reising
                                             Chief Financial Officer

                                    SHAREHOLDER:

                                    __________________________________________

                                    Number of Shares: ___________
                                    Number of Warrants:_________

                                       12

EX-10.9

                                                                    Exhibit 10.9
                            VERSO TECHNOLOGIES, INC.
                        1999 EMPLOYEE STOCK PURCHASE PLAN

                      AS AMENDED EFFECTIVE JANUARY 1, 2006

1. PURPOSE OF THE PLAN. This Verso Technologies, Inc. 1999 Employee Stock
Purchase Plan adopted as of the 16th day of November, 1999, is intended to
encourage eligible employees of the Company and its Subsidiaries to acquire or
increase their ownership of common stock of the Company on reasonable terms. The
opportunity so provided is intended to foster in participants a strong incentive
to put forth maximum effort for the continued success and growth of the Company
and its Subsidiaries, to aid in retaining individuals who put forth such
efforts, and to assist in attracting the best available individuals to the
Company and its Subsidiaries in the future. It is the Company's intention that
this Employee Stock Purchase Plan qualify as an "employee stock purchase plan"
under Section 423 of the Code. Accordingly, the provisions of the Plan shall be
construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.

2. DEFINITIONS. When used herein, the following terms shall have the meanings
set forth below:

2.2 "ACCOUNT" means the funds accumulated with respect to an Employee as a
result of deductions from his paycheck for the purpose of purchasing Shares
under the Plan. The funds allocated to an Employee's Account shall remain the
property of the employee at all times but may be commingled with the general
funds of the Company.

2.3 "BOARD" means the Board of Directors of Verso Technologies, Inc.

2.4 "CHANGE IN CONTROL" will mean the following:

(a) the sale, lease, exchange or other transfer, directly or indirectly, of
substantially all of the assets of the Company (in one transaction or in a
series of related transactions) to a person or entity that is not controlled by
the Company,

(b) the approval by the shareholders of the Company of any plan or proposal for
the liquidation or dissolution of the Company;

(c) any person becomes after the effective date of the Plan the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of (A) 20% or more, but less than 50% of the combined voting power
of the Company's outstanding securities ordinarily having the right to vote at
elections of directors, unless the transaction resulting in such ownership has
been approved in advance by the Incumbent Directors, or (B) 50% or more of the
combined voting power of the Company's outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any approval by the
Incumbent Directors);

(d) a merger or consolidation to which the Company is a party if the
shareholders of the Company immediately prior to effective date of such merger
or consolidation have "beneficial ownership" (as defined in Rule 13d-3 under the
Exchange Act), immediately following the



effective date of such merger or consolidation, of securities of the surviving
corporation representing (i) more than 50%, but less than 80%, of the combined
voting power of the surviving corporation's then outstanding securities
ordinarily having the right to vote at elections of directors, unless such
merger or consolidation has been approved in advance by the Incumbent Directors
(as defined in Section 2.11 below), or (ii) 50% or less of the combined voting
power of the surviving corporation's then outstanding securities ordinarily
having the right to vote at elections of directors (regardless of any approval
by the Incumbent Directors); or

(e) the Incumbent Directors cease for any reason to constitute at least a
majority of the Board.

2.5 "CODE" means the Internal Revenue Code of 1986, as in effect at the time of
reference, or any successor revenue code which may hereafter be adopted in lieu
thereof, and reference to any specific provisions of the Code shall refer to the
corresponding provisions of the Code as it may hereafter be amended or replaced.

2.6 "COMMITTEE" means the Committee of the Board or any other committee
appointed by the Board which is invested by the Board with responsibility for
the administration of the Plan and whose members meet the requirements for
eligibility to serve as set forth in the Plan.

2.7 "COMPANY" means Verso Technologies, Inc.

2.8 "ELIGIBLE COMPENSATION" means the regular compensation (i.e., straight time
earnings), bonuses and commissions earned by an Employee during a payroll
period, before deductions or withholdings, but shall exclude, unless the
Committee determines otherwise, all other amounts, including, but not limited
to, (i) all amounts contributed by the Company or any Subsidiary under any
profit-sharing, pension, retirement, group insurance or other employee welfare
benefit plan or trust whether now in existence or hereinafter adopted and (ii)
any income from stock option exercises or other equity based compensation.

2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as in effect at
the time of reference, or any successor law which may hereafter be adopted in
lieu thereof, and any reference to any specific provisions of the Exchange Act
as it may hereafter be amended or replaced.

2.10 "EMPLOYEES" means persons employed by the Company or any of its
Subsidiaries set forth in Schedule A attached hereto (as may be amended from
time to time by the Board of Directors in its sole discretion); provided,
however, that no person shall be considered an Employee unless he has been
employed for at least fifteen (15) consecutive days as of the Offering
Commencement Date of any such offering.

2.11 "FAIR MARKET VALUE" means, with respect to the Shares, as of any date (or,
if no shares were traded or quoted on such date, as of the next preceding date
on which there was such a trade or quote) (a) the average of the reported high
and low sale prices of the Shares if the common stock is listed, admitted to
unlisted trading privileges or reported on any national securities exchange or
on the Nasdaq National Market, the closing bid price as reported by the Nasdaq
SmallCap Market, OTC Bulletin Board or the National Quotation Bureau, Inc. or
other comparable service; or (c) if the common stock is not so listed or
reported, such price as the Committee determines in good faith in the exercise
of its reasonable discretion. If determined by


                                       2



the Committee, such determination will be final, conclusive and binding for all
purposes and on all persons, including, without limitation, the Company, the
shareholders of the Company, the Employees and their respective
successors-in-interest. No member of the Committee will be liable for any
determination regarding the fair market value of the Shares that is made in good
faith.

2.12 "INCUMBENT DIRECTORS" means any individuals who are members of the Board on
the effective date of the Plan and any individual who subsequently becomes a
member of the Board whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the Incumbent
Directors (either by specific vote or by approval of the Company's proxy
statement in which such individual is named as a nominee for director without
objection to such nomination).

2.13 "OFFERING COMMENCEMENT DATE" means January 1 or July 1, as the case may be,
or any other date determined by the Committee, on which a particular offering
begins.

2.14 "OFFERING TERMINATION DATE" means the June 30 or December 31, as the case
may be, or any other date determined by the Committee, on which a particular
offering terminates.

2.15 "OPTION" means the right granted to an Employee to purchase Shares pursuant
to an offering made under the Plan and pursuant to such Employee's election to
purchase Shares in such offering, at a price, and subject to such limitations
and restrictions as the Plan and the Committee may impose.

2.16 "PARENT" means any corporation, other than the employer corporation, in an
unbroken chain of corporations ending with the employer corporation if each of
the corporations other than the employer corporation owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.

2.17 "PLAN" means the Verso Technologies, Inc. 1999 Employee Stock Purchase
Plan.

2.18 "PURCHASE PERIOD" means the period commencing on the Offering Commencement
Date and ending on the Offering Termination Date during which installment
payments for Shares purchased pursuant to Options granted pursuant to an
offering made under the Plan shall be made.

2.19 "SHARES" means shares of the Company's no par value common stock or, if by
reason of the adjustment provisions contained herein, any rights under the Plan
pertaining to any other security, such other security.

2.20 "SUBSIDIARY" or "SUBSIDIARIES" means any corporation or corporations other
than the employer corporation in an unbroken chain of corporations beginning
with the employer corporation if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.

2.21 "SUCCESSOR" means the legal representative of the estate of a deceased
Employee or the


                                       3



person or persons who shall acquire the right to exercise or receive an Option
by bequest or inheritance or by reason of the death of the Employee.

3. STOCK SUBJECT TO THE PLAN. There will be reserved for use, upon the exercise
of Options to be granted from time to time pursuant to offerings made under the
Plan, an aggregate of 2,000,000 Shares, which Shares may be, in whole or in
part, as the Board shall from time to time determine, authorized but unissued
Shares, or issued Shares which shall have been reacquired by the Company. The
number of Shares reserved under the Plan may be issued pursuant to the exercise
of Options granted pursuant to one or more offerings made under the Plan. Any
Shares subject to issuance upon exercise of Options but which are not issued
because of a surrender, lapse, expiration or termination of any such Option
prior to issuance of the Shares shall once again be available for issuance in
satisfaction of Options.

4. ADMINISTRATION OF THE PLAN. The Board shall appoint the Committee to
administer the Plan. Subject to the provisions of the Plan, the Committee shall
have full authority, in its discretion, to determine when offerings will be made
under the Plan, the number of Shares available for purchase in any such
offering, and the terms and conditions of any such offering; to amend or cancel
Options (subject to Section 23 of the Plan); to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to the Plan; and
generally to interpret and determine any and all matters whatsoever relating to
the administration of the Plan, including the designation of individuals
responsible for the day-to-day operation of the Plan. All decisions,
determinations and interpretations made by the Committee shall be binding and
conclusive on all participants in the Plan and on their legal representatives,
heirs and beneficiaries. The Board may from time to time appoint members to the
Committee in substitution for or in addition to members previously appointed and
may fill vacancies, however caused, in the Committee. No Member of the Committee
shall be liable, in the absence of bad faith, for any act or omission with
respect to his service on the Committee.

5. OFFERINGS. Unless the Committee, in its discretion, determines otherwise, the
Plan will be implemented by up to twenty (20) consecutive six (6) month
offerings. The first offering under the Plan shall commence on January 1, 2000
and terminate on June 30, 2000. Thereafter, offerings shall commence on each
subsequent July 1 and January 1 and terminate on the following December 31 and
June 30, respectively, of such year until the Plan is terminated or no
additional Shares are available for purchase under the Plan.

6. ELIGIBILITY TO PARTICIPATE IN OFFERINGS. All Employees shall be eligible to
participate in the Plan.

7. PARTICIPATION. An eligible Employee may become a participant in the Plan by
completing, signing and submitting an enrollment form ("Enrollment Form") which
shall designate a whole percentage of his Eligible Compensation, not to exceed
ten percent (10%), to be withheld during the Purchase Period of any offering in
which he participates, and any other necessary papers, including, but not
limited to, any forms required to establish a brokerage account at a brokerage
firm designated by the Committee in the Employee's name for the purpose of
holding any Shares purchased pursuant to the Plan, with such person as the
Committee may designate at least ten (10) days prior to the Offering
Commencement Date of the first offering in which he wishes to participate. After
completing, signing and submitting an


                                       4



Enrollment Form and any other necessary papers in accordance with the preceding
sentence, an Employee shall be deemed to have become a participant in the Plan
for each subsequent offering until the Employee withdraws from the Plan in
accordance with Section 14 hereof, is deemed to have withdrawn from the Plan in
accordance with Section 17 hereof, or otherwise gives written notice of his
intent to withdraw to such person as the Committee may designate. Except as
otherwise provided in Section 14, if an Employee who withdraws from the Plan
desires to re-enter the Plan, he must submit a new Enrollment Form in accordance
with this Section 7 at least ten (10) days prior to the Offering Commencement
Date of the particular offering to which such re-entry is intended to apply, or
by such other time as the Committee determines in its sole discretion. An
Employee's re-entry into the Plan cannot become effective before the beginning
of the next offering following his withdrawal. Participation in one offering
under the Plan shall neither limit nor require participation in any other
offering.

8. GRANT OF OPTIONS. Subject to the limitations set forth in Sections 6 and 9 of
the Plan, on the Offering Commencement Date of each offering made under the
Plan, each Employee who has previously elected to participate in the Plan shall
automatically be granted an Option for as many full Shares as he will be able to
purchase with the payroll deductions credited to his Account during the Purchase
Period of that offering. In the event the total maximum number of Shares
resulting from all elections to purchase under any offering of Shares made under
the Plan exceeds the number of Shares offered, the Company reserves the right to
reduce the maximum number of Shares which Employees may purchase pursuant to
their elections to purchase, to allot the Shares available in such manner as it
shall determine (subject to the requirements of Section 423 of the Code), but
generally pro rata to subscriptions received, and to grant Options to purchase
only for such reduced number of Shares. Notice of any such reduction shall be
given to each participating Employee, in a uniform and nondiscriminatory manner
determined by the Committee in its sole discretion. In the event an Employee's
election to purchase Shares pursuant to an offering made under the Plan is
canceled pursuant to Section 9 of the Plan, the Option granted to such Employee
shall automatically terminate and the balance in his Account shall be returned
to the Employee.

9. LIMITATIONS OF NUMBER OF SHARES WHICH MAY BE PURCHASED. The following
limitations shall apply with respect to the number of Shares which may be
purchased by each Employee who elects to participate in an offering made under
the Plan:

(a) No Employee may purchase, or elect to purchase Shares during any one
offering pursuant to the Plan for an aggregate purchase price in excess of ten
percent (10%) of his Eligible Compensation during the Purchase Period applicable
to such offering.

(b) No Employee shall be granted an Option to purchase Shares under the Plan if
such Employee immediately after such Option is granted, owns stock (within the
meaning of Section 424(d) of the Code, and including stock subject to purchase
under any outstanding options) possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or, if
applicable, any Subsidiary or, if applicable, a Parent.

(c) No Employee shall be granted an Option to purchase Shares which permits his
right to purchase stock under the Plan and all other employee stock purchase
plans of the Company and, if applicable, a Subsidiary, and, if applicable, a
Parent, to accrue (as determined under Section


                                       5



423(b)(8) of the Code) at a rate which exceeds ($25,000) of fair market value of
such stock (determined on the date the Option to purchase is granted) for each
calendar year in which such Option is outstanding at any time.

10. EXERCISE PRICE. Unless the Committee, in its discretion, determines to set a
higher per Share exercise price, the per Share exercise price for Shares subject
to purchase under Options granted pursuant to an offering made under the Plan
shall be an amount equal to ninety-five percent (95%) of the Fair Market Value
of Shares on the Offering Termination Date.

11. PAYROLL DEDUCTIONS. Payment of the exercise price of any Option granted
pursuant to the Plan shall be made in installments through payroll deductions,
with no right of prepayment. Each Employee electing to participate in an
offering of Shares made under the Plan shall authorize the Company pursuant to
Section 7 of the Plan to withhold a designated amount from his regular weekly,
bi-weekly, semimonthly or monthly pay for each payroll period during the
Purchase Period, which amount, expressed as a percentage, may not exceed ten
percent (10%) of his Eligible Compensation (or such other percentage as
determined by the Committee in its sole discretion). All such payroll deductions
made for an Employee shall be credited to his Account. An Employee may not make
any separate cash payments into his Account nor may payment for Shares be made
other than by payroll deduction. No interest shall accrue on the amounts
credited to an Employee's Account pursuant to this Section 11.

12. EXERCISE OF OPTIONS. As of the close of business on the Offering Termination
Date of any offering of Shares made under the Plan, each outstanding Option
shall automatically be exercised. Subject to the limitations in Sections 6, 8
and 9 of the Plan upon the exercise of an Option, the aggregate amount of the
payroll deductions credited to the Account of each Employee as of that date will
automatically be applied to the exercise price for the purchase of that number
of Shares, rounded to the nearest whole share, equal to the Account balance
divided by the exercise price. Promptly following the end of each Offering
Termination Date, the number of Shares purchased by each Employee shall be
deposited into an account established in the Employee's name at a stock
brokerage or other financial services firm designated by the Company. Unless an
Employee notifies the Company in writing not to carry over the balance of his
Account (representing fractional Shares) to the next offering and to have the
balance of his Account returned to him, the Company shall carry over the balance
of his Account to the next offering. Upon termination of the Plan, the balance
of each Employee's Account shall be returned to him.

13. RIGHTS OF A SHAREHOLDER. An Employee will become a shareholder of the
Company with respect to Shares for which payment has been received at the close
of business on the Offering Termination Date. An Employee will have no rights as
a shareholder with respect to Shares under an election to purchase Shares until
he has become a shareholder as provided above.

14. CANCELLATION OF ELECTION TO PURCHASE. An Employee who has elected to
purchase Shares pursuant to any offering made under the Plan may cancel his
election in its entirety. Any such cancellation shall be effective upon the
delivery by the Employee of written notice of cancellation to such person as the
Committee may designate. Such notice of cancellation must be so delivered before
the close of business on the third to last business day of


                                       6



the Purchase Period. The amount credited to an Employee's Account at the time
the cancellation becomes effective may be, at the Employee's option, (i) applied
to the purchase of the number of Shares such amount will then purchase or (ii)
returned to the Employee. If the Employee elects to purchase Shares with the
amount credited to his Account at the time of cancellation, such purchase will
become effective at the close of business on the Offering Termination Date. Upon
cancellation, the Employee shall be deemed to have withdrawn from the Plan. To
re-enter the Plan, the Employee must submit a new Enrollment Form in accordance
with Section 7.

15. LEAVE OF ABSENCE OR LAYOFF. An Employee purchasing Shares under the Plan who
is granted a leave of absence (including a military leave) or is laid off during
the Purchase Period may at that time elect to suspend payments during such leave
of absence or period of layoff. Any such suspension shall be treated as a
partial cancellation of his election to purchase Shares. If the Employee does
not return to active service within ninety (90) days from the date of his leave
of absence or layoff, unless his rehire is guaranteed, his election to purchase
shall be deemed to have been canceled at that time, and the Employees only right
will be to receive in cash the amount credited to his Account.

16. EFFECT OF FAILURE TO MAKE PAYMENTS WHEN DUE. If in any payroll period an
Employee who has filed an election to purchase Shares under the Plan has no pay
or his pay is insufficient (after other authorized deductions) in any payroll
period to permit deduction of his installment payment, the amount of such
deficiency shall be treated as a partial cancellation of his election to
purchase Shares.

17. TERMINATION OF EMPLOYMENT. If an Employee's employment is terminated for any
reason, excluding death, prior to the end of the Purchase Period of any
offering, the Employee's rights under the Plan will terminate at such time. A
notice to withdraw from the Plan will be considered as having been received from
the Employee on the day his employment ceases, and the only right of the
Employee will be to receive the cash then credited to his Account. If an
Employee dies prior to the end of the Purchase Period of any offering, the
amount credited to such Employee's Account at the time of his death may, at the
option of the Employee's estate, heirs, beneficiaries or other authorized
person, be (i) applied to the purchase of the number of Shares such amount will
then purchase or (ii) paid to the estate, heirs, beneficiaries or other
authorized person. If the Employee's estate, heirs, beneficiaries or other
authorized person elects to purchase Shares with the amount credited to the
Employee's Account at the time of death, such purchase will become effective at
the close of business on the Offering Termination Date.

18. NONTRANSFERABILITY OF OPTIONS. An Option, or an Employee's right to any
amounts held for his Account under the Plan, shall not be transferable, other
than (a) by will or the laws of descent and distribution, and an Option may be
exercised, during the lifetime of the holder of the Option, only by the holder
or in the event of death, the holder's Successor or (b) if permitted pursuant to
the Code and the Regulations thereunder without affecting the Options
qualification under Section 423 of the Code, pursuant to a qualified domestic
relations order.

19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of changes in all
of the outstanding Shares by reason of stock dividends, stock splits,
recapitalizations, mergers, consolidations, combinations, or exchanges of
shares, separations, reorganizations or


                                       7



liquidations, or similar events, or in the event of extraordinary cash or
non-cash dividends being declared with respect to the Shares, or similar
transactions or events, the number and class of Shares available under the Plan
in the aggregate, the number and class of Shares subject to Options theretofore
granted, applicable purchase prices and all other applicable provisions, shall,
subject to the provisions of the Plan, be equitably adjusted by the Committee,
taking into account Section 424(a) of the Code. The foregoing adjustment and the
manner of application of the foregoing provisions shall be determined by the
Committee in its sole discretion. Any such adjustment may provide for the
elimination of any fractional Share which might otherwise become subject to an
Option.

20. CHANGE IN CONTROL. Notwithstanding anything to the contrary herein, in the
case of a Change in Control of the Company, the Board may, in its sole
discretion, elect to terminate the Purchase Period of any offering then in
effect as of the date of such Change of Control (or such other date in the
discretion of the Committee), with the effect that such day will be the Offering
Termination Date of such offering.

21. TAXES. The Employee, or his Successor, shall promptly notify the Company of
any disposition of Shares acquired pursuant to the exercise of an Option under
the Plan and the Company shall have the right to deduct any taxes required by
law to be withheld as a result of such disposition from any amounts otherwise
payable then or at any time thereafter to the Employee. The Company shall also
have the right to require a person entitled to receive Shares pursuant to the
exercise of an Option to Pay the Company the amount of any taxes which the
Company is or will be required to withhold with respect to the Shares before the
certificate for such Shares is delivered pursuant to the Option.

22. TERMINATION OF THE PLAN. The Plan shall terminate ten (10) years from the
date the Plan becomes effective, and an Option shall not be granted under the
Plan after that date although the terms of any Options may be amended at any
date prior to the end of its term in accordance with the Plan. Any Options
outstanding at the time of termination of the Plan shall continue in full force
and effect according to the terms and conditions of the Option and this Plan.

23. AMENDMENT OF THE PLAN. The Plan may be amended at any time and from time to
time by the Board, but no amendment without the approval of the shareholders of
the Company shall be made if shareholder approval under Section 423 of the Code
would be required. Notwithstanding the discretionary authority granted to the
Committee in Section 4 of the Plan, no amendment of the Plan or any Option
granted under the Plan shall impair any of the rights of any holder, without the
holder's consent, under any Option theretofore granted under the Plan.

24. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect
to an Option unless the exercise of such Option and the issuance and delivery of
such Shares pursuant thereto shall comply with all applicable provisions of law,
domestic or foreign, including, without limitation, the Securities Act of 1933,
as amended, the Exchange Act, the rules and regulations promulgated thereunder,
and the requirements of any stock exchange upon which the Shares may then be
listed, and shall be further subject to the approval of counsel for the Company
with respect to such compliance.


                                       8



25. FEES AND COSTS. The Company shall pay all fees and expenses necessarily
incurred by the Company in connection with operation of the Plan.

26. NO CONTRACT OF EMPLOYMENT. Neither the adoption of this Plan nor the grant
of any Option shall be deemed to obligate the Company or any Subsidiary to
continue the employment of any Employee.

27. EFFECTIVENESS OF THE PLAN. The Plan shall become effective on November 16,
1999. Notwithstanding the foregoing, unless the Plan is approved by the
Company's shareholders at a meeting duly held in accordance with Minnesota law
within twelve (12) months after being adopted by the Board, the Plan and all
Options made under it shall be void and of no force and effect.

28. OTHER PROVISIONS. As used in the Plan, and in other documents prepared in
implementation of the Plan, references to the masculine pronoun shall be deemed
to refer to the masculine, feminine or neuter, and references in the singular or
the plural shall refer to the plural or the singular, as the identity of the
person or persons or entity or entities being referred to may require. The
captions used in the Plan and in such other documents prepared in implementation
of the Plan are for convenience only and shall not affect the meaning of any
provision hereof or thereof.


                                       9

EX-10.113

                                                                  Exhibit 10.113

SILICON VALLEY BANK

                  AMENDED AND RESTATED SECURED PROMISSORY NOTE

$10,000,000                                                    MARCH 24, 2006

      FOR VALUE RECEIVED, the undersigned (jointly and severally, the
"Borrower") promises to pay to the order of SILICON VALLEY BANK ("Silicon"), at
3003 Tasman Drive, Santa Clara, California 95054, or at such other address as
the holder of this Note shall direct, the principal sum of TEN MILLION DOLLARS
($10,000,000), or such lesser or greater amount as shall be equal to the unpaid
balance of the "Exim Loans" as defined in the Loan and Security Agreement (Exim
Program) between Borrower and Silicon dated February 12, 2003 (as amended from
time to time, the "Loan Agreement"). This Amended and Restated Secured
Promissory Note amends and restates in its entirety that certain Amended and
Restated Secured Promissory Note dated March 18, 2005.

      The principal amount of this Note shall be payable on the date the Loan
Agreement terminates by its terms or is terminated by either party in accordance
with its terms.

      This Note shall bear interest on the unpaid principal balance hereof from
time to time outstanding at a rate equal to the interest rate set forth in the
Loan Agreement.

      Accrued interest on this Note shall be payable monthly in accordance with
the terms of the Loan Agreement. Any accrued interest not paid when due shall
bear interest at the same rate as the principal hereof.

      Principal of and interest on this Note shall be payable in lawful money of
the United States of America. If a payment hereunder becomes due and payable on
a Saturday, Sunday or legal holiday, the due date thereof shall be extended to
the next succeeding business day, and interest shall be payable thereon during
such extension.

      In the event any payment of principal or interest on this Note is not paid
in full when due, or if any other default or event of default occurs hereunder,
under the Loan Agreement or under any other present or future instrument,
document, or agreement between the Borrower and Silicon (collectively, "Events
of Default"), Silicon may, at its option, at any time thereafter, declare the
entire unpaid principal balance of this Note plus all accrued interest to be
immediately due and payable, without notice or demand. The acceptance of any
installment of principal or interest by Silicon after the time when it becomes
due, as herein specified, shall not be held to establish a custom, or to waive
any rights of Silicon to enforce payment when due of any further installments or
any other rights, nor shall any failure or delay to exercise any rights be held
to waive the same.

      All payments hereunder are to be applied first to costs and fees referred
to hereunder, second to the payment of accrued interest and the remaining
balance to the payment of principal.

                                      -1-


   SILICON VALLEY BANK          AMENDED AND RESTATED SECURED PROMISSORY NOTE

Silicon shall have the continuing and exclusive right to apply or reverse and
reapply any and all payments hereunder.

      The Borrower agrees to pay all costs and expenses (including without
limitation attorney's fees) incurred by Silicon in connection with or related to
this Note, or its enforcement, whether or not suit be brought. The Borrower
hereby waives presentment, demand for payment, notice of dishonor, notice of
nonpayment, protest, notice of protest, and any and all other notices and
demands in connection with the delivery, acceptance, performance, default, or
enforcement of this Note, and the Borrower hereby waives the benefits of any
statute of limitations with respect to any action to enforce, or otherwise
related to, this Note.

      This Note is secured by the Loan Agreement and all other present and
future security agreements between the Borrower and Silicon. Nothing herein
shall be deemed to limit any of the terms or provisions of the Loan Agreement or
any other present or future document, instrument or agreement, between the
Borrower and Silicon, and all of Silicon's rights and remedies hereunder and
thereunder are cumulative.

      In the event any one or more of the provisions of this Note shall for any
reason be held to be invalid, illegal or unenforceable, the same shall not
affect any other provision of this Note and the remaining provisions of this
Note shall remain in full force and effect.

      No waiver or modification of any of the terms or provisions of this Note
shall be valid or binding unless set forth in a writing signed by a duly
authorized officer of Silicon, and then only to the extent therein specifically
set forth. If more than one person executes this Note, their obligations
hereunder shall be joint and several.

      SILICON AND BORROWER EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (i)
THIS NOTE; OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN
SILICON AND BORROWER; OR (iii) ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR
BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR
ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER; IN EACH OF THE FOREGOING
CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

      This Note is payable in, and shall be governed by the laws of, the State
of California.

                                      -2-


   SILICON VALLEY BANK          AMENDED AND RESTATED SECURED PROMISSORY NOTE

VERSO TECHNOLOGIES, INC.,                  PROVO PREPAID (DELAWARE) CORP.,
a Minnesota corporation                    a Delaware corporation

By /s/ Steve Odom                          By /s/ Juliet M. Reising
   ----------------------------               ----------------------------
   Executive Chairman                              President

By  /s/ Juliet M. Reising                  By /s/ Leslie Gersack
    ---------------------------               ----------------------------
     Secretary                                Asst. Secretary

TELEMATE.NET SOFTWARE, INC.,               NEEDHAM (DELAWARE) CORP.,
a Georgia corporation                      a Delaware corporation

By /s/ Juliet M. Reising                    By /s/ Juliet M. Reising
   ----------------------------                ---------------------------
     President                                  President

By /s/ Leslie Gersack                       By /s/ Leslie Gersack
   ----------------------------                ---------------------------
   Asst. Secretary                               Asst. Secretary

                                      -3-

EX-10.114

                                                                  Exhibit 10.114


                    EXPORT-IMPORT BANK OF THE UNITED STATES
                       WORKING CAPITAL GUARANTEE PROGRAM

                               BORROWER AGREEMENT

                                                             Ex-Im Bank 12/31/05


                          TABLE OF CONTENTS


                                                                                 
ARTICLE I DEFINITIONS .........................................................      1
       1.01       Definition of Terms .........................................      1
       1.02       Rules of Construction .......................................     14
       1.03       Incorporation of Recitals ...................................     15
ARTICLE II OBLIGATIONS OF BORROWER ............................................     15
       2.01       Use of Credit Accommodations ................................     15
       2.02       Security Interests ..........................................     15
       2.03       Loan Documents and Loan Authorization Agreement .............     16
       2.04       Export-Related Borrowing Base Certificates and Export Orders      16
       2.05       Schedules, Reports and Other Statements .....................     16
       2.06       Exclusions from the Export-Related Borrowing Base ...........     16
       2.07       Borrowings and Reborrowings .................................     17
       2.08       Repayment Terms .............................................     17
       2.09       Financial Statements ........................................     17
       2.10       Additional Security or Payment ..............................     17
       2.11       Continued Security Interest .................................     18
       2.12       Inspection of Collateral and Facilities .....................     18
       2.13       General Intangibles .........................................     19
       2.14       Economic Impact Approval ....................................     19
       2.15       Indirect Exports ............................................     19
       2.16       Overseas Inventory and Accounts Receivable ..................     20
       2.17       Country Limitation Schedule .................................     21
       2.18       Notice of Certain Event .....................................     21
       2.19       Insurance ...................................................     22
       2.20       Taxes .......................................................     22
       2.21       Compliance with Laws ........................................     22
       2.22       Negative Covenants ..........................................     22
       2.23       Cross Default ...............................................     22
       2.24       Munitions List ..............................................     22
       2.25       Suspension and Debarment, etc ...............................     22
ARTICLE III       RIGHTS AND REMEDIES .........................................     23
       3.01       Indemnification .............................................     23
       3.02       Liens .......................................................     23
ARTICLE IV MISCELLANEOUS ......................................................     24
       4.01       Governing Law ...............................................     24
       4.02       Notification ................................................     24
       4.03       Partial Invalidity ..........................................     24
       4.04       Waiver of Jury Trial ........................................     24
       4.05       Consequential Damages .......................................     24




                     EXPORT-IMPORT BANK OF THE UNITED STATES
                        WORKING CAPITAL GUARANTEE PROGRAM
                               BORROWER AGREEMENT

      THIS BORROWER AGREEMENT (this "Agreement") is made and entered into by the
entity identified as Borrower on the signature page hereof ("Borrower") in favor
of the Export-Import Bank of the United States ("Ex-Im Bank") and the
institution identified as Lender on the signature page hereof ("Lender").

                                    RECITALS

      Borrower has requested that Lender establish a Loan Facility in favor of
Borrower for the purposes of providing Borrower with working capital to finance
the manufacture, production or purchase and subsequent export sale of Items.

      Lender and Borrower expect that Ex-Im Bank will provide a guarantee to
Lender regarding this Loan Facility subject to the terms and conditions of the
Master Guarantee Agreement, a Loan Authorization Agreement, and to the extent
applicable, the Delegated Authority Letter Agreement or Fast Track Lender
Agreement.

      Lender and Ex-Im Bank have requested that Borrower execute this Agreement
as a condition precedent to Lender establishing the Loan Facility and Ex-Im Bank
providing the guarantee.

      NOW, THEREFORE, Borrower hereby agrees as follows:

                                    ARTICLE I
                                   DEFINITIONS

      1.01 Definition of Terms. As used in this Agreement, including the
Recitals to this Agreement and the Loan Authorization Agreement, the following
terms shall have the following meanings:

      "Accounts Receivable" shall mean all of Borrower's now owned or hereafter
acquired (a) "accounts" (as such term is defined in the UCC), other receivables,
book debts and other forms of obligations, whether arising out of goods sold or
services rendered or from any other transaction; (b) rights in, to and under all
purchase orders or receipts for goods or services; (c) rights to any goods
represented or purported to be represented by any of the foregoing (including
unpaid sellers' rights of rescission, replevin, reclamation and stoppage in
transit and rights to returned, reclaimed or repossessed goods); (d) moneys due
or to become due to such Borrower under all purchase orders and contracts (which
includes Export Orders) for the sale of goods or the performance of services or
both by Borrower (whether or not yet earned by performance on the part of
Borrower), including the proceeds of the foregoing; (e) any notes, drafts,
letters of credit, insurance proceeds or other instruments, documents and
writings evidencing or supporting the foregoing; and (f) all collateral security
and guarantees of any kind given by any other Person with respect to any of the
foregoing.

                                                             Ex-Im Bank 12/31/05



      "Accounts Receivable Aging Report" shall mean a report detailing the
Export-Related Accounts Receivable and Export-Related Overseas Accounts
Receivable for a Loan Facility, and the applicable terms for the relevant time
period; in the case of Indirect Exports, such report shall indicate the portion
of such Accounts Receivables corresponding to Indirect Exports.

      "Advance Rate" shall mean, with respect to a Loan Facility, the rate
specified in Section 5.C. of the Loan Authorization Agreement for each category
of Primary Collateral except for Export-Related General Intangibles and Other
Collateral. Unless otherwise set forth in writing by Ex-Im Bank, in no event
shall the Advance Rate exceed (i) ninety percent (90%) for Eligible
Export-Related Accounts Receivable, (ii) seventy five percent (75%) for Eligible
Export-Related Inventory, (iii) seventy percent (70%) for Eligible
Export-Related Overseas Accounts Receivable or (iv) sixty percent (60%) for
Eligible Export-Related Overseas Inventory and (v) twenty five percent (25%) for
Retainage Accounts Receivable.

      "Affiliated Foreign Person" shall have the meaning set forth in Section
2.15.

      "Business Day" shall mean any day on which the Federal Reserve Bank of New
York is open for business.

      "Buyer" shall mean a Person that has entered into one or more Export
Orders with Borrower or who is an obligor on Export-Related Accounts Receivable
or Export-Related Overseas Accounts Receivable.

      "Capital Good" shall mean a capital good (e.g., manufacturing equipment,
licensing agreements) that will establish or expand foreign production capacity
of an exportable good.

      "Collateral" shall mean all real and personal property and interest in
real and personal property in or upon which Lender has been, or shall be,
granted a Lien as security for the payment of all the Loan Facility Obligations
and all products and proceeds (cash and non-cash) thereof.

      "Commercial Letters of Credit" shall mean those letters of credit subject
to the UCP payable in Dollars and issued or caused to be issued by Lender on
behalf of Borrower under a Loan Facility for the benefit of a supplier(s) of
Borrower in connection with Borrower's purchase of goods or services from the
supplier in support of the export of the Items.

      "Country Limitation Schedule" shall mean the schedule published from time
to time by Ex-Im Bank setting forth on a country by country basis whether and
under what conditions Ex-Im Bank will provide coverage for the financing of
export transactions to countries listed therein.

      "Credit Accommodation Amount" shall mean, the sum of (a) the aggregate
outstanding amount of Disbursements and (b) the aggregate outstanding Letter of
Credit Obligations, which sum may not exceed the Maximum Amount.

      "Credit Accommodations" shall mean, collectively, Disbursements and Letter
of Credit Obligations.

                                        2



      "Debarment Regulations" shall mean, collectively, (a) the Governmentwide
Debarment and Suspension (Nonprocurement) regulations (Common Rule), 53 Fed.
Reg. 19204 (May 26, 1988), (b) Subpart 9.4 (Debarment, Suspension, and
Ineligibility) of the Federal Acquisition Regulations, 48 C.F.R. 9.400-9.409 and
(c) the revised Governmentwide Debarment and Suspension (Nonprocurement)
regulations (Common Rule), 60 Fed. Reg. 33037 (June 26,1995).

      "Delegated Authority Letter Agreement" shall mean the Delegated Authority
Letter Agreement, if any, between Ex-Im Bank and Lender.

      "Disbursement" shall mean, collectively, (a) an advance of a working
capital loan from Lender to Borrower under the Loan Facility, and (b) an advance
to fund a drawing under a Letter of Credit issued or caused to be issued by
Lender for the account of Borrower under the Loan Facility.

      "Dollars" or "$" shall mean the lawful currency of the United States.

      "Economic Impact Approval" shall mean a written approval issued by Ex-Im
Bank stating the conditions under which a Capital Good may be included as an
Item in a Loan Facility consistent with Ex-Im Bank's economic impact procedures
(or other mechanism for making this determination that Ex-Im Bank notifies
Lender of in writing).

      "Economic Impact Certification" shall have the meaning set forth in
Section 2.14(b).

      "Effective Date" shall mean the date on which (a) all of the Loan
Documents have been executed by Lender, Borrower and, if applicable, Ex-Im Bank
and (b) all of the conditions to the making of the initial Credit Accommodations
under the Loan Documents or any amendments thereto have been satisfied.

      "Eligible Export-Related Accounts Receivable" shall mean Export-Related
Accounts Receivable which are acceptable to Lender and which are deemed to be
eligible pursuant to the Loan Documents, but in no event shall Eligible
Export-Related Accounts Receivable include any Account Receivable:

      (a) that does not arise from the sale of Items in the ordinary course of
Borrower's business;

      (b) that is not subject to a valid, perfected first priority Lien in favor
of Lender;

      (c) as to which any covenant, representation or warranty contained in the
Loan Documents with respect to such Account Receivable has been breached;

      (d) that is not owned by Borrower or is subject to any right, claim or
interest of another Person other than the Lien in favor of Lender;

      (e) with respect to which an invoice has not been sent;

      (f) that arises from the sale of defense articles or defense services;

                                        3



      (g) that arises from the sale of Items to be used in the construction,
alteration, operation or maintenance of nuclear power, enrichment, reprocessing,
research or heavy water production facilities unless with Ex-Im Bank's prior
written consent;

      (h) that is due and payable from a Buyer located in a country with which
Ex-Im Bank is prohibited from doing business as designated in the Country
Limitation Schedule;

      (i) that does not comply with the requirements of the Country Limitation
Schedule;

      (j) that is due and payable more than one hundred eighty (180) days from
the date of the invoice;

      (k) that is not paid within sixty (60) calendar days from its original due
date, unless it is insured through Ex-Im Bank export credit insurance for
comprehensive commercial and political risk, or through Ex-Im Bank approved
private insurers for comparable coverage, in which case it is not paid within
ninety (90) calendar days from its due date;

      (1) of a Buyer for whom fifty percent (50%) or more of the Accounts
Receivable of such Buyer do not satisfy the requirements of subclauses (j) and
(k) above;

      (m) that arises from a sale of goods to or performance of services for an
employee of Borrower, a stockholder of Borrower, a subsidiary of Borrower, a
Person with a controlling interest in Borrower or a Person which shares common
controlling ownership with Borrower;

      (n) that is backed by a letter of credit unless the Items covered by the
subject letter of credit have been shipped;

      (o) that Lender or Ex-Im Bank, in its reasonable judgment, deems
uncollectible for any reason;

      (p) that is due and payable in a currency other than Dollars, except as
may be approved in writing by Ex-Im Bank;

      (q) that is due and payable from a military Buyer, except as may be
approved in writing by Ex-Im Bank;

      (r) that does not comply with the terms of sale set forth in Section 7 of
the Loan Authorization Agreement;

      (s) that is due and payable from a Buyer who (i) applies for, suffers, or
consents to the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property or calls a meeting of its creditors, (ii) admits in writing its
inability, or is generally unable, to pay its debts as they become due or ceases
operations of its present business, (iii) makes a general assignment for the
benefit of creditors, (iv) commences a voluntary case under any state or federal
bankruptcy laws (as now or hereafter in effect), (v) is adjudicated as bankrupt
or insolvent, (vi) files a petition seeking to take advantage of any other law
providing for the relief of debtors, (vii) acquiesces to, or fails to have

                                        4



dismissed, any petition which is filed against it in any involuntary case under
such bankruptcy laws, or (viii) takes any action for the purpose of effecting
any of the foregoing;

      (t) that arises from a bill-and-hold, guaranteed sale, sale-and-return,
sale on approval, consignment or any other repurchase or return basis or is
evidenced by chattel paper;

      (u) for which the Items giving rise to such Accounts Receivable have not
been shipped to the Buyer or when the Items are services, such services have not
been performed or when the Export Order specifies a timing for invoicing the
Items other than shipment or performance and the Items have not been invoiced in
accordance with such terms of the Export Order, or the Accounts Receivable
otherwise do not represent a final sale;

      (v) that is subject to any offset, deduction, defense, dispute, or
counterclaim or the Buyer is also a creditor or supplier of Borrower or the
Account Receivable is contingent in any respect or for any reason;

      (w) for which Borrower has made any agreement with the Buyer for any
deduction therefrom, except for discounts or allowances made in the ordinary
course of business for prompt payment, all of which discounts or allowances are
reflected in the calculation of the face value of each respective invoice
related thereto;

      (x) for which any of the Items giving rise to such Account Receivable have
been returned, rejected or repossessed;

      (y) that is included as an eligible receivable under any other credit
facility to which Borrower is a party;

      (z) any of the Items giving rise to such Accounts Receivable are Capital
Goods, unless the transaction is in accordance with Section 2.14;

      (aa) that is due and payable from a Buyer that is, or is located in, the
United States; provided however, that this subsection (aa) shall not preclude an
Export-Related Accounts Receivable arising from the sale of Items to foreign
contractors or subcontractors providing services to a United States Embassy or
the United States Military located overseas from being deemed an Eligible
Export-Related Accounts Receivable; or

      (bb) that arises from the sale of Items that do not meet the U.S. Content
requirements in accordance with Section 2.01(b)(ii).

      "Eligible Export-Related Inventory" shall mean Export-Related Inventory
which is acceptable to Lender and which is deemed to be eligible pursuant to the
Loan Documents, but in no event shall Eligible Export-Related Inventory include
any Inventory:

      (a) that is not subject to a valid, perfected first priority Lien in favor
of Lender;

      (b) that is located at an address that has not been disclosed to Lender in
writing;

                                        5



      (c) that is placed by Borrower on consignment or held by Borrower on
consignment from another Person;

      (d) that is in the possession of a processor or bailee, or located on
premises leased or subleased to Borrower, or on premises subject to a mortgage
in favor of a Person other than Lender, unless such processor or bailee or
mortgagee or the lessor or sublessor of such premises, as the case may be, has
executed and delivered all documentation which Lender shall require to evidence
the subordination or other limitation or extinguishment of such Person's rights
with respect to such Inventory and Lender's right to gain access thereto;

      (e) that is produced in violation of the Fair Labor Standards Act or
subject to the "hot goods" provisions contained in 29 U.S.C.Section 215 or any
successor statute or section;

      (f) as to which any covenant, representation or warranty with respect to
such Inventory contained in the Loan Documents has been breached;

      (g) that is not located in the United States unless expressly permitted by
Lender, on terms acceptable to Lender;

      (h) that is an Item or is to be incorporated into Items that do not meet
U.S. Content requirements in accordance with Section 2.01(b)(ii);

      (i) that is demonstration Inventory;

      (j) that consists of proprietary software (i.e. software designed solely
for Borrower's internal use and not intended for resale);

      (k) that is damaged, obsolete, returned, defective, recalled or unfit for
further processing;

      (l) that has been previously exported from the United States;

      (m) that constitutes, or will be incorporated into Items that constitute,
defense articles or defense services;

      (n) that is an Item or will be incorporated into Items that will be used
in the construction, alteration, operation or maintenance of nuclear power,
enrichment, reprocessing, research or heavy water production facilities unless
with Ex-Im Bank's prior written consent;

      (o) that is an Item or is to be incorporated into Items destined for
shipment to a country as to which Ex-Im Bank is prohibited from doing business
as designated in the Country Limitation Schedule;

      (p) that is an Item or is to be incorporated into Items destined for
shipment to a Buyer located in a country in which Ex-Im Bank coverage is not
available for commercial reasons as designated in the Country Limitation
Schedule, unless and only to the extent that such Items are to be sold to such
country on terms of a letter of credit confirmed by a bank acceptable to Ex-Im
Bank;

                                        6



      (q) that constitutes, or is to be incorporated into, Items whose sale
would result in an Accounts Receivable which would not be an Eligible
Export-Related Accounts Receivable;

      (r) that is included as eligible inventory under any other credit facility
to which Borrower is a party; or

      (s) that is, or is to be incorporated into, an Item that is a Capital
Good, unless the transaction is in accordance with Section 2.14.

      "Eligible Export-Related Overseas Accounts Receivable" shall mean
Export-Related Overseas Accounts Receivable which are acceptable to Lender and
which are deemed to be eligible pursuant to the Loan Documents but in no event
shall include the Accounts Receivable (a) through (bb) excluded from the
definition of Eligible Export-Related Accounts Receivable.

      "Eligible Export-Related Overseas Inventory" shall mean Export-Related
Overseas Inventory which is acceptable to Lender and which is deemed to be
eligible pursuant to the Loan Documents, but in no event shall include the
Inventory (a) through (r) excluded from the definition of Eligible
Export-Related Inventory.

      "Eligible Person" shall mean a sole proprietorship, partnership, limited
liability partnership, corporation or limited liability company which (a) is
domiciled, organized or formed, as the case may be, in the United States,
whether or not such entity is owned by a foreign national or foreign entity; (b)
is in good standing in the state of its formation or otherwise authorized to
conduct business in the United States; (c) is not currently suspended or
debarred from doing business with the United States government or any
instrumentality, division, agency or department thereof; (d) exports or plans to
export Items; (e) operates and has operated as a going concern for at least one
(1) year; (f) has a positive tangible net worth determined in accordance with
GAAP; and (g) has revenue generating operations relating to its core business
activities for at least one year. An Affiliated Foreign Person that meets all of
the requirements of the foregoing definition of Eligible Person other than
subclause (a) thereof shall be deemed to be an Eligible Person

      "ERISA" shall mean the Employee Retirement Income Security Act of 1974 and
the rules and regulations promulgated thereunder

      "Export Order" shall mean a documented purchase order or contract
evidencing a Buyer's agreement to purchase the Items from Borrower for export
from the United States, which documentation shall include written information
that is necessary to confirm such purchase order or contract, including
identification of the Items, the name of the Buyer, the country of destination,
contact information for the Buyer and the total amount of the purchase order or
contract; in the case of Indirect Exports, such documentation shall further
include a copy of the written purchase order or contract from a foreign
purchaser or other documentation clearly evidencing a foreign purchaser's
agreement to purchase the Items.

      "Export-Related Accounts Receivable" shall mean those Accounts Receivable
arising from the sale of Items which are due and payable to Borrower in the
United States.

                                        7




      "Export-Related Accounts Receivable Value" shall mean, at the date of
determination thereof, the aggregate face amount of Eligible Export-Related
Accounts Receivable less taxes, discounts, credits, allowances and Retainages,
except to the extent otherwise permitted by Ex-Im Bank in writing.

      "Export-Related Borrowing Base" shall mean, at the date of determination
thereof, the sum of (a) (if Lender elects to include) the Export-Related
Inventory Value or Export-Related Historical Inventory Value multiplied by the
Advance Rate applicable to Eligible Export-Related Inventory set forth in
Section 5.B.(1.) of the Loan Authorization Agreement, plus (b) the
Export-Related Accounts Receivable Value multiplied by the Advance Rate
applicable to Eligible Export-Related Accounts Receivable set forth in Section
5.B.(2.) of the Loan Authorization Agreement, plus (c) if permitted by Ex-Im
Bank in writing, the Retainage Value multiplied by the Advance Rate applicable
to Retainages set forth in Section 5.B.(3.) of the Loan Authorization Agreement,
plus (d) the Other Assets set forth in Section 5.B.(4.) of the Loan
Authorization Agreement multiplied by the Advance Rate agreed to in writing by
Ex-Im Bank, plus (e) if permitted by Ex-Im Bank in writing, the Export-Related
Overseas Accounts Receivable Value multiplied by the Advance Rate applicable to
Eligible Export-Related Overseas Accounts Receivable set forth in Section
5.B.(5.) of the Loan Authorization Agreement, plus (f) if permitted by Ex-Im
Bank in writing, the Export-Related Overseas Inventory Value multiplied by the
Advance Rate applicable to Eligible Export-Related Overseas Inventory set forth
in Section 5.B.(6.) of the Loan Authorization Agreement, less (g) the amounts
required to be reserved pursuant to Sections 4.12 and 4.13 of this Agreement for
each outstanding Letter of Credit, less (h) such reserves and in such amounts
deemed necessary and proper by Lender from time to time.

      "Export-Related Borrowing Base Certificate" shall mean a certificate in
the form provided or approved by Lender, executed by Borrower and delivered to
Lender pursuant to the Loan Documents detailing the Export-Related Borrowing
Base supporting the Credit Accommodations which reflects, to the extent included
in the Export-Related Borrowing Base, Export-Related Accounts Receivable,
Eligible Export-Related Accounts Receivable, Export-Related Inventory, Eligible
Export-Related Inventory, Export-Related Overseas Accounts Receivable, Eligible
Export-Related Accounts Receivable, Export-Related Overseas Inventory and
Eligible Export-Related Overseas Inventory balances that have been reconciled
with Borrower's general ledger, Accounts Receivable Aging Report and Inventory
schedule.

      "Export-Related General Intangibles" shall mean the Pro Rata Percentage of
General Intangibles determined as of the earlier of: (i) the date such General
Intangibles are liquidated and (ii) the date Borrower fails to pay when due any
outstanding amount of principal or accrued interest payable under the Loan
Documents that becomes the basis for a Payment Default on which a Claim is
filed.

      "Export-Related Historical Inventory Value" shall mean with respect to a
Borrower, the relevant Export-Related Sales Ratio multiplied by the lowest of
(i) the cost of such Borrower's Inventory as determined in accordance with GAAP,
or (ii) the market value of such Borrower's Inventory as determined in
accordance with GAAP or (iii) the appraised or orderly liquidation value of such
Borrower's Inventory, if Lender has loans and financial accommodations to such
Borrower for which it conducts (or contracts for the performance of) such an
appraised or orderly liquidation value.

                                        8



      "Export-Related Inventory" shall mean the Inventory of Borrower located in
the United States that has been purchased, manufactured or otherwise acquired by
Borrower for sale or resale as Items, or to be incorporated into Items to be
sold or resold pursuant to Export Orders.

      "Export-Related Inventory Value" shall mean, at the date of determination
thereof, the lowest of (i) the cost of Eligible Exported-Related Inventory as
determined in accordance with GAAP, or (ii) the market value of Eligible
Export-Related Inventory as determined in accordance with GAAP or (iii) the
lower of the appraised market value or orderly liquidation value of the Eligible
Export-Related Inventory, if Lender has other loans and financial accommodations
to a Borrower for which it conducts (or contracts for the performance of) such
an appraised or orderly liquidation value.

      "Export-Related Overseas Accounts Receivable" shall mean those Accounts
Receivable arising from the sale of Items which are due and payable outside of
the United States either to a Borrower or an Affiliated Foreign Person.

      "Export-Related Overseas Accounts Receivable Value" shall mean, with
respect to a Loan Facility, at the date of determination thereof, the aggregate
face amount of Eligible Export-Related Overseas Accounts Receivable less taxes,
discounts, credits, allowances and Retainages, except to the extent otherwise
permitted by Ex-Im Bank in writing.

      "Export-Related Overseas Inventory" shall mean the Inventory of Borrower
located outside of the United States that has been purchased, manufactured or
otherwise acquired by such Borrower for sale or resale as Items, or to be
incorporated into Items to be sold or resold pursuant to Export Orders.

      "Export-Related Overseas Inventory Value" shall mean, at the date of
determination thereof, the lowest of (i) the cost of Eligible Export-Related
Overseas Inventory as determined in accordance with GAAP, (ii) the market value
of Eligible Export-Related Overseas Inventory as determined in accordance with
GAAP or (iii) the appraised or orderly liquidation value of the Eligible
Export-Related Overseas Inventory, if Lender has other loans and financial
accommodations to Borrower or an Affiliated Foreign Person for which it conducts
(or contracts for the performance of) such a appraised or orderly liquidation.

      "Export-Related Sales Ratio" shall mean with respect to a Borrower, the
percentage of such Borrower's total sales revenue derived from the sale of
Eligible Export-Related Inventory over a rolling twelve-month period ending no
more than ninety (90) days prior to the date of the relevant Export-Related
Borrowing Base Certificate

      "Extension" shall mean, with respect to a Loan Facility, an amendment to
the Loan Authorization Agreement extending the Final Disbursement Date on the
same terms and conditions as the Loan Facility for an aggregate period not to
exceed one hundred and twenty (120) days beyond the original Final Disbursement
Date, either as agreed to in writing by Ex-Im Bank or, in the case of Delegated
Authority, as notified by Lender to Ex-Im Bank pursuant to its authority under
the Delegated Authority Letter Agreement.

                                        9



      "Fast Track Lender Agreement" shall mean the Fast Track Lender Agreement,
if any, between Ex-Im Bank and Lender.

      "Final Disbursement Date" shall mean the last date on which Lender may
make a Disbursement set forth in Section 10 of the Loan Authorization Agreement
(including as amended by an Extension) or, if such date is not a Business Day,
the next succeeding Business Day; provided, however, to the extent that Lender
has not received cash collateral in the amount of the Letter of Credit
Obligations or an equivalent full indemnity from Borrower or Guarantor, as
applicable, with respect to Letter of Credit Obligations outstanding on the
Final Disbursement Date, the Final Disbursement Date with respect to an advance
to fund a drawing under such Letter of Credit shall be no later than thirty (30)
days after any such drawing which may be no later than the expiry date of the
Letter of Credit related thereto.

      "GAAP" shall mean the generally accepted accounting principles issued in
the United States.

      "General Intangibles" shall mean all intellectual property and other
"general intangibles" (as such term is defined in the UCC).

      "Guarantor" shall mean any Person which is identified in Section 3 of the
Loan Authorization Agreement who shall guarantee (jointly and severally if more
than one) the payment and performance of all or a portion of the Loan Facility
Obligations.

      "Guarantee Agreement" shall mean a valid and enforceable agreement of
guarantee executed by each Guarantor in favor of Lender.

      "Indirect Exports" shall mean finished goods or services that are sold by
a Borrower to a Buyer located in the United States, are intended for export from
the United States, and are identified in Section 4.A.(2.) of the Loan
Authorization Agreement.

      "Inventory" shall mean all "inventory" (as such term is defined in the
UCC), now or hereafter owned or acquired by Borrower, wherever located,
including all inventory, merchandise, goods and other personal property which
are held by or on behalf of Borrower for sale or lease or are furnished or are
to be furnished under a contract of service or which constitute raw materials,
work in process or materials used or consumed or to be used or consumed in
Borrower's business or in the processing, production, packaging, promotion,
delivery or shipping of the same, including other supplies.

      "ISP" shall mean the International Standby Practices-ISP98, International
Chamber of Commerce Publication No. 590 and any amendments and revisions
thereof.

      "Issuing Bank" shall mean the bank that issues a Letter of Credit, which
bank is Lender itself or a bank that Lender has caused to issue a Letter of
Credit by way of a guarantee or reimbursement obligation.

      "Items" shall mean the finished goods or services which are intended for
export from the United States, either directly or as an Indirect Export, meet
the U.S. Content requirements in

                                       10



accordance with Section 2.01(b)(ii) of this Agreement and are specified in
Section 4.A. of the Loan Authorization Agreement.

      "Letter of Credit" shall mean a Commercial Letter of Credit or a Standby
Letter of Credit.

      "Letter of Credit Obligations" shall mean all undrawn amounts of
outstanding obligations incurred by Lender, whether direct or indirect,
contingent or otherwise, due or not due, in connection with the issuance or
guarantee by Lender or Issuing Bank of Letters of Credit.

      "Lien" shall mean any mortgage, security deed or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, security title, easement or encumbrance, or preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever (including any lease or title retention agreement, any financing
lease having substantially the same economic effect as any of the foregoing, and
the filing of, or agreement to give, any financing statement perfecting a
security interest under the UCC or comparable law of any jurisdiction) by which
property is encumbered or otherwise charged.

      "Loan Agreement" shall mean a valid and enforceable agreement between
Lender and a Borrower setting forth, with respect to each Loan Facility, the
terms and conditions of such Loan Facility.

      "Loan Authorization Agreement" shall mean, as applicable, the duly
executed Loan Authorization Agreement, Fast Track Loan Authorization Agreement,
or the Loan Authorization Notice, setting forth certain terms and conditions of
each Loan Facility, a copy of which is attached hereto as Annex A.

      "Loan Authorization Notice" shall mean the Loan Authorization Notice
executed by Lender and delivered to Ex-Im Bank in accordance with the Delegated
Authority Letter Agreement setting forth the terms and conditions of each Loan
Facility.

      "Loan Documents" shall mean the Loan Authorization Agreement, the Loan
Agreement, this Agreement, each promissory note (if applicable), each Guarantee
Agreement, and all other instruments, agreements and documents now or hereafter
executed by the applicable Borrower, any Guarantor, Lender or Ex-Im Bank
evidencing, securing, guaranteeing or otherwise relating to the Loan Facility or
any Credit Accommodations made thereunder.

      "Loan Facility" shall mean the Revolving Loan Facility, the Transaction
Specific Loan Facility or the Transaction Specific Revolving Loan Facility
established by Lender in favor of Borrower under the Loan Documents.

      "Loan Facility Obligations" shall mean all loans, advances, debts,
expenses, fees, liabilities, and obligations, including any accrued interest
thereon, for the performance of covenants, tasks or duties or for payment of
monetary amounts (whether or not such performance is then required or
contingent, or amounts are liquidated or determinable) owing by Borrower to
Lender, of any kind or nature, present or future, arising in connection with the
Loan Facility.

                                       11



      "Loan Facility Term" shall mean, with respect to a Loan Facility, the
number of months or portion thereof from the Effective Date to the Final
Disbursement Date as set forth in the Loan Authorization Agreement as amended.

      "Master Guarantee Agreement" shall mean the Master Guarantee Agreement
between Ex-Im Bank and Lender, as amended, modified, supplemented and restated
from time to time.

      "Material Adverse Effect" shall mean a material adverse effect on (a) the
business, assets, operations, prospects or financial or other condition of
Borrower or any Guarantor, (b) any Borrower's ability to pay or perform the Loan
Facility Obligations in accordance with the terms thereof, (c) the Collateral or
Lender's Liens on the Collateral or the priority of such Lien, or (d) Lender's
rights and remedies under the Loan Documents.

      "Maximum Amount" shall mean the maximum Credit Accommodation Amount that
may be outstanding at any time under each Loan Facility, as specified in Section
5.A. of the Loan Authorization Agreement.

      "Other Assets" shall mean, with respect to a Loan Facility, such other
assets of a Borrower to be included in Primary Collateral, which may include
cash and marketable securities, or such other assets as Ex-Im Bank agrees to in
writing, and disclosed as Primary Collateral in Section 6.A. of the Loan
Authorization Agreement. The applicable Advance Rate (to be multiplied by the
Other Asset Value) shall be as agreed to by Ex-Im Bank in writing case by case
by case and set forth in Section 5.B.(4) of the Loan Authorization Agreement.

      "Other Asset Value" shall mean, with respect to a Loan Facility, at the
date of determination thereof, the value of the Other Assets as determined in
accordance with GAAP.

      "Other Collateral" shall mean any additional collateral that Lender
customarily would require as security for loan facilities on its own account and
risk where the permitted borrowing level is based principally on a borrowing
base derived from a borrower's inventory and accounts receivable, but where such
additional collateral does not enter into the borrowing base calculation.

      "Permitted Liens" shall mean (a) Liens for taxes, assessments or other
governmental charges or levies not delinquent, or, being contested in good faith
and by appropriate proceedings and with respect to which proper reserves have
been taken by Borrower; provided, that, the Lien shall have no effect on the
priority of the Liens in favor of Lender or the value of the assets in which
Lender has such a Lien and a stay of enforcement of any such Lien shall be in
effect; (b) deposits or pledges securing obligations under worker's
compensation, unemployment insurance, social security or public liability laws
or similar legislation; (c) deposits or pledges securing bids, tenders,
contracts (other than contracts for the payment of money), leases, statutory
obligations, surety and appeal bonds and other obligations of like nature
arising in the ordinary course of Borrower's business; (d) judgment Liens that
have been stayed or bonded; (e) mechanics', workers', materialmen's or other
like Liens arising in the ordinary course of Borrower's business with respect to
obligations which are not due; (f) Liens placed upon fixed assets hereafter
acquired to secure a portion of the purchase price thereof, provided, that, any
such Lien shall not encumber any other property of Borrower; (g) security
interests being terminated concurrently with the execution of the Loan
Documents; and (h) Liens disclosed in Section 6.D. of the Loan

                                       12



Authorization Agreement, provided that, except as otherwise permitted by Ex-Im
Bank in writing, such Liens in Section 6.D. shall be subordinate to the Liens in
favor of Lender on Primary Collateral.

      "Person" shall mean any individual, sole proprietorship, partnership,
limited liability partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company, institution,
public benefit corporation, entity or government (whether national, federal,
provincial, state, county, city, municipal or otherwise, including any
instrumentality, division, agency, body or department thereof), and shall
include such Person's successors and assigns.

      "Pro Rata Percentage" shall mean, with respect to a Loan Facility, as of
the date of determination thereof, the principal balance of the Credit
Accommodations outstanding as a percentage of the combined principal balance of
all loans from Lender to such Borrower including the then outstanding principal
balance of the Credit Accommodations plus unfunded amounts under outstanding
Letters of Credit.

      "Principals" shall mean any officer, director, owner, partner, key
employee, or other Person with primary management or supervisory
responsibilities with respect to Borrower or any other Person (whether or not an
employee) who has critical influence on or substantive control over the
transactions covered by this Agreement.

      "Retainage" shall mean that portion of the purchase price of an Export
Order that a Buyer is not obligated to pay until the end of a specified period
of time following the satisfactory performance under such Export Order.

      "Retainage Accounts Receivable" shall mean those portions of Eligible
Export-Related Accounts Receivable or Eligible Export-Related Overseas Accounts
Receivable arising out of a Retainage.

      "Retainage Value" shall mean, at the date of determination thereof, the
aggregate face amount of Retainage Accounts Receivable as permitted by Ex-Im
Bank in writing, less taxes, discounts, credits and allowances, except to the
extent otherwise permitted by Ex-Im Bank in writing.

      "Revolving Loan Facility" shall mean the credit facility or portion
thereof established by Lender in favor of Borrower for the purpose of providing
working capital in the form of loans and/or Letters of Credit to finance the
manufacture, production or purchase and subsequent export sale of Items pursuant
to Loan Documents under which Credit Accommodations may be made and repaid on a
continuous basis based solely on credit availability on the Export-Related
Borrowing Base during the term of such credit facility

      "Special Conditions" shall mean those conditions, if any, set forth in
Section 13 of the Loan Authorization Agreement.

      "Specific Export Orders" shall mean those Export Orders specified in
Section 5.D. of the Loan Authorization Agreement as applicable for a Transaction
Specific Revolving Loan Facility or a Transaction Specific Loan Facility.

                                       13



      "Standby Letters of Credit" shall mean those letters of credit subject to
the ISP or UCP issued or caused to be issued by Lender for Borrower's account
that can be drawn upon by a Buyer only if Borrower fails to perform all of its
obligations with respect to an Export Order.

      "Transaction Specific Loan Facility" shall mean a credit facility or a
portion thereof established by Lender in favor of Borrower for the purpose of
providing working capital in the form of loans and/or Letters of Credit to
finance the manufacture, production or purchase and subsequent export sale of
Items pursuant to Loan Documents under which Credit Accommodations are made
based solely on credit availability on the Export-Related Borrowing Base
relating to Specific Export Orders and once such Credit Accommodations are
repaid they may not be reborrowed.

      "Transaction Specific Revolving Loan Facility" shall mean a Revolving
Credit Facility established to provide financing of Specific Export Orders.

      "UCC" shall mean the Uniform Commercial Code, as the same may be in effect
from time to time in the relevant United States jurisdiction.

      "UCP" shall mean the Uniform Customs and Practice for Documentary Credits
(1993 Revision), International Chamber of Commerce Publication No. 500 and any
amendments and revisions thereof.

      "U.S." or "United States" shall mean the United States of America
including any division or agency thereof (including United States embassies or
United States military bases located overseas), and any United States Territory
(including without limitation, Puerto Rico, Guam or the United States Virgin
Islands).

      "U.S. Content" shall mean, with respect to any Item, all the costs,
including labor, materials, services and overhead, but not markup or profit
margin, which are of U.S. origin or manufacture, and which are incorporated into
an Item in the United States.

      "Warranty" shall mean Borrower's guarantee to Buyer that the Items will
function as intended during the warranty period set forth in the applicable
Export Order.

      "Warranty Letter of Credit" shall mean a Standby Letter of Credit which is
issued or caused to be issued by Lender to support the obligations of Borrower
with respect to a Warranty or a Standby Letter of Credit which by its terms
becomes a Warranty Letter of Credit.

      1.02 Rules of Construction. For purposes of this Agreement, the following
additional rules of construction shall apply, unless specifically indicated to
the contrary: (a) wherever from the context it appears appropriate, each term
stated in either the singular or plural shall include the singular and the
plural, and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, the feminine and the neuter; (b) the term "or" is not
exclusive; (c) the term "including" (or any form thereof) shall not be limiting
or exclusive; (d) all references to statutes and related regulations shall
include any amendments of same and any successor statutes and regulations; (e)
the words "this Agreement", "herein", "hereof, "hereunder" or other words of
similar import refer to this Agreement as a whole including the schedules,
exhibits, and annexes

                                       14



hereto as the same may be amended, modified or supplemented; (f) all references
in this Agreement to sections, schedules, exhibits, and annexes shall refer to
the corresponding sections, schedules, exhibits, and annexes of or to this
Agreement; and (g) all references to any instruments or agreements, including
references to any of the Loan Documents, the Delegated Authority Letter
Agreement, or the Fast Track Lender Agreement shall include any and all
modifications, amendments and supplements thereto and any and all extensions or
renewals thereof to the extent permitted under this Agreement.

      1.03 Incorporation of Recitals. The Recitals to this Agreement are
incorporated into and shall constitute a part of this Agreement.

                                   ARTICLE II
                             OBLIGATIONS OF BORROWER

      Until payment in full of all Loan Facility Obligations and termination of
the Loan Documents, Borrower agrees as follows:

      2.01 Use of Credit Accommodations. (a) Borrower shall use Credit
Accommodations only for the purpose of enabling Borrower to finance the cost of
manufacturing, producing, purchasing or selling the Items. Borrower may not use
any of the Credit Accommodations for the purpose of: (i) servicing or repaying
any of Borrower's pre-existing or future indebtedness unrelated to the Loan
Facility unless approved by Ex-Im Bank in writing; (ii) acquiring fixed assets
or capital assets for use in Borrower's business; (iii) acquiring, equipping or
renting commercial space outside of the United States; (iv) paying the salaries
of non U.S. citizens or non-U.S. permanent residents who are located in offices
outside of the United States; or (v) in connection with a Retainage or Warranty
unless approved by Ex-Im Bank in writing.

           (b) In addition, no Credit Accommodation may be used to finance the
manufacture, purchase or sale of any of the following:

           (i) Items to be sold to a Buyer located in a country as to which
Ex-Im Bank is prohibited from doing business as designated in the Country
Limitation Schedule;

           (ii) that part of the cost of the Items which is not U.S. Content
unless such part is not greater than fifty percent (50%) of the cost of the
Items and is incorporated into the Items in the United States;

           (iii) defense articles or defense services;

           (iv) Capital Goods unless in accordance with Section 2.14 of this
Agreement; or

           (v) without Ex-Im Bank's prior written consent, any Items to be used
in the construction, alteration, operation or maintenance of nuclear power,
enrichment, reprocessing, research or heavy water production facilities.

      2.02 Security Interests. Borrower agrees to cooperate with Lender in any
steps Lender shall take to file and maintain valid, enforceable and perfected
security interests in the Collateral.

                                       15



      2.03 Loan Documents and Loan Authorization Agreement. (a) This Agreement
and each of the other Loan Documents applicable to Borrower have been duly
executed and delivered on behalf of Borrower, and are and will continue to be
legal and valid obligations of Borrower, enforceable against it in accordance
with its terms.

      (b) Borrower shall comply with all of the terms and conditions of this
Agreement, the Loan Authorization Agreement and each of the other Loan Documents
to which it is a party.

      (c) Borrower hereby represents and warrants to Lender that Borrower is an
Eligible Person.

      2.04 Export-Related Borrowing Base Certificates and Export Orders. (a) In
order to receive Credit Accommodations under the Loan Facility, Borrower shall
have delivered to Lender an Export-Related Borrowing Base Certificate as
frequently as required by Lender but at least within the past month, together
with a copy of the Export Order(s) or, for Revolving Loan Facilities, if
permitted by Lender, a written summary of the Export Orders (when Eligible
Export-Related Inventory and Eligible Overseas Export-Related Inventory are
entering the Export-Related Borrowing Base) against which Borrower is requesting
Credit Accommodations. In addition, so long as there are any Credit
Accommodations outstanding under the Loan Facility, Borrower shall deliver to
Lender an Export-Related Borrowing Base Certificate at least once each month.
Lender shall determine if daily electronic reporting reconciled monthly may
substitute for monthly Export-Related Borrowing Base Certificates. If the Lender
requires an Export-Related Borrowing Base Certificate more frequently, Borrower
shall deliver such Export-Related Borrowing Base Certificate as required by
Lender.

      (b) If Lender permits summaries of Export Orders, Borrower shall also
deliver promptly to Lender copies of any Export Orders requested by Lender.

      2.05 Schedules, Reports and Other Statements. With the delivery of each
Export-Related Borrowing Base Certificate required in Section 2.04 above,
Borrower shall submit to Lender in writing (a) an Inventory schedule for the
preceding month, as applicable, and (b) an Accounts Receivable Aging Report for
the preceding month. Borrower shall also furnish to Lender promptly upon request
such information, reports, contracts, invoices and other data concerning the
Collateral as Lender may from time to time specify.

      2.06 Exclusions from the Export-Related Borrowing Base. In determining the
Export-Related Borrowing Base, Borrower shall exclude therefrom Inventory which
are not Eligible Export-Related Inventory or Eligible Export-Related Overseas
Inventory and Accounts Receivable which are not Eligible Export-Related Accounts
Receivable or Eligible Export-Related Overseas Accounts Receivable. Borrower
shall promptly, but in any event within five (5) Business Days, notify Lender
(a) if any then existing Export-Related Inventory or Export-Related Overseas
Inventory no longer constitutes Eligible Export-Related Inventory or Eligible
Export-Related Overseas Inventory, as applicable or (b) of any event or
circumstance which to Borrower's knowledge would cause Lender to consider any
then existing Export-Related Accounts Receivable or Export-Related Overseas
Accounts Receivable as no longer constituting an Eligible Export-Related
Accounts Receivable or Eligible Export-Related Overseas Accounts Receivable, as
applicable.

                                       16



      2.07 Borrowings and Reborrowings. (a) If the Loan Facility is a Revolving
Loan Facility or Transaction Specific Revolving Loan Facility, provided that
Borrower is not in default under any of the Loan Documents, Borrower may borrow,
repay and reborrow amounts under such Loan Facility up to the credit available
on the current Export-Related Borrowing Base Certificate subject to the terms of
this Agreement and each of the other Loan Documents until the close of business
on the Final Disbursement Date.

      (b) If the Loan Facility is a Transaction Specific Loan Facility, provided
that Borrower is not in default under any of the Loan Documents, Borrower may
borrow (but not reborrow) amounts under the Loan Facility up to the credit
available on the current Export-Related Borrowing Base Certificate subject to
the terms of this Agreement and each of the other Loan Documents until the close
of business on the Final Disbursement Date.

      2.08 Repayment Terms. (a) The Borrower on a Revolving Loan Facility shall
pay in full the outstanding Loan Facility Obligations no later than the first
Business Day after the Final Disbursement Date unless such Loan Facility is
renewed or extended by Lender consistent with procedures required by Ex-Im Bank.

      (b) The Borrower on a Transaction Specific Loan Facility and a Transaction
Specific Revolving Loan Facility shall, within two (2) Business Days of the
receipt thereof, pay to Lender (for application against the outstanding Loan
Facility Obligations) all checks, drafts, cash and other remittances it may
receive in payment or on account of the Export-Related Accounts Receivable,
Export-Related Overseas Accounts Receivable or any other Collateral, in
precisely the form received (except for the endorsement of Borrower where
necessary). Pending such deposit, Borrower shall hold such amounts in trust for
Lender separate and apart and shall not commingle any such items of payment with
any of its other funds or property. Unless a Transaction Specific Loan Facility
or Transaction Specific Revolving Loan Facility is renewed or extended by Lender
consistent with procedures required by Ex-Im Bank, Borrower shall pay in full
all outstanding Loan Facility Obligations no later than the first Business Day
after the Final Disbursement Date, except for Eligible Export-Related Accounts
Receivables and Eligible Export-Related Overseas Accounts Receivable outstanding
as of the Final Disbursement Date and due and payable after such date, for which
the principal and accrued and unpaid interest thereon shall be due and payable
no later than the first Business Day after the date such Accounts Receivable are
due and payable.

      2.09 Financial Statements. Borrower shall deliver to Lender the financial
statements required to be delivered by Borrower in accordance with Section 11 of
the Loan Authorization Agreement.

      2.10 Additional Security or Payment. (a) Borrower shall at all times
ensure that the Export-Related Borrowing Base equals or exceeds the aggregate
outstanding amount of Disbursements. If informed by Lender or if Borrower
otherwise has actual knowledge that the Export-Related Borrowing Base is at any
time less than the aggregate outstanding amount of Disbursements, Borrower
shall, within five (5) Business Days, either (i) furnish additional Collateral
to Lender, in form and amount satisfactory to Lender and Ex-Im Bank or (ii) pay
to Lender an amount equal to the difference between the aggregate outstanding
amount of Disbursements and the Export-Related Borrowing Base.

                                       17



      (b) For purposes of this Agreement, in determining the Export-Related
Borrowing Base there shall be deducted from the Export-Related Borrowing Base an
amount equal to (i) twenty-five percent (25%) of the undrawn amount of
outstanding Commercial Letters of Credit and Standby Letters of Credit and (ii)
one hundred percent (100%) of the undrawn amount of outstanding Warranty Letters
of Credit less the amount of cash collateral held by Lender to secure Warranty
Letters of Credit.

      (c) Unless otherwise approved in writing by Ex-Im Bank, for Revolving Loan
Facilities (other than Transaction Specific Revolving Loan Facilities), Borrower
shall at all times ensure that the sum of the outstanding amount of
Disbursements and the undrawn amount of outstanding Commercial Letters of Credit
that is supported by Eligible Export-Related Inventory or Eligible
Export-Related Overseas Inventory (discounted by the relevant Advance Rate
percentages) in the Export-Related Borrowing Base does not exceed sixty percent
(60%) of the sum of the total outstanding amount of Disbursements and the
undrawn amount of all outstanding Commercial Letters of Credit. If informed by
Lender or if Borrower otherwise has actual knowledge that the sum of the
outstanding amount of Disbursements and the undrawn amount of outstanding
Commercial Letters of Credit that is supported by such Inventory exceeds sixty
percent (60%) of the sum of the total outstanding Disbursements and the undrawn
amount of all outstanding Commercial Letters of Credit, Borrower shall, within
five (5) Business Days, either (i) furnish additional non-Inventory Collateral
to Lender, in form and amount satisfactory to Lender and Ex-Im Bank, or (ii) pay
down the applicable portion of the outstanding Disbursements or (iii) reduce the
undrawn amount of outstanding Commercial Letters of Credit such that the above
described ratio is not exceeded.

      (d) If informed by Lender or if Borrower otherwise has actual knowledge
that the conditions of Section 2.16(g) are at any time not being met, Borrower
shall, within five (5) Business Days, either (i) furnish additional Collateral
to Lender that is not Eligible Export-Related Overseas Accounts Receivable or
Eligible Export-Related Overseas Inventory, in form and amount satisfactory to
Lender and Ex-Im Bank, or (ii) remove from the Export-Related Borrowing Base the
portion of Eligible Export-Related Overseas Accounts Receivable or Eligible
Export-Related Overseas Inventory that supports greater than fifty percent (50%)
of the Export-Related Borrowing Base.

      2.11 Continued Security Interest. Borrower shall not change (a) its name
or identity in any manner, (b) the location of its principal place of business
or its jurisdiction of organization or formation, (c) the location of any of the
Collateral or (d) the location of any of the books or records related to the
Collateral, in each instance without giving thirty (30) days prior written
notice thereof to Lender and taking all actions deemed necessary or appropriate
by Lender to continuously protect and perfect Lender's Liens upon the
Collateral.

      2.12 Inspection of Collateral and Facilities. (a) Borrower shall permit
the representatives of Lender and Ex-Im Bank to make at any time during normal
business hours inspections of the Collateral and of Borrower's facilities,
activities, and books and records, and shall cause its officers and employees to
give full cooperation and assistance in connection therewith.

      (b) Borrower agrees to facilitate Lender's conduct of field examinations
at Borrower's facilities in accordance with the time schedule and content for
such examinations

                                       18



that Lender requests. Such field examinations shall address at a minimum: (x)
the value of the Collateral against which Credit Accommodations may be provided,
(y) the amount, if any, that the aggregate outstanding amount of Disbursements
exceeds the Export-Related Borrowing Base and (z) whether such Borrower is in
material compliance with the terms of each of the Loan Documents. Such field
examinations shall include an inspection and evaluation of the Export-Related
Inventory and Export-Related Overseas Inventory, a book audit of Export-Related
Accounts Receivable and Export-Related Overseas Accounts Receivable, a review of
the Accounts Receivable Aging Reports and a review of Borrower's compliance with
any Special Conditions. Lenders who opt to use the Export-Related Historical
Inventory Value in the Export-Related Borrowing Base calculation shall reconcile
those numbers against the calculation for the relevant time periods using the
Export-Related Inventory Value. Whenever Export-Related Accounts Receivable or
Export-Related Inventory derived from Indirect Exports are in the Export-Related
Borrowing Base, Lender shall verify compliance with Section 2.15 herein,
including taking a random sampling of ultimate foreign purchasers.

      2.13 General Intangibles. Borrower represents and warrants that it owns,
or is licensed to use, all General Intangibles necessary to conduct its business
as currently conducted except where the failure of Borrower to own or license
such General Intangibles could not reasonably be expected to have a Material
Adverse Effect.

      2.14 Economic Impact Approval. (a) For Loan Facilities up to and including
$10 million, Borrower acknowledges that Capital Goods may not be included as
Items, and Export-Related Inventory, Export-Related Overseas Inventory,
Export-Related Accounts Receivable and Export-Related Overseas Accounts
Receivable in connection with the sale of such Capital Goods may not be included
in the Export-Related Borrowing Base, if such Capital Goods would enable a
foreign buyer to establish or expand production of a product where, as of the
date of the Economic Impact Certification covering such Item: (i) the Buyer is
subject to a Final Anti-Dumping (AD) or Countervailing Duty (CVD) order, or a
Suspension Agreement arising from a AD or CVD investigation, and such product is
substantially the same as the product that is the subject of the AD/CVD order or
suspension agreement; or (ii) the Buyer is the subject of a Section 201 injury
determination by the International Trade Commission ("ITC") and such product is
substantially the same as a product that is the subject of the ITC injury
determination. Borrower may consult with Ex-Im Bank regarding the appropriate
application of this Section 2.14(a) and may, at its option, request that Ex-Im
Bank issue an Economic Impact Approval covering any Items listed in Section
4.A. of the Loan Authorization Agreement. For Loan Facilities over $10 million
involving Items that are Capital Goods, Borrower shall obtain from Ex-Im Bank,
and abide by, an Economic Impact Approval covering all Items listed in Section
4(A) of the Loan Authorization Agreement.

      (b) Borrower shall provide Lender with a certification in the form of
Annex B (an "Economic Impact Certification") covering the Items stated in
Section 4(A) of the Loan Authorization Agreement prior to Lender including such
Items in the Loan Authorization Agreement. Prior to Lender amending the Loan
Authorization Agreement to include additional Items, Borrower shall provide
Lender with an additional Economic Impact Certification covering such additional
Items.

      2.15 Indirect Exports. Indirect Exports may be included as Items in a Loan
Facility provided that funds available under such Loan Facility's Export-Related
Borrowing Base

                                       19



supported by Accounts Receivable and Inventory derived from Indirect Exports at
no time exceed ten percent (10%) of the Maximum Amount of such Loan Facility,
and provided, further that (a) the ultimate foreign buyer for the Items must be
located in a country in which Ex-Im Bank is not legally prohibited from doing
business in accordance with the Country Limitation Schedule, and (b) the
Borrower must make available to Lender verifiable evidence of intent to export
the Indirect Exports from the United States, which evidence may be contained in
the Export Orders and Accounts Receivable Aging Reports and supporting
documents. Lender must obtain written consent from Ex-Im Bank prior to including
funds derived from Indirect Exports in an Export-Related Borrowing Base above
the ten percent (10%) threshold.

      2.16 Overseas Inventory and Accounts Receivable. Upon the prior written
consent of Ex-Im Bank, Export-Related Overseas Accounts Receivable and
Export-Related Overseas Inventory of a Borrower or of an Affiliated Foreign
Person (as defined below) may be included in the Export-Related Borrowing Base
provided that conditions required by Ex-Im Bank, including the following, are
met:

      (a) the Affiliated Foreign Person, if any, has been approved by Ex-Im
Bank;

      (b) the Affiliated Foreign Person, if any, is a Borrower under the
relevant Loan Facility;

      (c) notwithstanding the Maximum Amount of the Loan Facility, all payments
due and payable on such Export-Related Overseas Accounts Receivable are
collected through a cash collateral account under Lender's control;

      (d) as of the Effective Date, or such later date when the Export-Related
Overseas Accounts Receivable and/or Export-Related Overseas Inventory are added
to the Loan Facility, Lender has obtained a valid and enforceable first priority
Lien in the Export-Related Overseas Accounts Receivable and Export-Related
Overseas Inventory, as applicable;

      (e) as of the Effective Date, or such later date when the Export-Related
Overseas Accounts Receivable and/or Export-Related Overseas Inventory are added
to the Loan Facility, Lender has obtained a legal opinion confirming the
security interest in the Export-Related Overseas Accounts Receivable and
Export-Related Overseas Inventory;

      (f) the Export-Related Overseas Accounts Receivable are due and payable in
United States Dollars or other currency acceptable to Ex-Im Bank; and

      (g) at no time may the portion of the Export-Related Borrowing Base
derived from Eligible Export-Related Overseas Accounts Receivable and Eligible
Export-Related Overseas Inventory exceed fifty percent (50%) of the
Export-Related Borrowing Base.

      For purposes hereof, an "Affiliated Foreign Person" shall mean a
subsidiary or affiliate of a Borrower on the same Loan Facility, which has duly
executed as a Borrower all of the applicable Loan Documents and any other
documents required by Ex-Im Bank, meets all of the requirements of the
definition of Eligible Person other than subclause (a) thereof and is in good
standing in the country of its formation or otherwise authorized to conduct
business in such country.

                                       20



      2.17 Country Limitation Schedule. Unless otherwise informed in writing by
Lender or Ex-Im Bank, Borrower shall be entitled to rely on the last copy of the
Country Limitation Schedule distributed from Lender to Borrower.

      2.18 Notice of Certain Events. Borrower shall promptly, but in any event
within five (5) Business Days, notify Lender in writing of the occurrence of any
of the following:

      (a) Borrower or any Guarantor (i) applies for, consents to or suffers the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
liquidator or similar fiduciary of itself or of all or a substantial part of its
property or calls a meeting of its creditors, (ii) admits in writing its
inability, or is generally unable, to pay its debts as they become due or ceases
operations of its present business, (iii) makes a general assignment for the
benefit of creditors, (iv) commences a voluntary case under any state or federal
bankruptcy laws (as now or hereafter in effect), (v) is adjudicated as bankrupt
or insolvent, (vi) files a petition seeking to take advantage of any other law
providing for the relief of debtors, (vii) acquiesces to, or fails to have
dismissed within thirty (30) days, any petition filed against it in any
involuntary case under such bankruptcy laws, or (vii) takes any action for the
purpose of effecting any of the foregoing;

      (b) any Lien in any of the Collateral, granted or intended by the Loan
Documents to be granted to Lender, ceases to be a valid, enforceable, perfected,
first priority Lien (or a lesser priority if expressly permitted pursuant to
Section 6 of the Loan Authorization Agreement) subject only to Permitted Liens;

      (c) the issuance of any levy, assessment, attachment, seizure or Lien,
other than a Permitted Lien, against any of the Collateral which is not stayed
or lifted within thirty (30) calendar days;

      (d) any proceeding is commenced by or against Borrower or any Guarantor
for the liquidation of its assets or dissolution;

      (e) any litigation is filed against Borrower or any Guarantor which has
had or could reasonably be expected to have a Material Adverse Effect and such
litigation is not withdrawn or dismissed within thirty (30) calendar days of the
filing thereof;

      (f) any default or event of default under the Loan Documents;

      (g) any failure to comply with any terms of the Loan Authorization
Agreement;

      (h) any material provision of this Agreement or any other Loan Document
for any reason ceases to be valid, binding and enforceable in accordance with
its terms;

      (i) any event which has had or could reasonably be expected to have a
Material Adverse Effect; or

      (j) the aggregate outstanding amount of Disbursements exceeds the
applicable Export-Related Borrowing Base.

                                       21



      2.19 Insurance. Borrower will at all times carry property, liability and
other insurance, with insurers acceptable to Lender, in such form and amounts,
and with such deductibles and other provisions, as Lender shall require, and
Borrower will provide evidence of such insurance to Lender on the proper Acord
Form, so that Lender is satisfied that such insurance is, at all times, in full
force and effect. Each property insurance policy shall name Lender as loss payee
or mortgagee and shall contain a lender's loss payable endorsement in form
acceptable to Lender and each liability insurance policy shall name Lender as an
additional insured. All policies of insurance shall provide that they may not be
cancelled or changed without at least thirty (30) days' prior written notice to
Lender and shall otherwise be in form and substance satisfactory to Lender.
Borrower will promptly deliver to Lender copies of all reports made to insurance
companies.

      2.20 Taxes. Borrower has timely filed all tax returns and reports required
by applicable law, has timely paid all applicable taxes, assessments, deposits
and contributions owing by Borrower and will timely pay all such items in the
future as they became due and payable. Borrower may, however, defer payment of
any contested taxes; provided, that Borrower (a) in good faith contests
Borrower's obligation to pay such taxes by appropriate proceedings promptly and
diligently instituted and conducted; (b) notifies Lender in writing of the
commencement of, and any material development in, the proceedings; (c) posts
bonds or takes any other steps required to keep the contested taxes from
becoming a Lien upon any of the Collateral; and (d) maintains adequate reserves
therefore in conformity with GAAP.

      2.21 Compliance with Laws. Borrower represents and warrants that it has
complied in all material respects with all provisions of all applicable laws and
regulations, including those relating to Borrower's ownership of real or
personal property, the conduct and licensing of Borrower's business, the payment
and withholding of taxes, ERISA and other employee matters, safety and
environmental matters.

      2.22 Negative Covenants. Without the prior written consent of Ex-Im Bank
and Lender, Borrower shall not: (a) merge, consolidate or otherwise combine with
any other Person; (b) acquire all or substantially all of the assets or capital
stock of any other Person; (c) sell, lease, transfer, convey, assign or
otherwise dispose of any of its assets, except for the sale of Inventory in the
ordinary course of business and the disposition of obsolete equipment in the
ordinary course of business; (d) create any Lien on the Collateral except for
Permitted Liens; (e) make any material changes in its organizational structure
or identity, or (f) enter into any agreement to do any of the foregoing.

      2.23 Cross Default. Borrower shall be deemed in default under the Loan
Facility if Borrower fails to pay when due any amount payable to Lender under
any loan or other credit accommodations to Borrower whether or not guaranteed by
Ex-Im Bank.

      2.24 Munitions List. If any of the Items are articles, services, or
related technical data that are listed on the United States Munitions List (part
121 of title 22 of the Code of Federal Regulations), Borrower shall send a
written notice promptly, but in any event within five (5) Business Days, of
Borrower learning thereof to Lender describing the Items(s) and the
corresponding invoice amount

      2.25 Suspension and Debarment, etc. On the date of this Agreement neither
Borrower nor its Principals are (a) debarred, suspended, proposed for debarment
with a final determination

                                       22



still pending, declared ineligible or voluntarily excluded (as such terms are
defined under any of the Debarment Regulations referred to below) from
participating in procurement or nonprocurement transactions with any United
States federal government department or agency pursuant to any of the Debarment
Regulations or (b) indicted, convicted or had a civil judgment rendered against
Borrower or any of its Principals for any of the offenses listed in any of the
Debarment Regulations. Unless authorized by Ex-Im Bank, Borrower will not
knowingly enter into any transactions in connection with the Items with any
person who is debarred, suspended, declared ineligible or voluntarily excluded
from participation in procurement or nonprocurement transactions with any United
States federal government department or agency pursuant to any of the Debarment
Regulations. Borrower will provide immediate written notice to Lender if at any
time it learns that the certification set forth in this Section 2.24 was
erroneous when made or has become erroneous by reason of changed circumstances.

                                   ARTICLE III
                               RIGHTS AND REMEDIES

      3.01 Indemnification. Upon Ex-Im Bank's payment of a Claim to Lender in
connection with the Loan Facility pursuant to the Master Guarantee Agreement,
Ex-Im Bank may assume all rights and remedies of Lender under the Loan Documents
and may enforce any such rights or remedies against Borrower, the Collateral and
any Guarantors. Borrower shall hold Ex-Im Bank and Lender harmless from and
indemnify them against any and all liabilities, damages, claims, costs and
losses incurred or suffered by either of them resulting from (a) any materially
incorrect certification or statement knowingly made by Borrower or its agent to
Ex-Im Bank or Lender in connection with the Loan Facility, this Agreement, the
Loan Authorization Agreement or any other Loan Documents or (b) any material
breach by Borrower of the terms and conditions of this Agreement, the Loan
Authorization Agreement or any of the other Loan Documents. Borrower also
acknowledges that any statement, certification or representation made by
Borrower in connection with the Loan Facility is subject to the penalties
provided in Article 18 U.S.C. Section 1001.

      3.02 Liens. Borrower agrees that any and all Liens granted by it to Lender
are also hereby granted to Ex-Im Bank to secure Borrower's obligation, however
arising, to reimburse Ex-Im Bank for any payments made by Ex-Im Bank pursuant to
the Master Guarantee Agreement. Lender is authorized to apply the proceeds of,
and recoveries from, any property subject to such Liens to the satisfaction of
Loan Facility Obligations in accordance with the terms of any agreement between
Lender and Ex-Im Bank.

                                       23



                                   ARTICLE IV
                                  MISCELLANEOUS

      4.01 Governing Law. This Agreement and the obligations arising under this
Agreement shall be governed by, and construed in accordance with, the law of the
state governing the Loan Agreement.

      4.02 Notification. All notices required by this Agreement shall be given
in the manner and to the parties provided for in the Loan Agreement.

      4.03 Partial Invalidity. If at any time any of the provisions of this
Agreement becomes illegal, invalid or unenforceable in any respect under the law
of any jurisdiction, neither the legality, the validity nor the enforceability
of the remaining provisions hereof shall in any way be affected or impaired.

      4.04 Waiver of Jury Trial. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY ACTION, SUIT, PROCEEDING OR OTHER LITIGATION BROUGHT TO RESOLVE
ANY DISPUTE ARISING UNDER, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT,
THE LOAN AUTHORIZATION AGREEMENT, ANY LOAN DOCUMENT, OR ANY OTHER AGREEMENT,
DOCUMENT OR INSTRUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITH
OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR
WRITTEN), OR ACTIONS OR OMISSIONS OF LENDER, EX-IM BANK, OR ANY OTHER PERSON,
RELATING TO THIS AGREEMENT, THE LOAN AUTHORIZATION AGREEMENT OR ANY OTHER LOAN
DOCUMENT.

      4.05 Consequential Damages. Neither Ex-Im Bank, Lender nor any agent or
attorney for any of them shall be liable to Borrower for consequential damages
arising from any breach of contract, tort or other wrong relating to the
establishment, administration or collection of the Loan Facility Obligations.

                                       24



      IN WITNESS WHEREOF, BORROWER HAS CAUSED THIS AGREEMENT TO BE DULY EXECUTED
AS OF THE _________ DAY OF MARCH, 2006.

VERSO TECHNOLOGIES, INC.                        PROVO PREPAID (DELAWARE) CORP.
- -------------------------------                 ------------------------------
     (NAME OF BORROWER)                             (NAME OF BORROWER)

BY: /s/ Juliet M. Reising                       BY: /s/ Juliet M. Reising
               (SIGNATURE)                                      (SIGNATURE)
NAME: Juliet M. Reising                         NAME: Juliet M. Reising
         (PRINT OR TYPE)                                   (PRINT OR TYPE)

TITLE:   EVP                                    TITLE: Vice President
         (PRINT OR TYPE)                                   (PRINT OR TYPE)

TELEMATE.NET SOFTWARE, INC.                     NEEDHAM (DELAWARE) CORP.
- -------------------------------                 ------------------------------
    (NAME OF BORROWER)                              (NAME OF BORROWER)

BY: /s/ Juliet M. Reising                       BY: /s/ Juliet M. Reising
   ----------------------------                     ---------------------------
         (SIGNATURE)                                      (SIGNATURE)

NAME: Juliet M. Reising                         NAME: Juliet M. Reising
         (PRINT OR TYPE)                                  (PRINT OR TYPE)

TITLE: Vice President                           TITLE: Vice President
         (PRINT OR TYPE)                                  (PRINT OR TYPE)

ACKNOWLEDGED:

   SILICON VALLEY BANK
- -------------------------------
      (NAME OF LENDER)

BY: /s/ Peter Bendoris
   ----------------------------
           (SIGNATURE)

NAME: Peter Bendoris
         (PRINT OR TYPE)

TITLE: Relationship Manager - VP
         (PRINT OR TYPE)

                                       25



ANNEXES:

Annex A - Loan Authorization Agreement, Fast Track Loan Authorization Agreement
          or Loan Authorization Notice, as applicable

Annex B - Economic Impact Certification

                                       26

EX-10.115

                                                                  Exhibit 10.115

SILICON VALLEY BANK

      AMENDMENT TO LOAN DOCUMENTS

 BORROWER: VERSO TECHNOLOGIES, INC.
           PROVO PREPAID (DELAWARE) CORP.
           TELEMATE.NET SOFTWARE, INC.
           NEEDHAM (DELAWARE) CORP.

 DATE:     JANUARY 27, 2006

      THIS AMENDMENT TO LOAN DOCUMENTS is entered into between Silicon Valley
Bank ("Silicon") and the borrower named above ("Borrower").

      The Parties agree to amend the Loan and Security Agreement between them,
dated December 14, 2001 (as otherwise amended, if at all, the "Loan Agreement"),
as follows, effective as of the date hereof. (Capitalized terms used but not
defined in this Amendment shall have the meanings set forth in the Loan
Agreement.)

      1. MODIFIED MINIMUM CASH ON HAND FINANCIAL COVENANT. The Minimum Cash On
Hand Financial Covenant set forth in Section 5 of the Schedule to Loan and
Security Agreement is hereby amended and restated in its entirety to read as
follows:

             MINIMUM CASH
             ON HAND/MINIMUM
             EXCESS AVAILABILITY:   As of the date Borrower submits each of its
                                    weekly Transaction Reports to Silicon,
                                    Borrower shall maintain a combination of a
                                    minimum of unrestricted cash (and cash
                                    equivalents) in accounts maintained at
                                    Silicon and Minimum Excess Availability
                                    (as defined below) of not less than
                                    $2,000,000.

      2. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon that
all representations and warranties set forth in the Loan Agreement, as amended
hereby, are true and correct.

      3. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and Borrower, and the
other written documents and agreements between Silicon and Borrower set forth in
full all of the representations and agreements of the parties with respect to
the subject matter hereof and supersede all prior discussions, representations,
agreements and understandings between the

                                       -1-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

parties with respect to the subject hereof. Except as herein expressly amended,
all of the terms and provisions of the Loan Agreement, and all other documents
and agreements between Silicon and Borrower shall continue in full force and
effect and the same are hereby ratified and confirmed.

BORROWER:                                           SILICON:

VERSO TECHNOLOGIES, INC.                            SILICON VALLEY BANK

BY /s/ Juliet M. Reising                        BY    /s/ Peter Bendoris
   ----------------------------                       --------------------------
   PRESIDENT OR VICE PRESIDENT                  Title Relationship Manager

BY /s/ David Ryan
   -----------------------------
   SECRETARY OR ASS'T SECRETARY

  BORROWER:                                     BORROWER:

PROVO PREPAID (DELAWARE)                        TELEMATE.NET SOFTWARE, INC.
CORP. (FKA NACT
TELECOMMUNICATIONS, INC.)

BY /s/ Juliet M. Reising                       BY /s/ Juliet M. Reising
   ---------------------------                     -----------------------------
   PRESIDENT OR VICE PRESIDENT                     PRESIDENT OR VICE PRESIDENT

BY /s/ David Ryan                              BY /s/ David Ryan
   ---------------------------                     -----------------------------
   SECRETARY OR ASS'T  SECRETARY                   SECRETARY OR ASS'T SECRETARY

BORROWER:

NEEDHAM (DELAWARE) CORP. (FKA
MCK COMMUNICATIONS, INC.)

BY /s/ Juliet M. Reising
   ------------------------------
   PRESIDENT OR VICE PRESIDENT

BY /s/ David Ryan
   ------------------------------
   SECRETARY OR ASS'T SECRETARY

                                       -2-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

                                     CONSENT

      The undersigned acknowledges that its consent to the foregoing Agreement
is not required, but the undersigned nevertheless does hereby consent to the
foregoing Agreement and to the documents and agreements referred to therein and
to all future modifications and amendments thereto, and any termination thereof,
and to any and all other present and future documents and agreements between or
among the foregoing parties. Nothing herein shall in any way limit any of the
terms or provisions of the Cross-Corporate Continuing Guaranty of the
undersigned, all of which are hereby ratified and affirmed.

CLARENT CANADA LTD.

BY    /s/ Juliet M. Reising
      ------------------------------
TITLE VP

                                       -3-

EX-10.116

                                                                  Exhibit 10.116

SILICON VALLEY BANK

                           AMENDMENT TO LOAN DOCUMENTS

                                 (EXIM PROGRAM)

BORROWER: VERSO TECHNOLOGIES, INC.
          PROVO PREPAID (DELAWARE) CORP.
          TELEMATE.NET SOFTWARE, INC.
          NEEDHAM (DELAWARE) CORP.

DATE:     MARCH 24, 2006

      THIS AMENDMENT TO LOAN DOCUMENTS (EXIM PROGRAM) is entered into between
Silicon Valley Bank ("Silicon") and the borrower named above ("Borrower").

      Reference is hereby made to that certain Loan and Security Agreement (Exim
Program) between Borrower and Silicon dated February 12, 2003 (as otherwise
amended, if at all, the "Loan Agreement"). Notwithstanding the Maturity Date of
March 17, 2006, since Obligations have remained outstanding, in accordance with
Section 6.3 of the Loan Agreement, the Loan Agreement has continued in full
force and effect. The Parties agree to amend the Loan Agreement, as follows,
effective as of the date hereof; provided, however, that prior to any of the
following modifications going into effect, Silicon must obtain the finalized,
written approval from Exim Bank regarding such modifications. (Capitalized terms
used but not defined in this Amendment shall have the meanings set forth in the
Loan Agreement.)

      1. MODIFIED INTEREST PROVISION. Section 9.1 of the Loan Agreement is
hereby amended to read as follows:

         9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
         checks and other items of payment received by Silicon (including
         proceeds of Receivables and payment of the Obligations in full) shall
         be deemed applied by Silicon on account of the Obligations two Business
         Days after receipt by Silicon of immediately available funds (except
         with respect to wire transfers which shall be deemed applied by Silicon
         on account of the Obligations the same Business Day as deemed received
         by Silicon), and, for purposes of the foregoing, any such funds
         received after 12:00 Noon on any day shall be deemed received on the
         next Business Day. Silicon shall not, however, be required to credit
         Borrower's account for the amount of any item of payment which is
         unsatisfactory to Silicon in its

                                      -1-


      SILICON VALLEY BANK                     AMENDMENT TO LOAN DOCUMENTS (EXIM)

         sole discretion, and Silicon may charge Borrower's loan account for the
         amount of any item of payment which is returned to Silicon unpaid.

      2. MODIFIED INVENTORY SUBLIMIT. That portion of Section 1 of the Schedule
to Loan and Security Agreement (Exim Program) that currently reads as follows:

      (b) 65% (an "Advance Rate") of the value of Borrower's Eligible Inventory
(as defined in Section 8 above).

is hereby amended in its entirety to read as follows:

      (b) the lesser of:

         (I) 65% (an "Advance Rate") of the value of Borrower's Eligible
             Inventory (as defined in Section 8 above); or

         (II) $3,000,000 through June 30, 2006; $2,750,000 from July 1, 2006
              through September 30, 2006 and $2,500,000 from and after October
              1, 2006.

      3. MODIFIED FOREIGN EXCHANGE CONTRACT SUBLIMIT. The Foreign Exchange
Contract Sublimit set forth in Section 1 of the Schedule to Loan and Security
Agreement (Exim Program) is hereby amended to read as follows:

         FOREIGN EXCHANGE

         CONTRACT SUBLIMIT:           $500,000. The Foreign Exchange Contract
                                      Sublimit set forth in this Agreement is in
                                      addition to the Foreign Exchange Contract
                                      Sublimit set forth in the Non-Exim
                                      Agreement.

                                      Borrower may enter into foreign exchange
                                      forward contracts with Silicon, on its
                                      standard forms, under which Borrower
                                      commits to purchase from or sell to
                                      Silicon a set amount of foreign currency
                                      more than one business day after the
                                      contract date (the "FX Forward
                                      Contracts"); provided that (1) at the time
                                      the FX Forward Contract is entered into
                                      Borrower has Loans available to it under
                                      this Agreement in an amount at least equal
                                      to 10% of the amount of the FX Forward
                                      Contract; and (2) the total FX Forward
                                      Contracts at any one time outstanding may
                                      not exceed 10 times the amount of the
                                      Foreign Exchange Contract Sublimit set
                                      forth above; and (3) the total Foreign
                                      Exchange Contract Sublimit shall not, at
                                      any time, exceed $500,000. Silicon

                                      -2-


      SILICON VALLEY BANK                     AMENDMENT TO LOAN DOCUMENTS (EXIM)

                                      shall have the right to withhold, from the
                                      Loans otherwise available to Borrower
                                      under this Agreement, a reserve (which
                                      shall be in addition to all other
                                      reserves) in an amount equal to 10% of the
                                      total FX Forward Contracts from time to
                                      time outstanding, and in the event at any
                                      time there are insufficient Loans
                                      available to Borrower for such reserve,
                                      Borrower shall deposit and maintain with
                                      Silicon cash collateral in an amount at
                                      all times equal to such deficiency, which
                                      shall be held as Collateral for all
                                      purposes of this Agreement. Silicon may,
                                      in its discretion, terminate the FX
                                      Forward Contracts at any time that an
                                      Event of Default occurs and is continuing.
                                      Borrower shall execute all standard form
                                      applications and agreements of Silicon in
                                      connection with the FX Forward Contracts,
                                      and without limiting any of the terms of
                                      such applications and agreements, Borrower
                                      shall pay all standard fees and charges of
                                      Silicon in connection with the FX Forward
                                      Contracts.

      4. MODIFIED INTEREST RATE. The Interest Rate set forth in Section 2 of the
Schedule to the Loan Agreement (Exim Program) is hereby amended in its entirety
to read as follows:

      INTEREST RATE (Section 1.2):

                                      A rate equal to the "Prime Rate" in effect
                                      from time to time, plus 2.25% per annum;
                                      provided, however, that the foregoing
                                      interest rate shall be reduced to a rate
                                      equal to the "Prime Rate" in effect from
                                      time to time, plus 1.75% per annum as set
                                      forth below if Borrower achieves EBITDA
                                      (as defined below) in excess of $0.00 for
                                      two consecutive fiscal quarters ending
                                      after the date of this Agreement and for
                                      so long as Borrower maintains EBITDA in
                                      excess of $0.00 for each fiscal quarter
                                      ending thereafter. If Borrower does not
                                      maintain EBITDA in excess of $0.00, the
                                      interest rate will be increased to a rate
                                      equal to the "Prime Rate" in effect from
                                      time to time plus 2.25% per annum.

                                      -3-


      SILICON VALLEY BANK                     AMENDMENT TO LOAN DOCUMENTS (EXIM)

                                      For purposes hereof, "EBITDA" means, on a
                                      consolidated basis, Borrower's earnings
                                      before interest, taxes, depreciation and
                                      other non-cash amortization expenses and
                                      other non-cash expenses, determined in
                                      accordance with generally accepted
                                      accounting principles, consistently
                                      applied.

                                      Changes in the interest rate based on the
                                      Borrower's EBITDA as provided above shall
                                      go into effect as of the first day of the
                                      month following the month in which
                                      Borrower's financial statements are
                                      received, reviewed and approved by
                                      Silicon. If, based on the Borrower's
                                      EBITDA as shown in Borrower's financial
                                      statements there is to be an increase in
                                      the interest rate, the interest rate
                                      increase may be put into effect by Silicon
                                      as of the first day of the month closest
                                      to the date on which the financial
                                      statements are due, even if the delivery
                                      of the financial statements is delayed.
                                      Notwithstanding the foregoing, in no event
                                      shall an interest rate reduction go into
                                      effect if, at the date it is to go into
                                      effect, a Default or Event of Default has
                                      occurred and is continuing.

                                      Interest shall be calculated on the basis
                                      of a 360-day year for the actual number of
                                      days elapsed. "Prime Rate" means the rate
                                      announced from time to time by Silicon as
                                      its "prime rate;" provided that the "Prime
                                      Rate" in effect on any day shall not be
                                      less than 4.25% per annum; it is a base
                                      rate upon which other rates charged by
                                      Silicon are based, and it is not
                                      necessarily the best rate available at
                                      Silicon. The interest rate applicable to
                                      the Obligations shall change on each date
                                      there is a change in the Prime Rate.

      5. MODIFIED COLLATERAL MONITORING FEE. The Collateral Monitoring Fee set
forth in Section 3 of the Schedule to the Loan Agreement (Exim Program) is
hereby amended in its entirety to read as follows:

      Collateral Monitoring Fee:      $1,250, per month, payable in arrears
                                      (prorated for any partial month at the

                                      -4-


      SILICON VALLEY BANK                     AMENDMENT TO LOAN DOCUMENTS (EXIM)

                                      beginning and at termination of this
                                      Agreement).

      6. MODIFIED MATURITY DATE. Section 4 of the Schedule to Loan and Security
Agreement (Exim Program) is hereby amended to read as follows:

         4. MATURITY DATE

          (Section 6.1):              March 23, 2007 [364 days from the date
                                      of this Amendment].

      7. MODIFIED REFERENCES TO EXIM DOCUMENTS. All references in the Loan
Agreement to a Master Guarantee Agreement shall mean that certain Master
Guarantee Agreement MA05 with an effective date of December 31, 2005. All
references in the Loan Agreement to a Delegated Authority Letter Agreement shall
mean that certain Delegated Authority Letter Agreement DA05 with an effective
date of December 31, 2005. All references in the Loan Agreement to a Loan
Authorization Agreement shall mean that certain Loan Authorization Notice of
approximate even date herewith. All references in the Loan Agreement to a
Borrower Agreement or Exim Borrower Agreement shall mean that certain Borrower
Agreement of approximate even date herewith.

      8. PROVO PREPAID (DELAWARE) CORP. AND NEEDHAM (DELAWARE) CORP. Borrower
represents and warrants that each of Provo Prepaid (Delaware) Corp. and Needham
(Delaware) Corp. is (i) a wholly-owned subsidiary of Verso Technologies, Inc.,
and (ii) is and will remain throughout the term of the Loan Agreement, inactive
with assets having an aggregate value of no more than $0.00. Borrower covenants
and agrees that while the Loan Agreement is in effect, Borrower shall not
transfer any assets or Collateral to either Provo Prepaid (Delaware) Corp. or
Needham (Delaware) Corp.

      9. FEES. In consideration for Silicon entering into this Agreement,
Borrower shall concurrently pay Silicon a fee in the amount of $115,000, which
fee shall be non-refundable and in addition to all interest and other fees
payable to Silicon under the Loan Documents. Silicon is authorized to charge
said fee to Borrower's loan account.

      10. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon that
all representations and warranties set forth in the Loan Agreement, as amended
hereby, are true and correct.

      11. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and Borrower, and the
other written documents and agreements between Silicon and Borrower set forth in
full all of the representations and agreements of the parties with respect to
the subject matter hereof and supersede all prior discussions, representations,
agreements and understandings between the parties with respect to the subject
hereof. Except as herein expressly amended, all of the terms and provisions of
the Loan Agreement, and all other documents and agreements between Silicon and
Borrower shall continue in full force and effect and the same are hereby
ratified and confirmed.

                                      -5-


      SILICON VALLEY BANK                     AMENDMENT TO LOAN DOCUMENTS (EXIM)

BORROWER:                                 SILICON:

VERSO TECHNOLOGIES, INC.                  SILICON VALLEY BANK

BY /s/ Steve Odom                         BY /s/ Peter Bendoris
   ----------------------------              ----------------------------
   Executive Chairman                     TITLE Relationship Manager - VP

BY /s/ Juliet M. Reising
   ----------------------------
   SECRETARY OR ASS'T SECRETARY

BORROWER:                                 BORROWER:

PROVO PREPAID (DELAWARE) CORP.            TELEMATE.NET SOFTWARE, INC.
(FKA NACT TELECOMMUNICATIONS, INC.)

BY /s/ Juliet M. Reising                   BY  /s/ Juliet M. Reising
   ----------------------------                --------------------------
   PRESIDENT OR VICE PRESIDENT                PRESIDENT OR VICE PRESIDENT

BY /s/ Leslie Gersack                      BY /s/ Leslie Gersack
   ----------------------------               ---------------------------
  SECRETARY OR ASS'T SECRETARY                SECRETARY OR ASS'T SECRETARY

BORROWER:

NEEDHAM (DELAWARE) CORP.
(FKA MCK COMMUNICATIONS, INC.)

BY /s/ Juliet M. Reising
   ----------------------------
   PRESIDENT OR VICE PRESIDENT

BY /s/ Leslie Gersack
   ----------------------------
   SECRETARY OR ASS'T SECRETARY

- -1

                                       -6

EX-10.117

                                                                  Exhibit 10.117

SILICON VALLEY BANK

      AMENDMENT TO LOAN DOCUMENTS

BORROWER:  VERSO TECHNOLOGIES, INC.
           PROVO PREPAID (DELAWARE) CORP.
           TELEMATE.NET SOFTWARE, INC.
           NEEDHAM (DELAWARE) CORP.

DATE:      MARCH 24, 2006

      THIS AMENDMENT TO LOAN DOCUMENTS is entered into between Silicon Valley
Bank ("Silicon") and the borrower named above ("Borrower").

      Reference is hereby made to that certain Loan and Security Agreement
between Borrower and Silicon dated December 14, 2001 (as otherwise amended, if
at all, the "Loan Agreement"). Notwithstanding the Maturity Date of March 17,
2006, since Obligations have remained outstanding, in accordance with Section
6.3 of the Loan Agreement, the Loan Agreement has continued in full force and
effect. The Parties agree to amend the Loan Agreement, as follows, effective as
of the date hereof. (Capitalized terms used but not defined in this Amendment
shall have the meanings set forth in the Loan Agreement.)

      1. MODIFIED INTEREST PROVISION. Section 9.1 of the Loan Agreement is
hereby amended to read as follows:

            9.1 INTEREST COMPUTATION. In computing interest on the Obligations,
            all checks and other items of payment received by Silicon (including
            proceeds of Receivables and payment of the Obligations in full)
            shall be deemed applied by Silicon on account of the Obligations two
            Business Days after receipt by Silicon of immediately available
            funds (except with respect to wire transfers which shall be deemed
            applied by Silicon on account of the Obligations the same Business
            Day as deemed received by Silicon), and, for purposes of the
            foregoing, any such funds received after 12:00 Noon on any day shall
            be deemed received on the next Business Day. Silicon shall not,
            however, be required to credit Borrower's account for the amount of
            any item of payment which is unsatisfactory to Silicon in its sole
            discretion, and Silicon may charge Borrower's loan account for the
            amount of any item of payment which is returned to Silicon unpaid.

      2. MODIFIED FOREIGN EXCHANGE CONTRACT SUBLIMIT. The Foreign Exchange
Contract Sublimit set forth in Section 1 of the Schedule to Loan and Security
Agreement is hereby amended to read as follows:

                                      -1-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

         FOREIGN EXCHANGE
         CONTRACT SUBLIMIT:         $500,000. The Foreign Exchange Contract
                                    Sublimit set forth in this Agreement is in
                                    addition to the Foreign Exchange Contract
                                    Sublimit set forth in the Exim Agreement.

                                      -2-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

                                    Borrower may enter into foreign exchange
                                    forward contracts with Silicon, on its
                                    standard forms, under which Borrower commits
                                    to purchase from or sell to Silicon a set
                                    amount of foreign currency more than one
                                    business day after the contract date (the
                                    "FX Forward Contracts"); provided that (1)
                                    at the time the FX Forward Contract is
                                    entered into Borrower has Loans available to
                                    it under this Agreement in an amount at
                                    least equal to 10% of the amount of the FX
                                    Forward Contract; and (2) the total FX
                                    Forward Contracts at any one time
                                    outstanding may not exceed 10 times the
                                    amount of the Foreign Exchange Contract
                                    Sublimit set forth above; and (3) the total
                                    Foreign Exchange Contract Sublimit shall
                                    not, at any time, exceed $500,000. Silicon
                                    shall have the right to withhold, from the
                                    Loans otherwise available to Borrower under
                                    this Agreement, a reserve (which shall be in
                                    addition to all other reserves) in an amount
                                    equal to 10% of the total FX Forward
                                    Contracts from time to time outstanding, and
                                    in the event at any time there are
                                    insufficient Loans available to Borrower for
                                    such reserve, Borrower shall deposit and
                                    maintain with Silicon cash collateral in an
                                    amount at all times equal to such
                                    deficiency, which shall be held as
                                    Collateral for all purposes of this
                                    Agreement. Silicon may, in its discretion,
                                    terminate the FX Forward Contracts at any
                                    time that an Event of Default occurs and is
                                    continuing. Borrower shall execute all
                                    standard form applications and agreements of
                                    Silicon in connection with the FX Forward
                                    Contracts, and without limiting any of the
                                    terms of such applications and agreements,
                                    Borrower shall pay all standard fees and
                                    charges of Silicon in connection with the FX
                                    Forward Contracts.

      3. MODIFIED INTEREST RATE. The Interest Rate set forth in Section 2 of the
Schedule to the Loan Agreement is hereby amended in its entirety to read as
follows:

         INTEREST RATE (Section 1.2):

                                      -3-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

                                    A rate equal to the "Prime Rate" in effect
                                    from time to time, plus 2.25% per annum;
                                    provided, however, that the foregoing
                                    interest rate shall be reduced to a rate
                                    equal to the "Prime Rate" in effect from
                                    time to time, plus 1.75% per annum as set
                                    forth below if Borrower achieves EBITDA (as
                                    defined below) in excess of $0.00 for two
                                    consecutive fiscal quarters ending after the
                                    date of this Agreement and for so long as
                                    Borrower maintains EBITDA in excess of $0.00
                                    for each fiscal quarter ending thereafter.
                                    If Borrower does not maintain EBITDA in
                                    excess of $0.00, the interest rate will be
                                    increased to a rate equal to the "Prime
                                    Rate" in effect from time to time plus 2.25%
                                    per annum.

                                    For purposes hereof, "EBITDA" means, on a
                                    consolidated basis, Borrower's earnings
                                    before interest, taxes, depreciation and
                                    other non-cash amortization expenses and
                                    other non-cash expenses, determined in
                                    accordance with generally accepted
                                    accounting principles, consistently applied.

                                    Changes in the interest rate based on the
                                    Borrower's EBITDA as provided above shall go
                                    into effect as of the first day of the month
                                    following the month in which Borrower's
                                    financial statements are received, reviewed
                                    and approved by Silicon. If, based on the
                                    Borrower's EBITDA as shown in Borrower's
                                    financial statements there is to be an
                                    increase in the interest rate, the interest
                                    rate increase may be put into effect by
                                    Silicon as of the first day of the month
                                    closest to the date on which the financial
                                    statements are due, even if the delivery of
                                    the financial statements is delayed.
                                    Notwithstanding the foregoing, in no event
                                    shall an interest rate reduction go into
                                    effect if, at the date it is to go into
                                    effect, a Default or Event of Default has
                                    occurred and is continuing.

                                    Interest shall be calculated on the basis of
                                    a 360-day year for the actual number of days
                                    elapsed. "Prime Rate" means the rate

                                      -4-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

                                    announced from time to time by Silicon as
                                    its "prime rate;" provided that the "Prime
                                    Rate" in effect on any day shall not be less
                                    than 4.25% per annum; it is a base rate upon
                                    which other rates charged by Silicon are
                                    based, and it is not necessarily the best
                                    rate available at Silicon. The interest rate
                                    applicable to the Obligations shall change
                                    on each date there is a change in the Prime
                                    Rate.

      4. MODIFIED COLLATERAL MONITORING FEE. The Collateral Monitoring Fee set
forth in Section 3 of the Schedule to the Loan Agreement is hereby amended in
its entirety to read as follows:

         Collateral Monitoring Fee: $1,250, per month, payable in arrears
                                    (prorated for any partial month at the
                                    beginning and at termination of this
                                    Agreement).

      5. MODIFIED UNUSED LINE FEE. The Unused Line Fee set forth in Section 3 of
the Schedule to Loan and Security Agreement is hereby amended in its entirety to
read as follows:

         Unused Line Fee:           In the event, in any calendar month (or
                                    portion thereof at the beginning and end of
                                    the term hereof), the average daily
                                    principal balance of the Non-Exim Loans and
                                    Exim Loans, in the aggregate, outstanding
                                    during the month is less than the amount of
                                    the Overall Credit Limit, Borrower shall pay
                                    Silicon an unused line fee in an amount
                                    equal to 0.375% per annum on the difference
                                    between the amount of the Overall Credit
                                    Limit and the average daily principal
                                    balance of the Non-Exim Loans and Exim
                                    Loans, in the aggregate, outstanding during
                                    the month, which unused line fee shall be
                                    computed and paid monthly, in arrears, on
                                    the first day of the following month.

      6. MODIFIED MATURITY DATE. Section 4 of the Schedule to Loan and Security
Agreement is hereby amended to read as follows:

         4. MATURITY DATE
           (Section 6.1):           March 23, 2007 [364 days from the date of
                                    this Amendment].

                                      -5-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

      7. MODIFIED MINIMUM TANGIBLE NET WORTH FINANCIAL COVENANT. The Minimum
Tangible Net Worth Financial Covenant set forth in Section 5 of the Schedule to
Loan Agreement is hereby amended and restated in its entirety to read as
follows:

         MINIMUM TANGIBLE
         NET WORTH:                 Borrower shall maintain a Tangible Net Worth
                                    of not less than the following:

                                    For the month ending February 28, 2006:
                                    $11,000,000;

                                    For the month ending March 31, 2006:
                                    $12,000,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending April 30, 2006:
                                    $9,000,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending May 31, 2006:
                                    $7,000,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending June 30, 2006:
                                    $9,000,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending July 31, 2006:
                                    $6,000,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending August 31, 2006:
                                    $4,000,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending September 30, 2006:
                                    $6,000,000 plus 65% of all consideration

                                      -6-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending October 31, 2006:
                                    $2,500,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending November 30, 2006:
                                    $1,500,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending December 31, 2006:
                                    $3,500,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending January 31, 2007:
                                    $400,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower;

                                    For the month ending February 28, 2007:
                                    <$1,500,000> plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower; and

                                    For the month ending March 31, 2007:
                                    $1,000,000 plus 65% of all consideration
                                    received after March 1, 2006 for equity
                                    securities and subordinated debt of the
                                    Borrower.

                                    Increases in the Minimum Tangible Net Worth
                                    Covenant based on consideration received for
                                    equity securities and subordinated debt of
                                    the Borrower shall be effective as of the
                                    end of the month in which such consideration
                                    is received, and shall continue effective
                                    thereafter.

                                      -7-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

      8. PROVO PREPAID (DELAWARE) CORP. AND NEEDHAM (DELAWARE) CORP. Borrower
represents and warrants that each of Provo Prepaid (Delaware) Corp. and Needham
(Delaware) Corp. is (i) a wholly-owned subsidiary of Verso Technologies, Inc.,
and (ii) is and will remain throughout the term of the Loan Agreement, inactive
with assets having an aggregate value of no more than $0.00. Borrower covenants
and agrees that while the Loan Agreement is in effect, Borrower shall not
transfer any assets or Collateral to either Provo Prepaid (Delaware) Corp. or
Needham (Delaware) Corp.

      9. FEES. In consideration for Silicon entering into this Agreement,
Borrower shall concurrently pay Silicon a fee in the amount of $20,000, which
fee shall be non-refundable and in addition to all interest and other fees
payable to Silicon under the Loan Documents. Silicon is authorized to charge
said fee to Borrower's loan account.

      10. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon that
all representations and warranties set forth in the Loan Agreement, as amended
hereby, are true and correct.

      11. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and Borrower, and the
other written documents and agreements between Silicon and Borrower set forth in
full all of the representations and agreements of the parties with respect to
the subject matter hereof and supersede all prior discussions, representations,
agreements and understandings between the parties with respect to the subject
hereof. Except as herein expressly amended, all of the terms and provisions of
the Loan Agreement, and all other documents and agreements between Silicon and
Borrower shall continue in full force and effect and the same are hereby
ratified and confirmed.

BORROWER:                                   SILICON:

VERSO TECHNOLOGIES, INC.                    SILICON VALLEY BANK

BY /s/ Steve Odom                           BY /s/ Peter Bendoris
   ------------------------------              ----------------------------
     PRESIDENT OR VICE PRESIDENT
                                            TITLE Relationship Manager - VP

BY /s/ Juliet M. Reising
   ------------------------------
     SECRETARY OR ASS'T SECRETARY

                                      -8-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

BORROWER:                                   BORROWER:

PROVO PREPAID (DELAWARE) CORP. (FKA NACT    TELEMATE.NET SOFTWARE, INC.
TELECOMMUNICATIONS, INC.)

BY /s/ Juliet M. Reising                    BY /s/ Juliet M. Reising
   ---------------------------------           --------------------------------
     PRESIDENT OR VICE PRESIDENT                  PRESIDENT OR VICE PRESIDENT

BY /s/ Leslie Gersack                       BY /s/ Leslie Gersack
   ---------------------------------           --------------------------------
     SECRETARY OR ASS'T SECRETARY                 SECRETARY OR ASS'T SECRETARY

BORROWER:

NEEDHAM (DELAWARE) CORP. (FKA
MCK COMMUNICATIONS, INC.)

BY /s/ Juliet M. Reising
   ---------------------------------
     PRESIDENT OR VICE PRESIDENT

BY /s/ Leslie Gersack
   ---------------------------------
   SECRETARY OR ASS'T SECRETARY

- -1

                                      -9-


         SILICON VALLEY BANK                         AMENDMENT TO LOAN DOCUMENTS

                                     CONSENT

      The undersigned acknowledges that its consent to the foregoing Agreement
is not required, but the undersigned nevertheless does hereby consent to the
foregoing Agreement and to the documents and agreements referred to therein and
to all future modifications and amendments thereto, and any termination thereof,
and to any and all other present and future documents and agreements between or
among the foregoing parties. Nothing herein shall in any way limit any of the
terms or provisions of the Cross-Corporate Continuing Guaranty of the
undersigned, all of which are hereby ratified and affirmed.

VERSO CANADA LTD.

BY /s/ Juliet M. Reising
   ---------------------------------
TITLE Vice President

- -1

                                      -10-

EX-21.1

                                                                    EXHIBIT 21.1


                    SUBSIDIARIES OF VERSO TECHNOLOGIES, INC.


Name                                                          State of Formation
- ----                                                          ------------------

Verso Technologies Canada Inc., formerly                      Quebec, Canada
Clarent Canada Ltd.

Eltrax International, Inc.                                    Pennsylvania

Needham (Delaware) Corp., formerly known as                   Delaware
MCK Communications, Inc.

Provo Prepaid (Delaware) Corp., formerly known as             Delaware
NACT Communications, Inc.

Telemate.Net Software, Inc.                                   Georgia

EX-23.1

                                                                    Exhibit 23.1



            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



We have issued our report dated March 3, 2006 accompanying the consolidated
financial statements of Verso Technologies, Inc. and subsidiaries appearing in
the 2005 Annual Report of the Company to its shareholders and accompanying the
schedules included in the Annual Report on Form 10-K for the years ended
December 31, 2005 and 2004. We hereby consent to the incorporation by reference
of said reports in the Registration Statements of Verso Technologies, Inc. on
Forms S-8, file numbers 333-74258, 333-74264, 333-59372, 333-92337, 333-85107,
333-80501, 333-26015, 333-124037 and 333-124038 and Forms S-3, file numbers
333-66292, 333-45028, 333-108613, 333-113759 and 333-123591.

/s/ Grant Thornton LLP

Atlanta, Georgia
March 31, 2006

EX-23.2

                                                                    EXHIBIT 23.2



            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Verso Technologies, Inc.:

We consent to the incorporation by reference in the registration statements
(Nos. 333-74258, 333-74264, 333-59372, 333-92337, 333-85107, 333-80501,
333-26015, 333-124037 and 333-124038) on Form S-8 and (Nos. 333-66292,
333-45028, 333-108613, 333-113759 and 333-123591) on Form S-3 of Verso
Technologies, Inc. of our report dated February 27, 2004, except as to note 5
which is as of March 16, 2005, with respect to the consolidated statements of
operations, shareholders' equity and cash flows of Verso Technologies, Inc. and
subsidiaries for the year ended December 31, 2003 and the related financial
statement schedule, which reports appear in the December 31, 2005 annual report
on Form 10-K of Verso Technologies, Inc.


/s/ KPMG LLP

Atlanta, Georgia
March 30, 2006

EX-31.1

                                                                    Exhibit 31.1

                     Rule 13a-14(a)/15d-14(a) Certification

I, Montgomery L. Bannerman, certify that:

     1.   I have reviewed this Annual Report on Form 10-K for the year ended
          December 31, 2005 of Verso Technologies, Inc.;

     2.   Based on my knowledge, this report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this 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
          report;

     4.   The registrant's other certifying officer(s) and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
          registrant and have:

               (a) Designed such disclosure controls and procedures, or caused
               such disclosure controls and procedures to be designed under our
               supervision, 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 report is being prepared;

               (b) Evaluated the effectiveness of the registrant's disclosure
               controls and procedures and presented in this report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               report based on such evaluation; and

               (c) Disclosed in this report any change in the registrant's
               internal control over financial reporting that occurred during
               the registrant's most recent fiscal quarter (the registrant's
               fourth fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonably likely to materially
               affect, the registrant's internal control over financial
               reporting; and

     5.   The registrant's other certifying officer(s) and I have disclosed,
          based on our most recent evaluation of internal control over financial
          reporting, to the registrant's auditors and the audit committee of the
          registrant's board of directors (or persons performing the equivalent
          functions):

               (a) All significant deficiencies and material weaknesses in the
               design or operation of internal control over financial reporting
               which are reasonably likely to adversely affect the registrant's
               ability to record, process, summarize and report financial
               information; and


               (b) Any fraud, whether or not material, that involves management
               or other employees who have a significant role in the
               registrant's internal control over financial reporting.

Date:  March 31, 2006

                                             /s/Montgomery L. Bannerman
                                             -----------------------------------
                                             Montgomery L. Bannerman,
                                             Chief Executive Officer

EX-31.2

                                                                    Exhibit 31.2

                     Rule 13a-14(a)/15d-14(a) Certification

I, Juliet M. Reising, certify that:

     1.   I have reviewed this Annual Report on Form 10-K for the year ended
          December 31, 2005 of Verso Technologies, Inc.;

     2.   Based on my knowledge, this report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this 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
          report;

     4.   The registrant's other certifying officer(s) and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
          registrant and have:

               (a) Designed such disclosure controls and procedures, or caused
               such disclosure controls and procedures to be designed under our
               supervision, 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 report is being prepared;

               (b) Evaluated the effectiveness of the registrant's disclosure
               controls and procedures and presented in this report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               report based on such evaluation; and

               (c) Disclosed in this report any change in the registrant's
               internal control over financial reporting that occurred during
               the registrant's most recent fiscal quarter (the registrant's
               fourth fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonably likely to materially
               affect, the registrant's internal control over financial
               reporting; and

     5.   The registrant's other certifying officer(s) and I have disclosed,
          based on our most recent evaluation of internal control over financial
          reporting, to the registrant's auditors and the audit committee of the
          registrant's board of directors (or persons performing the equivalent
          functions):

               (a) All significant deficiencies and material weaknesses in the
               design or operation of internal control over financial reporting
               which are reasonably likely to adversely affect the registrant's
               ability to record, process, summarize and report financial
               information; and

               (b) Any fraud, whether or not material, that involves management
               or other employees who have a significant role in the
               registrant's internal control over financial reporting.

Date:  March 31, 2006

                                             /s/Juliet M. Reising
                                             -----------------------------------
                                             Juliet M. Reising,
                                             Executive Vice President and
                                             Chief Financial Officer

EX-32.1

                                                                    Exhibit 32.1


                           SECTION 1350 CERTIFICATION


I, Montgomery L. Bannerman, Chief Executive Officer of Verso Technologies, Inc.
(the "Company"), do hereby certify in accordance with 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my
knowledge:

     1.   The Annual Report on Form 10-K of the Company for the period ended
          December 31, 2005 (the "Periodic Report") fully complies with the
          requirements of section 13(a) or 15(d) of the Securities Exchange Act
          of 1934 (15 U.S.C. Sections 78m or 78o(d)); and

     2.   The information contained in the Periodic Report fairly presents, in
          all material respects, the financial condition and results of
          operations of the Company.

Dated:  March 31, 2006

                                             /s/Montgomery L. Bannerman
                                             -----------------------------------
                                             Montgomery L. Bannerman,
                                             Chief Executive Officer

EX-32.2

                                                                    Exhibit 32.2


                           SECTION 1350 CERTIFICATION


I, Juliet M. Reising, Executive Vice President and Chief Financial Officer of
Verso Technologies, Inc. (the "Company"), do hereby certify in accordance with
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:

     1.   The Annual Report on Form 10-K of the Company for the period ended
          December 31, 2005 (the "Periodic Report") fully complies with the
          requirements of section 13(a) or 15(d) of the Securities Exchange Act
          of 1934 (15 U.S.C. Sections 78m or 78o(d)); and

     2.   The information contained in the Periodic Report fairly presents, in
          all material respects, the financial condition and results of
          operations of the Company.

Dated:  March 31, 2006

                                             /s/Juliet M. Reising
                                             -----------------------------------
                                             Juliet M. Reising,
                                             Executive Vice President and
                                             Chief Financial Officer