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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

Commission File Number 0-22190

Verso Technologies, Inc.

400 Galleria Parkway

678-589-3750

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 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.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes o          No þ

      The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed at $0.50 per share, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 28, 2002), was $38,457,557.

      As of March 31, 2003, 89,681,515 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

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PART I

Note Regarding Forward-Looking Statements

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

      Each forward-looking statement reflects our current view of future events and is subject to risks, uncertainties and other factors that could cause actual results to differ materially from any results expressed or implied by our forward-looking statements. Important factors that could cause actual results to differ materially from the results expressed or implied by any forward-looking statements include: our ability to fund future growth; our ability to become profitable; the volatility of the price of our common stock, par value $0.01 per share (the “Common Stock”); the low price of our Common Stock; the low trading volume for our Common Stock; general economic conditions of the telecommunications market; market demand for and market acceptance of our products; legal claims against us; our ability to protect our intellectual property rights; defects in our products; our current level of indebtedness; new regulation and legislation; the effects of our accounting policies and general changes in generally accepted accounting practices; general economic and business conditions; other risks and uncertainties included in the section of this Annual Report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors”; and other factors disclosed in our other filings made with the Securities and Exchange Commission (the “SEC”).

      All subsequent 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 (herein referred to as the “Company” or “we”), 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. Additionally, the Company provides a turn-key solution for telecommunications carriers that wish to migrate from a legacy circuit-based network to a next-generation, packet-based network.

      The Company’s headquarters is located at 400 Galleria Parkway, Suite 300, 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 ongoing, strategic business units consist of the Company’s Carrier Solutions Group, formerly known as the Gateway Solutions business, and the Company’s Enterprise Solutions Group, formerly known as the Applications and Services business, which units are both described below.

Carrier Solutions Group

      During fiscal year 2002, the Company’s Carrier Solutions Group consisted of the operations of the Company’s switching subsidiary, NACT Telecommunications, Inc. (“NACT”). NACT is a manufacturer of

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      Beginning the first quarter of 2003, the Company’s Carrier Solutions Group will also include the Company’s softswitch operations which the Company acquired on February 12, 2003, when it purchased substantially all of the business assets, and assumed certain liabilities related thereto, of Clarent Corporation (“Clarent”), a provider of VoIP solutions for next generation networks and convergent enterprise solutions (the “Clarent Asset Purchase”). Pursuant to the Clarent Asset Purchase, the Company acquired from Clarent its softswitch products, which provide software-driven VoIP solutions for wholesale transport and termination of voice traffic over global Internet protocol (“IP”) networks, and its enterprise products, which offer voice and data convergence solutions for businesses that wish to integrate traffic over a variety of corporate wide area network (“WAN”) infrastructures.

      For the fiscal year ended December 31, 2002, the Company’s revenue from the Carrier Solutions Group was $26.3 million, or 59%, of the Company’s consolidated revenue. Summarized financial information for the Company’s Carrier Solutions Group is set forth in Note 15 to the Company’s consolidated financial statements included elsewhere in this Annual Report.

     NACT Products and Services

      The Company’s turn-key solutions provide an integrated communications server, media gateway and applications server that are bundled with Class 4 applications targeted at service providers seeking a turn-key, pre-paid telecommunications solution. The Company’s “pay as you grow” platform provides a complete, digital Class 4 switch capable of scaling from 48 ports per switch for small emerging service providers up to 9600 ports per switch for more established providers.

      NACT’s IPAX family of Class 4 Tandem Digital Gateway Switches provides protocol support for T1, E1, Integrated Services Digital Network, Signaling System 7 (“SS7”), C7 and VoIP. The IPAX and Pico IPAX switches offer the same functionality but differ only in number of ports, chassis size and, therefore, price. The IPAX product functionality includes the most popular Class 4 applications such as long distance, toll-free and calling card applications, providing comprehensive and feature rich revenue-generating services over a low cost IP-based network infrastructure.

      The Company’s provisioning and billing platform supports multi-transport billing, allowing a company’s customer to receive one bill for all services, regardless of whether such customer’s calls were transported via the PSTN or over an IP-based network. Additionally, the Company provides a graphical user interface to support fast, efficient and intuitive provisioning of new services and users over the web. The platform supports comprehensive international functionality, including support for 95% of the world’s languages, simultaneous multiple currencies and numbering plans. Finally, the platform may be customized to support the customer’s unique billing and reporting needs.

     Clarent Softswitch Products and Services

      The Clarent PSTN Access Softswitch solution provides a software-driven VoIP solution for wholesale transport and termination of voice traffic over global IP networks. Additionally, the Clarent PSTN Access Softswitch solution can also support retail pre-paid and post-paid calling card applications and minutes exchange (IP clearing house) across hundreds of IP networks around the world. At the core, the Clarent PSTN Access Softswitch solution consists of the Clarent Command Center, the Clarent Class 4 Call Manager software, the Clarent Element Management Systems and Clarent media gateways. For advanced functionality, other elements may be added, including connectivity to SS7 networks and partner IP networks. Service providers who have deployed the Clarent PSTN Access Softswitch solution can leverage the common underlying platform to integrate with the Clarent Edge Access Softswitch for the delivery of managed services for the enterprise ranging from simple hosted network services for WAN trunking to converged voice and data

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Enterprise Solutions Group

      During fiscal year 2002, the Company’s Enterprise Solutions Group consisted of the operations of the Company’s customer response center services as well as the operations of the Company’s Telemate.Net Software, Inc. (“Telemate.Net”) subsidiary, which the Company acquired in a merger transaction in November 2001. For the year ended December 31, 2002, revenue from the Company’s Enterprise Solutions Group was $18.5 million, or 41%, of the Company’s consolidated revenue. Summarized financial information for the Company’s Enterprise Solutions Group is set forth in Note 15 to the Company’s consolidated financial statements included elsewhere in this Annual Report. Beginning in the first quarter of 2003, the Company’s Enterprise Solutions Group will also include the operations from Clarent’s enterprise group.

     Customer Response Center Services

      The Company’s support team delivers technical customer response center services for a customer’s network engineers, operational support team and end-users. Based on the customer’s specific business goals, the Company’s flexible and cost-effective programs can be designed to support a variety of technical needs, from short-term system or software upgrades to long-term outsourcing and ongoing product support. The Company’s support team receives and responds to technical inquiries so that the Company’s customers have more time to focus on their day to day businesses and on the satisfaction of their own customers.

      The Company’s technical support services include 7 x 24 help desk outsourcing, Tier I, II and III product support, in-sourcing, on-site deployment services, hardware and software training, and project management resources.

     Call Accounting Solution and IP-based Usage Management

      The Company’s Telemate.Net subsidiary provides telephone usage reporting that allows businesses to improve productivity, optimize trunk resources, prevent telephone call abuse, and allocate and recover telecommunications costs. The Call Accounting Solution offered by Telemate.Net collects call detail information from Private Branch Exchanges (“PBX”) and formats that information into reports.

      The Company’s Telemate.Net subsidiary also offers products that provide complete Internet access management, combining uniform resource locator filtering with comprehensive reporting. These products enable entities such as corporations, school systems, and government agencies, to enforce compliance with their Internet usage policies, manage and plan Internet bandwidth usage, and promote productive and effective use of the Internet by users of their networks. The Internet access management line of products consists of the NetSpective Reporter and WebFilter.

     Clarent Enterprise Solutions

      Clarent NetPerformer integrates voice and data capabilities into a single unified platform for businesses seeking to lower communications costs by using compressed voice and data over efficient packetized networks. The Clarent NetPerformer product family models provide telephony interfaces in densities that accommodate enterprise sizes from large headquarter installations to small, remote offices. Clarent NetPerformer can converge voice and data over leased or switched lines, frame relay, Asynchronous Transfer Mode, Integrated Services Digital Network, satellite, and IP/Ethernet circuits. The NetPerformer product line creates a unified network that interconnects distributed offices with disparate technologies, as well as allows users access to applications such as global voicemail, unified messaging, instant teleconferencing and data-empowered platforms that only IP can provide.

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Customers

      For fiscal year 2002, the Company’s primary base of customers consisted of emerging domestic and international long-distance providers, particularly those service providers seeking to implement a turn-key, pre-paid solution. These customers are buyers of NACT’s family of IPAX Class 4 Tandem switches and telecommunications provisioning and billing systems. To date, the Company has installed over 500 of NACT’s intelligent gateways for more than 400 customers.

      Currently, the Company services over 21,000 end-users through the Company’s customer response center services. The Company’s largest client of these services is Six Continents PLC, which has been a customer of the Company since 1992.

      Through the Company’s Telemate.Net subsidiary, the Company has recorded to date more than 14,000 installations of its call accounting and IP-based usage management solutions whereby approximately 4,000 customers are using Telemate.Net software to manage communications cost and network efficiency. Typical end-user customers of the Company’s Telemate.Net solutions are domestic commercial enterprises or government agencies with 100 to 10,000 employees.

      The assets and associated business purchased by the Company pursuant to the Clarent Asset Purchase are expected to attract additional customers to the Company in fiscal year 2003, including service providers, system integrators, resellers and enterprises seeking to implement a converged communications solution. The Clarent customer base has historically been primarily international customers and has included traditional local international and wholesale long distance telecommunications companies, as well as next-generation service providers, including Internet Service Providers (“ISPs”), Application Service Providers (“ASPs”), web-to-phone providers and others employing Internet-based business models.

      For the years ended December 31, 2002, and December 31, 2001, Six Continents PLC and Telco Group, Inc. were the Company’s only customers that accounted for more than 10% of the Company’s consolidated revenue. The revenue from Six Continents PLC represented approximately 15% and 24% of the Company’s consolidated revenues for the years ended December 31, 2002, and December 31, 2001, respectively. The revenue from Telco Group, Inc. represented approximately 12% and 10% of the Company’s consolidated revenue for the years ended December 31, 2002, and December 31, 2001, respectively.

Sales and Marketing

      The Company’s 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. Historically, sales of Clarent products and services have primarily been sold through distributors, and the Company expects this trend to continue. During fiscal year 2002, the Company sold its services primarily through a direct sales force of 22 individuals located in Provo, Utah, Atlanta, Georgia and the United Kingdom and, as a result of the Clarent Asset Purchase on February 12, 2003, added 15 people to its direct sales force located in the United States, the United Kingdom, France, Italy and Dubai.

Competition

     Carrier Solutions 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 solution

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     Enterprise Solutions Group

      In the market for the Company’s call accounting solutions, the Company competes with a number of similar-sized companies, such as IntegraTrak, MicroTel International, Inc., and Veramark Technologies, Inc., that provide enterprise communication network usage accounting and billing. In the market for Internet usage reporting and access management, the Company competes with providers of Internet filtering software, such as WebTrends Corporation, Elron Electronic Industries, Inc., SurfControl PLC, Websense, Inc., Symantec Corporation and Secure Computing Corporation.

      The Company’s customer response center services compete with those of companies that provide integrated, multi-channel customer contact centers, including APAC Customer Services, Inc., ClientLogic Corporation, Convergys Corporation and SITEL Corporation. The Company also faces competition from a customer’s own in-house information technology staff.

      The Company’s Clarent enterprise products compete with a number of communications solutions providers including Cisco Systems, Inc., Nortel Networks, Ltd., Motorola Inc., Alcatel and Hughes Electronics Corporation.

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 is 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. 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 database 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 network 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, 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.

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      On February 12, 2003, pursuant to the Clarent Asset Purchase, the Company acquired U.S. Patent Nos. 6,167,060 and 6,477,164, which were issued to Clarent on December 26, 2000 and November 5, 2002, respectively. The patents cover technology developed by Clarent for real-time voice and data transmissions over an Internet network and a dynamic error correction algorithm for Internet telephones.

      The Company also has several patent applications pending relating to its VoIP product and to certain products the Company acquired from Clarent pursuant to the Clarent Asset Purchase.

Research and Development

      The Company’s research and development expenses in 2002 were primarily related to the research and development initiatives associated with the development of NACT’s VoIP migration solution as well as for the initial development of a pre-paid wireless solution. Additionally, the Company invested in additional unique feature functionality for the Telemate.Net Webfilter product. These expenses totaled $5.9 million for the year ended December 31, 2002. The Company expects that further research and development expenses will relate to subsequent product enhancements, the development of additional features and functionality, and research and development associated with the newly-purchased Clarent products.

Employees

      As of March 15, 2003, the Company had 382 employees, 172 of whom are located at the Company’s headquarters in Atlanta, Georgia, 102 of whom are located at the Company’s NACT subsidiary in Provo, Utah, 47 of whom are located at the Company’s Clarent operations in Littleton, Colorado, and 49 of whom are located at the Company’s Clarent operations in Montreal, Canada, and 12 international Clarent sales support individuals located in France, Belgium, India, Italy, Germany and the United Kingdom.

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 Carrier Solutions Group and its Enterprise Solutions Group. During the last five years, the Company’s business developed as described below.

      In 1997, the Company made five acquisitions, adding service offerings in the data communications business. Also during 1997, the Company began focusing its efforts on its end-user network systems business, as well as on its entry into the network monitoring and management business.

      In 1998, the Company acquired Encore Systems, Inc., Global Systems and Support, Inc. and Five Star Systems, Inc. (collectively, the “Encore Group”). At the time of such acquisition, the Encore Group provided software and technology services to the hospitality industry, including industry leading customer response center services. The customer response center services remain part of the Company’s ongoing business.

      In 1999, the Company merged with Sulcus Hospitality Technologies Corp. (“Sulcus”). Sulcus developed, manufactured, marketed and installed computerized systems primarily intended to automate hospitality industry property management systems and the Squirrel point-of-sale system for the restaurant industry. Also in 1999, the Company merged with Windward Technology Group, Inc. (“Windward”). Windward focused on providing networking and network management services to the application development market.

      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 Sulcus and the Encore Group, with the exception of the Company’s customer response center services.

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      In September 2000, the Company acquired Cereus Technology Partners, Inc. (“Cereus”) in a merger transaction. Cereus provided end-to-end e-business and B2B technology solutions, including ebusiness strategy, network consulting and hosting and application integration. In connection with the acquisition of Cereus, the Company changed its name to “Verso Technologies, Inc.” and put in place the Company’s current executive management team and all but one of the directors currently serving on the Board.

      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 ASP. 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.

      The Company’s acquisition of NACT in July 2001 was the Company’s first significant investment in the area of next generation communications. 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 November 16, 2001, the Company acquired Telemate.Net in a merger transaction, 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; $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 also contributed to the joint venture certain next-generation communication equipment and software valued at approximately $236,000 and $50,000 cash. Additionally, the Company contributed $25,000 on December 30, 2002 and 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 will be recorded as an equity investment rather than consolidated in the Company’s results.

      On February 12, 2003, the Company consummated the Clarent Asset Purchase for a purchase price of $9.8 million in notes. The assets purchased from Clarent pursuant to the Clarent Asset Purchase 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.

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Item 2.     Properties

      The Company is headquartered in Atlanta, Georgia, where the Company currently leases 45,000 square feet of space, which is used for the Company’s corporate offices and certain components of the Company’s Enterprise Solutions Group, including the Telemate.Net operations and the Company’s customer response center services operations. The Company is obligated to pay rent on this space of approximately $110,000 per month, plus a share of operating expenses, through February 2010. Additionally, the Company is also obligated through February 2010 to pay rent of $29,000 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 is actively pursuing a sublease on the additional space.

      The Company also leases approximately 40,000 square feet of office space in Provo, Utah, which is used for the Company’s NACT operations, a component of the Company’s Carrier Solutions Group. Pursuant to the lease, the Company is obligated to pay rent of approximately $46,000 per month through December 2009.

      In connection with the Clarent Asset Purchase, the Company assumed two leases for real property located in Quebec, Canada. Pursuant to the 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 Clarent enterprise solutions, a component of the Company’s Enterprise Solutions Group. The Company is obligated to pay rent of approximately $22,000 per month through October 2003 and approximately $10,400 per month from November 2003 through the termination of the lease in October 2006. Subsequent to the Clarent Asset Purchase, the Company assigned the second lease to Clarent Canada Ltd., a wholly-owned subsidiary of the Company which the Company acquired in the Clarent Asset Purchase (“Clarent Canada”). Pursuant to the second lease, Clarent Canada leases approximately 10,000 square feet of office, warehouse and storage space for commercial and manufacturing purposes also related to the Company’s Clarent enterprise solutions. Clarent Canada is obligated to pay $2,900 per month, plus a share of operating expenses, until the lease terminates in May 2007.

      In connection with the Clarent Asset Purchase, 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 activities related to the Company’s Clarent softswitch products and services, a component of the Company’s Carrier Solutions Group. Pursuant to this lease, the Company is obligated to pay rent of approximately $31,000 per month, plus a share of operating expenses, until the lease terminates in January 2006.

      The Company is also obligated on leases in a number of other locations in North America through 2004, which are included in its discontinued operations. The Company has either subleased or is actively attempting to sublease these locations.

      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, taken together, are not expected to have a material adverse impact on the Company’s results of operations or financial condition.

      In addition, certain proceedings against the Company have been resolved as discussed below.

      On or about February 8, 2002, William P. O’Reilly, a former executive officer and director of the Company; Montana Corporation, Mr. O’Reilly’s consulting company; Clunet R. Lewis, a former officer of the Company; and CLR Enterprises, Inc., Mr. Lewis’ consulting company, filed with the American Arbitration Association (“AAA”) a demand for arbitration against the Company. Messrs. O’Reilly and Lewis and their respective consulting companies sought to have enforced the Consulting Agreements dated April 1, 1999, as amended, to which they and the Company are parties (together, the “Consulting Agreements”). Messrs. O’Reilly and Lewis claimed that the Company’s attempt by written notice dated June 1, 2001, to

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      On or about April 29, 2002, Omni Systems of Georgia, Inc. (“Omni”) and Joseph T. Dyer (“Dyer”) filed with the AAA a demand for arbitration against the Company and Eltrax International, Inc., a wholly-owned subsidiary of the Company (“Eltrax International”). Omni and Dyer claimed that the Company and Eltrax International breached that certain Assignment dated as of August 31, 1998, among Eltrax International, Dyer and Omni, which was executed in connection with the Company’s acquisition of the Encore Group (the “Assignment”). Pursuant to the Assignment, Omni and Dyer assigned and transferred to Eltrax International all of their right, title and interest in and to a certain computer software property management system in exchange for a one-time payment. The Assignment also provided for an earn-out component of the acquisition consisting of certain contingent monthly payments equal to a percentage of the maintenance and licensing net revenues received by Eltrax International with respect to a certain contract. Omni and Dyer claimed that the Company and Eltrax International had not paid to Omni and Dyer the contingent monthly payments owned to them pursuant to the Assignment beginning in June 2002. Omni and Dyer sought recovery of over $400,000 for contingent monthly payments alledgedly owned for the period from May 15, 2002 through January 2003, plus payments in like amounts going forward, together with interest thereon, attorneys’ fees and expenses. In January 2003, the matter was heard for six days by a three-arbitrator panel of the AAA. On April 1, 2003, the Company received notice that the AAA panel awarded to Omni and Dyer (i) payments and interest thereon with respect to the Assignment in the aggregate amount of approximately $506,000; and (ii) attorneys’ fee and expenses, excluding expenses of the AAA, in the aggregate amount of approximately $199,000 (net of attorneys’ fees and expenses awarded to the Company), which amounts are to be paid by Eltrax International (and not the Company) no later than April 30, 2003. Additionally, the AAA panel determined that Eltrax International (and not the Company) will be liable for future payments as they become due in accordance with the terms of the Assignment.

      On or about May 21, 2001, John M. Good, a former employee of the Company, filed a lawsuit in the Court of Common Pleas, Cuyahoga County, Ohio, against the Company claiming, among other things, fraud, negligence, securities fraud, breach of contract, conversion and damages resulting from and related to the Company’s alleged failure to deliver, on or about January 3, 2000, 50,000 shares of Common Stock to Mr. Good upon his exercise of an option to purchase such shares. The matter was set for jury trial on February 17, 2003. Based upon the Company’s anticipated exposure and the expected cost of litigation, on January 16, 2003, the Company and Mr. Good reached an agreement to settle all claims against the Company, which settlement had no material impact on the Company’s consolidated financial statements included elsewhere in this Annual Report.

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

      The Annual Meeting of Shareholders of the Company was held on December 5, 2002, in Atlanta, Georgia (the “Meeting”). At the Meeting, the shareholders of the Company voted on a proposal to 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. The results of such vote were as follows:

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

      The foregoing proposal was set forth and described in the Notice of Annual Meeting of Shareholders and Proxy Statement of the Company dated November 7, 2002.

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 15, 2003, of such officer:

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

      Steven A. Odom, age 49, has served as the Chief Executive Officer and a director of the Company since September 2000 and as the Chairman of the Board since December 2000. 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 Chairman of the Board and Chief Executive Officer of World Access, Inc., a provider of voice, data and Internet products and services around the world (“World Access”). Mr. Odom served as Chairman of World Access from June 1998 until June 1999. He served as Chief Executive Officer of World Access from 1994 until 1998. 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 the founder, Chairman and Chief Executive Officer of Data Contract Company, Inc., a manufacturer of telephone switching equipment and intelligent pay telephones. 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.

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      James M. Logsdon, age 56, has served as President, Chief Operating Officer and a director of the Company since September 2000. From January 2000 to September 2000, Mr. Logsdon also served as President, Chief Operating Officer and a director of Cereus. From January 1998 to January 2000, Mr. Logsdon served as Vice President and General Manager of Branch Operations — East for the Network Services division of GTE Corporation, a global telecommunications company. From January 1991 to December 1997, he served as GTE’s Vice President, Sales & Marketing — Commercial Markets.

      Juliet M. Reising, age 52, has served as Executive Vice President, Chief Financial Officer, Secretary, Treasurer and a director of the Company since September 2000. Ms. Reising also served as the 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. From September 1998 to February 1999, Ms. Reising served as Chief Financial Officer of AvData, Inc., a network management services company acquired by ITC DeltaCom, Inc. in 1999. From September 1997 to September 1998, Ms. Reising served as Vice President and Chief Financial Officer for Composit Communications International, Inc., an international software development company. From August 1995 to September 1997, Ms. Reising served as Vice President and Chief Financial Officer of InterServ Services Corporation, which was merged with Aegis Communications, Inc. in 1997. Ms. Reising started her career with Ernst & Young LLP in Atlanta, Georgia, where she received her certified public accountant license.

      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 the section of this Annual Report titled “Executive Compensation — Employment Agreements,” 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 and Related Stockholder Matters

      The Common Stock is currently traded on the Nasdaq SmallCap 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 SmallCap 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 Stock

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      As of March 15, 2003, there were approximately 1,772 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 in the foreseeable future. In addition, the Company’s credit facility with Silicon Valley Bank, the Company’s primary lender (“Silicon”), prohibits the payment of cash dividends on the Common Stock without Silicon’s prior written consent.

      In connection with amending the Company’s existing credit facility with Silicon, on February 12, 2003, the Company issued to Silicon a warrant to purchase 350,000 shares of Common Stock. The warrant may be exercised with respect to all of the underlying shares of Common Stock at any time from February 12, 2003, until February 12, 2008, at an exercise price of $0.44 per share of Common Stock. The number of shares of Common Stock underlying the warrant and the exercise price of the warrant are subject to certain adjustments described in the warrant and that certain Antidilution Agreement, dated as of February 12, 2003, between the Company and Silicon. The shares of Common Stock underlying the warrant are entitled to certain “piggy back” registration rights as set forth in that certain Registration Rights Agreement, dated as of February 12, 2003, between the Company and Silicon. The warrant issued to Silicon was issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption from registration set forth in Regulation D promulgated pursuant to Section 4(2) of the Securities Act (“Regulation D”). The Company based such reliance upon factual representations made to the Company by Silicon as to Silicon’s investment intent, sophistication, and status as an “accredited investor,” as that term is defined in Rule 501 of Regulation D, among other things.

      In connection with a private placement offering of securities conducted by the Company in October 2002, the Company sold and issued an aggregate of 9,646,303 Units of the Company’s securities, with each “Unit” consisting of one share of Common Stock and one warrant to purchase one share of Common Stock for an aggregate offering price of $3.0 million. The warrants issued in connection with the offering are immediately exercisable over a five-year period at an exercise price of $0.311 per share and are callable by the Company at any time after the closing price of the Common Stock as reported by the Nasdaq Stock Market equals or exceeds $1.20 per share for ten consecutive trading days and a registration statement permitting the resale of the shares underlying the warrants is then in effect. The shares of Common Stock underlying the warrants are entitled to certain “piggyback” registration rights as set forth in that certain form of Registration Rights Agreement entered into by the Company and each purchaser of a Unit. The Units were issued without registration under the Securities Act, in reliance upon the exemptions from registration set forth in Section 4(2) of the Securities Act and Regulation D. The Company based such reliance upon factual representations made to the Company by the purchasers of the Units as to such purchasers’ investment intent, sophistication, and status as an accredited investor, among other things.

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      Pursuant to the terms of the Arbitration Award Agreements executed as part of a settlement of claims made by Mr. Lewis and Mr. O’Reilly against the Company, on February 4, 2003, the Company issued 275,000 shares of restricted Common Stock to each of Mr. Lewis and Mr. O’Reilly. The shares issued under the Arbitration Award Agreements and to be issued under the New Consulting Agreements constitute full satisfaction of the award granted by an AAA arbitrator to Mr. O’Reilly and Mr. Lewis of $250,000 and $240,000, respectively, and attorneys’ fees and expenses of $22,000. The shares of restricted Common Stock are entitled to certain “piggy back” registration rights as set forth in the Arbitration Award Agreements. The shares of restricted Common Stock were issued without registration under the Securities Act, in reliance upon the exemptions from the registration set forth in Section 4(2) of the Securities Act and Regulation D. The Company based such reliance upon factual representations made to the Company by each of Mr. Lewis and Mr. O’Reilly as to their investment intent, sophistication, and status as an accredited investor, among other things.

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.

(1)	Includes the continuing operations of the following companies acquired by the Company from their respective dates of acquisition: Customer Response Center, a division of Encore Group (September 1, 1998); MessageClick (November 22, 2000); NACT (July 27, 2001); and Telemate.Net (November 16, 2001).
(2)	The fiscal year 2002 loss from continuing operations includes $592,000 of intangibles amortization, $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.
(3)	The fiscal year 2001 loss from continuing operations includes $1.5 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.
(4)	The fiscal year 2000 loss from continuing operations includes $982,000 of goodwill amortization, $482,000 in amortization of deferred compensation, $511,000 in reorganization costs, $1.8 million in loss on asset abandonment and $715,000 in non-cash interest expense primarily related to the amortization of the discount on convertible subordinated debentures and loan fees.
(5)	The fiscal year 1999 loss from continuing operations includes $982,000 in goodwill amortization and $543,000 in merger-related transaction and reorganization costs.
(6)	Includes $0, $582,000, $153.0 million, $47.2 million and $57.9 million of assets of discontinued operations, as of December 31, 2002, 2001, 2000, 1999 and 1998, respectively. The assets of discontinued

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	operations on December 2000, 1999 and 1998 included intangible assets totaling $119.2 million, $12.8 million and $14.1 million, respectively.

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

General

      The Company is a communications technology 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, the Carrier Solutions Group, which for the fiscal year 2002 includes the Company’s subsidiary NACT, and the Enterprise Solutions Group, which includes the Company’s customer response center operations, the Company’s subsidiary, Telemate.Net and, for 2000 and 2001, the Company’s MessageClick operations. The Company acquired Message.Click in November 2000, NACT in July 2001 and Telemate.Net in November 2001. The Company’s discontinued operations include its legacy VAR business and HSG.

      The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including Telemate.Net, NACT and MessageClick. The Company acquired Telemate.Net, NACT and MessageClick each in transactions accounted for as purchases.

      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 2002 Compared with Fiscal Year 2001

      For the year ended December 31, 2002, the Company’s net loss totaled $2.7 million, or $0.03 per share, compared with net loss of $147.6 million, or $2.71 per share, for the same period in 2001. The 2002 results include $592,000 in amortization of intangibles, $1.2 million in amortization of deferred compensation, $324,000 in reorganization costs, a loss from discontinued operations of $331,000 and an extraordinary item — gain on early retirement of debt totaling $350,000. The 2001 results include $1.5 million in amortization of intangibles, $1.8 million in amortization of deferred compensation, a loss from discontinued operations of $136.1 million and an extraordinary item — loss from debt conversion totaling $1.6 million.

     Continuing Operations

      For the year ended December 31, 2002, the Company’s net loss from continuing operations totaled $2.7 million, or $0.03 per share, compared with a net loss of $9.9 million, or $0.18 per share, for the same period in 2001. The 2002 results included $592,000 in amortization of intangibles, $1.2 million in amortization of deferred compensation and $324,000 in reorganization costs. The 2001 results included $1.5 million in amortization of intangibles and $1.8 million in amortization of deferred compensation.

      Total revenue was $44.8 million in the year ended December 31, 2002, reflecting a 50% increase from the same period in 2001. NACT accounted for $10.5 million and Telemate.Net accounted for $4.9 million of the increase in revenue. Products revenue was $23.0 million in the year ended December 31, 2002, and was primarily related to the NACT products. Products revenue was $14.4 million for the year ended December 31, 2001. Services revenue was $21.8 million in the year ended December 31, 2002, reflecting a 40% increase from 2001. Gross profit increased by $11.3 million in the year ended December 31, 2002, to $26.3 million, and was 59% of revenue, compared with 50% of revenue for 2001. The increase in revenue, gross profit percentage and gross profit dollars resulted primarily from the Company’s acquisition of NACT in July 2001 and Telemate.Net in November 2001, both of which sell higher margin proprietary products and services.

      Total operating expenses incurred in continuing operations for the year ended December 31, 2002, were $28.7 million, an increase of $5.0 million compared to the same period in 2001. The increase is primarily

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      The increase in sales, general and administrative expenses resulted from the addition of personnel and related costs related to the acquisitions of NACT in July 2001 of approximately $3.9 million and Telemate.Net in November 2001 of approximately $1.5 million offset by the reduction of corporate and customer response center operations sales, general and administrative expenses of approximately $2.9 million. The decrease in corporate and customer response center operations sales, general and administrative expenses resulted primarily from on-going cost reduction initiatives resulting in reduced personnel, telecom and other general and administrative expenses.

      The increase in research and development is primarily related to the acquisitions of NACT and Telemate.Net in July 2001 and November 2001, respectively.

      The increase in depreciation expense is primarily related to the purchase of furniture and equipment of approximately $889,000 and $1.4 million during 2002 and 2001, respectively, as well as the increased depreciation related to the assets acquired in the NACT and Telemate.Net acquisitions. Capital expenditures are primarily depreciated on a straight-line basis over an estimated useful life of three years.

      The $919,000 decrease in intangible amortization is primarily related to the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which eliminated amortization of goodwill beginning January 1, 2002.

      The $593,000 decrease in amortization of deferred compensation primarily related to the termination of certain options and full vesting of other options outstanding since the Company’s acquisition 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 third and fourth quarters of 2002, the Company implemented several restructuring plans as a part of its effort to improve operational efficiencies and financial performance and eliminated 42 positions held by employees. As a result of these actions, the Company recorded reorganization costs of $324,000. Annualized savings beginning in the first quarter of 2003 are expected to be approximately $2.8 million.

      As a percent of revenue, operating expenses from continuing operations were 64% during the year ended December 31, 2002, down from 79% for the same period in 2001.

      Other income was $531,000 during the year ended December 31, 2002, compared with $203,000 for the same period in 2001. Included in other income during the year ended December 31, 2002 was $254,000 of non-recurring transactions related to health insurance proceeds and sale of non-operating assets.

      Equity in loss of BeTrue was $5,000 during the year ended December 31, 2002. This amount represents the Company’s portion of BeTrue’s losses since the Company’s acquisition of a 51% interest in BeTrue on October 1, 2002.

      Interest expense was $1.1 million during the year ended December 31, 2002, a decrease of $220,000 compared to the same period in 2001. The decrease was attributable to the reduction of interest on the Company’s 5% convertible subordinated debentures, which were paid or converted to Common Stock in 2001, and interest on the Company’s Series B Preferred Stock issued in connection with the Company’s acquisition of NACT offset by the amortization of the fair value of warrants issued to Silicon in connection with the new credit facility.

      The Company recorded an income tax benefit of $200,000 during the year ended December 31, 2002, due to the reversal of a previously accrued exposure item no longer deemed necessary.

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     Business Unit Performance

(1)	Beginning in August 2001, the Carrier Solutions Group includes costs associated with certain corporate and administrative functions to support this business unit, which functions are located in Utah. Prior to the acquisition of NACT on July 27, 2001, the Company became an NACT reseller in the first quarter of 2001. The Company resold NACT gateway solutions totaling $2.8 million with cost of product sales of $2.1 million prior to July 27, 2001. The Enterprise Solutions Group includes no allocation of corporate overhead costs. See also (2) below.
(2)	All rent, utilities and other corporate office expenses, corporate marketing expenses, corporate development costs and corporate human resources, accounting and information technology functions that support corporate, as well as the Enterprise Solutions Group, are reflected in unallocated corporate, sales, general and administrative expenses. Office expenses, human resources, accounting and information technology costs specifically related to the Carrier Solutions Group are reflected in its contribution before unallocated items.

Carrier Solutions Group

      Total revenue from the Company’s Carrier Solutions Group was $26.3 million in the year ended December 31, 2002, a 67% increase from the same period in 2001. The increase in revenue reflects a full year of activity in 2002 versus only five months of activity in 2001 since the acquisition of NACT on July 27, 2001,

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      Gross profit increased by $7.3 million in the year ended December 31, 2002, and was 62% of revenue, an increase from 58% of revenue in the same period in 2001. The increase in gross profit dollars reflects a full year of activity in 2002 versus only five months of activity in 2001. The increase in gross margin is related to the lower margin resale activity in the first and second quarters of 2001.

      Allocated operating expenses incurred in the Carrier Solutions Group for the year ended December 31, 2002, were $12.9 million, an increase of $7.4 million compared to the same period in 2001. The increases in sales, general and administrative expenses and research and development expenses reflect the operations of NACT for a full year of activity in 2002 versus only five months of activity in 2001. Prior to the acquisition of NACT, there were no material operating expenses related to the Carrier Solutions Group segment. As a percent of revenue, operating expenses for the Carrier Solutions Group were 49% during the year ended December 31, 2002, up from 35% for 2001 due to increased research and development activities.

     Enterprise Solutions Group

      Total revenue for the Company’s Enterprise Solutions Group was $18.5 million in the year ended December 31, 2002, a 31% increase from 2001. The increase in revenue is primarily related to the Company’s acquisition of Telemate.Net in November 2001.

      Gross profit increased by $4.0 million in the year ended December 31, 2002 and was 54% of revenue compared with 42% for 2001. The improvement in gross margin was primarily attributable to a full year of operations in 2002 of the Company’s Telemate.Net operations, which offers higher margin proprietary products.

      Allocated operating expenses incurred in the Enterprise Solutions Group for the year ended December 31, 2002, were $3.1 million, a decrease of $308,000 compared to the same period in 2001. Sales, general and administrative expenses increased by $52,000. This increase relates to a full year of expenses for Telemate.Net, which was acquired in November 2001, of approximately $1.5 million offset by lower expenses related to MessageClick, the activities of which were substantially eliminated in the second quarter of 2001, of approximately $838,000 and lower expenses in the Company’s customer response center of approximately $564,000. The decrease in research and development expenses relates to the elimination of the research and development activity related to MessageClick’s ASP operations in 2001 of approximately $715,000 offset by the addition of the research and development activities of Telemate.Net, which was acquired in November 2001, of approximately $355,000. As a percent of revenue, allocated operating expenses for the Enterprise Solutions Group were 17% during the year ended December 31, 2002, down from 24% for 2001.

     Discontinued Operations

      Following the acquisition of NACT in July of 2001, the Company determined that its legacy VAR business was not strategic to the Company’s ongoing objectives and discontinued capital and human resource investment in this business. Accordingly, the Company elected to report its legacy VAR business as discontinued operations by early adoption of SFAS No. 144. This business was added to HSG (which was reported as discontinued operations in 2000) for a combined presentation of discontinued operations, and the consolidated financial statements have been reclassified to segregate the net assets and operating results of these business segments.

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      Summary operating results of the discontinued operations for the years ended December 31, 2002 and 2001 (in thousands) were as follows:

      The loss from discontinued operations in the year ended December 30, 2001 includes depreciation of $546,000, amortization of intangibles of $22.7 million, write-down of goodwill of $95.3 million, amortization of deferred compensation of $267,000 and reorganization costs of $9.2 million.

      The reorganization costs consist of the following (in thousands):

     Extraordinary Item

      In November 2002, the Company negotiated the early retirement of the remaining $1.75 million plus accrued interest due on the note made by the Company on April 25, 2002, in favor of WA Telcom Products Co., Inc., in connection with the acquisition of NACT (the “Note”). The Company paid $1.4 million plus accrued interest and recognized a gain on early retirement of debt of $350,000.

      In January 2001, the Company modified the terms of the $7.0 million outstanding balance of its 5% convertible subordinated debentures as follows: the Company repurchased $4.5 million, converted $1.5 million into Common Stock at a price of $1.40 per share, fixed the conversion rate at $1.19 per share for the remaining $1.0 million and issued warrants to purchase 954,455 shares of Common Stock at an exercise price of $1.98 per share. The cost of this conversion and early retirement of debt totaled $1.6 million.

     Fiscal Year 2001 Compared with Fiscal Year 2000

      For the year ended December 31, 2001, the Company’s net loss totaled $147.6 million, or $2.71 per share, compared with net loss of $55.5 million, or $2.14 per share, for 2000. The 2001 results include $1.5 million in amortization of intangibles, $1.8 million in amortization of deferred compensation, a loss from discontinued operations of $136.1 million and an extraordinary item — loss from debt conversion totaling $1.6 million. The 2000 results include $982,000 in amortization of intangibles, $482,000 in amortization of deferred compensation, $1.8 million loss on asset abandonment, $511,000 in reorganization costs and a loss from discontinued operations of $43.0 million.

     Continuing Operations

      For the year ended December 31, 2001, the Company’s net loss from continuing operations totaled $9.9 million, or $0.18 per share, compared with a net loss of $12.5 million, or $0.48 per share, for 2000. The 2001 results included $1.5 million in amortization of intangibles and $1.8 million in amortization of deferred

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      Total revenue was $29.9 million in the year ended December 31, 2001, reflecting a 135% increase from 2000. Products revenue was $14.4 million in the year ended December 31, 2001, and was primarily related to the NACT products. Services revenue was $15.5 million in the year ended December 31, 2001, reflecting a 22% increase from 2000. Gross profit increased by $9.8 million in the year ended December 31, 2001, and was 50% of revenue in 2001, compared with 42% of revenue for 2000. The increase in revenue, gross profit percentage and gross profit dollars resulted primarily from the acquisition of NACT in 2001.

      Total operating expenses incurred in continuing operations for the year ended December 31, 2001, were $23.7 million, an increase of $7.1 million compared to 2000. The increase is primarily attributable to the following items: increases in sales, general and administrative expenses of $3.5 million, research and development of $2.8 million, depreciation expense of $1.3 million, intangible amortization of $529,000, and amortization of deferred compensation of $1.3 million offset by decreases in reorganization costs of $511,000 and loss on asset abandonment of $1.8 million.

      The increase in sales, general and administrative expenses resulted from the addition of personnel and related costs related to the acquisitions of NACT and MessageClick of approximately $4.4 million offset by the reduction of corporate sales, general and administrative expenses of approximately $1.2 million. The decrease in corporate sales, general and administrative expenses resulted primarily from the cost savings from the reorganizations during 2000, as well as on-going cost reduction initiatives affecting personnel, telecom and other general and administrative expenses.

      The increase in research and development is primarily related to the acquisition of NACT in the third quarter of 2001.

      The increase in depreciation expense is primarily related to the purchase of furniture and equipment of approximately $1.4 million and $5.3 million during 2001 and 2000, respectively, as well as the increased depreciation related to the assets acquired in the NACT acquisition. Capital expenditures are primarily depreciated on a straight-line basis over an estimated useful life of three years.

      The $529,000 increase in intangible amortization is primarily related to the reduction in the remaining estimated life of a previously existing intangible asset and an intangible asset acquired in the acquisition of NACT.

      The $1.3 million increase in amortization of deferred compensation primarily related to the Company’s acquisition of Cereus in September 2000. The deferred compensation represents the intrinsic value of the Cereus unvested options outstanding at the date of the acquisition of Cereus and is amortized over the remaining vesting period.

      In 2000, the Company recorded reorganization costs of approximately $511,000 related to a reorganization announced during the second quarter of 2000.

      In 2000, the Company decided to replace software used internally and recorded a loss on asset abandonment of $1.8 million.

      As a percent of revenue, operating expenses from continuing operations were 79% during the year ended December 31, 2001, down from 131% for the same period in 2000 as a result of cost savings related to reorganizations.

      Other income was $203,000 during the year ended December 31, 2001. Other income is primarily related to the operations of NACT, which was acquired in July 2001.

      Interest expense was $1.4 million during the year ended December 31, 2001, an increase of $121,000 compared to the same period of 2000. The increase was attributable to the interest on the Note made by the Company in connection with the acquisition of NACT and interest on the Company’s Series B Preferred Stock issued in connection with the acquisition of NACT offset by the reduction of interest on the Company’s 5% convertible subordinated debentures, which were paid or converted to Common Stock in 2001.

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     Business Unit Performance

(1)	Beginning in August 2001, Carrier Solutions Group includes costs associated with certain corporate and administrative functions to support this business unit, which functions are located in Utah. Prior to the acquisition of NACT on July 27, 2001, the Company became an NACT reseller in the first quarter of 2001. The Company resold NACT carrier solutions totaling $2.8 million with cost of product sales of $2.1 million prior to July 27, 2001. The Enterprise Solutions Group includes no allocation of corporate overhead costs. See also (2) below.
(2)	All rent, utilities and other corporate office expenses, corporate marketing expenses, corporate development costs and corporate human resources, accounting and information technology functions that support corporate, as well as, the Enterprise Solutions Group are reflected in unallocated corporate, sales, general and administrative expenses. Office expenses, human resources, accounting and information technology costs specifically related to the Carrier Solutions Group are reflected in its contribution before unallocated items.

     Carrier Solutions Group

      For 2002, the Carrier Solutions Group represents the sales of NACT products and related services. Prior to the acquisition of NACT on July 27, 2001, the Company became an NACT reseller in the first quarter of 2001. The Company resold NACT carrier solutions totaling $2.8 million and cost of product sales of $2.1 million during the first and second quarters of 2001. All other revenue and expenses represent the operations of NACT after it was acquired by the Company. Prior to the acquisition of NACT, there were no identifiable operating expenses related to the Carrier Solutions Group.

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     Enterprise Solutions Group

      Total revenue from the Company’s Enterprise Solutions Group was $14.1 million in the year ended December 31, 2001, a 11% increase from the same period in 2000. The $1.4 million increase in revenue is comprised of an increase in customer resource center revenues of $530,000 and revenue from Telemate.Net subsequent to its acquisition by the Company on November 16, 2001 of $971,000.

      Gross profit remained constant in the year ended December 31, 2001, and was 42% percent of revenue, compared with 42% of revenue for 2000.

      Allocated operating expenses incurred in the Enterprise Solutions Group for the year ended December 31, 2001, were $3.4 million, an increase of $1.9 million compared to 2000. The increase of $817,000 in research and development relates primarily to MessageClick (which was acquired in 2000), the operations of which were substantially eliminated in the second quarter of 2001. The increase in sales, general and administrative expenses relates to Telemate.Net subsequent to its acquisition by the Company and MessageClick totaling $823,000. As a percent of revenue, allocated operating expenses for the Enterprise Solutions Group were 24% during the year ended December 31, 2001, up from 11% for 2000.

     Discontinued Operations

      Following the acquisition of NACT in July of 2001, the Company determined that its legacy VAR business was not strategic to the Company’s ongoing objectives and discontinued capital and human resource investment in this business. Accordingly, the Company has elected to report its legacy VAR business as discontinued operations by early adoption of SFAS No. 144. This business was added to HSG (which was reported as discontinued operations in 2000) for a combined presentation of discontinued operations, and the consolidated financial statements have been reclassified to segregate the net assets and operating results of these business segments.

      During 2000, the Board formally decided to dispose of HSG. In December 2000, the Company completed the sale of its domestic lodging business and international hospitality business for aggregate proceeds of $10.0 million. The Company sold its restaurant solutions business for aggregate proceeds of $8.5 million in January 2001.

      The loss on the sale of HSG totaled $11.5 million. A loss of $11.0 million was recorded in the third and fourth quarters of 2000. The loss included a reduction in asset values of approximately $6.7 million and a provision for anticipated closing costs and operating losses until disposal of approximately $4.8 million. An additional $500,000 was recorded in the third quarter of 2001, related to winding up the Company’s international hospitality operations, the assets of which were sold in the fourth quarter of 2000.

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

      The loss from discontinued operations in the year ended December 30, 2001, includes depreciation of $546,000, amortization of intangibles of $22.7 million, write-down of goodwill of $95.3 million, amortization of deferred compensation of $267,000 and reorganization costs of $9.2 million. The operating loss in 2000

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      The reorganization costs consist of the following (in thousands):

     Extraordinary Item

      In January 2001, the Company modified the terms of the $7.0 million outstanding balance of its 5% convertible subordinated debentures as follows: the Company repurchased $4.5 million, converted $1.5 million into Common Stock at a price of $1.40 per share, fixed the conversion rate at $1.19 per share for the remaining $1.0 million and issued warrants to purchase 945,378 shares of Common Stock at an exercise price of $2.00 per share. The cost of this conversion and early retirement of debt totaled $1.6 million.

Critical and Significant Accounting Policies

      The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America 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 and significant accounting policies follows:

     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 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.

     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 is required to make judgments as to future demand requirements and compare that with the current or committed 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.

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     Revenue Recognition

      The Company’s principal sources of revenues are from sales of broadband transmission networks, digital interactive subscriber systems and content distribution networks. The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” issued by the SEC. The Company recognizes revenue when (i) there is an agreement with the customer, (ii) product is shipped and title has passed, (iii) the amount due from the customer is fixed and determinable, and (iv) collectibility is reasonably assured. Revenue is also recognized only when the Company has no significant future performance obligation. At the time of the transaction, the Company assesses whether the amount due from the customer is fixed and determinable and collection of the resulting receivable is reasonably assured. The Company assesses whether the amount due from the customer is fixed and determinable based on the terms of the agreement with the customer, including, but not limited to, the payment terms associated with the transaction. The Company assesses collection based on a number of factors, including past transaction history with the customer and creditworthiness of the customer. If the Company determines that collection of an amount due is not reasonably assured, then the Company defers recognition of revenue until collection becomes reasonably assured.

      The Company’s right of return policy, which is standard for virtually all sales, allows a customer the right to return product for refund only if the product does not conform to product specifications; the non-conforming product is identified by the customer; and the customer rejects the non-conforming product and notifies the Company within ten days of receipt. If an agreement contains a non-standard right of return, the Company defers recognizing revenue until the conditions of the agreement are met. From time to time, the Company’s agreements include acceptance clauses. If an agreement includes an acceptance clause, the revenue is recorded at the time of acceptance.

     Restructuring Accruals

Continuing Operations:

      During the third and fourth quarters of 2002, the Company initiated certain restructuring plans. In conjunction with these plans, the Company established a reserve account of $324,000 for the estimated costs related to these plans. These costs primarily relate to severance costs. The balance of the reserve related to the 2002 restructuring was $69,000 at December 31, 2002.

Discontinued Operations:

      During the second and third quarters of 2001, the Company initiated certain restructuring plans. In conjunction with these restructuring plans, the Company established a restructuring reserve account for the estimated costs related to the plans. These costs primarily related to facilities closings, severance costs and MessageClick ASP service 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 of $2.7 million assumes that the building will be sub-leased for 50% of the total lease liability over the term of the lease. As of December 31, 2002, the Company had a remaining reserve balance of approximately $2.0 million, which is included in liabilities of discontinued operations. The Company currently believes that this remaining estimated balance is appropriate to cover future obligations associated with the restructurings. Activity in the 2002 restructuring accruals was as follows:

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     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.

     Intangible Assets

      The Company has significant intangible assets related to goodwill and other acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments. Changes in strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded asset balances. The Company assesses the recoverability of its intangible assets by determining whether the value of goodwill and other acquired intangible assets over their remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds. Effective January 1, 2002, the Company adopted SFAS No. 142, which stipulates an impairment test is to be performed annually that requires a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, then an impairment loss shall be recognized in an amount equal to that excess. Based on the Company’s analysis, there is no impairment of goodwill as of December 31, 2002.

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, sale of discontinued businesses and acquisitions.

      At December 31, 2002, the Company had a positive working capital position (excess of current assets over current liabilities) of $1.8 million compared to a negative working capital position of $2.2 million at December 31, 2001. The Company’s cash and cash equivalents totaled $1.3 million at December 31, 2002, and $7.4 million at December 31, 2001. Total long-term debt, including current portion, net of discount, was $3.7 million at December 31, 2002 and $3.4 million at December 31, 2001. At December 31, 2002, the Company had borrowed $800,000 under its $5.0 million credit facility with Silicon. The Company’s remaining borrowing availability under the credit facility at December 31, 2002, was $3.8 million.

      On February 12, 2003, in connection with the Company’s acquisition of the assets of Clarent, the Company amended its existing credit facility with Silicon, and in connection therewith, the Company and Silicon entered into certain amendments to the existing credit facility and certain additional credit

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      On February 12, 2003, the Company consummated the Clarent Asset Purchase whereby the Company purchased substantially all the business assets and assumed certain related liabilities of Clarent for $9.8 million in notes. At the closing of the Clarent Asset Purchase, the Company issued three promissory notes to Clarent: a $5.0 million secured note due February 13, 2004, which bears interest at 10% per annum, of which $500,000 is due May 13, 2003, and the remainder is due in monthly installments increasing in amount; a $1.8 million non-interest bearing unsecured note due February 13, 2004, of which $300,000 is due May 13, 2003 and the remainder is due in quarterly installments of $500,000; and a $3.0 million secured note due February 12, 2008, which bears interest at 5% per annum. The assets the Company purchased from Clarent secure the secured notes.

     Cash Flow

      Cash used in the Company’s continuing operations in the year ended December 31, 2002 totaled approximately $3.5 million compared with cash used in continuing operations of $6.8 million for 2001. The Company’s use of cash in continuing operations during 2002 resulted primarily from cash used for changes in current operating assets and liabilities of approximately $7.7 million and was offset by cash provided from continuing operations of $4.2 million (net loss from continuing operations of $2.4 million reduced by non-cash charges totaling $6.6 million, including depreciation and amortization of $5.1 million and provision for doubtful accounts of $1.8 million offset by an extraordinary item — gain on early retirement of debt of $350,000). The Company’s use of cash in continuing operations during 2001 resulted primarily from a net loss of $11.5 million and cash used for changes in current operating assets and liabilities of approximately $4.4 million and was offset by non-cash charges totaling $9.1 million (including depreciation and amortization of $6.0 million, provision for doubtful accounts of $1.5 million and an extraordinary item — loss from debt conversion of $1.6 million).

      Cash used in the Company’s discontinued operations in the year ended December 31, 2002, totaled $1.1 million compared with cash used in discontinued operations of $5.8 million for 2001.

      The Company used cash in investing activities for continuing operations in the year ended December 31, 2002 of approximately $1.8 million, compared to $17.6 million for 2001. In 2002, the Company used $605,000 in cash in connection with its acquisition of a 51% interest in BeTrue. In 2001, the Company used $16.1 million in cash related to the acquisition of NACT and Telemate.Net. The Company spent $889,000 and $1.4 million on capital expenditures in 2002 and 2001, respectively. The Company also invested $348,000 and $48,000 on purchased software development costs in 2002 and 2001, respectively.

      During the year ended December 31, 2001, the Company received net proceeds from sale of discontinued operations totaling $8.1 million for the sale of its restaurant solutions business.

      Cash provided by financing activities from continuing operations totaled approximately $317,000 in the year ended December 31, 2002, compared to $11.3 million for 2001. Payments on the Note made by the Company in connection with the acquisition of NACT totaling $3.9 million were offset by net proceeds from a private placement of $3.0 million, borrowings on the Company’s credit line of $800,000, proceeds from the issuance of the Common Stock totaling $408,000 and payments on notes receivable from shareholders totaling $24,000 in 2002. The proceeds from issuance of the Company’s Series B Preferred Stock to Telemate.Net in connection with the acquisition of NACT totaling $15.0 million and proceeds from the issuance of Common Stock totaling $755,000 were offset by payments to repurchase convertible subordinated debentures totaling $4.5 million in 2001.

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Contractual Obligations and Commercial Commitments

      The following summarizes the Company’s future contractual obligations at December 31, 2002 (in thousands):

Sources of Cash

      For 2003, the Company expects that its primary sources of cash will be from cash on hand, working capital provided by operating activities, borrowings under its Credit Agreement with Silicon and other possible sources, including issuances of equity or debt securities. The Company believes that, with its current operations, which were cash flow positive for the last five quarters, it will have sufficient liquidity from these sources to meet its current financial obligations through 2003. The Credit Agreement with Silicon, however, is subject to certain financial covenants and limitations on the Company’s ability to access funds under the Credit Agreement. If the Company is in violation of the Credit Agreement, or does not have sufficient eligible accounts receivable and inventory to support the level of borrowings it may need, the Company may be unable to draw on the Credit Agreement to the extent necessary. To the extent the Company does not have borrowing availability under the Credit Agreement, the Company may be required to obtain additional sources of capital, sell assets, obtain an amendment to the Credit Agreement or otherwise restructure its outstanding indebtedness. If the Company is unable to obtain additional capital, sell assets, obtain an amendment to the Credit Agreement or otherwise restructure its outstanding indebtedness, then the Company may not be able to meet its obligations.

      The Company’s short-term cash needs are to cover working capital needs, including cash operating losses, if any, capital expenditures, transaction costs related to the acquisition of Clarent’s assets not paid in 2002, payments on the secured and unsecured notes made by the Company in connection with the Clarent Asset Purchase, totaling approximately $4.8 million plus interest due February 13, 2004, payments pursuant to the award of the AAA panel in connection with the Assignment totaling approximately $1.3 million, and payments related to discontinued operations. At December 31, 2002, liabilities of discontinued operations included $2.0 million in lease payments related to discontinued operations. The Company expects to pay out approximately $756,000 related to discontinued operations in 2003.

      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. The Company expects to meet these cash needs through cash from operations, if any, cash on hand, borrowings under the Credit Agreement 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 Agreement 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.

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Risk Factors

      The Company’s business strategy calls for growth internally as well as through acquisitions. This growth 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 of ownership of the Company’s existing 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.

      The Company has a history of net losses, including net losses of approximately $2.7 million for the fiscal year 2002, $147.6 million for the fiscal year 2001 and $55.5 million for the fiscal year 2000. As of December 31, 2002, the Company had accumulated deficit of approximately $254.9 million. The Company’s revenues may not increase, and the Company may never generate sufficient revenues to achieve or sustain profitability.

      The stock market in general, and the market for technology companies in particular, has recently experienced extreme volatility that has often been unrelated to the operating performance of particular companies. From January 1, 2002 to September 12, 2002, the per share closing price of the Common Stock on the Nasdaq National Market fluctuated from a high of $1.79 to a low of $0.26. From September 13, 2002 to March 15, 2003, the per share closing price of the Common Stock on the Nasdaq SmallCap Market fluctuated from a high of $0.77 to a low of $0.26. The Company believes that the volatility of the price of its Common Stock does not necessarily relate to the Company’s performance and is broadly consistent with volatility experienced in the Company’s industry. Fluctuations may occur, among other reasons, in response to operating results, announcements by competitors, regulatory changes, economic changes, market valuation of technology firms, and general market conditions. Additionally, the Company’s operating results in one or more future quarters may fall below the expectations of securities analysts and investors, which would likely cause the trading price of the Common Stock to 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 Common Stock is currently quoted on the Nasdaq SmallCap Market. The Company must satisfy certain minimum listing maintenance requirements to maintain such quotation, including a series of financial tests relating to net tangible assets, public float, number of market makers and shareholders, market capitalization, and maintaining a minimum bid price of $1.00 per share for the Common Stock. In the past, the Company has had difficulty maintaining the minimum bid price for the Common Stock.

      Prior to September 13, 2002, the Common Stock was quoted on the Nasdaq National Market. On June 6, 2002, the Nasdaq National Market notified the Company that the bid price of the Common Stock had closed at less than $1.00 per share over the previous 30 consecutive trading days, and as a result, the Company did not comply with the minimum bid price continued listing requirement of the Nasdaq National Market. The Company was then provided 90 calendar days, or until September 4, 2002, to regain compliance with the

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      If the Company is not able to regain compliance with the minimum bid price requirement by September 2, 2003, then the Common Stock may be delisted from the Nasdaq SmallCap Market. If the Common Stock is delisted from the Nasdaq SmallCap Market, then the Common Stock may trade on the Over-the-Counter-Bulletin Board, or its successor, the Bulletin Board Exchange, both of which are viewed by most investors as less desirable and less liquid market places. Delisting from the Nasdaq SmallCap Market could make trading the Common Stock more difficult for the Company’s investors, leading to further 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 outstanding convertible debentures and, through certain cross default provisions, the Loan and Security Agreement the Company entered into with Clarent in connection with the Clarent Asset Purchase and the Credit Agreement with Silicon.

     Historically low trading volume in the Common Stock may affect shareholder liquidity.

      The trading volume of the Common Stock has been low historically. As of March 15, 2003, there were approximately 89.6 million shares of Common Stock issued and outstanding; however, there can be no assurance that there will be an active market for the Common Stock. Low trading volume may result in shareholders being unable to sell shares of Common Stock at the times and at the prices they desire.

     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 declines in capital spending from telecommunications service providers continue. If global economic conditions worsen, or if there is a prolonged slowdown in the telecommunications industry, then the Company may experience adverse operating results.

      The market for next generation communications solutions is new and evolving and, if this market does not develop as the Company expects, 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 next generation communications solutions to communications service providers, 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 the Company expects, then the Company may not be able to sell its products in significant volume, or at all.

      Further, the Company believes that, with the its recent acquisitions, it is positioned to succeed in leveraging the competencies acquired with these acquisitions to develop solutions for communication service providers. However, because of the intense competition in the market and the recent introduction of this technology, there can be no assurance that the Company will succeed in this evolving marketplace.

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              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 software 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 the Company’s 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 business, results of operations and financial condition. If successful, a claim of product infringement could deprive the Company of the technology the Company 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 potential investors or shareholders that its efforts to safeguard and maintain its proprietary rights will be adequate. Despite the Company’s efforts to protect the Company’s proprietary rights, unauthorized parties may attempt to copy or otherwise to use the Company’s products or technology.

      The Company has pending several patent applications related to the Company’s VoIP product and several patent applications which the Company acquired in connection with the Clarent Asset Purchase related to system architecture for Internet telephone, interaction of VoIP calls and cellular networks, real-time addition of devices to a subscriber accounting, and system and method applications for electronic transaction settlement and dynamic changes error correction . 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.

      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. Although the Company has implemented and will continue to implement protective measures in those countries, these efforts may not be successful. Additionally, even if the Company’s domestic and international efforts to protect its intellectual property rights 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 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, and legal claims by customers against the Company.

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      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 or lease equipment from the Company against claims of patent infringement.

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

      The Company’s growth could be limited if the Company 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 understanding of the Company’s markets. Workforce reductions by the Company during 2000, 2001, 2002 and 2003 may adversely affect the Company’s ability to retain its current employees and recruit new employees. The inability to hire or retain qualified personnel could hinder the Company’s ability to implement the Company’s business strategy and harm the Company’s business.

      The Company has incurred significant debt in connection with the consummation of the Clarent Asset Purchase, and as a result, the Company has become subject to risks associated with indebtedness.

      The Company funded the $9.8 million purchase price of the Clarent Asset Purchase using debt financing, $6.8 million of which will mature, and must be repaid with interest by the Company, in installments beginning May 13, 2003, through February 13, 2004. In addition to incurring such additional principal indebtedness, the Company has incurred interest expense with respect to such indebtedness. As a result of such additional principal indebtedness and interest expense, the Company is subject to risks associated with indebtedness including certain financial and other covenants required by the Company’s lender, and the risk that such additional principal indebtedness and interest expense could have an adverse effect on the market price of the Common Stock and the Company’s ability to fund future growth.

      The new softswitch and communication products which the Company intends to offer may not achieve acceptance in the marketplace.

      As a result of the consummation of the Clarent Asset Purchase, the Company is now able to offer products which it could not offer previously, including Class 5 softswitch products and satellite communication products. The markets for these products are relatively new, unpredictable and evolving rapidly. Lack of acceptance in the marketplace for these new products could have a material adverse effect on the Company’s business, results of operations and financial condition.

              The Company expects to conduct business in new geographic markets which will subject the Company and its business to new regulation and legislation and risks associated with foreign currency fluctuations.

      As a result of the consummation of the Clarent Asset Purchase, the Company has an operational presence in Canada which the Company did not have previously. Furthermore, although customers outside the United States and Canada have historically accounted for a large portion of Clarent’s revenues, the Company expects to conduct an even greater portion of its business in Europe than Clarent conducted. Consequently, the Company now has the additional responsibility of complying with the legislation and regulation in these new geographic markets. Failure of the Company to comply with such regulation and legislation could have a material adverse effect on the Company’s business, results of operations and financial condition. Additionally, increasing the amount of business that the Company conducts outside the United States increases the

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              The Company may become subject to certain patent infringement claims with respect to certain assets and technology purchased from Clarent.

      Pursuant to the Clarent Asset Purchase, the Company purchased from Clarent assets and technology related to Clarent’s Sky Performer product, which has been the subject of certain patent infringement claims made against Clarent. If such patent infringement claims are made against the Company in the future, even if such claims do not have merit, then the Company could be required to pay damages or settlement amounts or could be required to develop non-infringing technology or enter into costly royalty or licensing agreements. Any litigation could result in increase product costs, service delays or both. If successful, a claim of product infringement could deprive the Company of the assets and technology related to the Sky Performer product.

     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 its Common Stock or other securities. Any such claims against the Company may affect the Company’s business, results of operations and financial conditions. Such claims, even 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.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

Market and Interest Rate Risks

      The Company is exposed to various market risks, including changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest 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, although the Company may enter into such transactions in the future.

      At December 31, 2002, the Company’s outstanding debt, primarily consisting of convertible subordinated debentures (see Note 7 to the consolidated financial statements included elsewhere in this Annual Report), carries interest rates which are fixed. In addition, the Company has $800,000 outstanding under its Credit Agreement with Silicon. If interest rates increase or decrease by 1%, then the Company’s interest expense would increase or decrease, respectively, by $8,000.

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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