VERSO TECHNOLOGIES INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-22190

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VERSO TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)

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

400 GALLERIA PARKWAY
SUITE 300
ATLANTA, GA 30339
(Address of Principal Executive Offices)

678-589-3500
(Registrant's Telephone Number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: COMMON
STOCK, $0.01 PAR VALUE

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

Check 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. [ ]

As of March 22, 2002, 78,022,842 shares of common stock of the registrant
were outstanding, and the aggregate market value of the common stock of the
registrant as of that date (based upon the last reported sale price of the
common stock reported on that date by The Nasdaq National Market), excluding
outstanding shares beneficially owned by directors and officers, was
$89,736,940.

DOCUMENTS INCORPORATED BY REFERENCE:
NONE.
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PART I

NOTE REGARDING FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K (THE
"ANNUAL REPORT"), INCLUDING, WITHOUT LIMITATION, IN THE SECTIONS HEREIN TITLED
"BUSINESS" AND "MANAGEMENT'S DISCUSSIONS 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 GROW AND MANAGE OUR BUSINESS UNTIL OUR
OPERATIONS ARE CASH FLOW POSITIVE AND OUR ABILITY TO FUND CONTINUING OPERATING
LOSSES AND CAPITAL REQUIREMENTS UNTIL OUR OPERATIONS ARE GENERATING CASH; OUR
ABILITY TO SUCCESSFULLY ACCESS THE CAPITAL MARKETS TO FUND THE GROWTH OF OUR
BUSINESS AND CONTINUOUS DEVELOPMENT OF OUR PROPRIETARY PRODUCTS; TRENDS FOR THE
CONTINUED GROWTH OF OUR BUSINESS; OUR ABILITY TO ENHANCE AND DIVERSIFY REVENUE
AND EARNINGS GROWTH; OUR ABILITY TO SUCCESSFULLY MARKET EXISTING PRODUCTS AND
SERVICES, WHICH MAY BE ADVERSELY IMPACTED BY COMPETITION; OUR ABILITY TO
INTEGRATE OUR BUSINESS WITH THE BUSINESSES OF ENTITIES THAT WE HAVE RECENTLY
ACQUIRED AND OTHER ENTITIES WE MAY SUBSEQUENTLY ACQUIRE; OUR ABILITY TO
SUCCESSFULLY DEVELOP AND MARKET NEW PRODUCTS AND SERVICES; 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
"Verso," 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-switched network to a next-generation, packet-based network.

The Company's headquarters is located at 400 Galleria Parkway, Suite 300,
Atlanta, Georgia 30339, and its 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
Gateway Solutions business and the Company's Applications and Services business,
both of which are described below.

1

GATEWAY SOLUTIONS

The Company's Gateway Solutions business consists of the operations of the
Company's switching subsidiary, NACT Telecommunications, Inc. ("NACT"). NACT is
a manufacturer of next-generation network gateways, public switched telephone
network ("PSTN") Class 4 Tandem switches and telecommunication provisioning and
billing systems.

NACT's complete Voice over Internet Protocol ("VoIP") migration solution
includes state-of-the-art hardware and software, operational support system
("OSS") integration, the industry's most widely used applications, and expert
training and technical support. For the fiscal year ended December 31, 2001, the
Company's revenue from the Gateway Solutions business was $15,773,000, or 54% of
the Company's consolidated revenue. Summarized financial information for the
Company's Gateway Solutions business is set forth in Note 14 to the consolidated
financial statements included in this Annual Report.

VOIP MIGRATION PLATFORM

The Company's unique VoIP Migration Platform is an integrated
communications server, media gateway and applications server built for service
providers seeking to implement lower cost Internet Protocol ("IP")-based voice
services. The Company's "pay as you grow" platform provides a complete digital
Class 4 switch capable of scaling from 48 ports for small emerging service
providers up to 8 million ports for more established providers. The Company has
successfully completed beta trials of its VoIP product.

NACT's STX family of Class 4 Tandem Digital Gateway Switches provides
protocol support for T1, E1, Integrated Services Digital Network, Signaling
System 7, C7 and VoIP. Each of the STX, Micro STX and Pico STX switches offers
the same functionality, but differs in number of ports. The applications of the
STX products include long distance, toll-free and calling card applications and
provide comprehensive and feature-rich revenue-generating services over a low
cost IP-based network infrastructure.

CONVERGED PROVISIONING AND BILLING PLATFORM

The Company's stand-alone provisioning and billing platform is one of the
first platforms to support 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 has built the
graphical user interface to support fast, efficient and intuitive provisioning
of new services and users. The platform supports comprehensive international
functionality, including support for 28 languages, simultaneous multiple
currencies and numbering plans. Finally, the platform may be customized to
support the customer's unique billing and reporting needs.

APPLICATIONS AND SERVICES

The Company's Applications and Services business consists 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. For the
year ended December 31, 2001, revenue from the Company's Applications and
Services business was $13,580,000, or 46% of the Company's consolidated revenue.
Summarized financial information for the Company's Applications and Services
business is set forth in Note 14 to the consolidated financial statements
included in this Annual Report.

CUSTOMER RESPONSE CENTER SERVICES

The Company's support team delivers outsourced 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
needs, from short-term system upgrades to long-term outsourcing and ongoing
product support.

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.
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CALL ACCOUNTING SOLUTION AND IP-BASED USAGE MANAGEMENT

Through the Company's Telemate.Net subsidiary, the Company provides
patented communications billing and reporting technology for next generation
converged IP and PSTN networks.

Telemate.Net's call accounting solution helps enterprises reduce
telecommunication operating expenses and increase telecom cost recovery.
Telemate.Net solutions also provide carrier-class reporting via an original
equipment manufacturer bundle with Cisco Systems Inc.'s CiscoWorks Voice Manager
VoIP solution.

Telemate.Net's NetSpective products provide Children's Internet Protection
Act compliant Internet filtering and reporting solutions that allow schools,
government and enterprises to filter and monitor Internet usage and better
manage employee productivity.

CUSTOMERS

Currently, the Company's primary base of customers consists of emerging
domestic and international long-distance providers. These customers are buyers
of NACT's family of STX Class 4 Tandem switches and telecommunications
provisioning and billing systems. Additionally, NACT provides pre-paid long
distance applications to these customers. As the Company continues to develop
next generation communications services, it expects that it will sell its
solutions to larger wholesale and retail telecommunications providers seeking to
develop new packet-based telephony services with PSTN reliability and
scalability. To date, the Company has installed approximately 400 of NACT's
gateways for over 100 customers.

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

Through the Company's Telemate.Net subsidiary, the Company has installed
more than 14,000 of its call accounting and IP-based usage management solutions.
Typical end-user customers of the Company's Telemate.Net solutions are domestic
commercial enterprises or government agencies with 100 to 10,000 employees.

For the years ended December 31, 2001, and December 31, 2000, Six
Continents PLC was the Company's only customer that accounted for more than 10%
of the Company's consolidated revenues. The revenues from this customer
represented approximately 31% and 75% of the Company's consolidated revenues for
the years ended December 31, 2001, and December 31, 2000, 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, including Internet Service Providers, IP telephony service providers
and pre-paid service bureaus, and by selling new, next-generation communication
solutions to its current base of customers. The Company also plans to devote
research and development efforts toward developing features and functionality
that will appeal to larger international and domestic telecommunications carrier
customers. The Company sells its services primarily through a direct sales force
of 24 individuals located in Provo, Utah, Atlanta, Georgia, the New York City
metropolitan area, Miami, Florida and the United Kingdom.

3

COMPETITION

GATEWAY SOLUTIONS

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 its gateway
solutions, the Company's primary sources of competition include Class 4 solution
providers, vendors of networking and telecommunications equipment, and telephony
applications companies that bundle their offering with third-party equipment.
Some competitors, especially networking and telecommunications equipment
vendors, such as Lucent Technologies Inc., Cisco Systems Inc. and Nortel
Networks Ltd., have significantly greater financial resources and broader
customer relationships than the Company. Other public companies, such as Tekelec
and Sonus Networks, Inc., are focusing on market opportunities similar to the
Company's, as are a number of smaller, private companies, including Nuera
Communications, Inc., Voiceware Systems Corporation and iSoftel Ltd.

APPLICATIONS AND SERVICES

The Company's customer response center services compete with those of
companies that provide integrated, multi-channel customer contact centers.
Examples of such companies include 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.

In the market for the Company's call accounting solutions, the Company
competes with a number of similar sized companies that provide enterprise
communication network usage accounting and billing such as IntegraTrak Inc.,
MicroTel International, Inc. and Veramark Technologies Inc. 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.

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 its 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 of America.

The Company cannot be certain that the services it provides and the
finished products 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 intellectual property of such third parties 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 its 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 a database of user accounts. The
patented techniques are employed in several of Telemate.Net's products,
including Telemate.Net's call accounting and NetSpective Internet access
management solutions. This technology allows users to combine statistics from
diverse 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 information from a variety of data
sources and vendors' products, in addition to its own.

4

The Company also has several patent applications pending relating to its
VoIP product.

RESEARCH AND DEVELOPMENT

The Company's research and development expenses in 2001 were primarily
related to the enhancement of NACT's existing products and development
initiatives associated with NACT's VoIP migration solution. These expenses
totaled $2,755,000 for the year ended December 31, 2001. The Company expects
that further research and development expenses will relate to subsequent product
enhancements as well as the development of additional features and functionality
that will be used to target larger carrier customers.

EMPLOYEES

As of March 15, 2002, the Company had 338 employees, 221 of whom are
located at the Company's headquarters in Atlanta, Georgia, 109 of whom are
located at the Company's NACT subsidiary in Provo, Utah, and eight of whom are
located in various locations throughout the United States.

BACKGROUND

The Company was incorporated in Minnesota on March 20, 1984. The Company
has historically operated as a provider of technology infrastructure solutions,
including network performance management systems, OSS integration, and customer
response center services. Over the years, the Company has moved away from this
line of business and now focuses on providing the products and services offered
by its Gateway Solutions business and its Application and Services business.
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 the year 2000, the Company's Board of Directors (the "Board")
decided to explore the sale of all or a portion of the Company's Hospitality
Services Group, which consisted of the Company's lodging business, its
restaurant solutions business and its energy management business. Subsequently,
the operations of the Hospitality Services Group were classified as discontinued
operations, and each of the operating units of the Hospitality Services Group
were 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.

In September 2000, the Company merged with Cereus Technology Partners, Inc.
("Cereus"). Cereus provided end-to-end e-business and B2B technology solutions,
including resale of business applications software, e-business strategy, network
consulting and hosting and application integration. In connection with the
merger with Cereus, the Company changed its name to Verso Technologies, Inc. and
put in place the Company's current management team and all but two 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

5

application focused on serving communications service providers, which the
Company identifies as a target market.

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 that want to develop new packet-based telephony
services with PSTN reliability and scalability. The acquisition of NACT was
funded by a $15 million investment by Telemate.Net, per the Company's merger
agreement with Telemate.Net.

On November 16, 2001, the Company completed its merger with Telemate.Net,
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 merger with 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 value-added reseller ("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 No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 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. This discontinued presentation
includes the operations of Winward and Cereus.

The Company believes that the presentation of its VAR and associated
consulting practice as discontinued operations will allow for a more meaningful
comparison of the results from the Company's ongoing, strategic business units;
its Gateway Solutions business and its Applications and Services business.

ITEM 2. DESCRIPTION OF PROPERTY

The Company is headquartered in Atlanta, Georgia, where it currently leases
its principal executive offices. The leased facility in Atlanta is approximately
45,000 square feet, which is used for offices and for operations. Pursuant to
the lease agreement for the leased facility in Atlanta, which lease agreement
expires in February 2010, the Company is obligated to pay rent of approximately
$110,000 per month, plus a share of operating expenses. Effective February 2002,
the Company is obligated to pay rent with respect to an additional 13,000 square
feet totaling $29,000 per month, the costs of which are included in discontinued
operations. The Company is pursuing a sublease opportunity with respect to this
additional space. The leased facility in Atlanta is used by the Company's
Applications and Services business.

The Company also leases approximately 40,000 square feet of office space in
Provo, Utah, which is used for offices and operations. Pursuant to the lease
agreement for the leased facility in Provo, which lease agreement expires in
December 2009, the Company is obligated to pay rent of approximately $46,000 per
month. The leased facility in Provo is used by the Company's Gateway Solutions
business.

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 subleased some of these locations and is attempting to sublease
the remaining 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.

6

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, the Company is a
party to the proceedings discussed below.

On or about July 6, 2000, RSL Communications, Ltd., together with certain
of its affiliates (collectively, "RSL"), filed with the American Arbitration
Association a demand for arbitration against NACT as previously described in the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
2001. The arbitration proceeding initiated by RSL has been settled pursuant to
that certain Final Settlement Agreement and General Release dated March 13,
2002, among RSL, the Company and NACT.

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, breach of fiduciary
duty, breach of contract and damages resulting from and related to the Company's
alleged failure to deliver 50,000 shares of the Company's common stock, par
value $.01 per share (the "Common Stock"), to Mr. Good upon his exercise of an
option to purchase such shares on or about January 3, 2000. Mr. Good seeks
unspecified damages with respect to such claims. The Company intends to defend
such claims vigorously. This case is in the middle of the discovery period,
which is expected to close in May 2002. Trial for this case has been set for
October 2002. Although no assurances can be given, the Company does not expect
the final outcome of this matter to have a material adverse effect on the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Shareholders of the Company was held on November 16,
2001, in Atlanta, Georgia (the "Meeting"). The proposals set forth below were
voted on at the Meeting with the following results:

1. Approval of the Agreement and Plan of Merger, dated as of May 4,
2001, as amended on June 1, 2001, among the Company, a wholly-owned
subsidiary of the Company and Telemate.Net and the transactions it
contemplates, including: the issuance of shares of Common Stock to
Telemate.Net shareholders in the proposed merger transaction; the
conversion of Telemate.Net stock options into Company stock options and the
assumption of Telemate.Net's stock option plans; and the reconfiguration of
the Board. The results were as follows:

30,169,393 FOR 136,285 AGAINST 181,552 ABSTAIN 17,302,103 BROKER NON-VOTES

2. Election of a Board of eight directors to serve a one-year term.
The results were as follows:

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

7

3. Approval of an amendment to the Company's Amended and Restated
Articles of Incorporation to increase the number of authorized shares of
Common Stock from 100,000,000 to 200,000,000. The results were as follows:

29,738,909 FOR 541,035 AGAINST 207,285 ABSTAIN 17,302,104 BROKER NON-VOTES

4. Approval of an amendment to the Company's 1999 Stock Incentive Plan
to increase the number of shares of Common Stock underlying the plan from
10,000,000 to 15,000,000 and to remove the restriction on the exercise
price of "non-qualified" options that may be granted under the plan. The
results were as follows:

45,211,707 FOR 2,329,555 AGAINST 248,071 ABSTAIN 0 BROKER NON-VOTES

5. Ratification of separate indemnification agreements that have been
entered into between the Company and each of its directors and non-director
officers at the level of Vice President and above. The results were as
follows:

46,103,644 FOR 1,396,014 AGAINST 289,675 ABSTAIN 0 BROKER NON-VOTES

Each of the foregoing proposals was set forth and described in the Notice
of Annual Meeting and Joint Proxy Statement/Prospectus of the Company dated
October 12, 2001, included in the Company's Registration Statement on Form S-4
(No. 333-62262) filed with the SEC on June 4, 2001, as amended by Amendment No.
1, Amendment No. 2 and Amendment No. 3 thereto, filed with the SEC on August 1,
2001; September 12, 2001; and October 12, 2001, respectively (the "Registration
Statement").

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 31, 2002, of
such officer:

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

STEVEN A. ODOM 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 to until June 1999. 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, 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.

JAMES M. LOGSDON 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

8

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 has served as Executive Vice President, Chief Financial
Officer, Secretary and a director of the Company since September 2000. Ms.
Reising also served as the Executive Vice President, Chief Financial Officer and
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, she 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 and Consulting 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 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 SHAREHOLDER MATTERS

The Common Stock is traded on The Nasdaq National Market under the symbol
"VRSO." Prior to October 1, 2000, the Common Stock was traded on The Nasdaq
National Market under the symbol "ELTX." The Common Stock moved from The Nasdaq
Small Cap Market to The Nasdaq National Market on February 17, 2000. The
following table sets forth the quarterly high and low bid sale prices for the
Common Stock for the years ended December 31, 2001, and 2000, as reported by
Nasdaq. The stock prices set forth

9

below do not include adjustments for retail mark-ups, markdowns or commissions,
and represent inter-dealer prices and do not necessarily represent actual
transactions.

As of March 22, 2002, there were approximately 1,575 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 current credit facility with Silicon Valley Bank (the
"Bank") prohibits the payment of cash dividends on the Common Stock without the
Bank's prior written consent.

On November 16, 2001, the Company issued six warrants to purchase, in the
aggregate, 250,000 shares of Common Stock to an investment bank and five of its
affiliates in consideration for investment banking services rendered in
connection with the Company's merger with Telemate.Net, which services had a
fair market value in excess of the fair market value of such warrants. Each of
the warrants may be exercised with respect to all of the underlying shares of
Common Stock at any time from November 16, 2001, until November 16, 2004, at an
exercise price of $1.00 per share of Common Stock, subject to certain
adjustments described in each such warrant. The warrants issued to such
investment bank and its affiliates were issued without registration under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the
exemption from the registration set forth in Section 4(2) of the Securities Act.
The Company based such reliance upon factual representations made to the Company
by each recipient of the warrants as to such recipient's investment intent,
sophistication, and status as an "accredited investor," as that term is defined
in Rule 501 of Regulation D under the Securities Act, among other things.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Company's financial statements and related notes thereto,
set forth in Item 14 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

10

statements of the Company. The historical results are not necessarily indicative
of future results. All amounts in thousands except per share data.

- ---------------

(a) 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 Systems, Inc. (September 1, 1998); MessageClick
(November 22, 2000); NACT (July 27, 2001); and Telemate.Net (November 16,
2001).

(b) The 2001 loss from continuing operations includes $1.5 million of
intangibles amortization and $1.8 million in amortization of deferred
compensation primarily related to acquisitions during 2000, and $606,000 in
non-cash interest expense related to the amortization of the discount on
convertible subordinated debentures and loan fees.

(c) The 2000 loss from continuing operations includes $982,000 of goodwill
amortization and $482,000 in amortization of deferred compensation primarily
related to acquisitions during 2000, $1.8 million in loss on asset
abandonment, $511,000 in reorganization costs and $715,000 in non-cash
interest expense primarily related to the amortization of the discount on
convertible subordinated debentures and loan fees.

(d) The 1999 loss from continuing operations includes $543,000 in merger-related
transaction and reorganization costs and $982,000 in goodwill amortization.

(e) The operations of the Customer Response Center were acquired in 1998;
therefore, no continuing operations existed in 1997.

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, Gateway Solutions, which includes the
Company's subsidiary NACT, and Applications and Services, which includes its
customer response center operations and its subsidiary Telemate.Net. NACT was
acquired in July 2001 and Telemate.Net was acquired in November 2001. The
Company's discontinued operations include its VAR business and associated
consulting practice and its hospitality services group ("HSG"), which developed
and marketed proprietary software and related integration and maintenance
services.

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, including Telemate.Net which merged with the
Company on November 16, 2001, NACT which was acquired by the Company on July 27,
2001, MessageClick which merged with the Company on November 22, 2000, and
Cereus and its subsidiaries, which merged with the Company on September 29,
2000, each in transactions accounted for as purchases, and Sulcus and Windward,
each of which merged with the Company in the first quarter of 1999 in
transactions accounted for as poolings-of-interests. The

11

consolidated financial statements for 1999 include the results of Sulcus and
Windward for the entire year. Cereus, Sulcus and Windward are included in
discontinued operations.

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 14 of this Annual Report.

RESULTS OF OPERATIONS

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 primarily
related to acquisitions during 2000, 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 primarily related to
acquisitions during 2000, $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 $.18 per share, compared with a
net loss of $12.5 million, or $.48 per share, for 2000. The 2001 results
included $1.5 million in amortization of intangibles and $1.8 million in
amortization of deferred compensation primarily related to acquisitions during
2000. The 2000 results included $982,000 in amortization of intangibles,
$482,000 in amortization of deferred compensation primarily related to
acquisitions during 2000, $1.8 million loss on asset abandonment and $511,000 in
reorganization costs.

Total revenue was $29.4 million in the year ended December 31, 2001,
reflecting a 145% increase from 2000. Total revenue in the year ended December
31, 2001 included $15.8 million from NACT and $971,000 from Telemate.Net.
Products revenue was $14.4 million in the year ended December 31, 2001, and was
primarily related to the NACT products. Services revenue was $15.0 million in
the year ended December 31, 2001, reflecting a 25% increase from 2000. Gross
profit increased by $9.0 million in the year ended December 31, 2001, and was
51% of revenue in 2001, compared with 44% of revenue in 2000. The increase in
revenue, gross profit percentage and amount of gross profit 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 $8.1 million
compared to 2000. The increase is primarily attributable to the following items:
$3.5 million increase in sales, general and administrative expenses, $2.8
million increase in research and development expense, $1.3 million increase in
depreciation expense, $529,000 increase in intangible amortization and an
increase in amortization of deferred compensation of $1.3 million offset by $1.8
million decrease in loss on asset abandonment and $511,000 decrease in
reorganization costs.

The increase in sales, general and administrative expenses resulted from
the addition of personnel and related costs related to the acquisition of NACT
of approximately $3.6 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 reorganization 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 expense is primarily related to
the acquisition of NACT in the third quarter of 2001.

12

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 NACT acquisition.

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

The $1.3 million increase in amortization of deferred compensation
primarily related to the Cereus merger 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 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
70% during the year ended December 31, 2001 (excluding the amortization of
intangibles and deferred compensation) down from 107% in 2000 (excluding the
amortization of intangibles and deferred compensation, loss on asset abandonment
and reorganization costs).

13

Business Unit Performance

- ---------------

* 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 Applications and Services segment are reflected in unallocated
corporate, sales, general and administrative expenses. Office expenses, human
resources, accounting and information technology costs specifically related to
the Gateway Solutions segment are reflected in its contribution before
unallocated items.

GATEWAY SOLUTIONS

Gateway Solutions 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 gateway
solutions totaling $2.8 million and cost of product sales totaled $2.2 million
during the first and second quarters of 2001. All other revenue and expenses
represent the operations of NACT subsequent to its acquisition by the Company.

APPLICATIONS AND SERVICES

Total applications and services revenue was $13.6 million in the year ended
December 31, 2001, a 13% increase from 2000. The $1.6 million increase in
revenue is comprised of an increase in customer response

14

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
44% percent of revenue, compared with 44% of revenue in 2000.

Allocated operating expenses incurred in Applications and Services 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 by the Company in late 2000),
whose operations were substantially eliminated in the second quarter of 2001.
The increase in sales, general and administrative 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 Applications and
Services were 25% during the year ended December 31, 2001, up from 12% in 2000.

Discontinued Operations

Following the Company's acquisition of NACT in July of 2001, the Company
determined that its VAR business and associated consulting practice were not
strategic to the Company's ongoing objectives and discontinued capital and human
resource investment in these businesses. Accordingly, the Company has elected to
report its VAR business and associated consulting practice as discontinued
operations by early adoption of SFAS 144. These businesses were added to the
Company's 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 operating loss in 2001 includes depreciation of $546,000, amortization
of intangibles of $22.7 million, write-down of goodwill of $95.3 million,
reorganization costs of $9.2 million and amortization of deferred compensation
of $267,000. The operating loss in 2000 includes depreciation of $1.8 million,
amortization of intangibles of $11.5 million, loss on asset abandonment of
$218,000, reorganization costs of $1.0 million and amortization of deferred
compensation of $126,000.

15

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 shares of
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.

FISCAL YEAR 2000 COMPARED WITH FISCAL YEAR 1999

For the year ended December 31, 2000, the Company's net loss totaled $55.5
million, or $2.14 per share, compared with net loss of $9.8 million, or $.41 per
share, for 1999. The 2000 results include $982,000 in amortization of
intangibles, $482,000 in amortization of deferred compensation primarily related
to acquisitions during 2000, $1.8 million loss on asset abandonment, $511,000 in
reorganization costs and a loss from discontinued operations of $43.0 million.
The 1999 results include $982,000 in amortization of intangibles, $462,000 in
reorganization costs, $81,000 in transaction costs and a loss from discontinued
operations of $4.5 million.

Continuing Operations

For the year ended December 31, 2000, the Company's net loss from
continuing operations totaled $12.5 million, or $.48 per share, compared with a
net loss of $5.4 million, or $.23 per share, for 1999. The 2000 results include
$482,000 in amortization of deferred compensation primarily related to purchases
during 2000, $1.8 million loss on asset abandonment and $511,000 in
reorganization costs. The 1999 results include $462,000 in reorganization costs
and $81,000 in transaction costs.

Total revenue, which was entirely from services, was $12.0 million in the
year ended December 31, 2000, reflecting a 19.7% increase from 1999. Gross
profit increased by $927,000 in the year ended December 31, 2000, and was 44%
percent of revenue, compared with 44% of revenue in 1999.

Total operating expenses incurred in continuing operations for the year
ended December 31, 2000, were $16.6 million, an increase of $7.0 million
compared to 1999. The increase is primarily attributable to the following items:
$4.0 million increase in sales, general and administrative expenses, $793,000
increase in depreciation expense, an increase in reorganization cost of $49,000,
amortization of deferred compensation of $482,000 and $1.8 million in loss on
asset abandonment.

The increase in sales, general and administrative expenses resulted from
the addition of personnel and related costs related to the expansion of the
Company's marketing, finance, human resources and facilities costs related to
supporting its plans for growth, which did not materialize. Because the growth
did not materialize, in the second quarter of 2000, the Company announced a
reorganization as part of its effort to improve operational efficiencies and
financial performance. As a result of the reorganization, the Company recorded
reorganization costs of $511,000 (non-cash charges related to common stock
issued and the intrinsic value of options previously issued to employees with
accelerated vesting and extended exercise dates). The increase in depreciation
expense is related to the purchase of furniture and equipment of approximately
$5.3 million during 2000 and the amortization of deferred compensation of
$482,000 related to the purchase of Cereus in September 2000. In 2000, the
Company decided to replace software used internally and recorded a loss on asset
abandonment of $1.8 million.
16

In 1999, in connection with the Company's relocation of its headquarters to
Atlanta, Georgia, the Company recorded reorganization costs of $462,000 related
to recruiting and relocation of personnel. Also in 1999, the Company acquired
two businesses in transactions accounted for as poolings-of-interests and the
Company recorded merger-related transaction costs totaling $81,000 in connection
with these acquisitions. As a percent of revenue, operating expenses from
continuing operations were 107% in 2000 (excluding the amortization of
intangibles and deferred compensation, loss on asset abandonment and
reorganization costs), up from 80% in 1999 (excluding the amortization of
intangibles, reorganization costs and transaction costs).

Business Unit Performance

During 2000 and 1999, the Company operated only one of the business units
that now comprise its continuing operations.

Discontinued Operations

Following the Company's acquisition of NACT in July of 2001, the Company
determined that its VAR business and associated consulting practice were not
strategic to the Company's ongoing objectives and discontinued capital and human
resource investment in these businesses. Accordingly, the Company has elected to
report its VAR business and associated consulting practice as discontinued
operations by early adoption of SFAS 144. These businesses were added to HSG 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 $11.0 million and 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.

SUMMARY OPERATING RESULTS OF THE DISCONTINUED OPERATIONS (IN THOUSANDS) ARE
AS FOLLOWS:

The operating loss in 2000 includes depreciation of $1.8 million,
amortization of intangibles of $11.5 million, loss on asset abandonment of
$218,000, reorganization costs of $1.0 million and amortization of deferred
compensation of $126,000. The operating loss in 1999 includes depreciation of
$1.2 million, amortization of intangibles of $868,000, reorganization costs of
$192,000 and transaction costs of $170,000.

CRITICAL AND SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in
conformity with generally accepted accounting principles requires management to
make judgments, assumptions and estimates that affect the amounts reported in
the consolidated financial statements and accompanying notes. Factors that could
affect

17

the Company's future operating results and cause actual results to vary
materially 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, 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 effect on the Company's financial position and results of operations.

A summary of the Company's critical 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. Significant changes in required reserves have been recorded in recent
periods and may occur in the future due to the current market environment.

INVENTORY RESERVE

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 required reserves 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 required inventory reserves may
continue to occur in the future due to the current market conditions.

RESTRUCTURING ACCRUALS

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 lease with total payments
remaining of $2.7 million, assumes that the building will be sub-leased for 50%
of the lease value. As of December 31, 2001, the Company had a remaining reserve
balance of approximately $3.8 million, which is included in current liabilities
of discontinued operations. The Company believes that this remaining estimated
balance is appropriate to cover future obligations associated with the
restructurings.

FAIR VALUE OF ASSETS AND LIABILITIES ACQUIRED

During 2001, the Company acquired NACT and Telemate.Net (see further
discussion in Note 3 to the consolidated financial statements). In conjunction
with the acquisitions, the Company was required to estimate the fair value of
assets (including goodwill and other intangibles) and liabilities acquired based
on industry conditions, historical experience and future operational cash flow
projections, option valuation models and evaluation of events subsequent to the
acquisitions. The Company believes that the estimated purchased balances
approximate fair market value.

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 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 benefit recorded.
18

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 after careful analysis of each
individual issue based upon the then current facts and circumstances. 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
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets," which stipulates an impairment test is to be performed
at each reporting date 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.

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 working
capital provided by debt from third party lenders, issuances of debt and equity
securities, sale of discontinued businesses and acquisitions.

At December 31, 2001, the Company had a negative working capital position
(excess of current liabilities over current assets) of $4.6 million compared to
a positive working capital position of $133.4 million at December 31, 2000.
(Included in the positive working capital at December 31, 2000 is $153.9 million
of assets of discontinued operations, including $119.2 million of intangible
assets, $4.5 million of capitalized software and $4.3 million of furniture and
equipment.) Of the negative working capital at December 31, 2001, $5.5 million,
including accrued interest, relates to the deferred payment due for the purchase
of NACT of which $1.8 million is expected to be deferred until 2003 through a
restructuring of this deferred payment (see Note 15 to the consolidated
financial statements). The Company's cash and cash equivalents totaled $7.7
million at December 31, 2001, and $11.0 million at December 31, 2000. Total
long-term debt including current portion, net of discount was $3.4 million at
December 31, 2001 and $9.5 million at December 31, 2000. Borrowings under the
Company's line of credit were zero at December 31, 2001 and 2000.

CASH FLOW

Cash used in the Company's continuing operations in the year ended December
31, 2001, totaled approximately $6.8 million compared with $12.3 million in
2000. The Company's use of cash in continuing operations during 2001 resulted
primarily from a net loss of $11.5 million, cash used for changes in current
operating items of approximately $4.6 million and was offset by non-cash charges
totaling $9.4 million (including depreciation and amortization of $5.9 million,
provision for doubtful accounts of $1.5 million and an extraordinary
item -- loss on debt conversion of $1.6 million). The Company's use of cash in
continuing operations during 2000 resulted primarily from a net loss $12.5
million, cash used for changes in current

19

operating items of approximately $4.8 million and was offset by non-cash charges
totaling $5.0 million (including depreciation and amortization of $3.0 million,
provision for doubtful accounts of $198,000 and loss on asset abandonment of
$1.8 million).

Cash used in the Company's discontinued operations in the year ended
December 31, 2001, totaled $5.8 million compared with $24.3 million in 2000.

The Company used cash in investing activities for continuing operations in
the year ended December 31, 2001, of approximately $17.6 million, compared with
$5.7 million in 2000. In 2001, the Company used $16.1 million in cash related to
the acquisitions of NACT and Telemate.Net. The Company spent $1.4 million and
$5.3 million on capital expenditures in 2001 and 2000, respectively.

Cash provided by discontinued operations from investing activities totaled
$8.1 million in 2001 compared with $2.4 million in 2000. During 2001, the
Company received net proceeds from sale of discontinued operations totaling $8.1
million for the sale of its restaurant solutions business. During 2000, the
Company received net proceeds from sale of discontinued operations totaling $8.6
million for the sale of its lodging and international businesses and the Company
spent approximately $2.3 million on software development costs during 2000 and
approximately $2.0 million on purchases of furniture and equipment during 2000.
The Company used $1.9 million of cash related to the acquisition of Cereus.

Cash provided by financing activities from continuing operations totaled
approximately $11.3 million in 2001, compared with $29.6 million in 2000.
Proceeds from issuance of redeemable preferred stock totaling $15 million, and
net proceeds from the issuance of common stock totaling $755,000 were offset by
payments on the convertible subordinated debentures totaling $4.5 million in
2001. Proceeds from issuance of convertible subordinated debentures totaling
$11.3 million, an advance from Cereus, prior to the merger, of $10.2 million,
and proceeds from the issuance of common stock totaling $17.7 million were
offset by payments on the borrowing outstanding under the credit facility line
and long-term debt totaling $9.7 million in 2000.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes the Company's future contractual obligations at
December 31, 2001 (in thousands):

- ---------------

* On March 29, 2002, the Company entered into a Settlement Agreement and General
Release (the "WATP Settlement Agreement") with WA Telcom Products Co., Inc.
("WATP") which provides for a restructuring of the deferred payment due by the
Company to WATP pursuant to that certain Stock Purchase Agreement, dated as of
July 4, 2001, as amended, between the Company and WATP, whereby the Company
purchased from WATP all the issued and outstanding capital stock of NACT.
Pursuant to the WATP Settlement Agreement, the Company's obligation to pay to
WATP the deferred payment (the "Deferred Amount") on the date the Company
files its Annual Report on Form 10-K for the year ended December 31, 2001,
will be restructured pursuant to the terms and conditions of a Convertible
Secured Promissory Note to be made by the Company in favor of WATP, in the
aggregate principal amount of

20

$4,250,000, together with interest accrued thereon the ("Note"), pursuant to
which the aggregate principal amount and accrued interest thereunder is
payable by the Company as follows: (i) $1.5 million on the date the Note is
issued; (ii) $500,000 on each of July 1, 2002; October 1, 2002; and January 1,
2003; and (iii) $1.25 million plus all interest accrued under the Note since
April 1, 2002, on April 1, 2003. Also pursuant to the WATP Settlement
Agreement, the Company shall pay to WATP $1.5 million on April 1, 2002. The
WATP Settlement Agreement is subject to the approval of the United States
Bankruptcy Court for the Northern District of Illinois, Eastern Division (the
"Bankruptcy Court"), which has jurisdiction over WATP's pending bankruptcy
proceeding, and the Company's obligation to pay the Deferred Amount has been
suspended until the WATP Settlement Agreement is so approved or it terminates
pursuant to its terms. If the Bankruptcy Court grants such approval by May 31,
2002, then the $1.5 million payment to be made by the Company to WATP on April
1, 2002 will be applied to the payment due under the Note on the date the Note
is issued. If the Bankruptcy Court does not grant such approval by such time,
then such payment will be applied to the Deferred Amount owed by the Company,
and the Company will be required to pay to WATP the remainder of the Deferred
Amount totaling approximately $4.0 million.

At December 31, 2001, the Company had no borrowings under its $5.0 million
credit facility with Silicon Valley Bank (the "Credit Agreement"). The Credit
Agreement is secured by substantially all of the assets of the Company. The
availability under the Credit Agreement at December 31, 2001 is based on an
analysis of available collateral based on an audit by the Bank, which is being
completed now, and is expected to be determined well in advance of any expected
borrowing needs.

SOURCES OF CASH

For 2002, the Company expects that its primary sources of cash will be from
cash on hand, working capital provided by operating activities, borrowings under
the Credit Agreement and other possible sources, including issuances of equity
or debt securities. The Company believes that, with its current operations,
which were cash flow positive in the fourth quarter of 2001, and with the
restructuring of the Deferred Amount, it will have sufficient liquidity from
these sources to meet its current financial obligations through 2002. However,
the Credit Agreement contains 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.

In addition, as noted above, the WATP Settlement Agreement is subject to
Bankruptcy Court approval, and, if the Bankruptcy Court does not grant such
approval by May 31, 2002, then the Company will be required to pay to WATP the
remainder of the Deferred Amount totaling approximately $4.0 million.

If the Company is unable to obtain additional capital, sell assets, obtain
an amendment to the Credit Agreement or otherwise restructure its outstanding
indebtedness, 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, the restructured
payments during 2002 for the NACT acquisition and payments related to
discontinued operations. At December 31, 2001, the Company accrued $674,000 for
Telemate.Net related severances and $4.9 million in payments related to
discontinued operations. The Company expects to pay out $1.6 million related to
Telemate.Net severances and discontinued operations in 2002.

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, and funding the deferred payment for
the purchase of NACT. 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 the Company is unable to secure

21

a working capital line of credit with sufficient borrowing availability (or
restructure its existing line of credit), obtain additional capital or sell
assets, the Company may not be able to meet its obligations and growth plans.

RISK FACTORS

You should carefully consider the following risk factors as well as other
information included in this Annual Report. If any of the following risks or
uncertainties actually occurs, then our business, financial condition and
results of operations could be materially adversely affected. In that event, the
trading price of our Common Stock could decline.

WE MAY BE UNABLE TO FUND FUTURE GROWTH.

Our 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 us on favorable terms or at all. If adequate
funds are not available on acceptable terms, then we may not be able to meet our
business objectives for expansion. This in turn could harm our business, results
of operations and financial condition. In addition, if we raise additional funds
through the issuance of equity or convertible debt securities, then the
percentage of ownership of our existing shareholders will be reduced, and any
new securities could have rights, preferences and privileges senior to those of
our Common Stock. Furthermore, if we raise capital or acquire businesses by
incurring indebtedness, then we will become subject to the risks associated with
indebtedness, including interest rate fluctuations and any financial or other
covenants that our lender may require.

WE MAY NOT BECOME PROFITABLE.

We have a history of net losses, including net losses of approximately
$147.6 million for the 2001 fiscal year, $55.5 for the 2000 fiscal year and $9.8
for the 1999 fiscal year. As of December 31, 2001, we had accumulated deficit of
approximately $252.1 million. We have not achieved profitability on a quarterly
or annual basis. Our revenues may not grow and we may never generate sufficient
revenues to achieve or sustain profitability.

THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE.

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. During the year
ended December 31, 2001, the per share closing price of our Common Stock on The
Nasdaq National Market fluctuated from a high of $2.25 to a low of $0.50, and
from January 1, 2002 to March 27, 2002, the per share closing price of our
Common Stock fluctuated from a high of $1.79 to a low of $1.18. We believe that
the volatility of the price of our Common Stock does not necessarily relate to
our performance and is broadly consistent with volatility experienced in our
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, our 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 our Common Stock to decline. The trading price of our
Common Stock could continue to be subject to wide fluctuations in response to
these or other factors, many of which are beyond our control. If the market
price of our Common Stock decreases, then shareholders may not be able to sell
their shares of Common Stock at a profit.

A LOW PRICE FOR OUR COMMON STOCK COULD RESULT IN ITS DELISTING FROM THE NASDAQ
NATIONAL MARKET.

As noted above, our Common Stock is currently quoted on The Nasdaq National
Market. We must satisfy Nasdaq's minimum listing maintenance requirements to
maintain our listing on The Nasdaq National Market. Nasdaq's listing maintenance
requirements include a series of financial tests relating to shareholders'
equity, public float, number of market makers and shareholders, market
capitalization, and maintaining a minimum bid price of $1.00 per share for
shares of our Common Stock. The minimum bid price of our Common Stock has been
less than $1.00 per share at various times during the year ended December 31,
2001.

22

If the bid price of our Common Stock falls below $1.00 for a period that exceeds
that allowed by The Nasdaq National Market, or if we are unable to continue to
meet Nasdaq's standards for any reason, then our Common Stock could be delisted
from The Nasdaq National Market.

If our Common Stock is delisted from The Nasdaq National Market, then it
would trade on either The Nasdaq SmallCap Market or on the Over-the-Counter
Bulletin Board, both of which are viewed by most investors as less desirable and
less liquid marketplaces. Thus, delisting from The Nasdaq National Market could
make trading our shares more difficult for investors, leading to declines in
share price. It would also make it more difficult for us to raise additional
capital and execute our acquisition strategy. In addition, we would incur
additional costs under state blue sky laws to sell equity.

HISTORICALLY LOW TRADING VOLUME IN OUR COMMON STOCK MAY AFFECT SHAREHOLDER
LIQUIDITY.

The trading volume of our Common Stock on The Nasdaq National Market has
been low historically. As of March 22, 2002, there were approximately 78.0
million shares of our Common Stock issued and outstanding, however, there can be
no assurance that there will be an active market for our Common Stock. Low
trading volume may result in shareholders being unable to sell shares of our
Common Stock at the times and at the prices they desire.

WE ARE EXPOSED TO THE GENERAL CONDITION OF THE TELECOMMUNICATIONS MARKET.

Our business is subject to global economic conditions, and in particular,
market conditions in the telecommunications industry. Our 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 we may experience
adverse operating results.

THE MARKET FOR NEXT GENERATION COMMUNICATIONS SOLUTIONS IS NEW AND EVOLVING
AND, IF THIS MARKET DOES NOT DEVELOP AS WE EXPECT, IT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.

While we believe 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 our products will fully develop or be sustainable. If this
market does not develop, or develops more slowly than we expect, then we may not
be able to sell our products in significant volume, or at all.

Further, we believe that, with our acquisition of NACT in July 2001, we are
now positioned to succeed in leveraging this opportunity based on our core
competencies in developing 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 we will succeed
in this evolving marketplace. Although we intend to penetrate a niche market
within the network convergence technologies sector, we may be unsuccessful in
competing against larger competitors in the market who have greater financial,
operating and human resources and possess greater experience in this marketplace
than we do.

OUR SUCCESS WILL DEPEND, IN PART, ON OUR DEPLOYMENT OF OUR VOIP PRODUCT.

We believe that our VoIP product has significant revenue potential. We have
successfully completed beta trials of our VoIP product, but delays in its
general availability or lack of acceptance in the marketplace after its
widespread deployment could have a material adverse effect on our business,
results of operations and financial condition.

INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US, EVEN WITHOUT MERIT,
COULD REQUIRE US TO ENTER INTO COSTLY LICENSES OR DEPRIVE US OF THE TECHNOLOGY
WE NEED.

Our industry is technology intensive. As the number of competitors in our
target markets increases and the functionality of the products produced by such
competitors further overlap, third parties may claim that the technology we
develop or license infringes their proprietary rights. Any claims against us or
any of our subsidiaries may affect our business, results of operations and
financial conditions. Any infringement claims, even without merit, could require
us to pay damages or settlement amounts or could require us to develop non-
23

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 our management resources could
have a material adverse effect on our business, results of operations and
financial condition. If successful, a claim of product infringement could
deprive us of the technology we need altogether.

FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.

Our success depends in part upon the protection of our proprietary
application software and hardware products. We have taken steps that we believe
are adequate to establish, protect and enforce our intellectual property rights.
We cannot assure you that our efforts to safeguard and maintain our proprietary
rights will be adequate. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise to use our products or
technology.

We have pending several patent applications related to our VoIP product.
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 our proprietary
rights to the VoIP product.

Furthermore, the laws of many foreign countries in which we do 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 we have implemented and
will continue to implement protective measures in those countries, these efforts
may not be successful. Additionally, even if our U.S. and international efforts
are successful, our competitors may independently develop non-infringing
technologies that are substantially similar or superior to our technologies.

IF OUR PRODUCTS CONTAIN DEFECTS, THEN OUR SALES ARE LIKELY TO SUFFER AND WE
MAY BE EXPOSED TO LEGAL CLAIMS.

Our 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 we did not detect or anticipate when introducing such products or
enhancements to the market. In addition, the markets in which our 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 our products. Despite our testing, 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 our products; delays or cessation of service to our customers; and
legal claims by customers against us.

To the extent that contractual provisions that limit our 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 our
business, results of operations and financial condition.

WE MAY BE OBLIGATED TO INDEMNIFY CUSTOMERS WHO PURCHASE OR LEASE EQUIPMENT
FROM US AGAINST CLAIMS OF PATENT INFRINGEMENT.

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

OUR GROWTH COULD BE LIMITED IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL.

We believe that our success depends largely on our 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

24

technical skills and understanding of our market. Workforce reductions by us
during 2000 and 2001 may adversely affect our ability to retain our current
employees and recruit new employees. The inability to hire or retain qualified
personnel could hinder our ability to implement our business strategy and harm
our business.

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. The Company may enter into
such transactions in the future.

At December 31, 2001, the Company's outstanding debt, primarily consisting
of convertible subordinated debentures (see Note 6 to the consolidated financial
statements), carries interest rates which are fixed.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required to be filed with this Annual Report are
filed under Item 14 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 financial
statements and related notes appearing elsewhere in this Annual Report. The
results of operations for any quarter are not necessarily indicative of the
results to be expected for any future period.

- ---------------

(a) First quarter 2001 net loss includes an extraordinary item -- loss from debt
conversion totaling $1.6 million.

(b) Research and development expenses in 2001 relate to the operations of NACT,
Telemate.Net and MessageClick.

(c) Per common share amounts for the quarters and full years have been
calculated separately. Accordingly, quarterly amounts may not add to the
annual amounts because of differences in the average common shares
outstanding during each period.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

26

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS

Set forth below is certain information, as of March 31, 2002, concerning
each of the directors of the Company. Each of the individuals listed below shall
serve as a director of the Company until the next annual meeting of the
Company's shareholders and until their successors have been elected and
qualified.

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

MURALI ANANTHARAMAN has served as a director of the Company since November
16, 2001, the date Telemate.Net merged with the Company. Mr. Anantharaman also
served as a director of Telemate.Net from October 1999 until November 2001. From
July 1998 until the present, Mr. Anantharaman has served as a Managing Partner
of LiveOak Equity Partners, L.P., a venture capital firm that makes equity
investments in emerging growth companies in the information technology and
healthcare sectors, which firm he co-founded in July 1998. From May 1987 to June
1998, Mr. Anantharaman was a partner in EGL Holdings, an Atlanta-based private
equity investment firm.

MAX E. BOBBITT has served as a director of the Company since September
2000. From January 2000 to September 2000, Mr. Bobbitt served as a director of
Cereus. Mr. Bobbitt has served as a director of WorldCom, Inc. since 1992 where
he also serves on the compensation and audit committees. Mr. Bobbitt is also
currently a director of Metromedia China Corporation ("Metromedia China"), a
telecommunications company, and Xepiedus Holding Corporation, a competitive
local exchange company. From July 1998 until the present, Mr. Bobbitt has been a
telecommunications consultant. From March 1997 until July 1998, Mr. Bobbitt
served as President and Chief Executive Officer of Metromedia China. From
January 1996 until March 1997, Mr. Bobbitt was President and Chief Executive
Officer of Asian American Telecommunications Corporation, which was acquired by
Metromedia China in February 1997.

GARY H. HECK has served as a director of the Company since September 2000.
From January 2000 to September 2000, Mr. Heck served as a director of Cereus.
Mr. Heck has been a consultant since 1989, most recently serving as a Managing
Partner and a co-founder of PacifiCom, a consulting services company. From 1987
until 1989, Mr. Heck was President and Chief Executive Officer of Telematics
Products, Inc., a telecommunications products company. From 1983 until 1987, he
held various executive positions at Pacific Telesis Corporation, one of the
nation's largest Regional Bell Operating Companies, and completed his tenure as
a corporate officer of several subsidiaries of Pacific Telesis and as Chief
Executive Officer of PacTel Products Corporation. From 1977 until 1983, Mr. Heck
was a Division Manager and District Manager at AT&T Corporation, where he was
responsible for sales and marketing programs. From 1967 until 1977, Mr. Heck
held various positions at Pacific Telephone & Telegraph.

27

AMY L. NEWMARK has served as a director of the Company since September
2000. From January 2000 to September 2000, Ms. Newmark served as a director of
Cereus. Ms. Newmark is a private investor in the technology, Internet and
telecommunications fields. From 1995 to 1997, she served as Executive Vice
President of Strategic Planning at Winstar Communications, Inc. Prior to 1995,
Ms. Newmark served as the general partner of Information Age Partners, LP, a
hedge fund investing primarily in technology and emerging growth companies.
Before that, she was a securities analyst specializing in telecommunications and
technology companies. Ms. Newmark is also a director of U.S. Wireless Data, Inc.
and ParkerVision, Inc.

STEPHEN E. RAVILLE has served as a director of the Company since October
1997. Since 1996, Mr. Raville served as Chief Executive Officer and Chairman of
the Board of Telscape Communications, Inc. Mr. Raville is also President and
controlling shareholder of First Southeastern Corporation., a private investment
company he formed in 1992. In 1983, Mr. Raville founded TA Communications, a
long-distance telephone company, and served as its President, Chief Executive
Officer and Chairman of the Board. In 1985, in conjunction with a merger between
TA Communications and Advanced Telecommunications Corporation, he became
Chairman and Chief Executive Officer of Advanced Telecommunications until the
merger of Advanced Telecommunications into MCI WorldCom, Inc. in late 1992.

JOSEPH R. WRIGHT, JR. has served as a director of the Company since
September 2000. From January 2000 to September 2000, Mr. Wright served as a
director of Cereus. Mr. Wright is presently President and Chief Executive
Officer of PanAmSat Inc., a provider of global satellite-based communications
services, servicing news organizations, telecommunication companies, DirectTV
services, Internet networks and others around the globe. In the six years prior
to taking this position in 2001, he served as Vice Chairman of Terramark
Worldwide Inc., a public company that develops and operates Network Access Point
centers in the United States and Brazil. Mr. Wright also served as Chairman and
a director of GRC International, Inc., a public company that provides advanced
Internet and software technologies to government and commercial customers
("GRC"). In March 2000, GRC was acquired by AT&T Corp. From 1989 through 1994,
Mr. Wright also served as Co-Chairman and a director of Baker & Taylor Holdings,
Inc., an international book/video/software distribution and e-commerce company
that is majority owned by the Carlyle Group. Mr. Wright also served as Vice
Chairman, Executive Vice President and a director of W.R. Grace & Company, a
specialty chemicals and healthcare company, Chairman of Grace Energy Company,
and President of Grace Environmental Company. He served as Deputy Director, then
Director, of the Federal Office of Management and Budget under President Reagan,
serving in the Cabinet and the Executive Office of the President from 1982 to
1989. He also served as Deputy Secretary of the Department of Commerce from 1981
to 1982. Mr. Wright previously held positions as President of two of Citibank's
subsidiaries, as a partner of Booze Allen and Hamilton and in various management
and economic positions in the Federal Departments of Commerce and Agriculture.
In addition, Mr. Wright currently serves on the Board of Directors of Terramark
Worldwide, Inc., Titan Corporation, Baker & Taylor Holdings, Inc., Jefferson
Consulting Group and the AT&T Washington Advisory Board.

The biographical information for Messrs. Odom and Logsdon and Ms. Reising
is set forth in Item 4.5 of Part I of this Annual Report.

As a condition to completing the Telemate.Net merger, the Board was
required to appoint, as of the effective time of such merger, two additional
directors to serve on the Board who were selected by Telemate.Net and reasonably
acceptable to the Board. In satisfaction of such condition, the Board appointed
Mr. Anantharaman and Richard L. Mauro as directors of the Company effective
November 16, 2001, the date the Telemate.Net merger was consummated. Pursuant to
the terms of the Telemate.Net merger, until the 2004 annual meeting of the
Company's shareholders, any vacancy on the Board arising from the resignation,
removal or death of Messrs. Anantharaman or Mauro, or any nominee selected to
fill a director position occupied by either of the foregoing individuals, shall
be nominated on behalf of the Board and filled or selected by the remaining
Telemate.Net representative on the Board and approved by the Board. On February
19, 2002, Mr. Mauro resigned as a director of the Company, and the vacancy on
the Board created by such resignation has not yet been filled.

28

There are no family relationships among any of the executive officers or
directors of the Company. Except as disclosed above, no arrangement or
understanding exists between any director and any other person pursuant to which
any director was selected to serve as a director. To the best of the Company's
knowledge, (i) there are no material proceedings to which any director of the
Company is a party, or has a material interest, adverse to the Company, and (ii)
the