10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended June 28, 2002

Commission File Number: 0-28562

VERILINK CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
94-2857548
(IRS Employer
Identification No.)

127 Jetplex Circle, Madison, Alabama 35758-8989
(Address of principal executive offices)

(256) 327-2001
(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Series A Junior Participating Preferred Stock Purchase Rights
(Title of class)

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

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

             The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Common Stock on August 23, 2002, as reported by the Nasdaq SmallCap Market was $6,679,062. Shares of Common Stock held by each officer and director and by each person believed by the Company to own 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for other purposes.

             As of August 23, 2002, the registrant had outstanding 14,996,534 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

             Parts of the following document are incorporated by reference in this Annual Report on Form 10-K: the Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held November 13, 2002 (the “Proxy Statement”), (Part III).

PART I

Item 1. Business

Overview

            Verilink Corporation (the “Company”) provides voice and data network access solutions to service providers and enterprise customers for DDS, T1/E1, NxT1, T3 and G.SHDSL communication services. The Company develops, manufactures and markets customer premise equipment (“CPE”) and central site solutions for data and telecommunication centers. The Company offers a variety of application-specific solutions for time-division multiplexing, inverse multiplexing, digital cross-connect and IP bridging and routing, as well as converged solutions for access to Frame Relay, ATM and IP-based networks. The Company’s customers include equipment integrators, network service providers (“NSPs”) and enterprise customers consisting of wireline and wireless providers, inter-exchange carriers (“IXCs”), local exchange carriers (“LECs”), Internet service providers (“ISPs” ), Fortune 500 companies and various local, state and federal government agencies. The Company was founded in San Jose, California in 1982 and is a Delaware corporation.

Industry Background

            Network service providers, both of wireline and wireless, have historically been the main consumers of network access equipment. Capital spending by these companies comprises the majority of telecommunications spending, and determines the overall direction and financial health of the industry. Capital spending by carriers in calendar 2002 is expected to drop significantly to between $40-60 billion from an all time high of $113 billion in calendar 2000, according to data provided by Soundview and SG Cowen. This decline in spending was the consequence of the IXCs and LECs overbuilding their backbone networks in the last half of 1999 and throughout calendar 2000. According to Soundview, capital spending estimates have continued to be lowered since January of 2002 for the largest providers, and may continue to decline through calendar 2003 as the telecommunication downturn may force more carriers into bankruptcy.

            The outlook for the next 12 to 18 months for telecommunication equipment is still unclear based on the uncertainty of demand forecasts, capital spending projections, and the viability of certain service providers as ongoing businesses. Most market watchers still predict consolidation in both the equipment and service provider spaces, which may result in only a limited set of companies remaining as standalone entities. Opportunities for wholesale replacement of network gear are remote as companies and providers make only incremental investments in both equipment and infrastructure.

Material Changes in the Business

            Several changes were implemented in fiscal 2002 by the Company to address this general downturn in the telecommunication industry, and the lack of visibility for future business. The Company believes that these changes will allow the Company to reduce operating expenses, to focus on customers that provide profitable longer-term business opportunities, and to enhance the ability of the Company to generate positive cash flow in future periods and to return to profitability at lower revenue levels.

Optical Network Access Project

            In October 2001, the Company suspended its development activities related to the development of an optical network access product that targeted fiber-to-the-business (“FTTB”) applications. Based on the market conditions and the projected outlook for fiber deployments, the Company closed its operations in Boston, Massachusetts and archived all development work. The Company and Beacon Telco sought additional funding for this project through January 2002, but were unsuccessful. The Company owns the rights to all the optical network access development work completed during this project, and could restart the program in the future if market conditions and the outlook for FTTB applications improve.

Staff Reductions

            Headcount decreased from 212 employees at September 29, 2001 to 63 employees at August 23, 2002 as the Company adjusted its cost structure for reduced revenue levels. Changes were also made to the management

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team during this period that resulted in the appointment of a new President and CEO in January 2002 when Leigh S. Belden returned to that position. Mr. Belden founded the Company with Steven C. Taylor and served as its President and CEO from its inception in 1982 until his retirement in March 1999. Other executive positions were eliminated during this period, which results in the current executive management team of Leigh S. Belden, President and CEO, C. W. Smith, Vice President and CFO, and S. Todd Westbrook, Vice President Operations.

Facilities

            With the reduced number of employees, the Company relocated to a smaller leased facility in Madison, Alabama at the end of June 2002. In August 2002, the Company signed an agreement with The Boeing Company to lease its facility located at 950 Explorer Boulevard in Huntsville’s Cummings Research Park, and will continue to seek a prospective buyer for this facility. In addition, the Company is in the process of moving the manufacturing activities of its Access System 2000 products to the facility in Madison from a contract manufacturing firm in California in order to improve overall operational efficiencies.

The Market Opportunity

Industry Direction – Incremental Investments to Address Network and Application Migration

            Business customers today are searching for ways to improve the operation of their networks by increasing bandwidth and adding productivity-enhancing applications, while lowering the overall cost of owning and operating an enterprise network. Applications are increasingly IP-based, including VPNs for remote LAN access and packetized voice, and require improved security, encryption, traffic prioritization and network management. Many enterprise networks today are also experiencing technology obsolescence issues, and are without a clear path for migration to replacement or newer service offerings. Examples of these dynamics can be found in almost every segment of industry, creating communications problems that demand solutions to increase performance, facilitate migration to newer less costly services, and improve operations without economic penalty. The Company’s aim is to provide intelligent access solution s that allow enterprise customers to move forward with newer access technologies, but at an affordable pace.

Opportunity – Evolution of Managed Services and Carrier-bundled CPE

            Today, integrated network solutions, including access equipment, are being offered by the major network service providers to target specific service and application needs. These bundles generally include all the necessary elements that an enterprise will need for service including the communication facility, termination equipment, network management, maintenance and support, and verifiable service level agreements. Bundles exist today for all major services including TDM services for private line applications and frame relay, ATM, and IP services for converged voice and data connectivity. Part of the Company’s core strategy is to work with the major service providers to gain certification for network access equipment to be included as part of their integrated networking solution offerings.

            Communication traffic from enterprise customers continues to increase as cost effective data-centric applications provide new revenue opportunities for service providers and improved productivity for the enterprise. Business-to-Business connectivity, E-commerce, packet-voice, lower costs of bandwidth and the critical need to access information are key drivers of the growth in enterprise communication traffic.

Emerging Opportunities – Improvements for Copper-based Service Delivery

            New services enabled by the emerging international DSL standard (G.SHDSL) over existing copper infrastructure are predicted to provide new services and CPE opportunities over the next several years. Carriers work with digital subscriber loop access multiplexer (“DSLAM”) providers to implement new facilities for broadband services that include ADSL, SDSL, G.SHDSL and T1/E1 interfaces. In many international markets, T1/E1 replacement via G.SHDSL interfaces on the DSLAM provides a carrier with a less expensive alternative for providing business services for voice and data. In North America, G.SHDSL offers a migration technology for older HDSL loop systems that has improved reach and spectral compatibility as requested by the FCC. The Company is currently working with several leading DSLAM vendors to certify its WANsuite CPE devices, and to establish market partnerships for distribution of equipment to th e network service providers for both domestic and international markets.

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Growth - Improved Outlook for Wireless Data Services

            Demand for wireless communication services has grown from 1999 through 2002 with continued growth expected for the foreseeable future. Next-generation data services based on incremental technologies such as 1XRTT for CDMA systems, and the migration to 3G broadband services will drive incremental demand for access equipment to wireless carriers’ networks. This trend is driven by the availability of new low cost digital services, the shift in long distance voice services to wireless carriers, and the intense competition among service providers. Service providers seeking delivery of new communication services in developing nations are also increasingly choosing wireless technology as the most cost-effective solution. The Company expects that future growth in the wireless market will come from a further increase in the number of subscribers, an increase in the total minutes of use, the increased implementation of wireless local loop systems in developing nations and the emergence of data services for mobile Internet, e-mail and messaging in developed nations.

The Verilink Solution – Intelligent WAN Access

            The Company’s goal is to combine expertise in broadband access technologies with web-based application-level software to provide cost effective, scalable, integrated voice and data access solutions to yesterday’s and tomorrow’s communications services. In the past, access devices were typically used to terminate communications circuits and did not have the processing power needed to obtain higher-level statistics and provide service level monitoring of the new packet based services. The Company’s latest generation access solutions include such capabilities, and are often available with network management software so as to provide greatly improved network visibility and performance monitoring for service providers and their enterprise customers. Our WANsuite® family solutions are software based, often allowing no cost upgrades as our customers migrate from their TDM, or leased line facili ties, to Frame Relay, ATM or IP networks, while maintaining the highest levels of network management and information.

Products

            Verilink offers a portfolio of products appropriate for a wide range of applications. The Company’s products are both modular in design, such as the Access System 2000 product family, as well as stand-alone devices, such as the WANsuite product family and PRISM series of channel service/data service unit devices.

WANsuite Product Family

            The Company’s WANsuite product family is a suite of software programmable intelligent integrated access devices that target customer premise applications for improving “last mile” or network edge broadband communications. The WANsuite platform supports copper-based transmission services such as DDS, T1, E1 and G.SHDSL, and includes software support for ATM, Frame Relay and IP service and application monitoring and control. The WANsuite product line combines integral channel service/data service units (“CSU/DSU”), routing, probe and network monitoring capabilities. WANsuite products also utilize an embedded web server to provide an innovative user interface that aligns with the Internet for ease-of-use by service providers. The increased flexibility of WANsuite products allows quick delivery of customer specific requirements. Some key WANsuite features include a powerful web interface fo r simplified configuration, performance monitoring and diagnostics for all service layers, and access routing, bridging, and switching for Frame Relay, ATM, Ethernet and IP applications.

Access System 2000

            The Company’s Access System 2000 (“AS2000™”) is a flexible network access and management solution that provides cost-effective integrated access to a broad range of network services. AS2000 products are installed at the origination and termination points at which service providers provide communications services to their corporate customers. AS2000 systems provide transmission link management, multiplexing and inverse multiplexing functions for T1 (1.5 MBPS), E1, multi-T1, multi-E1 and T3 (45 MBPS) access links. A key feature of the AS2000 is its flexibility and adaptability made possible by a modular architecture that allows customers to access new services or expanded network capacity simply by configuring or changing circuit cards. In a single platform, the AS2000 combines the functions of a T1 CSU/DSU, E1 NTU, inverse multiplexer, cross-connect, T3 CSU/DSU, automatic protection switch an d a Simple Network Management Protocol

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(“SNMP”) management agent. A WANsuite gateway card is also available for the AS2000 for SCADA, IP routing and CSU/DSU applications.

PRISM Product Family

            The Company’s PRISM product family supports legacy TDM applications at transmission rates ranging from DDS through T1. Products included in this family are the NEBs compliant 1024 shelf system, 1051 shelf, 3030/3060 intelligent channel bank, 2000 & 2100 CSU’s and 3111/3112 CSU/DSUs. These devices provide physical layer performance monitoring and diagnostic functions. Management of the PRISM product family ranges from SNMP through simple DIP switches. The Company’s PRISM products are produced to carrier-grade standards of quality and are typically found deployed in the mission-critical applications used by wireline and wireless carriers, banks, utilities, government and other corporate enterprises.

ISNP – Industry Standard Product Portfolio

            In fiscal 2002, the Company worked with Interlink Communications Systems to launch a family of industry standard network access devices to target enterprise customers via the reseller channel in North America. The product portfolio consists of standards-based access equipment for DDS and T1 services, and incorporates interfaces for asynchronous and synchronous applications and network support for Frame Relay and IP services. This family of “generic-like” access devices provides the reseller community with opportunities to provide high quality access solutions and improve their operating margins in the process.

Sales, Marketing and Customer Support

Sales and Marketing

            The Company sells its products and services to network service providers and wireless equipment manufacturers primarily through a direct sales force located in major U.S. metropolitan areas. A direct sales effort, supported by sales engineers who provide customers with pre- and post-sale technical assistance, allows the Company to gain a more in-depth knowledge of customers’ network access requirements. The Company believes this knowledge helps it to build long-term relationships and alliances with key customers.

            The Company also sells its products and services to North American enterprises primarily through indirect channels, which include distributors, systems integrators and value-added resellers. These include a master-distributor relationship with Interlink Communication Systems, and Premier partnerships with Phillips Communications, Integrated Communications, Inc., Inter-Tel, Primary Telecommunications, Inc., Allencom and Nextira. With the addition of more intelligent integrated access devices and CPE products, the Company believes that sales through indirect channels will become increasingly more important.

            The Company believes that entry into international markets for advanced digital network products will be enabled through strategic relationships and in-country distribution channels that reach both enterprise and NSP customers. Over the last year, the Company has had minimal direct sales to international customers. In addition to the specific sales efforts directed at network service providers, the Company’s marketing activities include participating in industry trade shows and conferences, distribution of sales and product literature, media relations, advertising in trade journals, direct mail and ongoing communications with customers and industry analysts.

            In fiscal 2002, net sales to Nortel Networks and Interlink Communications Systems accounted for 36% and 15% of the Company’s net sales, respectively, and the Company’s top five customers accounted for 71% of the Company’s net sales. In fiscal 2001, net sales to Nortel Networks accounted for 37% of the Company’s net sales, and net sales to the Company’s top five customers accounted for 66% of the Company’s net sales. In fiscal 2000, net sales to Nortel Networks and WorldCom accounted for 30% and 19% of the Company’s net sales, respectively, and net sales to the Company’s top five customers accounted for 61% of the Company’s net sales. Other than Nortel Networks, Interlink Communications Systems and WorldCom, no customer accounted for more than 10% of the Company’s net sales in fiscal years 2002, 2001 or 2000. On a quarterly basis in fiscal 2002, net sales to Nort el Networks of legacy products has accounted for as much as 64% of the Company’s net sales that quarter. There can be no assurance that the Company’s current customers will continue to place orders with the Company, that orders by existing customers will continue at the levels of previous periods, or that the

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Company will be able to obtain orders from new customers. The economic climate and conditions in the telecommunication equipment industry are expected to remain unpredictable in fiscal 2003 and 2004. WorldCom filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code in July 2002. A bankruptcy filing by one or more of the Company’s other major customers would materially adversely affect the Company’s business, financial condition and results of operations. See “Item 7. Factors Affecting Future Results – Customer Concentration”.

Customer Service and Support

            The Company maintains 24-hour, 7-day a week telephone support for all of its customers. The Company provides, for a fee, direct installation and service of its products utilizing its own resources or resources available under a Worldwide Equipment Support agreement with Vital Network Services, Inc. The Company provides product training and support to its customers dealing with the installation, operation and maintenance of the Company’s products.

            The Company also offers various levels of maintenance agreements to its customers for a fee, which provide for on-site service in response to customer reported difficulties.

Research and Development

            The Company’s research and development efforts are focused on developing new products, core technologies and enhancements to existing products. During the past year, product development activities included enhancements of the existing WANsuite intelligent integrated access product family and development related to the optical network access project. The enhancements to the WANsuite product family included advanced protocol development and customer application inclusion, as well as the development of new offerings for ATM services over G.SHDSL. These WANsuite family additions take advantage of ATM’s fixed cell size to deliver reliable voice and data services over G.SHDSL. The Company’s product development strategy has focused on the development of modular software and hardware products that can be integrated and adapted to the changing standards and requirements of the communications and internetw orking industries and on the development of low-cost CPE devices that leverage advancements in hardware and software technology.

            In October 2001, the Company terminated its agreements with Beacon Telco, L.P. and the Boston University Photonics Center that established the product development center at the Photonics Center during fiscal 2001, and suspended its optical network access development project.

            During fiscal 2002, 2001 and 2000, total research and development expenditures were $5,505,000, $19,682,000 and $8,950,000, respectively. Research and development expenditures in fiscal 2002 and 2001 related to the optical network access product were $688,000 and $11,538,000, respectively. All research and development expenses are charged to expense as incurred. See Note 8 to the Consolidated Financial Statements regarding the accounting treatment of warrants and bonuses associated with the optical network access project.

            The markets for the Company’s products have historically been characterized by rapidly changing technology, evolving industry standards, continuing improvements in telecommunication service offerings, and changing demands of the Company’s customer base. During the fiscal year, the markets for the company’s products have been slower in accepting newer technologies as capital spending by carriers and enterprises has been reduced. However, the Company expects to continue its investment in research and development in fiscal 2003 for product development of specific technologies, such as IP, QoS, xDSL and network management, as well as to respond to market demand and new service offerings from service providers. Research and development activities may also include development of new products and markets based on the Company’s expertise in telecommunications network access technologies. See “I tem 7. Factors Affecting Future Results — Dependence on Recently Introduced Products and New Product Development”.

Manufacturing and Quality

            The Company has an agreement with an electronics manufacturing services provider to outsource substantially all of its procurement, assembly and system integration operations for the Company’s AS2000 product family. Under the terms of the agreement, the Company maintains a bonded warehouse on the services provider’s premises and ships products directly to the Company’s customers. In April 2002, the Company announced plans to terminate this contract and transfer the manufacture of these products to its manufacturing

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operations in Madison, Alabama. The Company expects to complete this transition in the second quarter of fiscal 2003.

            The Company’s manufacturing operations located in Madison primarily support the manufacturing of all other product lines, and consist primarily of material requirements planning, materials procurement and final assembly, test and quality control of subassemblies and systems. The Company performs virtually all aspects of its manufacturing process for the products at its Madison facility, with the exception of surface mounted printed circuit board assembly. The Company achieved TL 9000 registration in March 2002. TL 9000, which includes ISO 9001:2000, established by the Quality Excellence for Suppliers of Telecommunications (QuEST) Forum is an industry-specific standard fostering quality system requirements and metrics for the design, development, production, delivery, installation and service, emphasizing customer/supplier relations, continuous improvement, standardization metrics and cost reduction. Increasingly, TL 9000 is a contractual requirement in the telecommunications industry.

Competition

            The market for telecommunications network access equipment is characterized as highly competitive with price erosion on aging technologies. This market, in the past, has been subject to rapid technological change, regulatory developments and new entrants. The market for integrated access devices, such as the Access System 2000 and WANsuite product lines, and for enterprise termination devices, such as the PRISM product line, is subject to rapid change. The Company believes that the primary competitive factors in this market are the development and rapid introduction of products based on new technologies, high product value in price versus performance comparisons, support for multiple types of communication services, increased network monitoring and control, product reliability, and quality of customer support. There can be no assurance that the Company’s current products and future products will be able to compete successfully with respect to these or other factors.

            The Company’s principal competition for its current product offerings are Adtran, Inc., Paradyne Inc., Kentrox (owned by Platinum Equity Holdings), Vina Technologies, Inc., Quick Eagle Networks, Larscom, Inc. and Cisco Systems, Inc. for access routing with integrated WAN interface cards (WIC’s). Industry consolidation could lead to competition with fewer, but stronger competitors. In addition, advanced termination products are emerging, which represent both new market opportunities, as well as a threat to the Company’s current products. Furthermore, basic line termination functions are increasingly being integrated by competitors, such as Cisco, Lucent Technologies, Inc. and Nortel Networks, into other equipment such as routers and switches. These include direct WAN interfaces in certain products, which may erode the addressable market for separate network termination products. To the extent that current or potential competitors can expand their current offerings to include products that have functionality similar to the Company’s products and planned products, the Company’s business, financial condition and results of operations could be materially adversely affected.

            The Company believes that the market for basic network termination products is mature and that margins are eroding, but the market for feature-enhanced network termination and high bandwidth network access products may continue to grow and expand, as more “capability” and “intelligence” moves outward from the central office to the enterprise. The Company expects emerging broadband standards and technologies like G.SHDSL, ATM, Ethernet and IP Services to start the next wave of spending in this market as carriers and enterprises update services to the network edge.

            Many of the Company’s current and potential competitors have substantially greater technical, financial, manufacturing and marketing resources than the Company. In addition, many of the Company’s competitors have long-established relationships with network service providers. There can be no assurance that the Company will have the financial resources, technical expertise, manufacturing, marketing, distribution and support capabilities to compete successfully in the future. See “Item 7. Factors Affecting Future Results — Competition”.

Intellectual Property and Other Proprietary Rights

            The Company relies upon a combination of patent, trade secret, copyright, and trademark laws as well as contractual restrictions to establish and protect proprietary rights in its products and technologies. The Company has been issued certain U.S., Canadian, and European patents with respect to limited aspects of its network access technology. The Company has not yet obtained significant patent protection for its Access System or

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WANsuite technologies. There can be no assurance that third parties have not, or will not, develop equivalent technologies or products without infringing the Company’s patents or that a court having jurisdiction over a dispute involving such patents would hold the Company’s patents valid, enforceable, and infringed by such other technologies or products. The Company also typically enters into confidentiality and invention assignment agreements with its employees and independent contractors, and enters into non-disclosure agreements with its suppliers, distributors and appropriate customers so as to limit access to and disclosure of its proprietary information. There can be no assurance that these statutory and contractual arrangements will deter misappropriation of the Company’s technologies or discourage independent third-party development of similar technologies. In the event such arrangements are insufficient, the Company’s business, financial condition and r esults of operations could be materially adversely affected. The laws of certain foreign countries in which the Company’s products are or may be developed, manufactured, or sold may not protect the Company’s products or intellectual property rights to the same extent as do the laws of the United States and thus, make the possibility of misappropriation of the Company’s technology and products more likely. See “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and “Factors Affecting Future Results — Limited Protection of Intellectual Property”.

            The network access and telecommunications equipment industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company. The Company has not conducted a formal patent search relating to the technology used in its products, due in part to the high cost and limited benefits of a formal search. In addition, since patent applications in the United States are not publicly disclosed until the patent issues and foreign patent applications generally are not publicly disclosed for at least a portion of the time that they are pending, applications may have been filed which, if issued as patents, would relate to the Company’s products. Software comprises a substantial porti on of the technology in the Company’s products. The scope of protection accorded to patents covering software-related inventions is evolving and is subject to a degree of uncertainty which may increase the risk and cost to the Company if the Company discovers third party patents related to its software products or if such patents are asserted against the Company in the future. Patents have been granted on fundamental technologies in software, and patents may be issued which relate to fundamental technologies incorporated into the Company’s products. The Company may receive communications from third parties in the future asserting that the Company’s products infringe or may infringe the proprietary rights of third parties. In its distribution agreements, the Company typically agrees to indemnify its customers for all expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. In the event of litigation to determine the validity of any thir d-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company’s technical and management personnel from productive tasks. In the event of an adverse ruling in such litigation, the Company might be required to discontinue the use and sale of infringing products, or to expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on acceptable terms, if at all. In the event of a successful claim against the Company and the failure of the Company to develop or license a substitute technology, the Company’s business, financial condition, and results of operations would be materially adversely affected. See “Item 7. Factors Affecting Future Results — Risk of Third Party Claims Infringement”.

Employees

            As of June 28, 2002, the Company had 85 full-time employees worldwide, of whom 22 were employed in engineering, 24 in sales, marketing and customer service, 27 in manufacturing and 12 in general and administration. All of the employees are located in the United States except one employee in Canada. The Company reduced staff further in August 2002 as the Company adjusted its cost structure. See “Staff Reductions” above.

            Management believes that the future success of the Company will depend in part on its ability to attract and retain qualified employees, including management, technical, and design personnel. Any lengthy delay in filling new positions could lead to delays in the research and development associated with potential new products. See “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and “Factors Affecting Future Results — Dependence on Key Personnel”.

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Backlog

            The Company manufactures its products based, in part, upon its forecast of customer demand and typically builds finished products in advance of or at the time firm orders are received from its customers. Orders for the Company’s products are generally placed by customers on an as-needed basis and the Company has typically been able to ship these products within 30 days after the customer submits a firm purchase order. Because of the possibility of customer changes in delivery schedules or cancellation of orders, the Company’s backlog as of any particular date may not be indicative of sales in any future period.

Item 2. Properties

            During fiscal 2002, the Company’s headquarters and principal administrative, engineering, and manufacturing facility was located in a building owned by the Company containing about 113,000 square feet on approximately 19 acres in Cummings Research Park West at 950 Explorer Boulevard, Huntsville, Alabama. The Company also leased an additional 11,000 square feet of warehouse space in Madison, Alabama under a lease that terminated on June 30, 2002.

            In addition, the Company has two sales offices located in the United States, and an engineering office in Canada. These properties are occupied under operating leases that expire on various dates through the year 2003, with options to renew in most instances.

            On July 1, 2002, the Company relocated its headquarters and principal administrative, engineering and manufacturing operations to a leased facility containing approximately 37,500 square feet in Madison, Alabama. On August 2, 2002, the Company leased its facility located at 950 Explorer Boulevard to The Boeing Company under a lease that expires November 2007. The lease allows the lessee to terminate the lease at the end of the 40th month, but also includes the option to extend the lease term for five additional two-year periods.

Item 3. Legal Proceedings

            The Company is not currently involved in any legal actions expected to have a material adverse effect on the financial conditions or results of operations of the Company. From time to time, however, the Company may be subject to claims and lawsuits arising in the normal course of business.

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

            No matters were submitted to a vote of the security holders of the Company during the fourth quarter ended June 28, 2002.

Executive Officers of the Company

            Set forth below is certain information concerning executive officers of the Company. Unless otherwise indicated, the information set forth is as of June 28, 2002.

            Mr. Leigh S. Belden, age 52, has served as the Company’s President and Chief Executive Officer since he re-joined the Company in January 2002 and from its inception in December 1982 until his prior retirement from this position in March 1999. Mr. Belden co-founded the Company and has served as a Director since its inception in December 1982. From 1980 to 1982, he was Vice President of Marketing for Cushman Electronics, a manufacturer of telephone central office and two-way radio test equipment. Previously, he held various international and domestic sales and marketing management positions for California Microwave. Mr. Belden received a B.S. in Electrical Engineering from the University of California at Berkeley and an M.B.A. from Santa Clara University.

            Mr. S. Todd Westbrook, age 40, has served the Company as Vice President, Operations since February 2000. From July 1998 until joining the Company, Mr. Westbrook served as the president of ZAE Research, Inc., a firm engaged in electronics design. From April 1987 to July 1998, Mr. Westbrook held several positions at Avex Electronics, Inc. including Vice President of North America Operations from March 1996 to July 1998. Mr. Westbrook received a B.S. in Industrial Engineering from Auburn University.

            Mr. James B. Garner, age 35, served as Vice President, Marketing from March 2000 to August 2002. Mr. Garner joined the Company in November 1998 as Director of Engineering of the Company’s Huntsville

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operations. In November 1999, he transferred to the position of Director of Marketing for the Company. From March 1998 until joining the Company, Mr. Garner served as Director of Engineering for TxPort, Inc. From September 1988 to March 1998, Mr. Garner held various technical and management positions within Motorola including Senior Marketing Manager for Motorola’s Transmission Products Division. Mr. Garner received a B.S. in Electrical Engineering from the University of Alabama in Huntsville.

            Mr. C. W. Smith, age 48, has served as Vice President and Chief Financial Officer of the Company since November 2001. Mr. Smith joined the Company in November 1998 as Controller of the Company’s Huntsville operations. In September 1999, Mr. Smith was promoted to the position of Vice President and Corporate Controller. From February 1995 until joining the Company, Mr. Smith served as Vice President, Finance for TxPort, Inc. Mr. Smith received a B.S. in Accounting from the University of Alabama.

            Mr. Ronald W. Caines, age 47, served the Company as Vice President, Worldwide Sales from May 2002 to August 2002. Mr. Caines joined the Company in August 2000 as Vice President of Indirect Sales. From 1991 until joining the Company, he held various sales and management positions within Intermec Technologies Canada Ltd. Mr. Caines received a DEC (Diplome D’Etudes Collegiales) in Science from Champlain College, Montreal, Quebec.

            There are no family relationships among any of the directors or executive officers of the Company.

            All officers are elected annually by and serve at the pleasure of the Board of Directors of the Company.

PART II

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

            The Company’s Common Stock began trading on The Nasdaq SmallCap Market (“Nasdaq”) under the symbol “VRLK” on July 1, 2002. Prior to this date, the Company’s Common Stock traded on The Nasdaq National Market. As of September 4, 2002, the Company had 132 shareholders of record and approximately 3,800 beneficial owners of shares held in street name. The following table shows the high and low sale prices per share for the Common Stock as reported by Nasdaq for the periods indicated:

Fiscal 2002 — Quarter Ended	June 28		March 29		December 28		September 28
Market Price:   High		$0.55		$0.99		$2.00		$4.06
Low		$0.18		$0.41		$0.77		$1.45

Fiscal 2001 — Quarter Ended	June 29		March 30		December 29		September 29
Market Price:   High		$4.95		$3.94		$6.56		$13.25
Low		$1.41		$1.06		$1.75		$  3.94

            The Company has never declared or paid dividends on its capital stock and does not intend to pay dividends in the foreseeable future.

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Item 6. Selected Consolidated Financial Data

            The following selected consolidated financial data concerning the Company for and as of the end of each of the fiscal years are derived from the audited consolidated financial statements of the Company. The selected financial data are qualified in their entirety by the more detailed information and financial statements, including the notes thereto. The financial statements of the Company as of June 28, 2002 and June 29, 2001, and for each of the three years in the period ended June 28, 2002, and the report of PricewaterhouseCoopers LLP thereon, are included elsewhere in this report.

Financial Information by Year
(in thousands, except per share amounts and number of employees)

	Fiscal Year Ended
	June 28, 2002			June 29, 2001(1)			June 30, 2000(2)			June 27, 1999(3)			June 28, 1998
Results of Operations Data:
Net sales	$	23,413		$	44,956		$	67,661		$	59,553		$	50,915
Gross profit		8,016			20,541			33,698			27,729			25,121
Loss from operations		(17,449	)		(17,183	)		(5,759	)		(14,901	)		(3,745	)
Net income (loss)	$	(17,240	)	$	(22,755	)	$	25		$	(13,666	)	$	(1,071	)
Per share amounts:
Net income (loss):
Basic	$	(1.09	)	$	(1.51	)	$	0.00		$	(0.98	)	$	(0.08	)
Diluted	$	(1.09	)	$	(1.51	)	$	0.00		$	(0.98	)	$	(0.08	)
Number of weighted average shares outstanding:
Basic		15,816			15,095			14,238			13,929			13,742
Diluted		15,816			15,095			15,192			13,929			13,742
Cash dividends (4)		—			—			—			—			—
Research and development as a percentage of sales		23.5	%		43.8	%		13.2	%		22.5	%		24.5	%
Balance Sheet and Other Data:
Cash, cash equivalents and short-term investments	$	6,228		$	15,735		$	10,696		$	17,961		$	42,415
Working capital		6,290			16,251			26,352			25,960			45,163
Capital expenditures		340			5,304			7,333			2,586			2,752
Total assets		22,180			42,941			58,720			54,281			63,828
Long-term debt		4,480			5,210			3,521			—			—
Total stockholders’ equity	$	12,117		$	29,600		$	45,114		$	40,139		$	53,810
Employees		85			201			219			310			250

(1) Includes establishment of an income tax valuation allowance of $(13,381).

(2) Includes restructuring charges of $7,891 and reversal of the $3,424 income tax valuation allowance established in 1999.

(3) Includes in-process research and development charge of $3,330 related to acquisition, restructuring charges of $3,200, and establishment of an income tax valuation allowance of $(3,424).

(4) The Company has never declared or paid dividends on its capital stock and does not intend to pay dividends in the foreseeable future.

Summarized Quarterly Financial Data (Unaudited)

            The following table presents unaudited quarterly operating results for each of the Company’s last eight fiscal quarters. This information has been prepared by the Company on a basis consistent with the Company’s audited financial statements and includes all adjustments, consisting of normal recurring adjustments, that the Company considers necessary for a fair presentation of the data.

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Financial Information by Quarter (Unaudited)
(in thousands, except per share amounts)

	Three Months Ended
Fiscal 2002	June 28		March 29			December 28			September 28
Net sales	$	8,001	$	3,704		$	6,187		$	5,521
Gross profit		3,812		433			1,835			1,936
Income (loss) from operations		168		(9,433	)		(4,314	)		(3,870	)
Net income (loss)	$	152	$	(9,355	)	$	(4,282	)	$	(3,755	)
Per share amounts:
Net income (loss):
Basic	$	0.01	$	(0.59	)	$	(0.27	)	$	(0.24	)
Diluted	$	0.01	$	(0.59	)	$	(0.27	)	$	(0.24	)
Number of weighted average shares outstanding:
Basic		15,629		15,945			15,945			15,744
Diluted		15,634		15,945			15,945			15,744

	Three Months Ended
Fiscal 2001	June 29		March 30			December 29			(1) September 29
Net sales	$	13,801	$	10,290		$	9,036		$	11,829
Gross profit		6,777		3,985			3,332			6,447
Income (loss) from operations		11		(3,715	)		(12,644	)		(835	)
Net income (loss)	$	34	$	(3,620	)	$	(12,333	)	$	(6,836	)
Per share amounts:
Net income (loss):
Basic	$	0.00	$	(0.24	)	$	(0.84	)	$	(0.46	)
Diluted	$	0.00	$	(0.24	)	$	(0.84	)	$	(0.46	)
Number of weighted average shares outstanding:
Basic		15,633		15,312			14,719			14,715
Diluted		16,094		15,312			14,719			14,715

(1) Provision for income taxes of $(6,311) includes establishment of income tax valuation allowance.

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

            This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the 2002 Consolidated Financial Statements and Notes thereto.

            This MD&A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth herein, including those set forth in “Factors Affecting Future Results” below.

            The Company’s fiscal year is the 52- or 53-week period ending on the Friday nearest to June 30. Fiscal 2002 and 2001 consisted of 52 weeks and fiscal 2000 consisted of 53 weeks with a 14-week period for Q1 as compared to 13 weeks for all other quarterly periods.

Overview

            Verilink Corporation (the “Company”) provides voice and data network access solutions to service providers and enterprise customers for DDS, T1/E1, NxT1, T3 and G.SHDSL communication services. The Company develops, manufactures and markets customer premise equipment (“CPE”) and central site solutions for data and telecommunication centers. The Company offers a variety of application-specific solutions for time-division multiplexing, inverse multiplexing, digital cross-connect and IP bridging and routing, as well as converged solutions for access to Frame Relay, ATM and IP-based networks. The Company’s customers include equipment integrators, network service providers (“NSPs”) and enterprise customers consisting of wireline and wireless providers, inter-exchange carriers (“IXCs”), local exchange carriers (“LECs”), Internet service providers (“ISPs” ), Fortune 500 companies and various local, state and federal government agencies. The Company was founded in San Jose, California in 1982 and is a Delaware corporation currently headquartered in Madison, Alabama.

            The overall economic environment and the downturn in the telecommunication industry that continued throughout fiscal 2002 were worse than we had anticipated at the beginning of the fiscal year. Capital spending budgets and headcount were reduced, and projects and programs were delayed by many of our customers. Additionally, carriers and other service providers continued to review opportunities to maximize the use of their existing copper-based infrastructure in order to effectively operate in these difficult times.

            The Company implemented cost reduction programs in fiscal 2002 as a result of the reduced revenue levels. The optical network access development project was terminated in October 2001, headcount was reduced at times during the year to align operating spending with lower revenue levels and certain administrative tasks were outsourced to further reduce costs. The Company reported a quarterly profit in the fourth quarter of fiscal 2002, due in part to the positive impact of these cost reduction efforts.

            The majority of sales continue to be provided by the Company’s legacy products, primarily the AS2000 product line that provided 53% of net sales in fiscal 2002. Net sales of the WANsuite product family, which is a full line of access devices ranging from CSU/DSUs to software programmable intelligent integrated access devices with integrated routing and multi-tier reporting, increased 217% in fiscal 2002 over fiscal 2001 to $1.9 million. The Company anticipates that net sales from legacy products will shrink in the future.

            The Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. In addition, the Company’s results of operations have and may continue to fluctuate significantly from period-to-period in the future.

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Results of Operations

Sales

	Fiscal Year Ended
	June 28, 2002			June 29, 2001			June 30, 2000
				(thousands)
Net sales	$	23,413		$	44,956		$	67,661
Percentage change from preceding year		(48	)%		(34	)%		14	%

            Net sales for fiscal 2002 decreased 48% to $23,413,000 from net sales of $44,956,000 in fiscal 2001. This decrease in net sales resulted from a decrease in sales volume to most of the Company’s product markets. Carrier and carrier access products net sales, primarily AS2000 products, decreased 56% to $12,611,000 in fiscal 2002 from $28,900,000 in fiscal 2001 and Enterprise access products decreased 33% to $10,802,000 in fiscal 2002 from $16,056,000 in fiscal 2001. These decreases were primarily a result of additional reduced capital spending by our large telecommunication infrastructure customers, which was a result of both economic and industry-wide factors, including financial constraints affecting our customers and over-capacity in our customers’ markets. The Company anticipates that reduced capital spending by our customers will continue to affect sales until an overall recovery in the telecommuni cations market begins, which is not expected until at least 2004. In any event, it is challenging to predict in the current environment. These large infrastructure customers have traditionally contributed more than half of the Company’s revenue base. Net sales for fiscal 2001 decreased 34% from fiscal 2000 to $44,956,000. This decrease was also due primarily to reduced capital spending by our large telecommunication infrastructure customers that began in fiscal 2001. During fiscal 2002, shipments of the AS2000 product line accounted for approximately 53% of net sales compared to 61% during 2001 and 58% in 2000.

            The Company’s business is characterized by a concentration of sales to a limited number of key customers. Sales to the Company’s top five customers accounted for 71%, 66% and 61% of sales in fiscal 2002, 2001, and 2000, respectively. The Company’s five largest customers in fiscal 2002 were Ericsson, Interlink Communications Systems, Nortel Networks, Verizon and WorldCom. See Note 1 of “Notes to Consolidated Financial Statements” and “Factors Affecting Future Results — Customer Concentration”.

            The Company sells its products primarily in the United States through a direct sales force and through a variety of resellers, including original equipment manufacturers, system integrators, value-added resellers, and distributors. Sales to value-added resellers and distributors accounted for approximately 31% of sales in fiscal 2002, as compared to approximately 26% in fiscal 2001 and 24% in fiscal 2000. In fiscal 2002, direct sales outside of North America have not been significant. However, the Company intends to expand the marketing of its products to markets outside of North America.

Gross Profit

	Fiscal Year Ended
	June 28, 2002			June 29, 2001			June 30, 2000
				(thousands)
Gross Profit	$	8,016		$	20,541		$	33,698
Percentage of Sales		34.2	%		45.7	%		49.8	%

            Gross profit, as a percentage of sales, in fiscal 2002 was 34.2% as compared to 45.7% in fiscal 2001 and 49.8% in fiscal 2000. The decrease in gross profit margin in fiscal year 2002 was due to less favorable product sales mix, additional inventory reserves of $1,570,000 for excess inventories, severance costs totaling $250,000 and the impact to depreciation expense of $287,000 for the change in lives of IT assets described in Note 13 of “Notes to Consolidated Financial Statements”. The decrease in gross profit margin in fiscal 2001 was a result of significantly lower sales volume and the impact of unabsorbed manufacturing overhead. In future periods, the Company’s gross profit will vary depending upon a number of factors, including the cost of products manufactured at subcontract facilities, the channels of distribution, the price of products sold, discounting

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practices, the mix of products sold, price competition, increases in material costs and changes in other components of cost of sales. As the Company introduces new products, it is possible that such products may have lower gross profit margins than other established products in high volume production. Accordingly, gross profit as a percentage of sales may vary.

Research and Development

	Fiscal Year Ended
	June 28, 2002			June 29, 2001			June 30, 2000
				(thousands)
Research and development	$	5,505		$	19,682		$	8,950
Percentage of Sales		23.5	%		43.8	%		13.2	%

            Research and development (“R&D”) expenses decreased to $5,505,000, or 23.5% of sales in fiscal 2002 compared to $19,682,000, or 43.8% of sales in fiscal 2001. This decrease was due primarily to the suspension of the optical network access development project in October 2001 and the impact of cost reduction measures that resulted in a decrease in other product development. The decrease in R&D expense in fiscal year 2002 as a percentage of sales compared to fiscal 2001 was due to reduced actual expenses on lower sales volume. The increase in spending and the increase in R&D as a percentage of sales in fiscal 2001 from fiscal 2000 was due primarily to the optical network access development project initiated in October 2000, and refocusing R&D resources to key product development activities such as WANsuite.

            In October 2001, the Company terminated its agreements with Beacon Telco, L.P. and the Boston University Photonics Center discussed below and suspended its optical network access development project. Research and development expenditures in fiscal 2002 and 2001 related to the optical network access product were $688,000 and $11,538,000, respectively.

            In October 2000, the Company entered into agreements with Beacon Telco, L.P. and the Boston University Photonics Center to establish a product development center at the Photonics Center to develop new optical network access products. As part of the agreements, the Company issued Beacon Telco warrants for 2,249,900 shares of the Company’s Common Stock at an exercise price of $4.75 per share that were exercisable at various dates, and scheduled to expire on October 13, 2003. Warrants for 200,000 and 749,900 shares were exercised during fiscal 2002 and 2001, respectively. The remaining warrants were cancelled in connection with the termination of the agreements with Beacon Telco, L.P. and the Boston University Photonics Center.

            The agreements provided Beacon Telco the opportunity to receive two bonus payments based in part on meeting certain milestones and the market price of the Company’s Common Stock. The first bonus payment of $3,562,500 was earned on October 13, 2000 and paid on February 9, 2001 in the form of a note that Beacon Telco used in conjunction with the exercise of warrants for 749,900 shares of the Company’s Common Stock. The second bonus payment was waived in connection with the October 2001 termination of these agreements.

            The Company recorded a charge to research and development expenses in fiscal 2001 of $8,335,000 for the warrants and the first bonus payment used in the exercise of the warrants for 749,900 shares. The second bonus, of up to $7,125,000, was payable in full upon the completion of the final milestone in the optical network access project, or if the agreements were terminated, a pro-rata portion was payable based on the extent to which the milestones had been completed. The second bonus would be reduced if the price of the Company’s Common Stock was below $4.75 per share at the time the bonus payment was made. The Company accrued the pro-rata portion of the second bonus related to a milestone in the period that the milestone was achieved. The bonus accrual was adjusted for changes, either increases or decreases, in the closing market price of the Company’s Common Stock when the price was below $4.75 per share. For fiscal 2001, research and development expenses include $850,000 for the accrual of the pro-rata portion of the second bonus related to the milestones achieved during the fiscal year and based upon the closing market price of the Company’s Common Stock on June 29, 2001 of $3.40 per share.

            The Company considers product development expenditures to be important to future sales, but expects research and development expenditures to decrease in fiscal 2003, while such expenditures as a percentage of sales may vary. There can be no assurance that the Company’s research and development efforts will result in

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commercially successful new technology and products in the future, and those efforts may be affected by other factors as noted below. See “Factors Affecting Future Results — Dependence on Recently Introduced Products and Products Under Development”.

Selling, General and Administrative

	Fiscal Year Ended
	June 28, 2002			June 29, 2001			June 30, 2000
				(thousands)
Selling, general and administrative	$	14,581		$	18,042		$	22,616
Percentage of Sales		62.2	%		40.1	%		33.4	%

            The Company’s selling, general and administrative (“SG&A”) expenses decreased to $14,581,000, or 62.2% of sales in fiscal 2002 from $18,042,000, or 40.1% of sales in fiscal 2001. The decrease in absolute dollars in fiscal 2002 compared to fiscal 2001 was due primarily to reduced headcount between the two periods, lower variable sales compensation on lower sales volume and other cost reduction programs implemented during the current and prior fiscal years, offset by a charge for bad debts related to amounts outstanding from WorldCom of approximately $368,000. The increase in SG&A as a percentage of sales in fiscal 2002 was due entirely to lower sales volume. SG&A decreased in fiscal 2001 to $18,042,000 from $22,616,000 in fiscal 2000 due to lower variable sales compensation on lower sales volume, cost reduction programs implemented during fiscal 2001 that included a headcount reduction in March 2001, and the impact of the plan that consolidated the Company in Huntsville which was completed in fiscal 2000. The increase in SG&A spending as a percentage of sales in fiscal 2001 compared to fiscal 2000 is due to the decrease in dollar spending at lower sales levels. The Company expects that SG&A expenses will decrease in fiscal 2003 and decrease as a percentage of sales.

Impairment of Long-lived Assets

            During fiscal 2002, the Company completed a review of certain long-lived assets, including goodwill and other intangible assets, due to uncertainty in the general business environment, particularly the telecommunication markets. As a result of this review, the Company recorded charges of $5,379,000 for impairment of certain long-lived assets. This impairment included charges related to the Company’s headquarters facility, furniture and equipment of $3,898,000, an investment in a software development company of $750,000, intangible assets of $568,000 and software licenses of $163,000. See Note 2 of “Notes to Consolidated Financial Statements” for further details of the impairment charges.

Restructuring Charges

            During fiscal 2000, the Company announced and completed the consolidation of its operations into its existing operations located in Huntsville, Alabama, and outsourced its San Jose based manufacturing activities announced in July 1999. The Company incurred a net restructuring charge during fiscal 2000 of $7,891,000. See Note 3 of “Notes to Consolidated Financial Statements” for further details of this restructuring charge. Approximately $6,522,000 of the restructuring charge was cash in nature and paid out of the Company’s working capital.

Interest and Other Income, Net, and Interest Expense

            Interest and other income, net, declined to $503,000 in fiscal 2002 from $974,000 and $1,075,000 in fiscal 2001 and 2000, respectively, as a result of lower average invested cash and short-term investment balances, an increase in early payment discounts taken by customers, and lower interest rates. With the completion of renovations to the headquarters facility in January 2001, the Company began charging interest payments on long-term debt to interest expense that totaled $294,000 and $235,000 during fiscal 2002 and the last half of fiscal 2001, respectively.

Provision for (Benefit from) Income Taxes

            No tax benefit was provided in fiscal 2002 due to the valuation allowance provided against the net change in deferred tax assets. During fiscal 2001, the Company established a full valuation allowance against its

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deferred tax assets due to the net operating loss carry forwards from prior years and the operating losses incurred in fiscal 2001. The operating losses in fiscal 2001, while not expected at the beginning of the year, were driven by the development costs associated with the optical network access project announced in October 2000, as well as the downturn in the telecommunication market that the Company serves. Therefore, the provision for income taxes of $6,311,000 established a full valuation allowance at September 29, 2000 against the Company’s deferred tax assets.

            In fiscal 2000 with a return to profitability during the last two quarters of that fiscal year and the expectation of profits in fiscal 2001, the Company reversed the deferred tax asset valuation allowance that had been established in fiscal 1999 and recorded a net benefit from income taxes of $4,709,000. The effective tax rate in fiscal 2000 without the impact of the change in the deferred tax asset valuation allowance was a benefit of approximately (31)%, compared to a combined federal and state statutory rate of about 39%. The effective tax rate in fiscal 2000 without the impact of the deferred tax asset valuation allowance is less than the combined federal and state rates primarily due to the non-deductibility of the amortization of goodwill and other intangible assets associated with the TxPort acquisition.

Liquidity and Capital Resources

            At June 28, 2002, the Company’s principal source of liquidity included $6,228,000 of unrestricted cash, cash equivalents and short-term investments.

            During fiscal 2002, the Company used $8,269,000 of net cash in operating activities, compared to net cash generated by operating activities in fiscal 2001of $6,534,000 and net cash used in operating activities in fiscal 2000 of $7,358,000. Accounts receivable increased $557,000 to $4,045,000 at June 28, 2002 from the prior year balance due to the timing of shipments during the fourth quarter of each year and the change in the payment terms used by our largest customer. In fiscal 2001, our largest customer paid invoices early and took advantage of the early payment discounts, while in fiscal 2002 this customer began paying within normal payment terms. Accounts receivable decreased $11,745,000 to $3,488,000 at June 29, 2001, over the balance at June 30, 2000 due to timing of shipments and the early payment discount plan utilized by our largest customer in fiscal 2001. Inventories decreased $2,155,000 to $1,246,00 0 at June 28, 2002 and decreased $1,439,000 to $3,401,000 at June 29, 2001 as a result of better control of inventory levels in both years and the additional inventory reserves provided in fiscal 2002 of $1,570,000. In fiscal 2002, accounts payable and accrued expenses decreased a total of $1,560,000 due to the impact of lower sales volume and lower salary and benefit accruals associated with the lower headcount at June 28, 2002. In fiscal 2001, accounts payable and accrued expenses decreased in total by $2,901,000 due to the lower sales volume and cost reduction efforts implemented during fiscal 2001.

            Net cash used in investing activities of $272,000 in fiscal 2002 compares to net cash used in investing activities of $793,000 in fiscal 2001 and net cash provided by investing activities of $158,000 in fiscal 2000. The cash used in fiscal 2002 was due to equipment purchases of $340,000 and purchase of short-term investments of $82,000, reduced by repayment of notes receivable of $150,000. The funds used in fiscal 2001 were due to capital expenditures of $5,304,000 for renovations to the facility at 950 Explorer Boulevard, completion of the Oracle implementation project in July 2000 and other equipment purchases, offset by the maturity of short-term investments of $3,563,000. The increase in funds provided by investing activities in fiscal 2000 is primarily a result of the maturity of $7,517,000 in short-term investments reduced by $7,333,000 in purchases of property, plant and equipment that included the purch ase of the facility at 950 Explorer Boulevard for $6,350,000. Notes receivable decreased in fiscal 2001 and 2000 by $573,000 and $542,000, respectively.

            Net cash used in financing activities was $1,048,000 in fiscal 2002 compared to net cash provided by financing activities of $2,861,000 in fiscal 2001 and $7,452,000 in fiscal 2000. Payments against long-term debt and capital lease obligations of $719,000 and purchase of common stock of $332,000 accounted for the use of funds in fiscal 2002. Proceeds of $2,431,000, less payments of $645,000 from loan agreements to borrow up to $6,500,000 to finance the acquisition of the facility at 950 Explorer Boulevard and improvements thereon and $808,000 from the issuance of Common Stock under employee stock plans were the primary sources of cash in fiscal 2001 from financing activities. During fiscal 2000, proceeds of $4,121,000 from long-term debt used to finance the purchase of the facility at 950 Explorer Boulevard was the largest source of cash from financing activities along with proceeds of $3,201,000 from the issuance of Common Stock under employee stock plans. The Company received $309,000 and $157,000 in fiscal 2001 and 2000, respectively from repayment of notes receivable from stockholders.

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            As discussed in Note 11 – “Related Party Transactions” in “Notes to Consolidated Financial Statements”, the Company modified the payment terms of the outstanding notes to the Company’s President and CEO. Under the terms of the note modification agreements, the outstanding balance of one of the notes, with an outstanding balance of $991,000 at June 28, 2002, was extended from March 2002 to March 2003. The note modification agreements provide that the outstanding balance of the second note with an outstanding balance of $2,239,000 as of June 28, 2002 be extended to March 2006. However, the Company may accelerate the due date of this loan on 90 days notice if the Company’s aggregate amount of unrestricted cash, cash equivalents or short-term investments is less than $2,000,000 or if the President’s employment is terminated.

            The Company believes that its cash and investment balances, along with anticipated cash flows from operations based upon current operating plans and the cost reduction measures implemented by the Company in fiscal 2002 will be adequate to finance current operations and capital expenditures for the next fiscal year. The Company’s future capital needs will depend on the Company’s ability to meet its current operating forecast, the ability to successfully bring new products to market, market demand for the Company’s products, and the overall economic strength of our customers in the telecommunication sector. In the event that results of operations do not substantially meet the Company’s current operating forecast, the Company may evaluate further cost containment, further reduce investments or delay R&D, which could adversely affect the Company’s ability to bring new products to market .. The Company from time to time investigates the possibility of generating financial resources through committed credit agreements, technology or manufacturing partnerships, joint ventures, equipment financing, and offerings of debt and equity securities. To the extent that the Company obtains additional financing, the terms of such financing may involve rights, preferences or privileges senior to the Company’s Common Stock and stockholders may experience dilution.

Critical Accounting Policies

            The Company’s financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods might be based upon amounts that differ from those estimates. The following represent what the Company believes are among the critical accounting policies most affected by significant management estimates and judgments:

             Impairment of Long-Lived Assets and Goodwill. The Company assesses the impairment of long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable under the guidance prescribed by SFAS No. 121. The Company’s long-lived assets include, but are not limited to, the headquarters facility, related furniture and equipment, software licenses, and goodwill and intangible assets related to a previous acquisition.

            In assessing the recoverability of the Company’s long-lived assets, goodwill and other intangible assets during fiscal 2002, the Company obtained a third-party appraisal for the headquarters facility, and made assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded.

             Inventories. The Company values inventory at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. Inventory quantities on hand are reviewed on a quarterly basis and a provision for excess and obsolete inventory is recorded based primarily on our estimated forecast of product demand for the next twelve months. Management’s estimates of future product demand may prove to be inaccurate, in which case the Company may increase or decrease the provision required for excess and obsolete inventory in future periods.

             Revenue Recognition. The Company recognizes a sale when the product has been shipped, no material vendor or post-contract support obligations remain outstanding, except as provided by a separate service agreement and collection of the resulting receivable is probable. A reserve for future product returns is established at the time of the sale based on historical return rates and return policies, including stock rotation for sales to distributors that stock the Company’s products.

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             Warranty Provision. The Company records a warranty provision at the time of the sale based on our best estimate of the amounts necessary to settle future claims on products sold. While we believe that our warranty reserve is adequate and that the judgment applied is appropriate, actual product failure rates, material usage or other rework costs could differ from our estimates, which could result in revisions to our warranty liability.

             Allowance for Doubtful Accounts. The Company estimates losses resulted from the inability of our customers to make payments for amounts billed. The collectability of outstanding invoices is continually assessed. Assumptions are made regarding the customer’s ability and intent to pay, and are based on historical trends, general economic conditions and current customer data. Should our actual experience with respect to collections differ from these assessments, there could be adjustments to our allowance for doubtful accounts.

             Valuation of Notes Receivable. The Company continually assesses the collectability of assets classified as outstanding notes receivable. Assumptions are made regarding the counter party’s ability and intent to pay and are based on historical trends and general economic conditions, and current data. Should our actual experience with respect to collections differ from our initial assessment, adjustments in the reserves may be needed.

             Deferred Tax Assets. The Company has provided a full valuation reserve related to its deferred tax assets. In the future, if sufficient evidence of the Company’s ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, the Company may be required to reduce its valuation allowances, resulting in income tax benefits in the Company’s consolidated statement of operations. Management evaluates the realizability of the deferred tax assets and assesses the need for the valuation allowance each quarter.

Effects of Recent Accounting Pronouncements

            In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets , which has an effective date starting with fiscal years beginning after December 15, 2001. This statement, which supersedes APB Opinion No. 17, Intangible Assets , addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Accordingly, goodwill will cease to be amortized upon the implementation of the statement and companies will test goodwill at least annually for impairment. The Company adopted SFAS No. 142 effective June 29, 2002, and ceased amortizing goodwill of $1,232,900 (including $117,800 of goodwill previ ously classified as other intangible assets). The Company has completed the transitional impairment analysis of all goodwill and intangible assets that is required by the new statement. As a result of this analysis, the Company will record a charge of $1,232,900 during the first quarter of fiscal 2003 to reflect the impairment of the Company’s goodwill. Amortization of goodwill (including goodwill previously classified as other intangible assets) was $369,600 during fiscal 2002.

            In August 2001, the Financial Accounting Standards Board issued SFAS No.143, Accounting for Asset Retirement Obligations (“ARO”), which has an effective date for financial statements for fiscal years beginning after June 15, 2002. This statement addresses the diversity in practice for recognizing asset retirement obligations and requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an ARO, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability , an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The impact of SFAS No. 143 is not expected to be material to the Company’s financial statements.

            In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , which has an effective date for financial statements for fiscal years beginning after December 15, 2001. This statement, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, this statement expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company did not elect to early adopt SFAS No. 144, and is in the process of assessing its impact on the Company’s financial statements.

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            In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections , which has an effective date for transactions occurring after May 15, 2002. This statement rescinds or amends several existing statements related to the extinguishment of debt, intangible assets of motor carriers, certain lease transactions and several other technical corrections to existing pronouncements. The impact of SFAS No. 145 is not expected to be material to the Company’s financial statements.

            In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities , which has an effective date for exit or disposal activities that are initiated after December 31, 2002. This statement provides that cost associated with an exit or disposal activity must be recognized when the liability is incurred. The impact of SFAS No. 146 is not expected to be material to the Company’s financial statements.

Factors Affecting Future Results

            As described by the following factors, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

            This Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as “may”, “will”, “expects”, “plans”, “anticipates”, “estimates”, “potential”, or “continue”, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements in (i) Item 1 regarding the decline of the market for communications services; the recovery of the telecommunication industry; consolidation of equipment manufacturers and service providers; the incremental investment in both equipment and infrastructure; the introduction of new telecommunications services; the growing po pularity and use of the Internet; the need for virtual private networking capabilities; the requirement for better security, encryption, traffic prioritization and network management; the increase in bandwidth and addition of productivity-enhancing applications; the employment of new telecommunications equipment, technology and facilities; the beneficiaries of the trend toward higher bandwidth; the trend toward bundled service offerings; the creation of new revenue opportunities; developing nations increasingly looking to wireless technology; future growth in the wireless communications industry, particularly in terms of number of subscribers, minutes used, implementation of new systems and the emergence of broadband access; research and development expenditures; and (ii) Item 7 regarding product features under development; selling, general and administrative expenses; research and development expenditures; total budgeted capital expenditures; and the adequacy of the Company’s cash position for the next fiscal year. These forward-looking statements involve risks and uncertainties, and it is important to note that the Company’s actual results could differ materially from those in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors detailed below as well as the other factors set forth in Item 1 and Item 7 hereof. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statement or risk factor. You should consult the risk factors listed from time to time in the Company’s Reports on Form 10-Q and the Company’s Annual Report to Stockholders.

             Dependence on Legacy Products, Recently Introduced Products and New Product Development. The Company’s future results of operations are highly dependent on market acceptance of existing and future applications for both the Company’s WANsuite family of integrated access devices and new integrated access system products in development. The majority of sales continue to be provided by the Company’s legacy products, primarily the AS2000 product line which represented approximately 53% of net sales in fiscal 2002, 61% of net sales in fiscal 2001 and 58% of net sales in fiscal 2000. Sales of WANsuite products represented approximately 8% and 2% of net sales in fiscal 2002 and 2001, respectively. The Company anticipates that net sales of its legacy products will continue to shrink as newly introduced products by the Company and its competitors capture market share.

            Market acceptance of both the Company’s current and future product lines is dependent on a number of factors, not all of which are in the Company’s control, including the continued growth in the use of bandwidth intensive applications, continued deployment of new telecommunications services, market acceptance of

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integrated access devices and systems in general, the availability and price of competing products and technologies, and the success of the Company’s sales and marketing efforts. Failure of the Company’s products to achieve market acceptance would have a material adverse effect on the Company’s business, financial condition and results of operations. The market for the Company’s products are characterized by rapidly changing technology, evolving industry standards, continuing improvements in telecommunication service offerings, and changing demands of the Company’s customer base. Failure to introduce new products in a timely manner could cause companies to purchase products from competitors and have a material adverse effect on the Company’s business, financial condition and results of operations. Due to a variety of factors, the Company may experience delays in developing its planned products.

            New products may require additional development work, enhancement and testing or further refinement before the Company can make them commercially available. The Company has in the past experienced delays in the introduction of new products, product applications and enhancements due to a variety of internal factors, such as reallocation of priorities, difficulty in hiring sufficient qualified personnel and unforeseen technical obstacles, as well as changes in customer requirements. Such delays have deferred the receipt of revenue from the products involved. If the Company’s products have performance, reliability or quality shortcomings, then the Company may experience reduced orders, higher manufacturing costs, delays in collecting accounts receivable and additional warranty and service expenses.

             Continued Listing Requirements and Deficiency Notification. The Company’s common stock is currently traded on the Nasdaq SmallCap Market. For continued listing, the Nasdaq SmallCap Market requires, among other things, that listed securities maintain a minimum bid price of not less than $1.00 per share. Nasdaq has notified the Company that it has failed to maintain this continued listing requirement, and will commence procedures to delist its securities from the Nasdaq SmallCap Market unless the Company has regained compliance with this listing requirement by February 10, 2003. If, at anytime before February 10, 2003, the bid price of the company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, the Company will regain compliance with the continued listing requirements. If delisted from the Nasdaq SmallCap Market, the Company’s common stock may be eligible for trading on the OTC Bulletin Board or on other over-the-counter markets, although there can be no assurance that the Company’s common stock will be eligible for trading on any alternative exchanges or markets. Among other consequences, moving from the Nasdaq SmallCap Market, or delisting from the Nasdaq SmallCap Market may cause a decline in the stock price, reduced liquidity in the trading market for the common stock, and difficulty in obtaining future financing.

             Customer Concentration. A small number of customers continue to account for a majority of the Company’s sales. In fiscal 2002, net sales to Nortel Networks and Interlink Communications Systems accounted for 36% and 15% of the Company’s net sales, respectively, and the Company’s top five customers accounted for 71% of the Company’s net sales. In fiscal 2001, net sales to Nortel Networks accounted for 37% of the Company’s net sales, and net sales to the Company’s top five customers accounted for 66% of the Company’s net sales. In fiscal 2000, net sales to Nortel Networks and WorldCom accounted for 30% and 19% of the Company’s net sales, respectively, and net sales to the Company’s top five customers accounted for 61% of the Company’s net sales. Other than Nortel Networks, Interlink Communications Systems and WorldCom, no customer accounted for more than 1 0% of the Company’s net sales in fiscal years 2002, 2001 or 2000. On a quarterly basis in fiscal 2002, net sales to Nortel Networks of legacy products has accounted for as much as 64% of the Company’s net sales that quarter. There can be no assurance that the Company’s current customers will continue to place orders with the Company, that orders by existing customers will continue at the levels of previous periods, or that the Company will be able to obtain orders from new customers. The economic climate and conditions in the telecommunication equipment industry are expected to remain unpredictable in fiscal 2003 and 2004. WorldCom filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code in July 2002. A bankruptcy filing by one or more of the Company’s other major customers would materially adversely affect the Company’s business, financial condition and results of operations.

            Certain customers of the Company have been or may be acquired by other existing customers. The impact of such acquisitions on net sales to such customers is uncertain, but there can be no assurance that such acquisitions will not result in a reduction in net sales to those customers. In addition, such acquisitions could have in the past and could in the future, result in further concentration of the Company’s customers. The Company has in the past experienced significant declines in net sales it believes were in part related to orders being delayed or cancelled as a result of pending acquisitions relating to its customers. There can be no assurance that future merger and acquisition activity among the Company’s customers will not have a similar

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adverse affect on the Company’s net sales and results of operations. The Company’s customers are typically not contractually obligated to purchase any quantity of products in any particular period. Product sales to major customers have varied widely from period to period. In some cases, major customers have abruptly terminated purchases of the Company’s products. Loss of, or a material reduction in orders by, one or more of the Company’s major customers would materially adversely affect the Company’s business, financial condition and results of operations. See “Competition” and “Fluctuations in Quarterly Operating Results”.

             Dependence on Key Personnel. The Company’s future success will depend to a large extent on the continued contributions of its executive officers and key management, sales, and technical personnel. The Company is a party to agreements with its executive officers to help ensure the officer’s continual service to the Company in the event of a change-in-control. Each of the Company’s executive officers, and key management, sales and technical personnel would be difficult to replace. The Company implemented significant cost and staff reductions during fiscal 2002, which may make it more difficult to attract and retain key personnel. The loss of the services of one or more of the Company’s executive officers or key personnel, or the inability to attract qualified personnel could delay product development cycles or otherwise could have a material adverse effect on the Company’s busine ss, financial condition and results of operations.

             Dependence on Key Suppliers and Component Availability. The Company generally relies upon contract manufacturers to buy finished goods for certain product families and component parts that are incorporated into board assemblies used in its products. On-time delivery of the Company’s products depends upon the availability of components and subsystems used in its products. Currently, the Company and third party sub-contractors depend upon suppliers to manufacture, assemble and deliver components in a timely and satisfactory manner. The Company has historically obtained several components and licenses for certain embedded software from single or limited sources. There can be no assurance that these suppliers will continue to be able and willing to meet the Company and third party sub-contractors requirements for any such components. The Company and third party sub-contractors generally do not have an y long-term contracts with such suppliers, other than software vendors. Any significant interruption in the supply of, or degradation in the quality of, any such item could have a material adverse effect on the Company’s results of operations. Any loss in a key supplier, increase in required lead times, increase in prices of component parts, interruption in the supply of any of these components, or the inability of the Company or its third party sub-contractor to procure these components from alternative sources at acceptable prices and within a reasonable time, could have a material adverse effect upon the Company’s business, financial condition and results of operations.

            The loss of any of the Company’s outside contractors could cause a delay in the Company’s ability to fulfill orders while the Company identifies a replacement contractor. Because the establishment of new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, cost of manufacturing, adequacy of manufacturing capacity, quality control, and timeliness of delivery, the Company is unable to predict whether such relationships would be on terms that the Company regards as satisfactory. Any significant disruption in the Company’s relationships with its manufacturing sources would have a material adverse effect on the Company’s business, financial condition, and results of operations.

            Purchase orders from the Company’s customers frequently require delivery quickly after placement of the order. As the Company does not maintain significant component inventories, delay in shipment by a supplier could lead to lost sales. The Company uses internal forecasts to manage its general materials and components requirements. Lead times for materials and components may vary significantly, and depend on factors such as specific supplier performance, contract terms, and general market demand for components. If orders vary from forecasts, the Company may experience excess or inadequate inventory of certain materials and components, and suppliers may demand longer lead times, higher prices or termination of contracts. From time to time, the Company has experienced shortages and allocations of certain components, resulting in delays in fulfillment of customer orders. Such shortages and allocations may occ ur in the future, and could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Fluctuations in Quarterly Operating Results”.

             Fluctuations in Quarterly Operating Results. The Company’s sales are subject to quarterly and annual fluctuations due to a number of factors resulting in more variability and less predictability in the Company’s quarter-to-quarter sales and operating results. For example, sales to Nortel Networks during the last two fiscal years have varied between quarters by as much as $6.2 million, and order volatility by this customer had a significant impact on the Company in fiscal 2002. Most of the Company’s sales are in the form of large orders

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with short delivery times. The Company’s ability to affect and judge the timing of individual customer orders is limited. The Company has experienced large fluctuations in sales from quarter-to-quarter due to a wide variety of factors, such as delay, cancellation or acceleration of customer projects, and other factors discussed below. The Company’s sales for a given quarter may depend to a significant degree upon planned product shipments to a single customer, often related to specific equipment deployment projects. The Company has experienced both acceleration and slowdown in orders related to such projects, causing changes in the sales level of a given quarter relative to both the preceding and subsequent quarters.

            Delays or lost sales can be caused by other factors beyond the Company’s control, including late deliveries by the third party subcontractors the Company is using to outsource its manufacturing operations (as well as by other vendors of components used in a customer’s system), changes in implementation priorities, slower than anticipated growth in demand for the services that the Company’s products support and delays in obtaining regulatory approvals for new services and products. Delays and lost sales have occurred in the past and may occur in the future. The Company believes that sales in the past have been adversely impacted by merger activities by some of its top customers. In addition, the Company has experienced delays as a result of the need to modify its products to comply with unique customer specifications. These and similar delays or lost sales could materially adversely affect the Com pany’s business, financial condition and results of operations. See “Customer Concentration” and “Dependence on Key Suppliers and Component Availability”.

            The Company’s backlog at the beginning of each quarter typically is not sufficient to achieve expected sales for that quarter. To achieve its sales objectives, the Company is dependent upon obtaining orders in a quarter for shipment in that quarter. Furthermore, the Company’s agreements with certain of its customers typically provide that they may change delivery schedules and cancel orders within specified timeframes, typically up to 30 days prior to the scheduled shipment date, without significant penalty. The Company’s customers have in the past built, and may in the future build, significant inventory in order to facilitate more rapid deployment of anticipated major projects or for other reasons. Decisions by such customers to reduce their inventory levels could lead to reductions in purchases from the Company in certain periods. These reductions, in turn, could cause fluctuations in the Comp any’s operating results and could have an adverse effect on the Company’s business, financial condition and results of operations in the periods in which the inventory is reduced.

            The Company’s industry is characterized by declining prices of existing products, and therefore continual improvement of manufacturing efficiencies and introduction of new products and enhancements to existing products are required to maintain gross margins. In response to customer demands or competitive pressures, or to pursue new product or market opportunities, the Company may take certain pricing or marketing actions, such as price reductions, volume discounts, or provision of services at below-market rates. These actions could materially and adversely affect the Company’s operating results.

            Operating results may also fluctuate due to a variety of factors, particularly:

• delays in new product introductions by the Company;

• market acceptance of new or enhanced versions of the Company’s products;

• changes in the product or customer mix of sales;

• changes in the level of operating expenses;

• competitive pricing pressures;

• the gain or loss of significant customers;

• increased research and development and sales and marketing expenses associated with new product introductions; and

• general economic conditions.

            All of the above factors are difficult for the Company to forecast, and these or other factors can materially and adversely affect the Company’s business, financial condition and results of operations for one quarter or a series of quarters. The Company’s expense levels are based in part on its expectations regarding future sales and are fixed in the short term to a certain extent. Therefore, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in sales. Any significant decline in demand relative to the Company’s expectations or any material delay of customer orders could have a material adverse effect on the Company’s business, financial condition, and results of operations. There can be no assurance that the Company

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will be able to sustain profitability on a quarterly or annual basis. In addition, the Company has had, and in some future quarter may have operating results below the expectations of public market analysts and investors. In such event, the price of the Company’s Common Stock would likely be materially and adversely affected. See “Potential Volatility of Stock Price”.

            The Company’s products are covered by warranties and the Company is subject to contractual commitments concerning its products. If unexpected circumstances arise such that the product does not perform as intended and the Company is not successful in resolving product quality or performance issues, there could be an adverse effect on the Company’s business, financial condition and results of operations.

             Potential Volatility of Stock Price. The trading price of the Company’s Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, developments with respect to patents or proprietary rights, general conditions in the telecommunication network access and equipment industries, changes in earnings estimates by analysts, or other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices of many technology companies and which have often been unrelated to the operating performance of such companies. Company-specific factors or broad market fluctuations may materially adversely affect the market price of the Company’s Common Stock. The Company has experi enced significant fluctuations in its stock price and share trading volume in the past and may continue to do so.

             Competition. The market for telecommunications network access equipment is characterized as highly competitive with price erosions on aging technologies. This market, in the past, has been subject to rapid technological change, regulatory developments and new entrants. The market for integrated access devices, such as the Access System 2000 and WANsuite product lines, and for enterprise termination devices, such as the PRISM product line, is subject to rapid change. The Company believes that the primary competitive factors in this market are the development and rapid introduction of products based on new technologies, high product value in price versus performance comparisons, support for multiple types of communication services, increased network monitoring and control, product reliability, and quality of customer support. There can be no assurance that the Company’s current products and future p roducts will be able to compete successfully with respect to these or other factors.

            The Company’s principal competition for its current product offerings are Adtran, Inc., Paradyne Inc., Kentrox (owned by Platinum Equity Holdings), Vina Technologies, Inc., Quick Eagle Networks, Larscom, Inc. and Cisco Systems, Inc. for access routing with integrated WAN interface cards (WIC’s). Industry consolidation could lead to competition with fewer, but stronger competitors. In addition, advanced termination products are emerging, which represent both new market opportunities, as well as a threat to the Company’s current products. Furthermore, basic line termination functions are increasingly being integrated by competitors, such as Cisco, Lucent Technologies, Inc. and Nortel Networks, into other equipment such as routers and switches. These include direct WAN interfaces in certain products, which may erode the addressable market for separate network termination products. To the extent that current or potential competitors can expand their current offerings to include products that have functionality similar to the Company’s products and planned products, the Company’s business, financial condition and results of operations could be materially adversely affected.

            The Company believes that the market for basic network termination products is mature and that margins are eroding, but the market for feature-enhanced network termination and high bandwidth network access products may continue to grow and expand, as more “capability” and “intelligence” moves outward from the central office to the enterprise. The Company expects emerging broadband standards and technologies like G.SHDSL, ATM, Ethernet and IP Services to start the next wave of spending in this market as carriers and enterprises update services to the network edge.

            Many of the Company’s current and potential competitors have substantially greater technical, financial, manufacturing and marketing resources than the Company. In addition, many of the Company’s competitors have long-established relationships with network service providers. There can be no assurance that the Company will have the financial resources, technical expertise, manufacturing, marketing, distribution and support capabilities to compete successfully in the future. See “Factors Affecting Future Results — Competition”.

             Rapid Technological Change. The network access and telecommunications equipment markets are characterized by rapidly changing technologies and frequent new product introductions. The rapid development

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of new technologies increases the risk that current or new competitors could develop products that would reduce the competitiveness of the Company’s products. The Company’s success will depend to a substantial degree upon its ability to respond to changes in technology and customer requirements. This will require the timely selection, development and marketing of new products and enhancements on a cost-effective basis. The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation. The Company may need to supplement its internal expertise and resources with specialized expertise or intellectual property from third parties to develop new products. The development of new products for the WAN access market requires competence in the general areas of telephony, data networking, network management and wireless telephony as well as specific technologies such as DSL, ISDN, Frame Relay, ATM and IP.

            Furthermore, the communications industry is characterized by the need to design products that meet industry standards for safety, emissions and network interconnection. With new and emerging technologies and service offerings from network service providers, such standards are often changing or unavailable. As a result, there is a potential for product development delays due to the need for compliance with new or modified standards. The introduction of new and enhanced products also requires that the Company manage transitions from older products in order to minimize disruptions in customer orders, avoid excess inventory of old products and ensure that adequate supplies of new products can be delivered to meet customer orders. There can be no assurance that the Company will be successful in developing, introducing or managing the transition to new or enhanced products, or that any such products will be responsiv e to technological changes or will gain market acceptance. The Company’s business, financial condition and results of operations would be materially adversely affected if the Company were to be unsuccessful, or to incur significant delays in developing and introducing such new products or enhancements. See “Dependence on Recently Introduced Products and New Product Development”.

             Compliance with Regulations and Evolving Industry Standards. The market for the Company’s products is characterized by the need to meet a significant number of communications regulations and standards, some of which are evolving as new technologies are deployed. In the United States, the Company’s products must comply with various regulations defined by the Federal Communications Commission and standards established by Underwriters Laboratories and Bell Communications Research. For some public carrier services, installed equipment does not fully comply with current industry standards, and this noncompliance must be addressed in the design of the Company’s products. Standards for new services such as Frame Relay, performance monitoring services and DSL have evolved, such as the G.SHDSL standard. As standards continue to evolve, the Company will be required to modify its products or develo p and support new versions of its products. The failure of the Company’s products to comply, or delays in compliance, with the various existing and evolving industry standards could delay introduction of the Company’s products, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

            Government regulatory policies are likely to continue to have a major impact on the pricing of existing as well as new public network services and therefore are expected to affect demand for such services and the telecommunications products that support such services. Tariff rates, whether determined by network service providers or in response to regulatory directives, may affect the cost effectiveness of deploying communication services. Such policies also affect demand for telecommunications equipment, including the Company’s products.

             Risks Associated With Potential Acquisitions and Joint Ventures. An important element of the Company’s historical strategy has been to review acquisition prospects and joint venture opportunities that would complement its existing product offerings, augment its market coverage, enhance its technological capabilities or offer growth opportunities. Transactions of this nature by the Company could result in potentially dilutive issuance of equity securities, use of cash and/or the incurring of debt and the assumption of contingent liabilities, any of which could have a material adverse effect on the Company’s business and operating results and/or the price of the Company’s Common Stock. Acquisitions entail numerous risks, including difficulties in the assimilation of acquired operations, technologies and products, diversion of management’s attention from other business concerns, risks of entering markets in which the Company has limited or no prior experience and potential loss of key employees of acquired organizations. Joint ventures entail risks such as potential conflicts of interest and disputes among the participants, difficulties in integrating technologies and personnel, and risks of entering new markets. The Company’s management has limited prior experience in assimilating such transactions. No assurance can be given as to the ability of the Company to successfully integrate any businesses,

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products, technologies or personnel that might be acquired in the future or to successfully develop any products or technologies that might be contemplated by any future joint venture or similar arrangement, and the failure of the Company to do so could have a material adverse effect on the Company’s business, financial condition and results of operations.

             Risks Associated With Entry into International Markets. The Company to date has had minimal direct sales to customers outside of North America. The Company has little experience in the European and Far Eastern markets, but intends to expand sales of its products outside of North America and to enter certain international markets, which will require significant management attention and financial resources. Conducting business outside of North America is subject to certain risks, including longer payment cycles, unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations, greater difficulty in accounts receivable collection and potentially adverse tax consequences. To the extent any Company sales are denominated in foreign currency, the Company’s sales and results of operations may also be directly affected by fluctuations in foreign currency e xchange rates. In order to sell its products internationally, the Company must meet standards established by telecommunications authorities in various countries, as well as recommendations of the Consultative Committee on International Telegraph and Telephony. A delay in obtaining, or the failure to obtain, certification of its products in countries outside the United States could delay or preclude the Company’s marketing and sales efforts in such countries, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

             Risk of Third Party Claims of Infringement. The network access and telecommunications equipment industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company. The Company has not conducted a formal patent search relating to the technology used in its products, due in part to the high cost and limited benefits of a formal search. In addition, since patent applications in the United States are not publicly disclosed until the related patent is issued and foreign patent applications generally are not publicly disclosed for at least a portion of the time that they are pending, applications may have been filed which, if issued as patents, could relate to the Company’s products. Software comprises a substantial portion of the technology in the Company’s products. The scope of protection accorded to patents covering software-related inventions is evolving and is subject to a degree of uncertainty which may increase the risk and cost to the Company if the Company discovers third party patents related to its software products or if such patents are asserted against the Company in the future. Patents have been granted recently on fundamental technologies in software, and patents may be issued which relate to fundamental technologies incorporated into the Company’s products.

            The Company may receive communications from third parties asserting that the Company’s products infringe or may infringe the proprietary rights of third parties. In its distribution agreements, the Company typically agrees to indemnify its customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company’s technical and management personnel from productive tasks. In the event of an adverse ruling in such litigation, the Company might be required to discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses from third parties .. There can be no assurance that licenses from third parties would be available on acceptable terms, if at all. In the event of a successful claim against the Company and the failure of the Company to develop or license a substitute technology, the Company’s business, financial condition, and results of operations could be materially adversely affected.

             Limited Protection of Intellectual Property. The Company relies upon a combination of patent, trade secret, copyright, and trademark laws and contractual restrictions to establish and protect proprietary rights in its products and technologies. The Company has been issued certain U.S. and Canadian patents with respect to limited aspects of its single purpose network access technology. The Company has not obtained significant patent protection for its Access System or WANsuite technologies. There can be no assurance that third parties have not or will not develop equivalent technologies or products without infringing the Company’s patents or that a court having jurisdiction over a dispute involving such patents would hold the Company’s patents valid, enforceable and infringed. The Company also typically enters into confidentiality and invention assignment agreements with its employees and inde pendent contractors, and non-disclosure agreements with its suppliers,

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distributors and appropriate customers so as to limit access to and disclosure of its proprietary information. There can be no assurance that these statutory and contractual arrangements will deter misappropriation of the Company’s technologies or discourage independent third-party development of similar technologies. In the event such arrangements are insufficient, the Company’s business, financial condition and results of operations could be materially adversely affected. The laws of certain foreign countries in which the Company’s products are or may be developed, manufactured or sold may not protect the Company’s products or intellectual property rights to the same extent as do the laws of the United States and thus, make the possibility of misappropriation of the Company’s technology and products more likely.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

            At June 28, 2002, the Company’s investment portfolio consisted of fixed income securities of $598,000. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of June 28, 2002, the decline in the fair value of the portfolio would not be material. Additionally, the Company has the ability to hold its fixed income investments until maturity and therefore, the Company would not expect to recognize such an adverse impact in income or cash flows. The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less.

            The Company is subject to interest rate risks on its long-term debt. If market interest rates were to increase immediately and uniformly by 10% from levels as of June 28, 2002, the additional interest expense would not be material. The Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company’s financial position, results of operations, and cash flows would not be material.

Item 8. Financial Statements and Supplementary Data

            The chart entitled “Financial Information by Quarter (Unaudited)” contained in Item 6 of Part II hereof is hereby incorporated by reference into this Item 8 of Part II of this form 10-K.

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VERILINK CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

Consolidated Financial Statements Included in Item 8:

	Page
Report of Independent Accountants	28
Consolidated Balance Sheets as of June 28, 2002 and June 29, 2001	29
Consolidated Statements of Operations for each of the three fiscal years in the period ended June 28, 2002	30
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended June 28, 2002	31
Consolidated Statements of Stockholders’ Equity for each of the three fiscal years in the period ended June 28, 2002	32
Notes to Consolidated Financial Statements	33
Schedule for each of the fiscal three years in the period ended June 28, 2002 included in Item 14(a):
Schedule II — Valuation and Qualifying Accounts and Reserves	52

            Schedules other than those listed above have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.

- 27 -

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Verilink Corporation

            In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Verilink Corporation and its subsidiaries at June 28, 2002 and June 29, 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 28, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/        PricewaterhouseCoopers LLP                       

PricewaterhouseCoopers LLP

Birmingham, Alabama
July 24, 2002, except for
Note 14, as to which the
date is September 3, 2002

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VERILINK CORPORATION

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

	June 28, 2002			June 29, 2001
ASSETS
Current assets:
Cash and cash equivalents	$	5,630		$	15,219
Short-term investments		598			516
Restricted cash		—			500
Accounts receivable, net of allowance for doubtful accounts of $560 and $275,       respectively		4,045			3,488
Inventories, net		1,246			3,401
Other current assets		354			408
Total current assets		11,873			23,532
Property, plant and equipment, net		7,288			13,611
Restricted cash, long-term		1,000			500
Notes receivable, long-term, net of allowances of $840 and $799, respectively		—			1,026
Goodwill and other intangible assets, net		1,659			2,999
Other assets		360			1,273
	$	22,180		$	42,941
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	711		$	697
Accounts payable		1,445			2,311
Accrued expenses		3,427			4,273
Total current liabilities		5,583			7,281
Long-term debt and capital lease obligations		4,480			5,210
Other long-term liabilities		—			850
Total liabilities		10,063			13,341
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized; no shares issued and       outstanding		—			—
Common Stock, $0.01 par value; 40,000,000 shares authorized; 14,996,534 and       15,740,209 shares issued and outstanding in 2002 and 2001, respectively		150			157
Additional paid-in capital		51,483			51,530
Notes receivable from stockholder		(3,230	)		(3,060	)
Accumulated other comprehensive loss		(25	)		(6	)
Retained deficit		(36,261	)		(19,021	)
Total stockholders’ equity		12,117			29,600
	$	22,180		$	42,941

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

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VERILINK CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

	Fiscal Year Ended
	June 28, 2002			June 29, 2001			June 30, 2000
Net sales	$	23,413		$	44,956		$	67,661
Cost of sales		15,397			24,415			33,963
Gross profit		8,016			20,541			33,698
Operating expenses:
Research and development		5,505			19,682			8,950
Selling, general and administrative		14,581			18,042			22,616
Impairment of long-lived assets		5,379			—			—
Restructuring charges		—			—			7,891
Total operating expenses		25,465			37,724			39,457
Loss from operations		(17,449	)		(17,183	)		(5,759	)
Interest and other income, net		503			974			1,075
Interest expense		(294	)		(235	)		—
Loss before provision for (benefit from) income taxes		(17,240	)		(16,444	)		(4,684	)
Provision for (benefit from) income taxes		—			6,311			(4,709	)
Net income (loss)	$	(17,240	)	$	(22,755	)	$	25
Net income (loss) per share:
Basic	$	(1.09	)	$	(1.51	)	$	0.00
Diluted	$	(1.09	)	$	(1.51	)	$	0.00
Weighted average shares outstanding:
Basic		15,816			15,095			14,238
Diluted		15,816			15,095			15,192

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

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VERILINK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Fiscal Year Ended
	June 28, 2002			June 29, 2001			June 30, 2000
Cash flows from operating activities:
Net income (loss)	$	(17,240	)	$	(22,755	)	$	25
Adjustments to reconcile net income (loss) to net cash provided by       (used in) operating activities:
Depreciation and amortization		3,363			3,461			3,876
Impairment of long-lived assets		5,379			—			—
Deferred income taxes		—			6,311			(6,311	)
Research and development expenses related to Beacon Telco           agreements		(583	)		9,185			—
Tax benefit from exercise of stock options		—			—			1,602
Loss on retirement of property, plant, and equipment		10			6			—
Deferred compensation related to stock options		—			—			86
Net book value of assets charged to restructuring reserve		—			—			1,435
Accrued interest on notes receivable from stockholders		315			(52	)		(69	)
Changes in assets and liabilities:
Accounts receivable, net		(557	)		11,745			(6,072	)
Inventories, net		2,155			1,439			2,024
Other assets		449			95			703
Accounts payable		(866	)		(1,290	)		783
Accrued expenses		(694	)		(1,611	)		(5,440	)
Net cash provided by (used in) operating activities		(8,269	)		6,534			(7,358	)
Cash flows from investing activities:
Purchases of property, plant, and equipment		(340	)		(5,304	)		(7,333	)
Sale (purchase) of short-term investments		(82	)		3,563			7,517
Increase in restricted cash		—			—			(485	)
Decrease in notes receivable		150			573			542
Acquisition purchase adjustments		—			375			(83	)
Net cash provided by (used in) investing activities		(272	)		(793	)		158
Cash flows from financing activities:
Proceeds from long-term debt		—			2,431			4,121
Payments on long-term debt and capital lease obligations		(719	)		(645	)		—
Proceeds from issuance of Common Stock under stock plans		11			808			3,201
Repurchase of Common Stock		(332	)		—			(78	)
Proceeds from repayment of notes receivable from stockholders		9			309			157
Change in other comprehensive income (loss)		(17	)		(42	)		51
Net cash provided by (used in) financing activities		(1,048	)		2,861			7,452
Net increase (decrease) in cash and cash equivalents		(9,589	)		8,602			252
Cash and cash equivalents at beginning of year		15,219			6,617			6,365
Cash and cash equivalents at end of year	$	5,630		$	15,219		$	6,617
Supplemental disclosures:
Cash paid for interest, net of capitalized interest of $189 in 2001	$	272		$	213		$	—
Cash paid for income taxes	$	7		$	14		$	—

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

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VERILINK CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)

	Common Stock						Additional Paid-in			Notes Receivable From			Treasury			Accumulated Other Comprehensive Income			Deferred Compensation Related to Stock			Retained Earnings
	Shares			Amount			Capital			Stockholders			Stock			(Loss)			Options			(Deficit)			Total
Balance at June 27, 1999		17,466,108		$	174		$	45,902		$	(1,288	)	$	(8,257	)	$	(15	)	$	(86	)	$	3,709		$	40,139
Issuance of Common Stock under stock plans		841,643			9			3,192			—			—			—			—			—			3,201
Purchase of treasury stock		—			—			—			—			(78	)		—			—			—			(78	)
Amortization of deferred compensation		—			—			—			—			—			—			86			—			86
Accrued interest on notes receivable from    stockholders		—			—			—			(69	)		—			—			—			—			(69	)
Repayment of notes receivable from    stockholders		—			—			—			157			—			—			—			—			157
Tax benefit of stock options		—			—			1,602			—			—			—			—			—			1,602
Unrealized loss on marketable equity securities		—			—			—			—			—			51			—			—			51
Net income		—			—			—			—			—			—			—			25			25
Balance at June 30, 2000		18,307,751			183			50,696			(1,200	)		(8,335	)		36			—			3,734			45,114
Issuance of Common Stock under stock plans		345,081			4			804			—			—			—			—			—			808
Issuance of Common Stock under Warrant    agreement		749,900			7			8,328			—			—			—			—			—			8,335
Retirement of treasury stock		(3,662,523	)		(37	)		(8,298	)		—			8,335			—			—			—			—
Accrued interest on notes receivable from    stockholders		—			—			—			(52	)		—			—			—			—			(52	)
Reclass of notes receivable from stockholders		—			—			—			(2,117	)		—			—			—			—			(2,117	)
Repayment of notes receivable from    stockholders		—			—			—			309			—			—			—			—			309
Unrealized loss on marketable equity securities		—			—			—			—			—			(37	)		—			—			(37	)
Foreign currency translation adjustment		—			—			—			—			—			(5	)		—			—			(5	)
Net loss		—			—			—			—			—			—			—			(22,755	)		(22,755	)
Balance at June 29, 2001		15,740,209			157			51,530			(3,060	)		—			(6	)		—			(19,021	)		29,600
Issuance of Common Stock under stock plans		4,625			—			11			—			—			—			—			—			11
Issuance of Common Stock under warrant    agreement		200,000			2			265			—			—			—			—			—			267
Purchase and retirement of treasury stock		(948,300	)		(9	)		(323	)		—			—			—			—			—			(332	)
Accrued interest on notes receivable from    stockholders		—			—			—			(179	)		—			—			—			—			(179	)
Repayment of notes receivable from    stockholders		—			—			—			9			—			—			—			—			9
Unrealized loss on marketable equity securities		—			—			—			—			—			(7	)		—			—			(7	)
Foreign currency translation adjustment		—			—			—			—			—			(12	)		—			—			(12	)
Net loss		—			—			—			—			—			—			—			(17,240	)		(17,240	)
Balance at June 28, 2002		14,996,534		$	150		$	51,483		$	(3,230	)	$	—		$	(25	)	$	—		$	(36,261	)	$	12,117

For fiscal 2002, comprehensive loss of $(17,259) consists of $(7) unrealized loss on marketable equity securities, $(12) foreign currency translation adjustment and net loss of $(17,240). Comprehensive loss for fiscal 2001 of $(22,797) consists of $(37) unrealized loss on marketable equity securities, $(5) foreign currency translation adjustment and net loss of $(22,755). Comprehensive income for fiscal 2000 of $76 consist of $51 unrealized gain on marketable equity securities and net income of $25.

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

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VERILINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — The Company and a Summary of Significant Accounting Policies

The Company

            Verilink Corporation (the “Company”), a Delaware Corporation, was incorporated in 1982. The Company develops, manufactures, and markets integrated access products and customer premise equipment products (“CPE”) for use by telecommunications network service providers (“NSPs”) and corporate end users on wide area networks (“WANs”). The Company’s integrated network access and CPE products are used by NSPs such as interexchange and local exchange carriers, and providers of Internet, personal communications, and cellular services to provide seamless connectivity and interconnect for multiple traffic types on wide area networks.

Basis of presentation

            The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries in Canada, Mexico and Barbados. All significant intercompany accounts and transactions have been eliminated in consolidation.

            The Company’s fiscal year is the 52- or 53-week period ending on the Friday nearest to June 30.

Management estimates and assumptions

            The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign currency

            The functional currency of the Company’s foreign subsidiaries is the local currency. The balance sheet accounts are translated into United States dollars at the exchange rate prevailing at the balance sheet date. Revenues, costs and expenses are translated into United States dollars at average rates for the period. Gains and losses resulting from translation are accumulated as a component of stockholders’ equity and to date have not been material. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not significant during any of the periods presented.

Cash and cash equivalents

            The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents.

Short-term investments

            The Company considers highly liquid instruments with a maturity greater than three months when purchased and its investment securities classified as available for sale to be short-term investments. Realized gains or losses are determined on the specific identification method and are reflected in income. Net unrealized gains or losses are recorded directly in stockholders’ equity except those unrealized losses that are deemed to be other than temporary which are reflected in the statements of operations. No such losses were recorded during any of the periods presented.

Inventories

            Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis.

- 33 -

Property, plant and equipment

            Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are 25 years for the building and generally two to five years for all other assets. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the remaining lease term. Maintenance and repairs are charged to operations as incurred. Upon sale, retirement or other disposition of these assets, the cost and related accumulated depreciation are removed from the respective accounts. The Company performs reviews of estimated future cash flows expected to result from the use of property, plant and equipment to determine the impairment of such assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Note 2 below.

Revenue recognition

            The Company recognizes a sale when the product has been shipped, no material vendor or post-contract support obligations remain outstanding, except as provided by a separate service agreement, and collection of the resulting receivable is probable. Revenue from separately priced extended warranty and service programs is deferred and recognized over the respective service or extended warranty period when the Company is the obligor. The Company accrues related product return reserves and warranty costs at the time of sale. The Company warrants its products for a five-year period.

            The following table summarizes the percentage of total sales for customers accounting for more than 10% of the Company’s sales:

	Fiscal Year Ended
	June 28, 2002		June 29, 2001		June 30, 2000
Nortel Networks		36%		37%		30%
Interlink Communication Systems, Inc		15%		—		—
WorldCom		—		—		19%

Concentrations of credit risk

            Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company limits the amount of investment exposure to any one financial institution and financial instrument. The Company’s trade accounts receivables are derived from sales to customers primarily in North America. The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company maintains reserves for potential credit losses based upon the expected collectability of the accounts receivable.

            The following table summarizes accounts receivable from customers comprising 10% or more of the gross accounts receivable balance as of the dates indicated:

	June 28, 2002		June 29, 2001		June 30, 2000
Nortel Networks		69%		11%		42%
Ericsson		—		33%		—
WorldCom		—		—		18%

Research and development costs

            Research and development costs are expensed as incurred. Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires the capitalization of certain software development costs incurred subsequent to the date technological feasibility is established, which the Company defines as the completion of a working model, and prior to the date the product

- 34 -

is generally available for sale. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs.

Income taxes

            A deferred income tax liability or asset, net of valuation allowance, is established for the expected future tax consequences resulting from the differences between the financial reporting and income tax bases of the Company’s assets and liabilities and from tax credit carryforwards.

Stock-based compensation

            The Company accounts for stock-based awards to employees using the intrinsic value method. Accordingly, no compensation expense has been recognized for options granted with an exercise price equal to market value at the date of grant or in connection with the employee stock purchase plan.

Earnings (loss) per share

            Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted earnings (loss) per share, the average price of the Company’s Common Stock for the period is used in determining the number of shares assumed to be purchased from exercise of stock options and stock warrants. The following table sets forth the computation of basic and diluted earnings (loss) per share for each of the past three fiscal years:

	Fiscal Year Ended
	June 28, 2002			June 29, 2001			June 30, 2000
Net income (loss)	$	(17,240	)	$	(22,755	)	$	25
Weighted average shares outstanding:
Basic		15,816			15,095			14,238
Effect of potential common stock from the exercise of stock       options and stock warrants		—			—			954
Diluted		15,816			15,095			15,192
Basic earnings (loss) per share	$	(1.09	)	$	(1.51	)	$	0.00
Diluted earnings (loss) per share	$	(1.09	)	$	(1.51	)	$	0.00

            Options to purchase 4,265,723, 3,862,043 and 906,083 shares of Common Stock were outstanding at June 28, 2002, June 29, 2001, and June 30, 2000, respectively, and stock warrants to purchase 1,500,000 shares were outstanding at June 29, 2001, but were not included in the computation of diluted earnings (loss) per share because inclusion of such options and warrants would have been antidilutive.

Comprehensive income (loss)

            Comprehensive income (loss) consists of net income (loss), unrealized gains/losses on available-for-sale securities, and gains or losses on the Company’s foreign currency translation adjustments, and is presented in the Consolidated Statement of Stockholders’ Equity.

Recently issued accounting pronouncements

            In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets , which has an effective date starting with fiscal years beginning after December 15, 2001. This statement, which supersedes APB Opinion No. 17, Intangible Assets , addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their

- 35 -

acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Accordingly, goodwill will cease to be amortized upon the implementation of the statement and companies will test goodwill at least annually for impairment. The Company adopted SFAS No. 142 effective June 29, 2002, and ceased amortizing goodwill of $1,232,900 (including $117,800 of goodwill previously classified as other intangible assets). The Company has completed the transitional impairment analysis of all goodwill and intangible assets that is required by the new statement. As a result of this analysis, the Company will record a charge of $1,232,900 during the first quarter of fiscal 2003 to reflect the impairment of the Company’s goodwill. Amortization of goodwill (including goodwill previously classified as other intangible assets) was $369,600 during fiscal 2002.

            In August 2001, the Financial Accounting Standards Board issued SFAS No.143, Accounting for Asset Retirement Obligations (“ARO”), which has an effective date for financial statements for fiscal years beginning after June 15, 2002. This statement addresses the diversity in practice for recognizing asset retirement obligations and requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an ARO, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability , an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The impact of SFAS No. 143 is not expected to be material to the Company’s financial statements.

            In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , which has an effective date for financial statements for fiscal years beginning after December 15, 2001. This statement, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, this statement expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company did not elect to early adopt SFAS No. 144, and is in the process of assessing its impact on the Company’s financial statements.

            In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections , which has an effective date for transactions occurring after May 15, 2002. This statement rescinds or amends several existing statements related to the extinguishment of debt, intangible assets of motor carriers, certain lease transactions and several other technical corrections to existing pronouncements. The impact of SFAS No. 145 is not expected to be material to the Company’s financial statements.

            In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities , which has an effective date for exit or disposal activities that are initiated after December 31, 2002. This statement provides that cost associated with an exit or disposal activity must be recognized when the liability is incurred. The impact of SFAS No. 146 is not expected to be material to the Company’s financial statements.

Fair value of financial instruments

            The carrying amounts of cash, cash equivalents, short-term investments and other current assets and liabilities such as accounts receivable, accounts payable, and accrued expenses, as presented in the financial statements, approximate fair value based on the short-term nature of these instruments. The fair value of the Company’s long-term debt is determined based on the borrowing rates currently available to the Company for loans with similar terms and maturities.

Goodwill and other purchased intangible assets

            Goodwill, representing the excess of purchase price and acquisition costs over the fair value of net assets of businesses acquired, and other purchased intangible assets are amortized on a straight-line basis over the estimated economic lives, which range from three to ten years. Amortization expense relating to goodwill and other purchased intangible assets was $772,000, $984,000 and $1,062,000 for fiscal years 2002, 2001 and 2000,

- 36 -

respectively. Goodwill and other purchased intangible assets are reviewed for impairment on an undiscounted cash flow basis, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. See Note 2 below.

Reclassifications

            Certain prior year amounts have been reclassified to conform to the fiscal 2001 financial statement presentation. These reclassifications had no effect on previously reported net income (loss), cash flows from operations or total stockholders’ equity.

Note 2 — Impairment of Long-lived Assets

            During fiscal 2002, the Company completed a review of certain long-lived assets due to uncertainty in the general business environment, particularly the telecommunication markets, and made the decision to sell specific assets and outsource certain administrative support functions to reduce operating expenses. As a result of this review, the Company recorded a charge in fiscal 2002 of $4,811,000 for impairment of certain long-lived assets. This impairment includes charges related to the Company’s headquarters facility, furniture and equipment of $3,898,000, an investment in a software development company of $750,000, and software licenses of $163,000.

            The charge for the headquarters facility, furniture and equipment was based upon an independent third-party appraisal of the property completed in April 2002, and estimated selling prices for the furniture and equipment. The charge related to the investment in the software development company was based upon management’s review of the expected cash return from this investment, and the charge for the software licenses was due to the termination of licenses in connection with the Company’s Oracle ERP outsourcing activities.

            Also during fiscal 2002, the Company completed a review of its goodwill and other intangible assets acquired in connection with a November 1998 acquisition. In completing this review, goodwill was allocated to the separately identifiable intangible assets, which include developed technology, customer list and assembled work force, on a pro rata basis using the relative fair values of these identifiable intangible assets at the date of acquisition. A cost approach was used to evaluate the assembled work force. Due primarily to staff reductions, the carrying value of the assembled work force, including a pro rata portion of goodwill, exceeded the estimated value by $568,000 and an impairment charge equal to this amount was recorded.

Note 3 — Restructuring Charges

            In July 1999, the Company announced its plans to consolidate its San Jose operations with its facilities in Huntsville, Alabama and outsource its San Jose-based manufacturing operations. The Company recorded net charges of $7,891,000 in fiscal 2000 in connection with restructuring activities that included: (1) severance and other termination benefits for the approximately 135 San Jose-based employees who were involuntarily terminated, (2) the termination of certain facility leases, (3) the write-down of certain impaired assets, and (4) non-recurring retention bonuses offered to involuntarily terminated employees to support the transition from California to Alabama. These restructuring activities were completed during fiscal 2000.

Note 4 — Restricted Cash and Short-Term Investments

            As of June 28, 2002 and June 29, 2001, the Company had total restricted cash in the form of certificates of deposit totaling $1,000,000, which is held by the lender as additional collateral on long-term debt as discussed in Note 6 below.

            The Company’s short-term investments consist primarily of certificate of deposits and are stated at fair value in the accompanying balance sheets.

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Note 5 — Balance Sheet Components

	June 28, 2002			June 29, 2001
Inventories:
Raw materials	$	2,102		$	2,041
Work-in-process		18
Finished goods		2,336			3,084
		4,456			5,125
Less: Inventory reserves		(3,210	)		(1,724	)
Inventories, net	$	1,246		$	3,401
Property, plant and equipment:
Land	$	1,400		$	1,400
Building		5,273			9,060
Furniture, fixtures, and office equipment		5,972			9,151
Machinery and equipment		3,115			5,852
Projects in progress		235			—
		15,995			25,463
Less: Accumulated depreciation and amortization		(8,707	)		(11,852	)
Property, plant and equipment, net	$	7,288		$	13,611
Goodwill and other intangible assets:
Developed technology	$	720		$	720
Customer relations		1,510			1,510
Assembled work force		917			1,220
Goodwill		1,953			2,218
		5,100			5,668
Less: Accumulated amortization		(3,441	)		(2,669	)
Goodwill and other intangible assets, net	$	1,659		$	2,999
Accrued expenses:
Compensation and related benefits	$	1,026		$	1,177
Warranty		920			995
Severance accrual		501			101
Right of return accrual		283			548
Other		697			1,452
Accrued expenses	$	3,427		$	4,273

Note 6 — Long-Term Debt

            In connection with the acquisition of the Huntsville, Alabama headquarters facility in June 2000, the Company entered into a loan agreement with Regions Bank to borrow up to $6,000,000 to finance the purchase of the property and to make improvements thereon. In December 2000 the Company entered into a second agreement with Regions Bank to borrow an additional $500,000 to finance the improvements to the facility. The land, building and two $500,000 certificates of deposit (“CDs”) are provided as collateral for amounts outstanding under these agreements.

            As required by the first loan agreement, the Company makes monthly payments of $50,000 plus accrued interest with a balloon payment due on July 1, 2005. The interest is at a rate of 225 basis points over the 30 day London inter-bank offered rate, except the interest rate on amounts collateralized by the two CDs is the rate earned on the CDs plus one-half percent (1/2%). The second loan agreement requires a monthly payment of $10,400 that includes interest calculated at 250 basis points over the 30 day London inter-bank offered rate, which was 4.34% at June 28, 2002.

            Also included in long-term debt at June 28, 2002 is a capital lease obligation of $38,000, which requires monthly payments of $1,332, including interest at a rate of 10%.

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            Long-term debt and capital lease obligations are payable as follows:

Fiscal year,
2003	$	711
2004		729
2005		3,736
2006		15
Total		5,191
Less current portion of long-term debt and capital lease obligations		711
Long-term debt and capital lease obligations	$	4,480

Note 7 — Income Taxes

            The provision for (benefit from) income taxes consists of the following (in thousands):

	Fiscal Year Ended
	June 28, 2002			June 29, 2001			June 30, 2000
Current:
Federal	$	—		$	—		$	—
State		—			—			—
		—			—			—
Deferred:
Federal		(2,621	)		(5,939	)		(1,135	)
State		(520	)		(1,131	)		(150	)
Change in valuation allowance		3,141			13,381			(3,424	)
	$	—		$	6,311		$	(4,709	)

            The tax provision reconciles to the amount computed by multiplying income before tax by the U.S. federal statutory rate of 34% as follows:

	Fiscal Year Ended
	June 28, 2002			June 29, 2001			June 30, 2000
Provision at statutory rate		(34.0	)%		(34.0	)%		(34.0	)%
State taxes, net of federal benefit		(3.0	)		(6.9	)		(4.3	)
Change in valuation allowance		18.2			81.4			(69.7	)
Credits		—			(1.2	)		(2.2	)
Loss of tax benefit related to stock warrants		14.4			—			—
Goodwill amortization		1.5			2.0			7.7
Other		2.9			(2.9	)		2.0
		—			38.4	%		(100.5	)%

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            Deferred tax assets comprise the following (in thousands):

	June 28, 2002			June 29, 2001
Net operating loss	$	13,453		$	9,444
Credit carryforwards		59			781
Inventory reserves		1,308			703
Warranty provisions		302			406
Other reserves and accruals		736			754
Impairment of long-lived assets		306			—
Stock warrants		—			2,613
Beacon bonus accrual		—			346
Depreciation		944			(656	)
Other		569			145
Total deferred tax assets		17,677			14,536
Valuation allowance		(17,677	)		(14,536	)
Net deferred tax assets	$	—		$	—

            During fiscal 2001, the Company established a full valuation allowance against its deferred tax assets due to the net operating loss carry forwards from prior years and the operating losses incurred in fiscal 2001. The operating losses in fiscal 2001, while not expected at the beginning of that year, were driven by costs associated with the optical network access project announced in October 2000, as well as the downturn in the overall telecommunications market that the Company serves. During fiscal 2001 and as of June 29, 2001, management believed that due to these factors, it was more likely than not that the deferred tax assets would not be realized. Therefore, the provision for income taxes of $6,311,000 established a full valuation allowance at September 29, 2000 against the Company’s deferred tax assets.

            The valuation allowance at June 28, 2002 and June 29, 2001 includes $1,155,000 for deferred tax assets of an acquired business for which uncertainty exists surrounding the realization of such assets. The valuation allowance will be used to reduce costs in excess of net assets of the acquired company when any portion of the related tax assets is recognized.

            At June 30, 2000, the Company reversed the deferred tax asset valuation allowance that it had established in fiscal 1999 and recorded a net benefit from income taxes of $4,709,000. At that time, management of the Company believed that due to the available objective evidence, including a return to profitability during the last half of the fiscal year and the expectation of profits in fiscal 2001, it was more likely than not that the deferred tax assets would be realized. Of the amount reversed, $1,155,000 related to the deferred tax assets of an acquired business and was used to reduce costs in excess of net assets of the acquired company.

            At June 28, 2002, the Company had net operating loss carryforwards of approximately $34,500,000 for federal income tax purposes, which will begin to expire in the year 2020, and $25,250,000 for state income tax purposes, which expire in 2005 through 2008. The Company also had credit carryforwards of $699,000 available to offset future income, which expire in 2006 through 2021.

            The Tax Reform Act of 1996 limits the use of net operating losses in certain situations where changes occur in the stock ownership of a company. The availability and timing of net operating losses carried forward to offset the taxable income may be limited due to the occurrence of certain events, including change of ownership.

Note 8 — Capitalization

Preferred Stock

            The Company has 1,000,000 shares of $0.01 par value preferred stock authorized, of which 40,000 shares have been reserved for issuance in connection with our preferred stock rights plan. The right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock at a price of $22.00. The rights were distributed at the rate of one right for each share of Common Stock as a

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non-taxable dividend and will expire December 2011. The rights will be exercisable only in the event that a person or group acquires 20% or more of the Company’s outstanding Common Stock.

Treasury Stock

            During fiscal 2002, the Company repurchased 948,300 shares of Common Stock from Beacon Telco, L.P. at $0.35 per share. These shares were retired at the time of purchase. During fiscal 2000, the Company repurchased 25,000 shares of Common Stock on the open market at prices ranging from $2.56 to $3.84 per share.

            In November 2000, the Company retired all 3,662,523 shares of its treasury stock by charging the original cost against Common Stock and additional paid in capital.

Stock Warrants and Related Agreements

            Effective November 2, 2001, the Company terminated its agreements with Beacon Telco, L.P. and the Trustees of Boston University related to its optical network access project. These agreements included the Warrant and Stockholder’s Agreement (“Warrant Agreement”), Cooperative Research Agreement (“Research Agreement”) and the Premises License and Services Agreement. In October 2001, the Company issued 200,000 shares of its Common Stock in exchange for the cancellation of Beacon’s right to acquire up to an additional 1,300,000 shares underlying the warrant under the Warrant Agreement and the waiver of any rights to the second bonus contemplated under the Research Agreement. The Company recorded a charge to research and development expenses in fiscal 2002 of $267,500 for the stock issued in connection with the cancellation of Beacon’s rights under the Warrant Agreement and Researc h Agreement. Research and development expenses were then credited by $850,000 due to the waiver of the second bonus note, which represented the amount earned as of June 29, 2001.

            In October 2000, the Company entered into the agreements with Beacon Telco, L.P. and the Boston University Photonics Center to establish a product development center at the Photonics Center to develop new optical network access products. As part of the agreements, the Company issued Beacon Telco warrants for 2,249,900 shares of the Company’s Common Stock at an exercise price of $4.75 per share that were exercisable at various dates, and scheduled to expire on October 13, 2003. Warrants for 200,000 and 749,900 shares were exercised during fiscal 2002 and 2001, respectively. As noted above, the remaining warrants were cancelled.

            The agreements provided Beacon Telco the opportunity to receive two bonus payments based in part on meeting certain milestones and the market price of the Company’s Common Stock. The first bonus payment of $3,562,500 was earned on October 13, 2000 and paid on February 9, 2001 in the form of a note that Beacon Telco used in conjunction with the exercise of warrants for 749,900 shares of the Company’s Common Stock. The second bonus payment was waived in connection with the October 2001 termination of these agreements.

            The Company recorded a charge to research and development expenses in fiscal 2001 of $8,335,000 for the warrants and the first bonus payment used in the exercise of the warrants for 749,900 shares. The second bonus, of up to $7,125,000, was payable in full upon the completion of the final milestone in the optical network access project, or if the agreements were terminated, a pro-rata portion was payable based on the extent to which the milestones had been completed. The second bonus would be reduced if the price of the Company’s Common Stock were below $4.75 per share at the time the bonus payment was made. The Company accrued the pro-rata portion of the second bonus related to a milestone in the period that the milestone was achieved. The bonus accrual was adjusted for changes, either increases or decreases, in the closing market price of the Company’s Common Stock when the price was below $4.75 per share. For fiscal 2001, research and development expenses include $850,000 for the accrual of the pro-rata portion of the second bonus related to the milestones achieved during the fiscal year and based upon the closing market price of the Company’s Common Stock on June 29, 2001 of $3.40 per share. This accrual is included in other long-term liabilities on the consolidated balance sheet as of June 29, 2001.

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Note 9 — Employee Benefit Plans

1993 Amended and Restated Stock Option Plan

            As of June 28, 2002, a total of 8,800,000 shares of Common Stock had been reserved for issuance under the 1993 Amended and Restated Stock Option Plan (the “1993 Plan”) to eligible employees, officers, directors, independent contractors and consultants upon the exercise of incentive stock options (“ISOs”) and nonqualified stock options (“NSOs”). Options granted under the 1993 Plan are for periods not to exceed ten years and must be issued at prices not less than 100% and 85% for ISOs and NSOs, respectively, of the fair market value of the stock on the date of grant. Options granted under the 1993 Plan to employees are generally exercisable immediately and the shares issued upon exercise generally vest over a four-year period, provided that the optionee remains continuously employed by the Company. Upon cessation of employment for any reason, the Company has the option to repurchase all unvested shares of Common Stock issued upon exercise of an option at a repurchase price equal to the exercise price of such shares. ISOs granted to stockholders who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant.

            The following summarizes stock option activity under the 1993 Plan:

	Shares Available for Grant			Options Outstanding			Weighted Average Exercise Price
Balance at June 27, 1999		1,257,703			2,855,405		$	4.83
Approved		750,000			—			—
Granted		(2,947,550	)		2,947,550			4.69
Exercised		—			(665,622	)		4.15
Repurchased		—			588			.88
Canceled		1,288,390			(1,288,390	)		6.11
Balance at June 30, 2000		348,543			3,849,531			4.42
Approved		2,000,000			—			—
Granted		(943,550	)		943,550			3.93
Exercised		—			(97,351	)		2.90
Canceled		833,687			(833,687	)		5.66
Balance at June 29, 2001		2,238,680			3,862,043			4.07
Granted		(1,889,050	)		1,889,050			0.74
Exercised		—			(2,375	)		2.25
Canceled		1,482,995			(1,482,995	)		4.13
Balance at June 28, 2002		1,832,625			4,265,723		$	2.57

            The following table summarizes information concerning outstanding and vested stock options as of June 28, 2002:

		Options Outstanding						Options Vested
Range of Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Vested		Weighted Average Exercise Price
	$0.22—$ 0.50		699,050		9.73	$	0.23		4,000	$	0.50
	$0.69—$ 0.69		800,000		9.60		0.69		83,333		0.69
	$0.88—$ 2.00		845,627		7.97		1.65		494,002		1.90
	$2.13—$ 2.38		719,752		7.51		2.27		435,466		2.27
	$2.88—$ 4.50		719,436		6.83		3.29		662,239		3.26
	$5.25—$16.00		481,858		5.84		10.07		337,234		9.81
	$0.22—$16.00		4,265,723		8.05	$	2.57		2,016,274	$	3.70

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1996 Employee Stock Purchase Plan

            In April 1996, the Company adopted an Employee Stock Purchase Plan (the “Purchase Plan”) under which a total of 750,000 shares of Common Stock have been reserved for issuance. The Purchase Plan permits eligible employees to purchase Common Stock through periodic payroll deductions of up to 10% of their annual compensation. The Purchase Plan was amended in July 2000 to provide for successive offering and concurrent purchase periods of six months. The price at which Common Stock is purchased under the Purchase Plan is equal to 85% of the fair value of the Common Stock on the first day of the offering period, or the last day of the purchase period, whichever is lower. No shares were issued in fiscal 2002 under the Purchase Plan since all shares reserved had been issued in prior years. During fiscal 2001 and 2000, a total of 249,980 and 175,921 shares of Common Stock were issued under the Purchase Plan at an average purchase price of $2.12 and $2.50, respectively.

Estimated fair value awards under the Company’s stock plans

            The weighted average estimated grant date fair value, as defined by SFAS No. 123, of options granted during fiscal 2002, 2001 and 2000 under the Company’s stock option plan was $0.48, $2.56 and $2.71, respectively. The weighted average estimated grant date fair value of Common Stock issued pursuant to the Company’s employee stock purchase plan during fiscal 2002, 2001 and 2000 was none, $1.79, and $1.63, respectively. The estimated grant date fair values disclosed by the Company are calculated using the Black-Scholes model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expecte d time until exercise, which greatly affect the calculated grant date fair value.

            The following weighted average assumptions are included in the estimated grant date fair value calculations for the Company’s stock option and purchase awards:

	2002			2001			2000
Stock option plan:
Expected dividend yield%		0.0	%		0.0	%		0.0	%
Expected stock price volatility		124	%		120	%		106	%
Risk free interest rate		3.34	%		5.08	%		6.05	%
Expected life (years)		2.56			2.40			2.59
Stock purchase plan:
Expected dividend yield		—			0.0	%		0.0	%
Expected stock price volatility		—			120	%		106	%
Risk free interest rate		—			4.97	%		5.44	%
Expected life (years)		—			0.50			0.50

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Pro forma net income (loss) and net income (loss) per share

            Had the Company recorded compensation based on the estimated grant date fair value, as defined by SFAS No. 123, for awards granted under its stock option plan and stock purchase plan, the Company’s net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts below for the years ended June 28, 2002, June 29, 2001 and June 30, 2000, respectively (in thousands, except per share amounts):

	2002			2001			2000
Net income (loss) as reported	$	(17,240	)	$	(22,755	)	$	25
Pro forma net income (loss)	$	(17,396	)	$	(24,593	)	$	(1,298	)
Basic net income (loss) per share as reported	$	(1.09	)	$	(1.51	)	$	0.00
Diluted net income (loss) per share as reported	$	(1.09	)	$	(1.51	)	$	0.00
Pro forma basic net income (loss) per share	$	(1.10	)	$	(1.63	)	$	(0.09	)
Pro forma diluted net income (loss) per share	$	(1.10	)	$	(1.63	)	$	(0.09	)

            The pro forma effect on net income (loss) and net income (loss) per share is not representative of the pro forma effect on net income (loss) in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996.

            The Company has recorded compensation expense for the difference between the grant price and deemed fair market value of the Company’s Common Stock for options granted in January and February 1996. Such compensation expense was $86,000 for fiscal 2000 and totaled approximately $968,000 over the vesting period of four years. No compensation expense was recorded in fiscal 2002 or 2001.

            Awards under the Company’s profit sharing plan are based on achieving targeted levels of profitability. The Company provided for awards of $29,000 and $92,000 in fiscal 2001 and 2000, respectively. No expense was incurred under the plan in fiscal 2002.

Note 10 — Retirement Plan

            The Company has a retirement plan that provides certain employment benefits to all eligible employees and qualifies as a deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended. In June 2002, the Company changed its retirement plan to provide for discretionary Company matching contributions. The Company did not match participant’s contributions for the month of June 2002. In the first eleven months of fiscal 2002 and in fiscal 2001, the Company matched 100% of the first three percent and 50% of the next two percent of a participant’s contributions. In fiscal 2000, the Company matched 25% of the participant’s contributions. An employee’s interest in the Company’s contributions becomes 100% vested at the date participation in the retirement plan commences. Charges to operations for the retirement plan amounted to approximately $274,000, $429,000 and $209 ,000, in fiscal 2002, 2001 and 2000, respectively.

Note 11 — Related Party Transactions

            In prior fiscal years, the Company provided non-interest bearing housing assistance loans to two executive officers as specified in their offers of employment. In connection with the termination of employment of one of these executive officers in fiscal 2002, the Company acquired the interest in real property in exchange for the $410,000 outstanding note. In connection with the termination of employment of the second executive officer, the outstanding note in the amount of $243,000 is due and payable on January 8, 2003. As of June 28, 2002, the outstanding note is included in notes receivable, net of allowance. The interest in the real property acquired in exchange for the note is included in other assets at a net carrying value of $300,000.

            The Company also provided other non-interest bearing loans to the two executive officers totaling $600,000. These loans were made at the time of hire and were to be repaid based on the earlier of termination of employment for any reason or within one year after the value of exercisable stock options exceeded $2,000,000 (defined as the fair market value of stock subject to exercisable options less the total exercise price of such

- 44 -

options). The loans further provided that if the executive’s employment terminated before the exercisable stock options exceeds $2,000,000, a portion of the loan amount would be forgiven for each full year the executive remained employed by the Company. With the termination of the two executives during fiscal 2002, one hundred percent of one loan was forgiven and fifty percent of the second loan was forgiven. The remaining fifty percent of the second loan, or $150,000, was repaid in fiscal 2002.

            In September 1993, the Company issued 1,600,000 shares of Common Stock to its President and Chief Executive Officer (“President”) in exchange for a non-recourse note totaling $800,000 with the issued shares of Common Stock initially collateralizing the note. From time to time thereafter, the Company released excess collateral based upon then current market prices. Through note modifications in February 1998, September 1999 and February 2002, repayment of this note, which bears interest at 5% per annum, is due in March 2003. During fiscal 2001, payments of $230,000 were made against this note. As of June 28, 2002, $991,000 of principal and interest was outstanding and included in notes receivable from stockholder in the accompanying Statements of Stockholders’ Equity. Shares of Common Stock of the Company collateralize this note and the loan facility discussed below per the note modification agree ments. The February 2002 note modification agreement also includes a negative pledge that requires the net proceeds from the sale of any shares of the Company’s Common Stock owned by the President to be applied against the outstanding balance of this note. In fiscal 2002, the number of shares held by the Company as collateral for this note and the loan facility described below was increased by 97,040 shares to 891,280 shares.

            In February 1999, the Company approved a loan facility of up to $3,000,000 to its President in return for a note that bears interest at 6% per annum with an original maturity date of March 1, 2000. All or a portion of this loan facility may be made available through guarantees by the Company of third party loans. The note modification agreements in September 1999, February 2002 and July 2002 now provides for the repayment of this note in March 2006. Under the terms of the July 2002 amendment, the Company may accelerate the due date of this loan on 90 days notice if the Company’s aggregate amount of unrestricted cash, cash equivalents or short-term investments is less than $2,000,000 or if the President’s employment is terminated. During fiscal 2002 and 2001, payments of $9,000 and $720,000, respectively, were made against this note. As of June 28, 2002, $2,239,000 of principal and interest was outstan ding and included in notes receivable from stockholder in the accompanying Statements of Stockholders’ Equity. A total of 891,280 shares of Common stock of the Company was held by the Company as of June 28, 2002 as collateral for this loan facility and the note discussed above.

            Included in notes receivable as of June 28, 2002 are cash advances and accrued interest of $597,000, net of allowance of $597,000, due from certain former officers of the Company. These advances bear interest at varying rates up to 7.5%, with various maturities to September 2002. During fiscal 2001, a total of $20,000 of principal and interest on such loans was repaid.

Note 12 — Commitments and Contingencies

            The Company leases various sales offices, warehouse space and equipment under operating leases that expire on various dates from October 2002 through May 2006.

            Future minimum lease payments under all non-cancelable operating leases with initial terms in excess of one year are as follows (in thousands):

Fiscal year,	Operating Leases
2003	$	210
2004		198
2005		167
2006		15
Total minimum lease payments	$	590

            Rent expense under all non-cancelable operating leases totaled $299,000, $769,000 and $1,384,000 for fiscal 2002, 2001, and 2000, respectively.

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            As of June 28, 2002, the Company had approximately $1,636,000 of outstanding purchase commitments for inventory and inventory components.

            The Company is not currently involved in any legal actions expected to have a material adverse effect on the financial conditions or results of operations of the Company. From time to time, however, the Company may be subject to claims and lawsuits arising in the normal course of business.

Note 13 — Change in Accounting Estimate

            The service lives of information technology assets (“IT assets”) were reviewed and decreased as a result of the Company’s decision to outsource certain administrative functions, which impacted depreciation expense and operating results in fiscal 2002. The effect of this change in accounting estimate was to increase the net loss in fiscal 2002 by $586,000, or $.04 per share.

Note 14 — Subsequent Events

            On August 2, 2002, the Company signed an agreement with The Boeing Company (“Boeing”) to lease its facility located at 950 Explorer Boulevard through November 2007. The lease allows Boeing the option of terminating the lease at the end of the 40th month, but also provides an option for Boeing to extend the lease term for five additional two-year periods.

            On September 3, 2002, the Company approved providing its President with additional relocation benefits of approximately $300,000 in connection with the sale of his California residence. The President has advised the Company that he has committed to make a payment of $675,000 against his outstanding notes receivable to the Company following the sale of his California residence.

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

            Not Applicable.

PART III

Item 10.  Directors and Executive Officers of the Registrant

            Information regarding directors appearing under the caption “Election of Directors” in the Proxy Statement is hereby incorporated by reference.

            Information regarding executive officers is incorporated herein by reference from Part I hereof under the heading “Executive Officers of the Company” immediately following Item 4 in Part I hereof.

            Information regarding compliance with Section 16(a) of the Securities Act of 1934, as amended, is hereby incorporated by reference to the Company’s Proxy Statement.

Item 11.  Executive Compensation

            The information required by this item is incorporated by reference to the Company’s Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

            The information required by this item is incorporated by reference to the Company’s Proxy Statement.

Item 13.  Certain Relationships and Related Transactions

            The information required by this item is incorporated by reference to the Company’s Proxy Statement.

PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)     1. Financial Statements

            The financial statements (including the notes thereto) listed in the Index to Consolidated Financial Statements and Financial Statement Schedule (set forth in Item 8 of Part II of this Form 10-K) are filed within this Annual Report on Form 10-K.

          2. Financial Statement Schedule

            The financial statement schedule listed in the Index to Consolidated Financial Statements and Financial Statement Schedule (set forth in Item 8 of Part II of this Form 10-K) is filed as part of this Annual Report on Form 10-K.

          3. Exhibits

            The exhibits listed under Item 14(c) hereof are filed as part of this Annual Report on Form 10-K.

(b)     Reports on Form 8-K

            No reports on Form 8-K were filed during the quarter ended June 28, 2002.

(c)     Exhibits

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Exhibit Number	Description
3.1	–Registrant’s Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010)
3.2	–Registrant’s Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010)
4.1	–Reference is made to Exhibits 3.1 and 3.2.
4.2	–Rights Agreement dated as of November 29, 2001 by and between Verilink Corporation and EquiServe Trust Company, N.A. (incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A, effective December 6, 2001, Commission File No. 00000-28562)
4.2A†	–Rights Agent Appointment and Amendment No. 1 to Rights Agreement dated as of May 30, 2002 by and between Verilink Corporation and American Stock Transfer and Trust Company
4.3	–Certificate of Designations of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 2 to the Company’s Registration Statement on Form 8-A, effective December 6, 2001, Commission File No. 00000-28562)
4.4	–Form of Right Certificate (incorporated by reference to Exhibit 3 to the Company’s Registration Statement on Form 8-A, effective December 6, 2001, Commission File No. 00000-28562)
4.5	–Summary of Rights to Purchase Preferred Shares (incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form 8-A, effective December 6, 2001, Commission File No. 00000-28562)
10.1	–Registrant’s Amended and Restated 1993 Stock Option Plan (incorporated by reference to the Company’s definitive Proxy Statement, filed October 14, 1999, Commission File No. 000-28562)
10.1A	–First Amendment to the Verilink Corporation Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.51 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, Commission File No. 000-28562)
10.1B	–Second Amendment to the Verilink Corporation 1993 Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.51 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562)
10.2	–Form of Registrant’s 1996 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010)
10.2A	–First Amendment to the Verilink Corporation 1996 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.50 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, Commission File No. 000-28562)
10.2B	–Second Amendment to the Verilink Corporation 1996 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.52 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562)
10.3	–Form of Indemnification Agreement between the Registrant and each of its executive officers and directors (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010)
10.4*	–Change of Control Severance Benefits Agreements (incorporated by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 28, 1997, Commission File No. 000-28562)

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Exhibit Number	Description
10.5*	–Executive Deferred Compensation Plan adopted by Registrant for certain of its executive employees and members of its Board of Directors effective as of January 1, 2001 (terminated May 30, 2002) (incorporated by reference to Exhibit 10.57 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562)
10.6*	–Employment Agreement between the Registrant and Graham Pattison dated March 22, 1999 (incorporated by reference to Exhibit 10.28 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 1999, Commission File No. 000-28562)
10.6A*	–Bonus Agreement between the Registrant and Graham G. Pattison dated September 21, 1999 (incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 1999, Commission File No. 000-28562)
10.6B*	–Letter Agreement between the Registrant and Graham G. Pattison dated October 27, 1999 modifying the March 22, 1999 and September 21, 1999 agreements, including form of promissory notes (incorporated by reference to Exhibit 10.6B to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2001, Commission File No. 000-28562)
10.6C*	–Promissory Note of Graham G. Pattison in favor of the Registrant dated January 13, 2000 (incorporated by reference to Exhibit 10.6C to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2001, Commission File No. 000-28562)
10.7*	–Employment Agreement between the Registrant and Michael L. Reiff dated October 25, 1999 (incorporated by reference to Exhibit 10.44 to Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1999, Commission File No. 000-28562)
10.7A*	–Promissory Note of Michael L. Reiff in favor of the Registrant dated December 1, 1999 (incorporated by reference to Exhibit 10.7A to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2001, Commission File No. 000-28562)
10.7B*	–Promissory Note of Michael L. Reiff in favor of the Registrant dated December 18, 2000 (incorporated by reference to Exhibit 10.7B to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2001, Commission File No. 000-28562)
10.7C*	–Separation Agreement between Registrant and Michael L. Reiff dated November 20, 2001 (incorporated by reference to Exhibit 10.7C to Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2001, Commission File No. 000-28562)
10.8*	–Employment Agreement between the Registrant and Todd Westbrook dated February 1, 2000 (incorporated by reference to Exhibit 10.46 to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, Commission File No. 000-28562)
10.9*	–Employment Agreement between the Registrant and Ronald G. Sibold dated May 3, 2000 (incorporated by reference to Exhibit 10.52 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, Commission File No. 000-28562)
10.9A*	–Separation Agreement between Registrant and Ronald G. Sibold dated November 15, 2001 (incorporated by reference to Exhibit 10.9A to Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2001, Commission File No. 000-28562)
10.10*	–Employment Agreement between the Registrant and Leigh S. Belden dated January 8, 2002 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, dated as of January 18, 2002, Commission File No. 00000-28562)
10.11*	–Promissory Note of Robert F. Griffith in favor of the Registrant dated as of August 27, 1997 (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 1997, Commission File No. 000-28562)

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Exhibit Number	Description
10.12	–Common Stock Purchase Agreement and Promissory Note between the Registrant and Leigh S. Belden each dated as of September 16, 1993 (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010)
10.12A	–Amended Common Stock Purchase Agreement and Promissory Note between the Registrant and Leigh S. Belden, dated as of February 10, 1998 (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 1998, Commission File No. 000-28562)
10.12B	–Promissory Note Modification Agreement of Leigh S. Belden dated September 22, 1999 (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 1999, Commission File No. 000-28562)
10.12C	–Second Note Modification Agreement dated as of February 5, 2002 by and between Verilink Corporation and Leigh S. Belden (incorporated by reference to Exhibit 10.1A to Current Report on Form 8-K, dated as of August 14, 2002, Commission File No. 00000-28562)
10.12D	–Amended and Restated Security Agreement dated as of February 5, 2002 by Leigh S. Belden and Deborah Tinker Belden, Trustees U/A Dated 12/9/98 for the benefit of Verilink Corporation, Beltech, Inc., Leigh S. Belden and Deborah Tinker Belden (incorporated by reference to Exhibit 10.1B to Current Report on Form 8-K, dated as of August 14, 2002, Commission File No. 00000-28562)
10.12E	–Third Note Modification Agreement dated as of July 29, 2002 by and between Verilink Corporation and Leigh S. Belden (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, dated as of August 14, 2002, Commission File No. 00000-28562)
10.13*†	–Separation Agreement between Registrant and James B. Garner dated August 27, 2002
10.14	–Promissory Note of Stephen M. Tennis in favor of the Registrant dated June 30, 1994 (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 1998, Commission File No. 000-28562)
10.15	–Promissory Note of Stephen M. Tennis in favor of the Registrant dated February 21, 1996 (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 1998, Commission File No. 000-28562)
10.16	–Promissory Note of Stephen M. Tennis in favor of the Registrant dated May 23, 1996 (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 1998, Commission File No. 000-28562)
10.17	–Lease Agreement between the Registrant and Industrial Properties of the South for 129 Jetplex Circle, Madison, Alabama, dated January 19, 1995 (incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 1999, Commission File No. 000-28562)
10.17A†	–Addendum No. 4 to Lease Agreement between the Registrant and Industrial Properties of the South for 129 Jetplex Circle, Madison, Alabama, dated April 18, 2001
10.18†	–Lease Agreement between Registrant and Industrial Properties of the South for 127 Jetplex Circle, Suites A&B, Madison, Alabama, dated April 16, 2002
10.18A†	–Addendum No. 1 to Lease Agreement between Registrant and Industrial Properties of the South for 127 Jetplex Circle, Suites A&B, Madison, Alabama, dated June 19, 2002
10.19†	–Triple Net Lease Agreement between Registrant and The Boeing Company for 950 Explorer Boulevard, Huntsville, Alabama, dated August 2, 2002
10.20‡	–Software License Agreement between the Registrant and Integrated Systems, Inc. dated January 27, 1993, as amended (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010)

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Exhibit Number	Description
10.21‡	–Purchase Agreement between the Registrant and Wellex Corporation (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 1999, Commission File No. 000-28562)
10.22†	–Letter Agreement between the Registrant and Beacon Telco, L.P. dated October 19, 2001 for the “Exchange of Warrants and Future Bonus Payments for Common Stock of Verilink Corporation”
10.23†	–Stock Repurchase Agreement between the Registrant and Beacon Telco, L.P. dated June 14, 2002
10.24	–Cooperative Research Agreement between the Registrant and Beacon Telco, L.P. dated October 13, 2000 (incorporated by reference to Exhibit 10.53 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562)
10.25	–Warrant and Stockholder’s Agreement between the Registrant and Beacon Telco, L.P. dated October 13, 2000 (incorporated by reference to Exhibit 10.54 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562)
10.26	–Premises License and Services Agreement between the Registrant, Beacon Telco, L.P., and Trustees of Boston University dated October 16, 2000 (incorporated by reference to Exhibit 10.55 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562)
10.26A	–First Amendment to Premises License and Services Agreement between the Registrant, Beacon Telco, L.P., and Trustees of Boston University dated July 12, 2001 (incorporated by reference to Exhibit 10.24A to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2001, Commission File No. 000-28562)
23.1†	–Consent of PricewaterhouseCoopers LLP
99.1†	–Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2†	–Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Identifies Exhibit that consists of or includes a management contract or compensatory plan or arrangement.

‡ Confidential treatment granted as to portions of this exhibit.

† Filed herewith.

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VERILINK CORPORATION

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)

	Balance at Beginning of Year		Additions Charged to Income			Deductions from Reserves			Balance at End of Year
Inventory Reserves:
Year ended June 28, 2002	$	1,724	$	1,806		$	(320	)	$	3,210
Year ended June 29, 2001	$	2,871	$	576		$	(1,723	)	$	1,724
Year ended June 30, 2000	$	3,360	$	575		$	(1,064	)	$	2,871
Allowance for Doubtful Accounts:
Year ended June 28, 2002	$	275	$	317		$	(32	)	$	560
Year ended June 29, 2001	$	518	$	(43	)	$	(200	)	$	275
Year ended June 30, 2000	$	205	$	340		$	(27	)	$	518
Allowances for Notes Receivable:
Year ended June 28, 2002	$	799	$	454		$	(413	)	$	840
Year ended June 29, 2001	$	611	$	188		$	—		$	799
Year ended June 30, 2000	$	276	$	335		$	—		$	611
Warranty Liability:
Year ended June 28, 2002	$	995	$	331		$	(406	)	$	920
Year ended June 29, 2001	$	1,125	$	346		$	(476	)	$	995
Year ended June 30, 2000	$	1,877	$	761		$	(1,513	)	$	1,125

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SIGNATURES

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

	Verilink Corporation
September 26, 2002	By:	/s/                    LEIGH S. BELDEN
		Leigh S. Belden President, Chief Executive Officer and Director

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

Signature	Title	Date
/s/           LEIGH S. BELDENLeigh S. Belden	President, Chief Executive Officer and Director (Principal Executive Officer)	September 26, 2002
/s/          C. W. SMITHC. W. Smith	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	September 26, 2002
/s/          HOWARD ORINGERHoward Oringer	Chairman of the Board of Directors	September 26, 2002
/s/          STEVEN C. TAYLORSteven C. Taylor	Vice Chairman of the Board of Directors	September 26, 2002
/s/          JOHN E. MAJORJohn E. Major	Director	September 26, 2002
/s/         JOHN A. MCGUIREJohn A. McGuire	Director	September 26, 2002

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CERTIFICATIONS

I, Leigh S. Belden, certify that:

1.	I have reviewed this annual report on Form 10-K of Verilink Corporation;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
3.	Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

Date: September 26, 2002
	By:	/s/                           LEIGH S. BELDEN
		Leigh S. Belden President and Chief Executive Officer (Principal Executive Officer)

I, C. W. Smith, certify that:

1.	I have reviewed this annual report on Form 10-K of Verilink Corporation;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
3.	Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

Date: September 26, 2002
	By:	/s/                              C. W. SMITH
		C. W. Smith Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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EX-4

Exhibit 4.2A

RIGHTS AGENT APPOINTMENT AND
AMENDMENT NO. 1 TO RIGHTS AGREEMENT

            This Rights Agent Appointment and Amendment No. 1 to Rights Agreement is entered into as of May 30, 2002 by and between Verilink Corporation (the “Company”), a Delaware corporation and American Stock Transfer and Trust Company, a New York banking corporation (“AST”).

             WHEREAS , the Company entered into a Rights Agreement (the “Rights Agreement”) dated as of November 29, 2001 with EquiServe Trust Company, N.A. (“EquiServe”) as Rights Agent; and

             WHEREAS , the Company has given EquiServe notice of removal of EquiServe as rights agent; and

             WHEREAS , the Company desires to substitute AST as rights agent pursuant to Section 21 of the Rights Agreement;

             NOW THEREFORE , in consideration of the foregoing and of other consideration, the sufficiency of which is hereby acknowledged, the parties agree as follows:

1.	The Company hereby appoints AST as Rights Agent pursuant to Section 21 of the Rights Agreement effective as of the close of business, Eastern Time, on May 31, 2002, to serve in that capacity on the terms and conditions of the Rights Agreement.
2.	AST hereby accepts the appointment as Rights Agent pursuant to Section 21 of the Rights Agreement and agrees to serve in that capacity on the terms and conditions of the Rights Agreement.
3.	From and after the Effective Time (as defined below), each and every reference in the Rights Agreement to a “Rights Agent” shall be deemed to be a reference to AST.
4.	Section 21 of the Rights Agreement is amended by striking the fifth sentence thereof and substituting in lieu thereof:

Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the States of Delaware or New York (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the States of Delaware or New York), in good standing, having a principal office in the States of Delaware or New York, which is authorized under such laws to conduct or otherwise engage in the shareholder services business or exercise corporate trust powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $10 million.

5. Section 25 of the Rights Agreement is amended to provide that notices or demands to the Rights Agent shall be addressed as follows (until another address is filed).

American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
Attention: Shareholder Services Division

6.	Except as expressly modified herein, the Rights Agreement shall remain in full force and effect.
7.	These foregoing amendments shall become effective as of the close of business, Eastern Daylight Time, on May 31, 2002. This Agreement of Appointment and Amendment may be executed in one or more counterparts, each of which shall together constitute one and the same document.

             IN WITNESS WHEREOF , the parties have caused this Agreement to be duly executed as of the date indicated above.

VERILINK CORPORATION
By:
	Leigh S. Belden President and Chief Executive Officer

AMERICAN STOCK TRANSFER & TRUST
COMPANY

By: 

Name: 

Title: 

2

EX-10

Exhibit 10.13

SETTLEMENT AGREEMENT AND
FULL AND FINAL RELEASE OF CLAIMS

            This Settlement Agreement and Full and Final Release of Claims (“Agreement”) is made and entered into between James B. Garner (“Mr. Garner” or “Employee”) and Verilink Corporation (“Verilink” or “the Company”).

             1.     SEVERANCE. Mr. Garner and Verilink have agreed to end their employment relationship in a manner such that Mr. Garner’ employment with Verilink terminated effective August 21, 2002 (“Effective Separation Date”).

             2.     CONSIDERATION. In consideration of Mr. Garner’s decision to enter into this Agreement, Verilink will provide Mr. Garner with the following:

                        (a)   The continuation of his current salary for a period of six (6) months following the effective date of this Agreement. In the alternative, Verilink may at any time choose to pay Mr. Garner a lump sum payment equal to the outstanding balance of his remaining salary. All such payments are subject to applicable legal withholdings.

                        (b)   The payment of COBRA premiums for continuation of the coverage currently in effect for Mr. Garner and Mr. Garner’s covered dependents under the medical, dental and vision plans for a period of six (6) months from his Effective Separation Date, if Mr. Garner so elects COBRA continuation within the applicable period. These payments will be started following the effective date of this Agreement.

                        (c)   Mr. Garner will be covered under Verilink’s “Directors & Officers” insurance policy in accordance with the terms of that policy.

                        (d)   Mr. Garner will receive an amount equal to the amount accrued under the Salary Recovery Program for the quarter ending June 30, 2002 and a prorated amount for the period beginning July 1, 2002 and ending on the date of termination.

            Whether or not Mr. Garner executes this Agreement, Verilink will provide Mr. Garner with the following:

                        (e)   The right to exercise any vested stock options for a period of three (3) months following Mr. Garner’s Effective Separation Date, pursuant to Verilink’s current Stock Option Plan.

                        (f)   Whether or not Mr. Garner executes this Agreement, Verilink will pay any accrued, but unused, paid-time-off as soon as administratively feasible after his Effective Separation Date or within a reasonable period after this Agreement becomes binding and effective, whichever is later. All such payments are subject to the applicable legal withholdings. Mr. Garner will not continue to accrue paid-time-off after the Effective Separation Date.

             3.     NO OBLIGATION. Mr. Garner agrees and understands that the consideration described in Paragraphs 2(a), 2(b) and 2(c) above are not required by Verilink’s policies and procedures or by any prior agreement between Verilink and Mr. Garner.

             4.     FULL AND FINAL RELEASE. In consideration of the payments being provided to him above, Mr. Garner, for himself, his attorneys, heirs, executors, administrators, successors and assigns, fully, finally and forever releases and discharges Verilink, all subsidiary and/or affiliated companies, as well as its and their successors, assigns, officers, owners, directors, agents, representatives, attorneys, and employees (all of whom are referred to throughout this Agreement as “Verilink”), of and from all claims, demands, actions, causes of action, suits, damages, losses, and expenses, of any and every nature whatsoever, as a result of actions or omissions occurring through the effective date of this Agreement. Specifically included in this waiver and release are, among other things, any and all claims for severance pay benefits under the Employee Retirement Income Security Act of 1974 (ERISA), any and all claims of alleged employment discrimination, either as a

result of the separation of Mr. Garner’s employment, or otherwise, under the Age Discrimination in Employment Act, the Older Workers’ Benefit Protection Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, any other federal, state or local statute, rule, ordinance, or regulation, as well as any claims for alleged wrongful discharge, negligent or intentional infliction of emotional distress, breach of contract, fraud, or any other unlawful behavior, the existence of which is specifically denied by Verilink.

            Nothing in this Agreement, however, is intended to waive Mr. Garner’s entitlement to vested benefits under any pension or 401(k) plan or other benefit plan provided by Verilink. Nor does this release waive any right Mr. Garner may have to challenge the validity of this Agreement with the Equal Employment Opportunity Commission (“EEOC”) with respect to any claim arising under the Age Discrimination in Employment Act. Finally, the above release does not waive claims that Mr. Garner could make, if available, for unemployment or workers’ compensation.

             5.     NO OTHER CLAIMS. Mr. Garner represents that he has not filed, nor assigned to others the right to file, nor are there pending, any complaints, charges or lawsuits against Verilink with any governmental agency or any court, and that he will not file, nor assign to others the right to file, or make any further claims against Verilink at any time for actions or omissions covered by the release in Paragraph 4 above. Nothing in this Agreement, however, prohibits Mr. Garner from filing a charge or complaint with the EEOC with respect to any claim arising under the Age Discrimination in Employment Act.

             6.     OWNERSHIP AND PROTECTION OF PROPRIETARY INFORMATION.

                        (a)   Confidentiality. All Confidential Information and Trade Secrets, as defined below, and all physical embodiments thereof received or developed by Mr. Garner while employed by Verilink are confidential to and are and will remain the sole and exclusive property of Verilink. Mr. Garner will hold such Confidential Information and Trade Secrets in trust and strictest confidence, and will not use, reproduce, distribute, disclose or otherwise disseminate the Confidential Information and Trade Secrets or any physical embodiments thereof and may in no event take any action causing or fail to take the action necessary in order to prevent, any Confidential Information and Trade Secrets disclosed to or developed by Mr. Garner to lose its character or cease to qualify as Confidential Information or Trade Secrets.

                                     (i)   “Confidential Information” means data and information relating to the Business of the Company (which does not rise to the status of a Trade Secret) which is or has been disclosed to Mr. Garner or of which Mr. Garner became aware as a consequence of or through his employment relationship with Verilink and which has value to Verilink and is not generally known to its competitors. Confidential Information shall not include any data or information that has been voluntarily disclosed to the public by Verilink (except where such public disclosure has been made by Mr. Garner without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means.

                                     (ii)   “Trade Secrets” means information including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans or lists of actual or potential customers or suppliers which (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

                        (b)   Return of Company Property. Mr. Garner will promptly deliver to Verilink all property belonging to Verilink, including, without limitation, all Confidential Information and Trade Secrets (and all embodiments thereof) then in Mr. Garner’s custody, control or possession.

                        (c)   Survival. The covenants of confidentiality set forth in this Paragraph will apply as of the date Mr. Garner executes this Agreement to any Confidential Information and Trade Secrets previously disclosed by Verilink or developed by Mr. Garner during the course of his employment with Verilink. The covenants restricting the use of Confidential Information will continue and be maintained by Mr. Garner for a period of two (2) years following the date of execution of this Agreement. The covenants restricting the use of Trade Secrets will continue and be maintained by Mr. Garner following execution of this Agreement for so long as permitted by the Alabama law.

2

             7.     AGREEMENT NOT TO SOLICIT CUSTOMERS OR EMPLOYEES.

                        (a)   Agreement Not to Solicit Customers or Consultants. Mr. Garner agrees that beginning immediately and continuing for a period of one year from his Effective Separation Date, he will not, either directly or indirectly, on his own behalf or in the service of or on behalf of others, (1) solicit, divert, or appropriate or attempt to solicit, divert, or appropriate to any third party, any individual or entity which was an actual or actively sought prospective client, customer, or consultant of Verilink (determined at the date Mr. Garner was last employed by Verilink and continuing for a period of one year from his Effective Separation Date) and with whom Mr. Garner had material contact during Mr. Garner’s term of employment with Verilink; or (2) interfere in any way with Verilink’s business relationship with any person or entity.

                        (b)   Agreement Not to Solicit Employees. Mr. Garner agrees that beginning immediately, and continuing for a period of one year from his Effective Separation Date, he will not, either directly or indirectly, on his own behalf or in the service of or on behalf of others, solicit, divert or hire, or attempt to solicit, divert or hire, any person employed by Verilink, and whom Mr. Garner supervised, either directly or indirectly, or hired on behalf of Verilink, whether or not such employee is a full-time employee or a temporary employee of Verilink and whether or not such employment is pursuant to written agreement and whether or not such employment is for a determined period or is at will.

             8.     NON-DISPARAGEMENT. Mr. Garner agrees that he has not and will not make statements to clients, customers and suppliers of Verilink or to other members of the public that are in any way disparaging or negative towards Verilink, Verilink’s products or services, or Verilink’s representatives or employees. Verilink agrees to use reasonable efforts to prevent its employees and representatives from making or issuing any statements that are negative or disparaging towards Mr. Garner or the termination of his employment.

             9.     NON-ADMISSION OF LIABILITY OR WRONGFUL CONDUCT. This Agreement shall not be construed as an admission by Verilink of any liability or acts of wrongdoing or discrimination, nor shall it be considered to be evidence of such liability, wrongdoing, or discrimination.

             10.     COMPLETE TERMINATION OF EMPLOYMENT RELATIONSHIP. Except as set forth above, Mr. Garner and Verilink agree as a matter of intent that, except for vested pension benefits, if any, this Agreement terminates all aspects of the relationship between them for all time and that Mr. Garner will not represent himself as an officer or employee of Verilink after the Effective Separation Date. Mr. Garner acknowledges that neither Verilink nor any subsidiary or affiliated company shall be under any obligation whatsoever to consider him for reinstatement, employment, re-employment, consulting or other similar status at any time. This provision will not preclude Mr. Garner from contracting with Verilink on behalf of another company that has employed him. It also will not preclude Verilink in the future from considering Mr. Garner for a position, either upon request or otherwise, although Verilink cannot be compelled to consider Mr. Garner for or to provide Mr. Garner with any position at any time.

             11.     CONFIDENTIALITY. The nature and terms of this Agreement are strictly confidential and they have not been and shall not be disclosed by Mr. Garner at any time to any person other than his lawyer, his accountant, or his immediate family, who shall be informed of and bound by this confidentiality clause, without the prior written consent of an officer of Verilink, except as necessary in any legal proceedings directly related to the provisions and terms of this Agreement, to prepare and file income tax forms, or pursuant to court order after reasonable notice to Verilink.

             13.     GOVERNING LAW. This Agreement shall be interpreted under the laws of the State of Alabama.

             14.     SEVERABILITY. The provisions of this Agreement are severable, and if any part of this Agreement except Paragraph 4 is found by a court of law to be unenforceable, the remainder of the Agreement will continue to be valid and effective. If Paragraph 4 is found by a court of competent jurisdiction to be unenforceable, the parties agree to seek a determination by the court as to the rights of the parties, including whether Mr. Garner is entitled under those circumstances and the relevant law to retain the benefits paid to him under the Agreement.

             15.     SOLE AND ENTIRE AGREEMENT. This Agreement sets forth the entire agreement between the parties. Any prior agreements between or directly involving the parties to the Agreement are

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superseded by the terms of this Agreement and thus are rendered null and void. However, the following agreements remain intact and are incorporated herein by reference: (1) the December 17, 1998 letter agreement between the parties (executed on December 17, 1998), attached hereto as Attachment II; and (2) any non-compete agreements or other prior agreements between the parties related to inventions, business ideas, and confidentiality of corporate information.

             16.     NO OTHER PROMISES. Mr. Garner affirms that the only consideration for him signing this Agreement is that set forth in Paragraphs 2(a), 2(b) and 2(c), that no other promise or agreement of any kind has been made to or with him by any person or entity to cause him to execute this document, and that he fully understands the meaning and intent of this Agreement, including, but not limited to, its final and binding effect.

             17.     REMEDIES. Mr. Garner agrees that the covenants and agreements contained in Sections 6 and 7 hereof are of the essence of this Agreement; that each such covenant is reasonable and necessary to protect and preserve the interests and properties of Verilink; that Mr. Garner has access to and knowledge of Verilink’s business and financial plans; that irreparable loss and damage will be suffered by Verilink should Mr. Garner breach any such covenant and agreement; that each such covenant and agreement is separate, distinct and severable not only from the other of such covenants and agreements but also from the other and remaining provisions of this Agreement; that the unenforceability of any such covenant or agreement shall not affect the validity or enforceability of any other such covenant or agreement or any other provision or provisions of this Agreement; and that, in addition to other remedies available to it, Verilink shall be entitled to specific performance of this Agreement and to both temporary and permanent injunctions to prevent a breach or contemplated breach by Mr. Garner of any of the covenants or agreements.

             18.     ADVICE OF COUNSEL. Mr. Garner acknowledges that he has been advised by Verilink to consult with an attorney in regard to this matter. He further acknowledges that he has been given seven (7) days from the time that he receives this Agreement to consider whether to sign it. If Mr. Garner has signed this Agreement before the end of this seven (7) day period, it is because he freely chose to do so after carefully considering its terms. Finally, Mr. Garner shall have seven (7) days from the date he signs this Agreement to change his mind and revoke the Agreement. If Mr. Garner does not revoke this Agreement within seven days of his signing, this Agreement will become final and binding on the day following such seven-day period.

             19.     SIGNATURE. The Agreement may be signed in counterpart and/or through the use of facsimile signatures without effecting its binding nature or effectiveness.

             20.     LEGALLY BINDING AGREEMENT. Mr. Garner understands and acknowledges that (a) that this is a legally binding release; (b) that by signing this Agreement, he is hereafter barred from instituting claims against Verilink in the manner and to the extent set forth in Paragraph 4 and Paragraph 5 above; and (c) that this Agreement is final and binding.

PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE
OF ALL KNOWN AND UNKNOWN CLAIMS.

Date:                   08/27/02	/s/ JAMES B. GARNER
	James B. Garner

For: Verilink Corporation
Date:                   08/27/02	By:                    /s/ LEIGH S. BELDEN
	Full Name: Leigh S. Belden Title: President and Chief Executive Officer

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EX-10

Exhibit 10.17A

April 18, 2001

ADDENNDUM NO. 4 TO LEASE AGREEMENT BETWEEN INDUSTRIAL
PROPERTIES OF THE SOUTH AS LESSOR
AND VERILINK CORPORATION (AS SUCCESSOR TO TXPORT, INC.) AS
LESSEE DATED JUNE, 1993 AND EFFECTIVE SEPTEMBER 22, 1993 AND HEREIN
AFTER REFERRED TO AS THE MASTER LEASE

As successor to TxPort, Inc., Verilink Corporation and Industrial Properties of the South did execute a Lease Agreement for warehouse space at 129 Jetplex Circle, Madison AL dated January 17, 1995 and was effective January 19, 1995.

See Exhibit 2-A dated June 18, 1997 showing area B.

This Addendum No. 4 to the above-referenced Lease is to extend the Lease on the approximately 11,250 square feet of area B for the time period July 1, 2001 through June 30, 2002 at a rate of $3.50 per square foot per year or $3,281.25 payable monthly.

Lessee agrees to pay their pro rata share of utilities. Lessor is not obligated to provide utilities to Lessee without reimbursement.

All other terms and conditions of the lease remain in effect.

Industrial Properties of the South By:	Verilink Corporation
By:              /s/ Charlene B. Graham	By:                /s/ Ronald G. Sibold
Title:           Managing Partner	Title:             CFO
Date:           06/11/01	Date:             06/08/01

Prepared by:
Industrial Properties of the South
2903 Wall Triana Hwy., Suite 7
Huntsville, AL 35824

EX-10

Exhibit 10.18

INDUSTRIAL PROPERTIES OF THE SOUTH
2903 Wall Triana Highway, Suite 7
HUNTSVILLE, AL 35824

LEASE AGREEMENT

This Lease Agreement dated the 16th day of April between Industrial Properties of the South (herein referred to as the “Lessor”) and Verilink Corporation, (herein referred to as the “Lessee”).

WITNESSETH: That the Lessor hereby demises and leases unto the Lessee, from the Lessor, for the term and upon the rentals-hereinafter specified, the premises described herein and in Exhibit A.

PREMISES

1. Square footage                   Approximately 31,250                                                                          
Street Address                   127 Jetplex Circle, Suites A&B                                                              
City/Township                   Madison                                                                                                 
County                                 Madison                                                                                                
State                                    Alabama                                                                                                 
Zip Code                             35758                                                                                                     
For purposes of this Lease Agreement the above-described premises shall be deemed the “Demised Premises”. See Exhibit A, incorporated herein by reference, for additional information on the Demised Premises.

TERM

2.	This Lease Agreement will be effective upon execution by both parties for liability purposes and for early access by the tenant to do modifications.
	The Fixed Term of this Lease Agreement shall be Three (3) years commencing on July 1, 2002 and terminating on June 30, 2005 unless sooner terminated, as provided herein. The full term of the Lease may be extended by mutual written agreement of the parties’ authorized representatives, or upon exercise of any options described herein.
	No rent will be charged for the three (3) months of July, August, and September 2002. This is $10,416.67 x 3 = $31,250.01 as a tenant improvement allowance. Regular rent will start October 1, 2002.

RENT

3.	Rent is due the 1st of each month, and is late after the 5th of each month. A LATE PAYMENT FEE OF ONE HUNDRED DOLLARS ($100.00) PER DAY will be charged to accounts received after the 5th of the month.
	/s/ CWS                     /s/ CBG                                                                                                             Lessee                      Lessor
	Lessee shall pay to the Lessor, without previous demand for this rent by the Lessor, rent in monthly installments and due on the first of each month and forwarded via U.S. mail, overnight courier, or by hand to the office of the Lessor as provided herein or such other address as may otherwise be directed by Lessor in writing; provided, that the Lessor has performed all covenants contained herein and is not in default hereof. If the term of this Lease Agreement shall commence or terminate on a day other than the first day of the calendar month, the rent for any partial month shall be prorated. For the Initial Term the rent shall be an annual rent of $125,000.00, payable in equal monthly installments of $10,416.67.

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QUIET ENJOYMENT

4. Lessor covenants that during the full term of this Lease Agreement, upon the payment of the rent herein provided and the performance by the Lessee of all covenants herein, Lessee shall have and hold the Demised Premises, free from any interference from the Lessor except as otherwise provided for herein.

PEACEFUL POSSESSION

5. Lessor covenants that during the full term of this Lease Agreement, upon the payment of the rent herein provided and the performance by the Lessee of all covenants herein, that the Lessee shall peaceably and quietly have, hold, and enjoy peaceful possession of the Demised Premises.

PERMITTED USES

6. Lessee covenants and agrees to use the Demised Premises as offices, warehouse, or light industrial space and agrees not to use or permit the premises to be used for any other purpose without the prior written consent of the Lessor. Lessor covenants that the premises may be lawfully used for these purposes.

SUBLETTING AND ASSIGNMENT

7. Lessee shall not sublet the Demised Premises nor any portion thereof, nor shall this Lease Agreement be assigned by the Lessee without the prior written consent of the Lessor, which consent shall not be unreasonably withheld.

ATTORNMENT

8. In the event the Demised Premises are sold due to any foreclosure sale or sales, by virtue of judicial proceedings or otherwise, this Lease Agreement shall continue in full force and effect, and Lessee agrees, upon request, to attorn to and acknowledge the foreclosure purchaser or purchasers at such sale as Lessors hereunder; provided, however, that such purchaser will accept all obligations of Lessor as contained in this Lease Agreement.

ESTOPPEL CERTIFICATE

9. The Lessee agrees to execute an Estoppel Certificate for the benefit of Lessor’s lender or lenders; provided, however, that such Estoppel Certificate consists solely of an acknowledgment of the terms and conditions of this Lease Agreement.

RULES AND REGULATIONS

10. Lessee covenants and agrees that Lessee shall observe and comply with those Rules and Regulations (if any) contained in Exhibit B attached, initialed by Lessee, and made a part hereof.

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LESSOR INSURANCE

11. Lessor shall maintain fire and extended coverage insurance on the Demised Premises, unless otherwise specified in this Lease Agreement in sufficient amounts so as to be able to make all necessary repairs to the Demised Premises in the event of a fire in or other destruction of the Demised Premises, as well as insurance sufficient to cover bodily injury and personal injury in the event of a claim against Lessor for same. Certificates of insurance may be issued at Lessee’s request at reasonable times during the term of the Lease Agreement.

LESSEE INSURANCE

12.

Lessee agrees to procure and maintain at Lessee’s expense throughout the term of this Lease Agreement and any extension thereof, a policy or policies of insurance as follows: (a) workers’ compensation (statutory); (b) Employers’ Liability ($1,000,000 per occurrence, bodily injury by accident or disease, including death); Commercial General Liability ($1,000,000 combined limit, bodily injury, personal injury and property damage, including blanket contractual liability). The Lessor shall be included as an additional insured under Commercial General Liability as respects this lease of premises. Certificates of insurance may be issued at Lessor’s request at reasonable times during the term of the Lease Agreement.

All personal property of Lessee in the demised premises or in the building of which the demised premises is a part shall be at the sole risk of Lessee. Lessor shall not be liable for any damage thereto or for the theft or misappropriation thereof, unless such damage, theft or misappropriation is directly attributable to the negligence or intentional acts of Lessor, its agents or employees. Lessor shall not be liable for any accident to or damage to property of Lessee resulting from the use or operation of mechanical, electrical or plumbing apparatus, unless caused by and due to the negligence of Lessor, its agents or employees.

LESSEE’S AND LESSOR’S OBLIGATIONS

13.

Lessor shall take all reasonable and necessary precautions to prevent damage, injury, or loss of life in and around the Demised Premises. Lessor agrees to indemnify and save Lessee harmless from and against any and all claims, actions, damages, liability and expense in connection with or arising out of Lessee’s use of the Demised Premises occasioned wholly or in part by any willful misconduct or negligent act or omission of Lessor, its agents, clients, or customers. In case Lessee shall, without material fault on its part, be made a party to any litigation commenced by or against Lessor, Lessor shall protect and hold Lessee harmless and shall pay all costs, expenses and reasonable attorneys’ fees incurred or paid by Lessee in connection with such litigation. The aforementioned indemnification by Lessor of Lessee shall not be effective as to any claim arising from or to the extent of negligence or willful misconduct of the Lessee.

Lessee shall take all reasonable and necessary precautions to prevent damage, injury, or loss of life in and around the Demised Premises. Lessee agrees to indemnify and save Lessor harmless from and against any and all claims, actions, damages, liability and expense in connection with or arising out of Lessee’s use of the Demised Premises occasioned wholly or in part by any willful misconduct or negligent act or omission of Lessee, its agents, clients, or customers. In case Lessor shall, without material fault on its part, be made a party to any litigation commenced by or against Lessee, Lessee shall protect and hold Lessor harmless and shall pay all costs, expenses and reasonable attorneys’ fees incurred or paid by Lessor in connection with such litigation. The aforementioned indemnification by Lessee of Lessor shall not be effective as to any claim arising from or to the extent of negligence or willful misconduct of the Lessor.

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EVENT OF DESTRUCTION

14. In the event of the whole or partial destruction of the Demised Premises or of the building containing the Demised Premises by fire, explosion, the elements or otherwise during the term of this Lease Agreement or previous thereto as to render the Demised Premises untenable or unfit for occupancy in whole or in part, or should the Demised Premises be so badly injured that the same cannot be repaired within ten days from the occurrence to the Demised Premises of such destruction and injury then the Lessee may, at its option, terminate this Lease Agreement and surrender the Demised Premises and all the Lessee’s interest therein to the Lessor as of the date of termination, and shall pay rent only to the time of such event of destruction.

Should the Demised Premises be rendered untenable and unfit for occupancy in whole or in part, but yet be repairable within ten days from the happening of such injury, the Lessor may enter and repair the same, and the rent shall not accrue after such injury or while repairs are being made, but shall recommence immediately after such repairs shall be completed; provided such repairs are completed within the ten days. But if the premises shall be so slightly injured as not to be rendered untenable and unfit for occupancy in whole or in part in the opinion of the Lessee, then the Lessor agrees to repair the same with reasonable promptness and in that case the rent accrued and accruing shall not cease. Nothing in this clause, however, shall be construed as requiring the Lessor to repair the Demised Premises in the event of their whole or partial destruction. However, if the Lessor either does not repair within the appropriate time limits or states his intention not to repair, then the Lessee’s rights shall be the same as though the Demised Premises were injured beyond repair.

In any event if the Lessor is unable to make repairs of such damage or destruction within ten days of the occurrence of such an event the Lessee may terminate the lease for other than default (unless such damage or destruction was the result of the willful misconduct or negligence of Lessor, its agents, clients, or customers, in which case the termination shall be deemed one for default) by written notice to the Lessor without any further obligations hereunder from the date of the occurrence of such destruction.

OBSERVATION OF LAWS

15. The Lessee agrees to observe and comply with all laws, ordinances, rules, and regulations of the Federal, State, County and Municipal authorities applicable to the Demised Premises. The Lessor and Lessee agree not to do or permit anything to be done in the Demised Premises or the building in which the Demised Premises exist, or keep anything therein which would obstruct or conflict with the regulations of the Fire Department.

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SERVICES AND UTILITIES

16. Services and utilities furnished to the Demised Premises UTILITIES shall be provided and paid for as follows:

By     Lessee	Item Description	By     Lessor
c	Water & sewer charges
c	Electric, fuel oil, and/or gas
c	Plumbing mechanical & maintenance, except capital expenditures*
c	Heating mechanical maintenance, except capital expenditures
c	Air conditioning mechanical & maintenance, except capital expenditures*
c	Interior building maintenance
c	Cleaning of the building exterior entryways of the demised area only **
c	Dock equipment, Dock Levelers, Overhead Doors
b, d, e	Real estate taxes (when begun being charged, as of Nov. 1, 2005)
c	Trash removal
c	Janitorial service
c	Any security above “normally” locked doors
	Lawn care & landscaping maintenance	a
c	Driveway, parking lot & sidewalk maintenance
	Structural maintenance	a
	Roof maintenance	a
c	Fire alarm maintenance and inspections
c	Fire extinguishers, installation & service
c	Lessee’s signage, with Lessor’s approval

*	A capital expenditure is the purchase of any repair or replacement item that costs in excess of $1,000.
**	Cleaning of the building exterior demised area only, e.g., window cleaning, picking up trash & cigarette butts, dusting and sweeping.

In each instance, the following key indicates how the cost of such services will be paid by Lessee:

(a)	Included in the annual rent amount;
(b)	Actual metered amounts or pro rated on square footage amounts to be paid by Lessee to Lessor within thirty days of receipt of written notice of a request to be reimbursed by the Lessor; necessary records to support the amounts will be kept by the Lessor and copies made available to Lessee upon request; Lessee may require such records prior to payment; An administration fee of 3% will be added to all utility accounts paid by Lessor and invoiced to tenant.
(c)	Actual cost of services or metered amounts to be paid by Lessee to the provider of the service (e.g., the utility company or contractor).

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(d)	To be prorated based upon square footage ratio of this tenant’s area to the entire metered area or total building area as applicable. Reimbursement will be made the same as (b) above.
(e)	If at any time which the Lessee is obligated to pay the ad valorem taxes as provided above and if Lessee shall at any time object to any assessment of taxes as being excessive or otherwise unjust, Lessee shall have the right, but not the obligation, to contest, at its expense, said tax assessment in the manner provided by law. The Lessor shall cooperate in such efforts and assist Lessee in any manner reasonably requested, including making available to Lessee detailed information with respect to the Leased Premises. All of such proceedings shall be under the direct control of Lessee and its counsel and, to the extent that Lessor shall incur costs or expenses in conjunction therewith; such reasonable actual costs or expenses shall be reimbursable upon Lessor’s submitting to Lessee its statement, subject to Lessee’s audit and approval, not more frequently than quarterly. Any tax savings resulting from any such proceeding shall belong to and be retained by Lessee if they had been paid or pre-paid by Lessee.
	Whenever the Lessee is required to pay ad valorem taxes on the Leased Premises, Lessee shall pay said taxes to Lessor at least thirty (30) days prior to the time said taxes are payable by Lessor to the proper taxing authority. Lessee will be charged for ad valorem real estate taxes for the time of this lease. Partial years to be prorated accordingly.
	If lease termination is other than September 30 of any given year, prorated ad valorem taxes will be due to Lessor at least thirty (30) days prior to lease termination.

INTERRUPTION OF SERVICES

17. Notwithstanding anything contained herein to the contrary, Lessee shall have the right upon written notification to the Lessor to terminate this Lease Agreement for default if any stoppage in any of the services listed in the immediately preceding paragraph as being provided by the Lessor continues for twenty days for whatever reason.

HOLDING OVER BY LESSEE

18.

Nothing contained herein shall constitute the consent of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease Agreement.

However, if Lessee shall for any reason remain in possession of any of the Demised Premises after the expiration or earlier termination of the Term hereof, except as specifically provided, such possession shall be as a month-to-month Tenancy during which time Lessee shall pay as rental, rent on the first day of each month at a rate equal to one-twelfth the amount of annual rent payable monthly during the prior year of the term of this Lease Agreement or the option rate, whichever is higher. Unless evidenced otherwise in writing as the exercise of an option stated herein or as a modification to this Lease Agreement, in no event shall any holding over by the Lessee be construed as creating any new tenancy other than a month to month tenancy.

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CARE OF PREMISES

19. The Lessee agrees that it will take good care of the Demised Premises, fixtures and appurtenances, and suffer no waste or injury, that it will make all repairs to the Demised Premises, fixtures and appurtenances necessitated by the fault of the Lessee, its agents, employees or guests.

REPAIRS

20. The Lessor agrees to make such repairs, per Section 16, as may be necessary to keep the Demised Premises and appurtenances in good order and condition within a reasonable time after it knows or should know of the need of such repairs; provided, however, when such repairs are necessitated by the fault of the Lessee, its agents, employees or guests, Lessee shall reimburse Lessor for its reasonable costs expended in making such repairs plus overhead. Costs shall include actual out-of-pocket expenses of Lessor and shall include profit or overhead. Lessor shall make available to Lessee copies of any and all records necessary to support the costs levied against Lessor under this clause for which reimbursement is being sought.

RESERVED PARKING

21. It is agreed that car and truck parking will be in the same proportion as tenant’s space is to the entire building. Lessee may not invite 3rd parties to park or rent parking to 3rd parties.

IMPROVEMENTS

22.

The Lessor and Lessee have agreed as to the extent of improvements to be made to the Demised Premises, and the work will proceed in order to meet the commitments herein provided. Such work to be completed by Lessor is described in Exhibit C to this Lease Agreement. The parties agree to cooperate in order for the work to proceed to be completed on a timely basis. Should work beyond that required by Exhibit C be required by Lessee, it shall be described in Exhibit D, and performed and paid for by Lessee.

In the event Lessee desires to make improvements to the Demised Premises as described on Exhibit “D”, Lessee agrees to enter into a construction contract with a contractor acceptable to Lessor. Said construction contract must be in form and substance satisfactory to Lessor. In the event Lessee desires to make improvements to the Demised Premises, Lessee agrees to deliver to Lessor the Plans and specifications acceptable to Lessor.

NOTICES

23. Formal notices or communications pertaining to this Lease Agreement shall be deemed to have been duly given if personally provided to the other party in writing or if sent to the other by U.S. mail, or an independent delivery service, postage and other costs prepaid. Until otherwise specified in writing, the addresses and telephone numbers of the parties hereto for the purpose of any such notice or communications are:

LESSEE:	LESSOR:
Verilink Corporation	Industrial Properties of the South
950 Explorer Blvd.	2903 Wall Triana Hwy., #7
Huntsville, AL 35806	Huntsville, AL 35824
Attn:     C. W. Smith	Attn:     Charlene B. Graham
Telephone:        (256) 327-2204	Telephone:          (256) 461-7482
Fax:                   (256) 327-2525	Fax:                     (256) 464-0193

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SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST

24. This Lease Agreement is subject and is hereby subordinated to all present mortgages, deeds of trust and other encumbrances affecting the Demised Premises or the property of which said premises are a part. The Lessor agrees to cause the mortgagee to provide to the Lessee, if requested, in recordable form, an agreement not to disturb Lessee’s right in or possession of the premises so long as Lessee is not in default hereunder, in the event this Lease Agreement is subordinated to mortgage deeds of trust or other encumbrances and the subordination of this Lease Agreement is conditioned upon the Lessee receiving such non-disturbance agreement from the mortgagee.

LEASE BINDING ON HEIRS, SUCCESSORS, ETC.

25. All of the terms, covenants, and conditions of this Lease Agreement shall inure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and assigns of the parties hereto.

EMINENT DOMAIN, CONDEMNATION

26.

If the entire property or any material part thereof wherein the Demised Premises are located shall be taken by public or quasi-public authority under any power of eminent domain or condemnation, this Lease Agreement shall forthwith terminate and the Lessee shall have the right through the Lessor to a claim for such taking, limited only to the cost or value of material stock and cost of removal of stock, furniture and fixtures owned by Lessee.

A material part is defined as taking which could interfere with the Lessee’s continued enjoyment and utilization of the premises as described herein.

SEVERABILITY

27. Each covenant and agreement in this Lease Agreement shall for all purposes be construed to be a separate and independent covenant or agreement. If any provision in this Lease Agreement or the application thereof shall to any extent be invalid, illegal or otherwise unenforceable, the remainder of this Lease Agreement, and the application of such provision other than as invalid, illegal or unenforceable, shall not be affected thereby; and such provisions in this Lease Agreement shall be valid and enforceable to the fullest extent permitted by law.

ADDITIONAL SIGNS

28. All signage must be approved in writing by the Lessor. Only building standard signage will be allowed.

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LESSOR’S RIGHT TO ENTRY

29.

Lessor and Lessor’s agents may enter the Demised Premises for the following purposes only: to make repairs, alterations, or improvements necessary under the terms of this Lease Agreement; to perform Lessor’s covenants as set forth in this Lease Agreement; for purposes of inspection and, during the last two months of the Lease Term, to show the Demised Premises to perspective tenants. Such entry shall not be so frequent or of such a type as to disturb Lessee’s peaceful enjoyment of the Leased Premises. Such entry shall only take place with reasonable prior notice to and consent of Lessee; consent shall not be unreasonably withheld. If Lessor or its agent reasonably believes that an emergency exists which requires immediate entry, such entry may be made without Lessee’s consent, but Lessor shall so inform Lessee of such entry at the earliest practicable time afterwards. All persons who enter the Demised Premises at Lessor’s request must first o btain clearance from Lessee before entry.

Notwithstanding anything in this Lease Agreement to the contrary, upon any entry by Lessor or its duly authorized agents, servants, or employees at any time during the Lease Term, such entry shall conform to Lessee’s security requirements as may be required by Lessee, the federal government or any agency thereof, or any of Lessee’s clients.

LESSEE’S ALTERATIONS, IMPROVEMENTS, OR ADDITIONS

30.

Any alterations, improvements, or additions to the Demised Premises in the form of fixtures to the Demised Premises (collectively referred to as “Alterations”) and made by or at the request of Lessee shall remain upon the Demised Premises at the expiration of this Lease Agreement and shall become the property of Lessor unless Lessor prior to the expiration or termination of this Lease Agreement, gives written notice to Lessee to remove all such Alterations. Lessee shall repair any damage caused by such removal and restore the Demised Premises to substantially the same condition in which it existed prior to the time that any such Alterations were made.

Lessee shall not, without on each occasion first obtaining Lessor’s prior written consent, make any Alterations to the Demised Premises, except that Lessee may, without the consent of the Lessor but with prior written notice to Lessor, make minor improvements to the interior of the Demised Premises provided that they do not impair the structural strength, operation, or value of the building of which Demised Premises are a part, or violate any zoning, fire or building code. The cost to correct any such violation shall be the responsibility of the Lessee.

RENEWAL OPTION

31.

Lessee is given and granted an option to renew the term of this Lease Agreement for Two (2) successive terms of One (1) year(s) each on the same terms and conditions except for the rental rate and the length of the term. To exercise its option, the Lessee shall give the Lessor a notice in writing not less than sixty days prior to the end of the original term and any renewal terms and as a condition precedent to the notice and the renewal that the Lessee not be in default under the terms and conditions of this Lease Agreement.

The rental rate during the renewal period shall be the current rate increased by the c.p.i. over the prior term of the lease. The c.p.i. used is the 1982-84=100 All USA Cities.

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LESSEE’S DEFAULT

32. The Lessee shall be considered in default of this Lease Agreement upon failure to pay when due the rent or any other sum required by the terms of this Lease; the failure to perform any material term, covenant, or condition of this Lease Agreement; the commencement of any action or proceeding for the dissolution, liquidation, or reorganization under the Bankruptcy Act, of Lessee, or for the appointment of a receiver or trustee of the Lessee’s property; the making of any assignment for the benefit of creditors by Lessee; the suspension of business; or the abandonment of the Demised Premises by the Lessee. In each case, Lessee shall only be in default if the Lessee is given written notice by Lessor of the specific grounds for the default termination and twenty business days from receipt of such notice to correct such default and Lessee fails to do so.

LESSOR’S DEFAULT

33. The Lessor shall be considered in default of this Lease Agreement upon the failure to perform any material term, covenant, or condition of this Lease Agreement; the commencement of any action or proceeding for the dissolution, liquidation, or reorganization under the Bankruptcy Act, of Lessor, or for the appointment of a receiver or trustee of the Lessor’s property; the making of any assignment for the benefit of creditors by Lessor; the suspension of business; or any other reason provided for herein. In each case, Lessor shall only be in default if the Lessor is given written notice by Lessee of the specific grounds for the default termination and twenty business days from receipt of such notice to correct such default and Lessor fails to do so.

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GENERAL

34.	a.	This Lease Agreement shall be governed by and under the laws of the State/Commonwealth of Alabama.
	b.	Each party acknowledges that it has read this Lease Agreement, understands it, and agrees to be bound by its terms, and further agrees that this is the complete and exclusive statement of the Lease Agreement between the parties, which supersedes and merges all prior proposals, understandings, and all other agreements, oral or written, between the parties relating to this Lease Agreement. Any change in this Lease Agreement must be made in writing and signed by authorized representatives of both the Lessee and the Lessor.
	c.	If either party cannot perform any or all of its respective obligations under this Lease Agreement because of the occurrence of any event which is beyond its reasonable control, then the non-performing party shall (i) notify the other party, (ii) take reasonable steps to resume performance as soon as possible, and (iii) not be considered in breach during the period performance is beyond the party’s reasonable control.
	d.	The failure of either party at any time to require performance by the other party of any provision hereof shall not affect in any way the full right to require such performance at any time thereafter. The waiver by either party of a portion of a provision herein shall not be taken or held by the other party to be a waiver of the provision itself unless such a waiver shall be express and in writing
	e.	In the event of any inconsistency between its component parts, this Lease Agreement shall be construed with the following order of precedence:

(1)	The Basic Lease Agreement (This document)
(2)	Exhibit A
(3)	Exhibit C
(4)	Exhibits B and D
(5)	Other Exhibits (if any)

f.	The titles of the clauses in this Lease Agreement, including all Exhibits thereto, shall be read as references only and shall not be read as affecting, contradicting, negating, or explaining the meaning or interpretation of this Lease Agreement.
g.	Each party represents and warrants that it has the right and authority to enter into this Lease Agreement.
h.	Unless otherwise specifically noted, “days” shall mean calendar days.
i.	In no event shall either party be liable to the other for indirect, consequential, incidental or special damages, even if it has been made aware of the possibility of such.

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MECHANICS’ LIENS

35. In the event that any mechanics’ lien is filed against the premises as a result of alterations, additions or improvements made by the Lessee, the Lessee shall procure effective cancellation, bonding or discharge of the lien within 30 days following written notice of the existence of such condition or shall be considered in immediate default of this Lease Agreement and will not be entitled to the notice and cure provisions described in Section 32 hereof. Alternatively, the Lessor shall have the option, if the Lessee shall be unable to procure effective cancellation, bonding or discharge of the lien within 30 days following written notice of the existence of such condition, to take such steps and pay such monies as may be necessary to obtain an effective cancellation or discharge of such notice or claim, in which event such monies as shall be expended by the Lessor shall be considered additional rent hereunder and shall be due and payable on the first day of the n ext month succeeding such payment by the Lessor.

ENVIRONMENTAL

36.	Lessor warrants and represents to Lessee that: (a) Lessor, its agents, employees, representatives, tenants, and its predecessors in interest in the Premises did not discharge, release, or dispose of, in any form, any hazardous material or substance into or onto the Premises and that no condition exists in or on the Premises that may result in any violation of any federal, state or local laws, regulations or ordinances relating to the protection of the environment or the public health and welfare(collectively hereinafter called “Environmental Laws”); and (b) Lessor has no liability and there are no outstanding claims against Lessor for the clean up of any hazardous material or substance deposited in the environment, either directly on the premises or elsewhere, that resulted from ownership of the Premises.
	Lessee warrants and represents to Lessor that (a) Lessee, its agents, employees, representatives and sublessees, if any, will not discharge, release, or dispose of in any form any hazardous materials or substances into or onto the Premises and that Lessee, will not create, or permit to be created, any condition in or on the Premises that may result in any violation of any environmental laws: and (b) Lessee will not allow any hazardous material or substance to exist or be stored, located, discharged, possessed, managed, processed or otherwise handled on the Premises except those customarily used in the conduct of Lessee’s normal business activities, and that Lessee shall comply with all Environmental Laws affecting the Premises; and c) Lessee shall immediately notify Lessor should Lessee become aware of (i) any hazardous material or substance or any other environmental problem or liability with respect to the Premises, (ii) any lien, action or notice related to a ny such environmental problem or liability, or (iii) any material or substance or any other problem with respect to or arising out of or in connection with the premises.
	Lessee Agrees to provide a Phase I environmental study at least thirty (30) days prior to vacating and to correct or address any environmental concerns prior to lease termination. Lessor affirms that the Lessee provided a Phase I environmental study for the Demised Premises at the end of its previous lease which terminated in February 2001, and since that time, no other person has rented or used the Demised Premises.

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REMEDIES

37. Upon the happening of any event of default, Lessor if Lessor shall elect, may 1) collect each installment of rental hereunder as and when the same matures and this Agreement shall remain in effect except that the Lessee shall not be allowed to continue to possess the Demised Premises and the Lessor shall be free to lease the Demised Premises to a third party, or 2) terminate the term of this Agreement without further liability to Lessee hereunder, or 3) terminate Lessee’s right to possession and occupancy of the Demised Premises without terminating the term of this Agreement, and in the event Lessor shall exercise such right of election the same shall be effective as of the date of written notice of Lessor’s election given by the latter to Lessee at any time after the date of such event of default. Upon any termination of the term hereof, whether by lapse of time or otherwise, or upon any termination of Lessee’s right to possession or occupancy of the Demised Premises without terminating the term thereof, Lessee shall promptly surrender possession and vacate the Demised Premises and deliver possession thereof to Lessor. If Lessor shall elect to terminate Lessee’s right to possession only, without terminating the term of this Agreement, Lessor at Lessor’s option may enter onto the Demised Premises, remove Lessee’s property and other evidence of tenancy and take and hold possession thereof without such entry and possession terminating the term of this Agreement or otherwise releasing Lessee in whole or in part from Lessee’s obligation to pay the rent herein reserved for the full term hereof and in such case Lessee shall be liable for the difference in the rent received by Lessor and the rent due under his agreement for the remainder of said term. Upon and after entry into possession without termination of the term hereof, Lessor shall use reasonable efforts to relet the Demised Premises or any part thereof for the account of Lessee to any person, firm or corporation other than Lessee for such rent, for such time, and upon such terms as Lessor in Lessor’s sole discretion shall determine or if Lessor chooses, Lessor may operate the demised property for its own account holding the Lessee liable for the difference between the rental described herein and the fair market rental of the Demised Premises at the time of the event of default. The Lessee agrees to pay Lessor, or on Lessor’s behalf, a reasonable attorney’s fee in the event Lessor employs an attorney to collect any amounts due hereunder by Lessee, or to protect the interest of Lessor in the event the Lessee is adjudged a bankrupt, or legal process is levied upon the goods, furniture, effects or personal property of the Lessee upon the said Demised Premises, or in the event the Lessee violated any of the terms, conditions, or covenants on the part of the Lessee herein contained. In order to further accrue the prompt payments of said rents, as and when the same mature, and the faithful performance by the Lessee of all and singular the terms, conditions and covenants on the part of the Lessee herein contained, and all damages, and costs that the Lessor may sustain by reason of the violation of said terms, conditions and covenants, or any of them, the Lessee hereby waives any and all rights to claim personal property as exempt from levy and sale, under the laws of any state or the United States.

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IN WITNESS WHEREOF , the parties hereto have signed this Agreement as of day and year first written above.

LESSEE Verilink Corporation                                    950 Explorer Blvd.                                       Huntsville, AL 35806	LESSOR Industrial Properties of the South                      2903 Wall Triana Hwy., #7                                Huntsville, AL 35824
By:      /s/ C. W. Smith	By:      /s/ Charlene B. Graham
Printed Name:     C. W. Smith	Printed Name:       Charlene B. Graham
Title:    VP and Chief Financial Officer       Date:     04/29/02	Title:       Managing Partner                              Date:       04/29/02

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EXHIBIT A
DESCRIPTION OF DEMISED PREMISES

Southern most end of 127 Jetplex Circle, Madison, AL 35758, Suites A & B, consisting of approximately 31,250 square feet.

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EXHIBIT B
RULES AND REGULATIONS

Rule 1:	No sign, picture, advertisement, or notice shall be displayed, inscribed, painted or affixed on any part of the outside or inside of the building or on or about the Demised Premises except on the doors of said Demised Premises and on the Directory Board of the building, and then only of such color, size and style and materials as shall be first specified by the Lessor. No “For Rent” signs shall be displayed by the Lessee, and no showcases, or obstructions, signs, flags, statuary, or any advertising device of any kind whatever shall be placed in front of said building or in the passageways, halls, lobbies, or corridors thereof by the Lessee; and the Lessor reserves the right to remove all such showcases, obstructions, signs, flags, statuary, or advertising devices and all signs other than those provided for, without notice to the Lessee and at its expense.
Rule 2:	The Lessor will maintain the grounds. Any person employed by the Lessor to do grounds work, shall, while outside of said Demised Premises be subject to, and under the control and direction of the Lessor (but not as agent or servant of the Lessor).
Rule 3:	No person shall disturb the occupants of this or any adjoining building premises by the use of any musical instrument, unseemly noises, whistling, singing or in any other way.
Rule 4:	The Demised Premises leased shall not be used for lodging or sleeping, not for any immoral or illegal purposes for any purpose that will damage the Demised Premises.
Rule 5:	Canvassing, soliciting and peddling in the building are prohibited and each Lessee shall cooperate to prevent the same.
Rule 6:	The water closets, wash basins, sinks, and other apparatus shall not be used for any other purpose than those for which they were constructed, and no sweeping, rubbish, or other substances shall be thrown therein.
Rule 7:	All glass, locks and trimmings, in or about the doors and windows, and all electrical globes and shades, broken by any Lessee, shall be immediately replaced or repaired and put in order by such Lessee under the direction and to the satisfaction of the Lessor, and on removal shall be left whole and in good repair, normal wear and tear excluded.
Rule 8:	Lessee will not block ingress and egress of the driveways or docks leased to others.
Rule 9:	The Lessor reserves the right to rescind any rules and to make such other and further rules and regulations as, in Lessor’s judgment, may from time to time be needed for the safety, care, maintenance, operation and cleanliness of the building, and for the preservation of good order therein, which, when so made, and notice thereof given to the Lessee, shall have the same force and effect as if originally made a part of the foregoing lease; and such other further rules, not however, to be inconsistent with the proper and rightful enjoyment by the Lessee under the foregoing lease of the premises therein referred to.
Rule 10:	No smoking shall be allowed within any part of the premises herein described.

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EXHIBIT C
ALTERATIONS TO BE MADE BY LESSOR

Lessor will repair/replace all plumbing in the restroom facilities to correct any problems prior to the start date of the lease.

TI allowance is three (3) months “Free Rent” for July, August and September 2002.
$10,416.67 x 3 = $31,250.01 to be used for new carpet and paint at new Tenant’s discretion.

Lessor reserves the right to approve color selections and materials.

EXHIBIT D
ALTERATIONS TO BE MADE BY LESSEE

1.	Install voice data wiring and equipment.
2.	Security above a normally locked door.
3.	Provide fire extinguishers, per code.
4.	Any special electric circuits needed for Tenant’s equipment.
5.	Modifications (additions/removals) of interior walls, subject to approval by Lessor.
6.	Installation of new floor coverings and paint as noted above in Exhibit C.

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EX-10

Exhibit 10.18A

June 19, 2002

ADDENNDUM NO. 1 TO MASTER LEASE AGREEMENT
DATED APRIL 16, 2002
BETWEEN INDUSTRIAL PROPERTIES OF THE SOUTH AS LESSOR
AND VERILINK CORPORATION AS LESSEE

Whereas Verilink Corporation, as Lessee and Industrial Properties of the South, as Lessor did execute a Lease Agreement dated April 16, 2002 hereinafter referred to as the Master Lease; and now this addendum is executed to add approximately 6250 s.f. of warehouse space (contiguous with currently lease space) at 127 Jetplex Circle, Suite C, Madison, AL  35758, as shown on the attached 1-A.

The fixed term for this added space is July 1, 2002 through June 20, 2005. For early access, this addendum is effective upon execution for liability purposes.

The rate is $4.00 per s.f. per year or $4,083.33 per month.

Master Lease	$10,416.67
Addendum	$  2,083.33
	$12,500.00	New Monthly Total

No rent will be charged for this space for the three (3) months of July, August, and September, 2002. Regular rent will start October 1, 2002.

Lessee is to have the utilities, Huntsville Utilities, phone # 535-1217, account # 6723670215 (electric), and gas, to North Alabama Gas, phone # 772-0227, transferred from Industrial Properties of the South to Verilink Corporation, effective the date of signature of Addendum #1. Lessee agrees to pay their pro rata share of the water, which will be invoiced by Lessor monthly. Should Lessee become the sole tenant of all 50,000 s.f., they will assume the domestic water line account in their name also. Lessor will keep the landscape irrigation account as part of the grounds maintenance.

Lessee is responsible for extending wiring for its voice and data equipment and security.

All other terms and conditions of the lease remain in effect.

Industrial Properties of the South By:	Verilink Corporation
By:             /s/ Jerry M. Graham, M.D	By:             /s/ C. W. Smith
Title:          Owner – Partner	Title:           VP & CFO
Date:          07/02/02	Date:            07/01/02

Prepared by:  Industrial Properties of the South
2903 Wall Triana Hwy., Suite 7, Huntsville, AL 35824

EX-10

Exhibit 10.19

“TRIPLE NET” LEASE AGREEMENT

ARTICLE 1: BASIC TERMS

The following terms used in this Lease shall have the meanings set forth below.

1.1	Date of Lease:	August 2, 2002
1.2	Landlord (legal entity):	Verilink Corporation, a Delaware corporation
1.3	Tenant (legal entity):	The Boeing Company, a Delaware corporation
1.4	Premises:	The “Premises” means the building (“Building”) located at 950 Explorer Boulevard, Huntsville, Alabama 35806 depicted on the site plan attached as Exhibit A, and the land described in Exhibit B (the “Property”). The Premises includes the grounds surrounding the Building, which are part of the Property, together with the right to park 450 to 500 vehicles in the parking lot adjoining the Building.
1.5	Approximate Size of Premises:	109,910 allocated square feet of floor area in the Building. The parties agree that the Base Rent is an agreed-upon sum not based on the exact amount of rentable square feet actually located in the Leased Premises.
1.6	Lease Term:	The sixty-four (64) month period beginning on the Lease Commencement Date.
1.7	Lease Commencement Date:	The estimated lease commencement date is August 1, 2002 and the rental commencement date is December 1, 2002. The term of the lease shall commence upon the later to occur of: (i) the estimated commencement date, or (ii) the date the Premises are delivered to Tenant with Verilink furniture and servers removed and vacated by all Verilink employees. August 1, 2002 or the date the Premises is delivered to Tenant with Verilink furniture and servers removed and vacated by all Verilink employees.
1.8	Expiration Date:	November 30, 2007, unless the Lease Term is terminated sooner pursuant to the terms of this Lease, including particularly Paragraph 2.2.
1.9	Permitted Uses:	Any lawful purpose consistent with the character of the Building, including general office and warehouse. The use must comply with the Cumming Research Park West District Regulations, Article 50.1 (see attached)
1.10	Base Rent:	See Attached Rental Schedule
1.11	Address of Landlord for Notices:	Verilink Corporation 127 Jetplex Circle Madison, Alabama 35758 Attention: Todd Westbrook

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1.12	Address of Tenant for Notices:                                          Overnight:	The Boeing Company c/o Boeing Realty Corporation J.S. McDonnell Blvd. and Airport Rd Building 100, Mail Code: S100-1380 Berkeley, Missouri 63134                         OR
	Regular:	P. O. Box 516 Mail Code: S100-1380 St. Louis, Missouri 63166-0516 Attention: Real Estate Manager
1.13	Exhibits:	A.      Site Plan B.      Legal Description C.      Rental Schedule D.      Use - Cumming Research Park West           District Regulations, Article 50.1 E.      Cummings Research Park West Sign           Control Regulations, Article 72.4.8

ARTICLE 2: LEASE TERM

2.1     Lease of Premises for Lease Term. Landlord leases the Premises to Tenant and Tenant leases the Premises from Landlord for the Lease Term. The Lease Term shall be the period stated in Article 1 and shall begin on the Lease Commencement Date set forth in Article 1. The Premises will be available to Tenant continuously, 24 hours of each day, seven days of each week, during the Lease Term. If the Landlord has not vacated the Building by August 1, 2002, provided that Tenant does not cause such delays, the rental commencement date shall be delayed one week for every week of delay in giving possession. If the Landlord has not given possession by September 1, 2002, then the Tenant may give the Landlord written notice of lease termination.

2.2     Termination by Tenant. Tenant may terminate the Lease Term at the end of the fortieth (40) full calendar month, respectively, of the Lease Term by giving notice of such termination to Landlord no later than 180 days prior to the date on which such termination is to become effective. The Tenant shall pay Landlord for any unamortized commissions at the time such notice is given. Unamortized commissions equal 6% multiplied by all rent that would have been paid for the terminated months of the initial Lease Term.

2.3     Right to Extend Lease Term. Tenant shall have five (5) successive two (2) year options to extend the Lease. To extend the Lease term Tenant must give written notice to Landlord no later than nine (9) month’s prior to the end of the Lease Term (or any extensions thereof) of its intention to extend the Lease. The rent for each option period shall be at Fair Market Rent (as defined below in article 3.1.2).

2.4     Holding Over. In the event Tenant remains in possession of the Premises after the expiration of the Lease Term without Landlord’s written consent, Tenant shall be deemed to be a tenant from month-to-month only, at 125 percent of the monthly installment of Base Rent in effect during the last month of the expired Lease Term. Except as aforesaid, such tenancy shall be upon and subject to the terms of this Lease. Either party may terminate such tenancy as of any date by giving to the other at least 30 days’ prior written notice of termination. Nothing herein, however, shall be deemed to grant to Tenant the right to hold over in the Premises beyond the expiration of the Lease Term, and Landlord shall be entitled to all remedies available to it, in law or in equity, in order to recover possession of the Premises upon Tenant holding over in the Premises without Landlord’s consent.

ARTICLE 3: RENT

“Rent” shall comprise “Base Rent” as provided in Paragraph 3.1 and “Additional Rent.” Additional Rent shall include all amounts payable by Tenant pursuant to Paragraph 3.2 and all amounts payable by Tenant under this Lease that are not Base Rent.

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3.1     Base Rent.

3.1.1

Base Rent During Initial Term. On the first day of each calendar month during the Lease Term, Tenant shall pay to Landlord (as provided in the last sentence of this Paragraph 3.1) the monthly Base Rent amount set forth in Paragraph 1.10 in lawful money of the United States, in advance and, except as provided herein, without offset, deduction, or prior demand. Rent shall be payable at Landlord’s address specified in Paragraph 1.11 above or at such other place or to such other person as Landlord may designate by notice to Tenant from time to time.

3.1.2

Base Rent During Extended Term. If Tenant elects to extend the Lease Term as provided in Paragraph 2.3, then on the first day of each Extended Term (respectively, the “Rent Adjustment Date”) Base Rent shall adjust to the Fair Market Rent, determined as follows. Fair Market Rent shall mean the amount per rentable square foot that a willing comparable tenant would pay and a willing, comparable landlord would accept in an arm’s length transaction, for delivery on or about the applicable delivery of effective date, for comparable, non-renewal, non-expansion space in the Building and in other qualified buildings in the same geographic area, similarly improved, giving appropriate consideration to annual rental rates per rentable square foot, the type of escalation clauses (including, without limitation, operating costs, real estate tax allowances or base year and rental adjustments), rentable abatement or free rent concessions, if any, brokerage commissions, the length of the term, the size and location of the project, building standard work letters and/or tenant improvement allowances, if any, the extent of services provided to the leased premises, the date as of which the Fair Market Rate is to become effective, and other generally applicable terms and conditions of tenancy for comparables sized space. In no event will the Fair Market Rate, impute a value upon leasehold improvements or fixtures installed by Tenant to the extent such leasehold improvements would increase the Fair Market Rate. No later than four months prior to the relevant Rent Adjustment Date, Landlord shall notify Tenant of Landlord’s good faith, reasonable opinion of the Fair Market Rent (expressed in dollars per rentable square foot in the Building in the Premises per year) for the Premises (“Landlord’s Proposed Rent”). Within 30 days after Tenant’s receipt of Landlord’s Proposed Rent, Tenant shall indicate whether or not Tenant accepts Landlord’s Proposed Rent. If Tenant accepts Landlord’s Proposed Rent, then Landlord’s Proposed Rent shall become the Base Rent for the subsequent Extended Term. If Tenant does not accept Landlord’s Proposed Rent, Tenant shall notify Landlord of Tenant’s opinion of the Market Rent for the Premises (“Tenant’s Proposed Rent”). Within ten days after receipt of Tenant’s Proposed Rent, Landlord shall indicate whether or not Landlord accepts Tenant’s Proposed Rent (and if Landlord does so accept, then Tenant’s Proposed Rent shall become the Base Rent for the Premises for the relevant Extended Term). If Landlord does not accept Tenant’s Proposed Rent, then the parties shall proceed to arbitrate Base Rent as follows.

The parties shall appoint a single arbitrator, who shall be an MAI appraiser with not less than ten years’ experience in appraising industrial property in the Huntsville, Alabama area. If the parties cannot agree upon an arbitrator within ten days after Landlord’s rejection of Tenant’s Proposed Rent, then either party may apply to the District Vice President of the Atlanta Regional Office of the American Arbitration Association and the individual appointed by the Director shall be the arbitrator for this purpose. Each party shall present to the arbitrator such information as the party deems relevant and the arbitrator shall select either the Landlord’s Proposed Rent or the Tenant’s Proposed Rent (but no other amount) as the Base Rent for the Extended Term in question and the rent so selected shall become the Base Rent for said Extended Term.

3.2     Additional Rent; Operating Expenses. In addition to Base Rent, Tenant shall pay the Operating Expenses as provided in this Paragraph 3.2. Tenant shall pay the operating expenses for the building beginning upon the Lease Commencement Date. Both parties agree to a pro-ration of some operating expenses in the event that possession occurs on a date other than the first day of the month.

3.2.1 Expenses to be Paid by Tenant. During the Lease Term and subject to the exceptions set out in Paragraph 4.2, Tenant shall be responsible to pay all reasonable and necessary costs for (a) utilities, maintenance and repair of the Building, (b) subject to the provisions of Article 5, real estate taxes, assessments, storm water management and similar charges imposed on the Building by any state or local government or governmental agency (excluding franchise taxes, income taxes, business and occupational taxes, and other similar taxes imposed on Landlord), and (c) providing property insurance for said Building (together, the “Operating Expenses”) .

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3.2.2 Exceptions. Notwithstanding Paragraph 3.1.1, Operating Expenses shall not include, and Tenant shall not be required to pay any of the following:

A.	Any and all ground lease rentals;
B.	Any and all payments of principal, finance charges, interest, or fees on debt or amortization of any loan, mortgage, deed of trust, or other debt;
C.	Costs of maintenance, repair, replacement or renewal of load bearing walls, foundations and other structural components, and roofs and any costs of performing maintenance for which Landlord is responsible under this Lease;
D.	Costs of depreciation and amortization (except as provided with respect to capital improvements);
E.	Marketing costs, leasing or brokerage commissions, attorneys’ fees, costs, disbursements, advertising and promotional costs, and other expenses incurred by Landlord or its agents in connection with negotiations for leases with tenants (including Tenant), other occupants, or prospective tenants or other occupants of the Building, and costs of signs identifying the owner and/or any occupant of the Building;
F.	Franchise or income taxes of Landlord or any other taxes, except for real property taxes on the Building and Land;
G.	Costs in any way related to reporting, documenting, cleanup, remediation, or response of any kind in connection with the use, transportation, storage, generation or release by any person other than Tenant, its agents, employees, invitees and contractors, of any chemical, petroleum or petroleum product, asbestos, asbestos-containing material, contaminant, dangerous waste, or hazardous material as regulated or defined under any federal, state or local law or regulation relating to the protection of the environment or of human health.
H.	Legal fees, costs, settlements, judgments, or awards paid or incurred in connection with disputes between Landlord and any tenant (including the Tenant), provider, or contractor;
I.	Compensation paid to executives, any compensation paid to clerks, attendants or other persons in any commercial concessions operated by Landlord;
J.	Expenses incurred for the correction of any latent or patent defects in the improvements in the Premises or Building;
K.	Expenses in connection with services or other benefits are not offered to Tenant or for which Tenant is charged directly by Landlord or by an independent contractor or utility, but which are provided to another tenant or occupant of the Building and charged to such tenant as Operating Expenses;
L.	Cost of complying with the provisions of the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended, the Resource Conservation and Recovery Act, or any other federal, state, or local law relating to the protection of the environment;
M.	Landlord’s general corporate overhead and general and administrative expenses, and costs associated with the operation of Landlord’s business, including partnership accounting and legal matters;
N.	With respect to any assessment, premium, or other charge which is payable over a period of time by Landlord (or which Landlord may elect to pay over a period of time), any portion of such assessment, premium, or other charge which exceeds the then-current year’s installment thereof;
O.	Any bad debt loss, rent loss, reserves for bad debt or rent loss, or reserves of any kind;
P.	Any item which would be otherwise be treated as an Operating Expense, but which is paid by Tenant directly to Landlord or to the purveyor thereof;
Q.	Tax penalties and other penalties or fines with respect to taxes;

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R.	Costs arising from the negligence or willful misconduct of Landlord, except that costs arising from Landlord’s negligence are allowed to the extent that such losses could not have been covered by commercial general liability insurance;
S.	Costs incurred (including costs of repair or alteration) as the result of fire or other casualty or the exercise of the right of eminent domain by any governmental authority;
T.	Costs or expenses for sculpture, paintings, or other works of art, including costs incurred with respect to the purchase, ownership, leasing, showing, promotion, repair, and/or maintenance of same;
U.	Costs of correcting or repairing defects in any equipment or in replacing defective equipment to the extent that such costs are covered by warranties of manufacturers, suppliers, or contractors, or are otherwise borne by parties other than Landlord;
V.	Initial costs of exterior landscaping and construction of the parking lot and any other required landscaping necessary to accommodate the parking described in Section 1.4;
W.	Costs incurred in removing the property of former tenants and/or other occupants of the Building;
X.	Costs of any “tap fees” or one-time lump sum sewer or water connection fees for the Building;
Y.	Costs or fees relating to the defense of Landlord’s title to or interest in the Building, the Property, or any part thereof;
Z.	Any other expenses which, in accordance with generally accepted accounting principles, consistently applied, or in accordance with the practice of landlords in the same market as the Building, would not normally be treated as an operating expense by landlords of comparable properties.

3.3     Interest. Any rent or other amount due to Landlord other than interest, if not paid when due, shall bear interest from the date due until paid at the Default Rate, provided that interest shall not be payable on late charges incurred by Tenant nor on any amounts upon which late charges are paid by Tenant to the extent such interest would cause the total interest to be in excess of that legally permitted. The Default Rate is a fluctuating rate of interest per annum equal at all times to the rate of interest announced from time to time by Chase Manhattan Bank in New York, New York as its “prime rate” plus two percent per annum, each change in such fluctuating rate to take effect simultaneously with each change in such prime rate.

ARTICLE 4: [INTENTIONALLY LEFT BLANK]

ARTICLE 5: PROPERTY TAXES

5.1     Assessments for Public Improvements. If the Property or any part thereof is assessed for the cost of construction or maintenance of any public improvement, Landlord shall pay such assessment and Tenant shall have no responsibility therefor.

5.2     Payment of Real Property Taxes. Tenant shall be responsible for the payment of all real property taxes affecting the Property and shall keep the Property free and clear of any liens, charges, and encumbrances of any taxing authority for the collection of unpaid real property taxes. Tenant understands that due to IDB financing, property taxes are not due on this building during the initial term of this lease; provided if Landlord causes The Industrial Development Board of the City of Huntsville to convey title to the Property out of the name of The Industrial Development Board of the City of Huntsville, then Landlord shall have the obligation to pay all such taxes.

5.3     Personal Property Taxes. Tenant shall pay directly all taxes charged against trade fixtures, furnishings, equipment, inventory, or any other personal property belonging to Tenant.

ARTICLE 6: UTILITIES

6.1     Utilities. Tenant shall pay for any water, gas, electricity, heat, light, power, sewer, sprinkler services, refuse and trash collection, and other utilities and services used on the Premises, all maintenance charges for utilities, and any storm sewer charges or other similar charges for utilities imposed by any governmental entity or utility provider, together with any taxes, penalties, surcharges or the like pertaining to Tenant’s use of the

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Premises with respect to all utilities and services used on the Premises, and Tenant shall be responsible for payment of any telecommunications charges incurred by Tenant for telecommunications services provided to Tenant at the Premises and Tenant shall be responsible for the costs of all janitorial services provided to Tenant at the Premises.

ARTICLE 7: INDEMNITIES AND INSURANCE

7.1     Tenant Indemnity. Tenant shall indemnify and hold Landlord harmless from and against any and all claims or liability for bodily injury to or death of any person or loss of or damage to any property arising out of Tenant’s use of the Premises or the Property or from the conduct of Tenant’s business or from any activity, work or thing done, permitted or suffered by Tenant, its agents, employees, contractors or invitees in or about the Premises or the Property except:

(a)	claims and liabilities to the extent caused by any negligence on the part of Landlord, its agents, employees, contractors or invitees, or
(b)	claims and liabilities for property damage addressed in Paragraph 7.4.

In the absence of any negligence on the part of the Landlord, its agents, employees, contractors or invitees, such indemnity shall include all reasonable costs, attorneys’ fees and expenses incurred in the defense of any such claim or any action or proceeding brought thereon. In the event any action or proceeding is brought against Landlord by reason of any claim falling within the scope of the foregoing indemnity, and in the absence of any negligence on the part of Landlord, Tenant upon written notice from Landlord to Tenant within 60 days after Landlord receives notice of the claim shall defend same at Tenant’s expense by counsel reasonably satisfactory to Landlord.

The foregoing indemnity is conditioned upon Landlord providing notice to Tenant within 60 days after Landlord receives notice of any claim or occurrence that is likely to give rise to a claim that will fall within the scope of the foregoing indemnity and cooperating fully with Tenant in any defense or settlement of the claim or liability.

7.2     Landlord Indemnity. Landlord shall indemnify and hold Tenant harmless from and against any and all claims or liability for bodily injury to or death of any person or loss of or damage to any property arising out of the condition of the Premises or the Property or from any activity, work or thing done, permitted or suffered by Landlord, its agents, employees, contractors or invitees in or about the Premises or the Property except:

(a)	claims and liabilities to the extent caused by any negligence on the part of Tenant, its agents, employees, contractors or invitees, or
(b)	claims and liabilities for property damage addressed in Paragraph 7.4.

In the absence of any negligence on the part of the Tenant, its agents, employees, contractors or invitees, such indemnity shall include all reasonable costs, attorneys’ fees and expenses incurred in the defense of any such claim or any action or proceeding brought thereon. In the event any action or proceeding is brought against Tenant by reason of any claim falling within the scope of the foregoing indemnity, and in the absence of any negligence on the part of Tenant, Landlord upon written notice from Tenant to Landlord within 60 days after Tenant receives notice of the claim shall defend same at Landlord’s expense by counsel reasonably satisfactory to Tenant.

The foregoing indemnity is conditioned upon Tenant providing notice to Landlord within 60 days after Tenant receives notice of any claim or occurrence that is likely to give rise to a claim that will fall within the scope of the foregoing indemnity and cooperating fully with Landlord in any defense or settlement of the claim or liability.

7.3     Tenant’s Insurance. Tenant, at Tenant’s own cost and expense, will provide and keep in full force and effect during the Lease Term, commercial general liability insurance with limits of not less than $5,000,000 covering bodily injury to any person, including death, and loss of or damage to real and personal property, or shall self-insure for the same. Insurance provided hereunder may be provided under Tenant’s blanket liability insurance policy. During the Lease Term Landlord shall be named as an additional insured under insurance carried pursuant to this Paragraph 7.3 to the extent of Tenant’s undertaking set forth in Paragraph 7.1 and a certificate evidencing such insurance coverage shall be delivered to Landlord not less than fifteen days prior to the Lease Commencement Date or the date when Tenant shall enter into possession, whichever occurs later.

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Such certificate of insurance will provide for fifteen days’ advance notice to Landlord in the event of cancellation.

7.4     Mutual Waiver of Claims. [INTENTIONALLY DELETED]

7.5     Mutual Waiver of Subrogation. [INTENTIONALLY DELETED]

7.6     Premises Insurance. Notwithstanding Paragraph 7.4, Tenant shall, at Tenant’s expense, procure and maintain at all times during the Lease Term a policy or policies of property insurance covering loss or damage to the Building in the amount of the full replacement value thereof (including Tenant’s Alterations, trade fixtures and equipment) providing protection against all perils normally included in an “all risk” property insurance policy, including flood, but excepting peril of earthquake. Such property insurance shall provide for payment of loss thereunder to Landlord or any mortgagee and/or financial institutions as their respective interests may appear and to Tenant for its cost of alterations, trade fixtures, furniture, and equipment. Landlord will notify Tenant on or before the Commencement Date, and from time to time thereafter at intervals no more frequent than annually, of the amount of insurance coverage required hereunder and Tenant may rely on said amount as being the full insurable value for the purpose of this Lease, and the amount of any loss or damage exceeding such insurable value shall be assumed by, for the account of, and at the sole risk of the Landlord. Such insurance policies shall provide that such policies may not be canceled without 30 days’ prior written notice to Landlord. Landlord shall, at Landlord’s expense, provide and maintain in full force and effect a policy or policies of commercial general liability insurance with limits of not less than $5,000,000 covering bodily injury to any person, including death, and loss of or damage to real and personal property. Such insurance policy shall provide that it may not be canceled without thirty days prior written notice to Landlord.

ARTICLE 8: USE OF THE PREMISES

8.1     Permitted Uses. Tenant may use the Premises for the uses set forth in Paragraph 1.9 above.

8.2     Manner of Use. Tenant shall not cause or permit the Premises to be used in any way that violates any law, ordinance, restrictive covenants encumbering the Premises as of the date hereof or governmental regulation or order, or which shall constitute a nuisance or waste.

8.3     Signs. Subject to Landlord’s reasonable approval, Tenant shall be entitled to install appropriate signage, including Tenant’s logo and/or name on the exterior of the building, entrance doors and/or entranceways to the Building. Tenant’s Building signage shall comply with all governmental laws, rules and regulations (including but not limited to Cummings Research Park West Sign Control Regulations, Article 72.4.8 (see attached) and all covenants, conditions and restrictions encumbering the Building. Tenant’s signage rights are not personal to Tenant and may be assigned. The cost of all fabrication, installation, maintenance, insurance, removal and utilities shall be paid for by Tenant. The monument sign is located at the Explorer Boulevard entry will be available for Tenant’s sole use.

ARTICLE 9: COMPLIANCE WITH LAWS; HAZARDOUS SUBSTANCES

9.1     Compliance with Laws in General. Provided that the Building and the Premises are in the condition required by Paragraph 10.1, Tenant shall, at all times during the Lease Term and at its sole cost and expense, maintain the Building and the Premises in compliance with all present and future laws and codes, including all applicable building, fire, seismic, safety, electrical, mechanical and similar codes, the Americans with Disabilities Act, and any state or local laws relating to access to facilities or accommodations by handicapped or disabled persons, and insurance company requirements and shall make all modifications to the Building and the Premises that may be required by such laws, codes and requirements.

9.2     Hazardous Substances Use. Any and all use, storage, release, handling, transportation, treatment or storage by Tenant of Hazardous Substances on the Premises shall be carried out in substantial compliance with all applicable federal, state and local laws, ordinances and regulations. Intentional disposal of Hazardous Substances shall not occur on the Premises under any circumstances except as permitted by law.

9.3     Representation. Landlord hereby represents and warrants that to the best of Landlord’s knowledge, and Landlord having no obligation to have made any independent study or investigation, (i) there have been no releases of Hazardous Substances at the Premises; (ii) Landlord has no reason to believe that Hazardous Substances have in the past been used, generated, treated, stored or disposed of at the Premises; and (iii) no

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claim of liability relating to the presence of adverse environmental conditions at or on the Premises has been made or is threatened by any government agency or other third party.

9.4     Indemnification. Tenant shall indemnify, defend and hold harmless Landlord, and reimburse Landlord for any costs it incurs arising from any and all claims of liability asserted against Landlord by a third party, including without limitation any agency or instrumentality of the federal, state or local government, for bodily injury including death, physical damage to or loss of use of property or cleanup activities to the extent required by applicable law (remedial or removal), arising out of or relating to the release or threat of release of any Hazardous Substance by Tenant, its agents, employees, invitees and contractors, while Tenant, its agents, employees, invitees and contractors are on the Premises.

Landlord shall indemnify, defend and hold harmless Tenant, and reimburse Tenant for any costs it incurs arising from and against any and all claims of liability asserted against Tenant by a third party, including without limitation any agency or instrumentality of the federal, state or local government, for bodily injury including death, physical damage to or loss of use of property or cleanup activities to the extent required by applicable law (remedial or removal), arising out of or relating to the release or threat of release of any Hazardous Substance existing at or emanating from the Premises, except to the extent caused by Tenant, its agents, employees, invitees and contractors on the Premises.

9.5     Definition, Hazardous Substances. For purposes of this Lease, the term “Hazardous Substances” shall mean any dangerous waste, hazardous waste or hazardous substance that is regulated as toxic or otherwise hazardous to human health or the environment under any applicable law. In the United States, the term shall include, but not be limited to, any hazardous waste or hazardous substance as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended (42 U.S.C. S 9601 et seq.); the Resource Conservation and Recovery Act as amended (42 U.S.C. S 6901 et seq.); or any analogous state or local law.

ARTICLE 10: REPAIR AND MAINTENANCE

10.1     Landlord’s Warranty of Existing Conditions. Landlord warrants that as of the date of this Lease the Building and the Premises comply with all laws and codes, including all applicable building, fire, seismic, safety, electrical, mechanical and similar codes, the Americans with Disabilities Act, and any state or local laws relating to access to facilities or accommodations by handicapped or disabled persons, and all applicable insurance company requirements. All systems in the Building and all equipment used in the operation of the Building are in good operating condition, and have been maintained in accordance with applicable manufacturers’ instructions or otherwise in accordance with best practices. All costs incurred by Landlord in connection with its obligations under this Article 10 shall be excluded from “Operating Expenses” for purposes of Paragraph 3.2.

10.2     Tenant’s Acceptance of Existing Conditions. In reliance on Landlord’s warranty set out in Paragraph 10.1, and subject to Landlord providing additional parking to total between 450 and 500 spaces to be completed by December 1, 2002, Tenant shall accept the Premises in their condition as of the execution of this Lease. Except as expressly provided herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation, express or implied, as to the condition of the Premises or the suitability of the Premises for Tenant’s intended use.

10.3     Landlord’s Obligation. Subject to Section 10.4, Landlord shall, at its own cost and expense, maintain the roof of the Building (including structural members and roof deck, membrane and sheathing), gutters, all load bearing walls, the foundations of the Building and all other structural elements of the Building. During the initial year of the term of the Lease Landlord shall be responsible for the portion of the HVAC repairs or replacement costs if the cost to Tenant exceeds $15,000 per occurrence.

10.4     Tenant’s Obligations. Tenant shall be responsible for providing all janitorial, cleaning, and sanitation service to the Building. In addition, the Tenant shall maintain (i) all electrical, mechanical, plumbing, heating, ventilation and air-conditioning systems, wiring and ducting in the Building or at the Property; (ii) all utility lines, connections and hook ups serving the Building and Property; (iii) all electric lights, including replacement of burned out lights and systems: (iv) windows and doors, including replacement of damaged or broken glass and cleaning of exterior glass surfaces, and the siding of the Building (including painting as required); (v) elevators and stairs; (vi) parking areas, sidewalks, fencing and landscaping. Landlord will assist in the enforcing of any existing warranties resulting from the recent building remodeling.

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10.5     Repairs Due to Negligence. Notwithstanding anything to the contrary that may be contained in this Lease but subject to the waivers of the right of recovery in Paragraphs 7.4 and 7.5, any repairs that are required by reason of any waste, misuse or negligence on the part of either party (and that are not within the scope of Paragraphs 7.4 and 7.5) shall be made by and at the expense of the party causing such waste, misuse or negligence.

10.6     Repair Standard. All repairs made pursuant to the provisions of this Article 10 shall be made within a reasonable time (depending on the nature of the required repair or replacement) after the party who is obligated to make such repair or replacement has actual notice of the necessity for such repair or replacement. The terms “maintain” and “repair” in this Article 10 mean maintaining and repairing to the physical condition as exists at the date of this Lease or on the Lease Commencement Date, as the case may be, and shall include replacement when an item has reached the end of its useful life and cannot be reasonably repaired and maintained, subject to the limitation that Tenant shall not be required to improve the condition of the Premises above that existing as of the Lease Commencement Date.

ARTICLE 11: ALTERATIONS

11.1     Alterations. Tenant shall have the right, at its own cost and expense, to make alterations, installations and changes (hereinafter collectively called “Alterations”) in, on and to the Premises as it shall deem expedient or necessary for its business purposes without Landlord’s prior written consent if such Alterations are not “Structural Alterations.” For purposes of this Lease, a Structural Alteration is an Alteration that affects the structural integrity of the Premises, pierces the roof membrane or floor slab, or affects the mechanical, electrical or plumbing systems of the building. Tenant may not make any Structural Alterations unless it has first obtained Landlord’s written consent thereto and to the name of the contractor undertaking such Structural Alterations, which consent Landlord shall not unreasonably withhold or delay. If Landlord fails to give or deny its consent within 20 days after Landlord’ s receipt of Tenant’s written request therefor, Landlord shall be deemed to have given its consent. All Alterations shall be performed in a good and workmanlike manner and in accordance with all applicable laws. Tenant shall notify Landlord prior to beginning any construction to enable Landlord to post on or about the Premises notices of non-responsibility. Landlord may condition its consent to any Alteration, which would interfere with future use of the Property if not removed at the termination of this Lease on Tenant’s agreement to remove such Alteration at that time pursuant to Article 17 hereof. Tenant shall otherwise have the option to remove any or all Alterations and signage during the Lease Term or upon termination of this Lease.

11.2     Contractor Liens. Tenant shall not create or place any lien or encumbrance on the interest of Landlord or Tenant in the Premises or charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises by or on behalf of Tenant and will save and hold Landlord harmless from all loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the interest of Landlord in the Premises or under this Lease arising from any work performed by or on behalf of Tenant. Tenant shall give Landlord prompt written notice of the placing of any lien or encumbrance against the Premises and cause such lien or encumbrance to be discharged within 30 days after the filing or recording thereof or, at its election, shall contest such lien or encumbrance as long as such contest prevents foreclosure of the lien or encumbrance and Tenant causes such lien or encumbrance to be bonded or insured over in a manner reasonably satisfactory to Landlord within such 30-day period.

11.3     Initial Tenant Improvement Work. Tenant, at its sole cost and expense, shall construct initial improvements to the Premises in accordance with the concept drawing attached as Exhibit ____, subject to review and redraw for compliance to local codes, etc. Tenant shall have the opportunity to relocate standard electrical outlets and computer cabling locations throughout the Building. It is understood Tenant shall perform all computer wiring. Final plans to be prepared by and at the sole expense of Tenant and approved by Landlord, which approval shall not be unreasonably withheld or delayed. Landlord shall not charge any administrative, project management, or other fees to Tenant, nor shall Tenant be required to reimburse Landlord for its review of plans and specifications for Tenant’s alterations. Tenant will not be required to remove its improvements or restore the Premises at the end of the lease term.

11.4     Landlord Capital Improvements. Other than the maintenance that is Tenant’s obligation under Section 10.4, Landlord will not make any capital improvements to the Property without Tenant’s prior written consent.

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ARTICLE 12: DAMAGE AND RESTORATION

12.1     Damage That Can be Repaired within 90 Days. If the Premises shall be destroyed or so damaged by any cause as to be unfit, in whole or in part, for occupancy and such damage or destruction could be substantially repaired within 90 days from the date on which Landlord receives notice of such damage or destruction, Landlord shall give Tenant written notice within 30 days after receiving notice of such damage or destruction that such damage or destruction can be restored within said 90-day period. In such case, Landlord shall repair such damage or destruction (including Alterations constructed by Tenant) with all reasonable speed and shall substantially complete such repairs within 90 days from the date on which Landlord receives notice of such damage or destruction.

12.2     Damage That Cannot be Repaired within 90 Days. If such damage or destruction cannot be substantially repaired within 90 days from the date on which Landlord receives notice thereof, Landlord shall give Tenant written notice within 30 days after receiving notice of such damage or destruction that Landlord will be unable to repair or rebuild the Premises within such 90-day period and shall specify in such notice the time within which such repairs or reconstruction can be completed. Tenant shall have the option, within 30 days after Tenant’s receipt of such notice, to elect either to terminate this Lease and to be released from further liability hereunder, or to extend the Lease Term by a period of time equivalent to the time specified in Landlord’s notice as the time within which such repairs or reconstruction can be completed less 90 days. If Tenant elects to extend the Lease Term, then Landlord shall restore the Premises to their former condition (exclusive of Alterations constructed by Tenant), to the extent reasonably practical, within the time specified in the notice.

12.3     Performance and Completion of Repairs. Repairs and restoration performed by Landlord pursuant to this Article shall be made in a commercially reasonable matter, in conformity with all applicable legal requirements, and shall be subject to Tenant’s reasonable approval. If Landlord fails to substantially complete repairs within the applicable period of time required by this Article, Tenant shall have the right to terminate this Lease upon 30 days’ written notice to Landlord unless Landlord shall substantially complete such repairs prior to the expiration of such 30-day period.

12.4     Abatement of Rent. Notwithstanding anything herein stated to the contrary, in the event of any damage or destruction and this Lease is not terminated as provided herein, then, to the extent that the Premises are unusable, Base Rent shall abate until Landlord has completed its repair and restoration work, plus such additional period of time, not exceeding an additional 90 days, as is reasonably necessary in order for Tenant to repair Alterations. In the event of any damage or destruction of the Premises and the termination of this Lease, Tenant shall be released from any liability hereunder as of the date of such damage or destruction and insurance proceeds shall be applied as required by Landlord or Landlord’s mortgagee.

12.5     Last Year of Lease Term. Notwithstanding anything herein stated to the contrary, Landlord shall not be obligated to repair or rebuild the Premises if material damage or destruction shall occur during the last year of the Lease Term and Tenant does not elect within 30 days after such damage or destruction to extend the Lease Term for the following Extended Term (if any).

ARTICLE 13: CONDEMNATION

13.1     Condemnation. If any part of the Property should be taken under governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking would in Tenant’s reasonable judgment prevent or materially interfere with Tenant’s use of the Premises, then upon not less than 30 days’ prior written notice by Tenant this Lease shall terminate and Base Rent shall be apportioned as of the date of title vesting in such proceeding or purchase. Otherwise, this Lease shall not terminate, but the Base Rent payable hereunder during the unexpired term (or period of such taking if shorter) shall be reduced to such extent as may be fair and reasonable under the circumstances. If this Lease is not terminated pursuant to this Paragraph 13.1, then Landlord shall, to the extent of condemnation proceeds received by the Landlord, restore any property damage as a result of the taking. Landlord shall be entitled to receive the entire price or award from any such taking, except that Tenant shall be entitled to an allowance for the cost of Alterations installed by Tenant, Tenant’s moving expenses, damage to the property that Tenant is permitted to remove under this Lease and other items recoverable by Tenant under applicable law (excluding Tenant’s leasehold interest).

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ARTICLE 14: ASSIGNMENT AND SUBLETTING

14.1     Assignments and Subleases. Tenant shall be permitted to assign and sublet all or any portion of the Premises with Landlord’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. In no event shall Tenant assign this Lease if the proposed subtenant is a party who would detract from the character of the building as a first-class office building, an agency that enjoys diplomatic immunity, or if the use would contravene any restrictive covenant affecting the building. Landlord’s consent to one assignment, sublease, or transfer shall not be deemed as consent to any other further assignment or sublease. No acceptance by Landlord of any rent or any other sum of money from any assignee, sublessee or other category of transferee shall release Tenant from any of its obligations. Tenant shall remain primarily liable on this Lease for the entire Term and shall not be released from the full and complete performance of the terms, conditions, covenants and agreements. Landlord’s consent shall not be required with respect to, and Tenant shall be permitted to assign the Lease or sublease any portion of the premises during the initial term and any extensions term(s), to any related entity, parent company, subsidiary or affiliate of Tenant (collectively, “Affliate”), or any assignment resulting from a consolidation, merger, stock transfer or purchase of substantially all of Tenant’s assets. However, Tenant must inform Landlord in writing, of it’s intent to sublease or assign any portion of its interest to a related entity.

14.2     Tenant to Remain Liable. Notwithstanding any permitted assignment or subletting, Tenant shall at all times remain directly primarily and fully responsible and liable for the payment of the rent herein specified and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease. Upon the occurrence of an event of default as hereinafter defined, if the Premises or any part thereof are then sublet, Landlord, in addition to any other remedies herein provided, or provided by law, may at its option collect directly from such subtenant all rents becoming due to Tenant under such sublease and apply such rent against any sums due to Landlord from Tenant hereunder, and no such collection shall be construed to constitute a novation or a release of Tenant from the further performance of Tenant’s obligations hereunder.

ARTICLE 15: DEFAULT BY TENANT

15.1     Defaults. Each of the following shall be an “event of default” under this Lease:

(a)	Tenant shall fail to pay rent or any other sum payable under this Lease within five days after it is due.
(b)	Tenant shall abandon the Premises at any time when rent is due and unpaid or at any time when Tenant has failed to maintain the insurance required by Paragraph 7.3
(c)	Tenant shall fail to perform any of Tenant’s other obligations under this Lease (other than as described in (a) above) and such failure shall continue for a period of 30 days after written notice from Landlord; provided that if more than 30 days shall be reasonably required to complete such performance, Tenant shall not be in default if Tenant shall commence such performance within the 30-day period and shall thereafter diligently pursue its completion. Any notice provided to Tenant shall be in lieu of, and not in addition to, any notice required under applicable law, and any cure period provided herein shall run concurrently with any cure period provided by applicable laws.

15.2     Remedies. On the occurrence of an event of default by Tenant, Landlord may, at any time thereafter, and without limiting Landlord in the exercise of any right or remedy which Landlord may have, pursue any of the following remedies, provided that Landlord shall not commence such remedies prior to five days (or any longer period required by law) after giving notice of an event of default under Paragraph 15.1(a) or prior to fifteen days (or any longer period required by law) after giving notice of an event of default under Paragraph 15.1(b) or 15.1(c) and if the events giving rise to the event of default are cured within such time period, Landlord’s notice of default shall be deemed rescinded:

(a)	Landlord may peaceably reenter the Premises upon voluntary surrender by Tenant or may remove Tenant and any other persons occupying the Premises therefrom, using such legal proceedings as may be available.
(b)	In addition to reentry under Paragraph 15.2(a) above, Landlord may elect in writing to terminate this Lease. Upon such termination, Landlord may recover from Tenant the following: (i) the worth at the time of award of the unpaid rent and other charges under this

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Lease that had been earned at the time of termination; (ii) the worth at the time of award of the amount by which (x) the unpaid rent and other charges under this Lease which would have been earned after termination until the time of award exceeds (y) the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which (x) the unpaid rent and other charges under this Lease for the balance of the Lease Term after the time of award exceeds (y) the amount of such rental loss that Tenant proves could have been reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or that in the ordinary course of things would be likely to result therefrom. The “worth at the time of award” of the amounts referred to in clauses (i) and (ii) shall be computed by allowing interest at the Default Rate (as defined in Paragraph 3.2). The “worth at the time of award” of the amount referred to in clause (iii) shall be computed by discounting such amount at the discount rate of Chase Manhattan Bank of New York at the time of award plus two percent.

(c)

In addition to reentry pursuant to Paragraph 15.2(a) above, Landlord may elect in writing to terminate Tenant’s right to possession without terminating this Lease. In such case, this Lease shall continue in effect (subject to Landlord’s right to terminate this Lease pursuant to Paragraph 15.2(b)), and Landlord may enforce all its rights and remedies under this Lease, including the right to recover rent as it becomes due. Any such payments due Landlord shall be made upon demand therefor from time to time and Tenant agrees that Landlord may file suit to recover any sums falling due from time to time.

Notwithstanding anything to the contrary set forth above, in the event that Landlord retakes possession of the Premises pursuant to subparagraphs (a), (b) or (c) of this Paragraph 15.2, Landlord shall use commercially reasonable efforts to relet the Premises and thereby mitigate its damages.

15.3     Self-Help. In addition to the remedies set forth in Paragraph 15.2, Landlord shall have the right, upon advance written notice as set forth below, at all times when Tenant has failed to perform any of its obligations under this Lease, to enter the Premises for the purpose of curing any uncured event of default of Tenant (whether or not such default is yet an event of default), and no entry for that purpose shall be deemed to work a forfeiture or termination of this Lease. Tenant shall permit such entry, and in that regard:

(a)	Landlord shall give at least seven (7) days’ written notice to Tenant of its intention to enter the Premises for that purpose, but may enter upon a shorter period of notice or without notice where in Landlord’s reasonable judgment there is real or immediate emergency or danger to persons or property or where any delay in remedying the default could materially prejudice Landlord or its interest in the Premises;
(b)	For the purpose of curing the default of Tenant under this Lease, Landlord may perform said obligation or cause said obligation to be performed and do or cause to be done those things that may be necessary or incidental thereto including without limiting the generality of the foregoing the right to make reasonable repairs and installations and to expend monies reasonably in connection with such right; and
(c)	Tenant shall reimburse Landlord upon written demand, accompanied by paid receipts or other substantiating evidence of cost, for all reasonable expenses incurred by Landlord in remedying such default.

Landlord shall be under no obligation to remedy any default by Tenant and shall not incur any liability to Tenant for any act or omission in the course of its remedying or attempting to remedy any default except to the extent such act or omission constitutes intentional misconduct by or negligence of Landlord.

15.4     General Provisions Concerning Remedies. For purposes of calculating the damages, which Landlord may recover from Tenant pursuant to this Article 15, all amounts payable by Tenant in excess of Base Rent shall be deemed rent. On any termination, Landlord’s damages for default shall include all reasonable costs and fees, including reasonable attorneys’ fees that Landlord shall incur in connection with the filing, commencement, pursuing and/or defending of any action in any bankruptcy court or other court with respect to this Lease, the obtaining of relief from any stay in bankruptcy restraining any action to evict Tenant, or the pursuing of any action with respect to Landlord’s right to possession of the Premises. To the extent permitted by applicable law,

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any and all rights and remedies which either party may have under this Lease and at law and equity shall be cumulative and shall not be deemed inconsistent with each other, and any two or more of all such rights and remedies may be exercised at the same time to the greatest extent permitted by law. All costs incurred by either party in connection with collecting any amounts and damages owing by the other party pursuant to the provisions of this Lease or to enforce any provision of this Lease, including by way of example, but not limitation, reasonable attorneys’ fees from the date any such matter is turned over to an attorney, shall also be recoverable from the other party. LANDLORD AND TENANT AGREE THAT ANY ACTION OR PROCEEDING ARISING OUT OF THIS LEASE SHALL BE HEARD BY A COURT SITTING WITHOUT A JURY IN THE STATE OF ALABAMA AND EACH PARTY HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.

ARTICLE 16: DEFAULT BY LANDLORD

16.1     Notice of Landlord Default. Tenant may give notice to Landlord of any failure by Landlord to perform any of its obligations under this Lease. Landlord shall not be in default under this Lease unless Landlord shall fail to cure such non-performance within 30 days after receipt of Tenant’s notice. However, if such nonperformance shall reasonably require more than 30 days to cure, Landlord shall not be in default if such cure shall be commenced within such 30-day period and thereafter diligently pursued to completion. If Landlord’s default renders the Premises unusable by Tenant, in whole or in part, for Tenant’s normal purposes in any case in which Paragraph 6.2 above is not applicable, Base Rent (or an equitable portion thereof, based upon the portion of the Premises rendered unusable by Tenant) shall abate beginning 48 hours after Tenant gives notice to Landlord that the Premises are unusable in whole or in part (and Base Rent shall abate notwithstanding that the 30-day grace period for Landlord’s performance has not expired) and, if a substantial portion of the Premises is unusable for Tenant’s normal purposes for a period in excess of 60 days by reason thereof, Tenant shall have the right to terminate this Lease by giving notice to Landlord at any time thereafter prior to the default being cured.

16.2     Self Help. If Landlord shall default beyond applicable grace and notice periods in the performance of any repair, maintenance or payment obligation on Landlord’s part to be performed or paid hereunder and such default materially adversely affects the condition of the Premises or the ability of Tenant to perform its business therein or may result in termination of this Lease, then Tenant may perform the same for the account and at the sole cost and expense of Landlord, without notice if an emergency exists, or, if no emergency exists, on 30 days’ prior written notice to Landlord, and all costs and expenses paid or incurred by Tenant in curing such default shall be paid by Landlord to Tenant upon demand together with interest at the Default Rate, provided, however, that, prior to performing any such obligation for the account of Landlord (other than in the event of an emergency), Tenant shall notify any mortgagee of the Premises of whom Landlord has provided Tenant with written notice (“Lender”), which notice may be given simultaneously with Tenant’s notice to Landlord as provided above, and such Lender shall have 30 days to cure such default. If (a) Landlord fails to pay to Tenant any amounts expended by Tenant to cure Landlord’s default (as provided in the previous sentence), (b) Tenant obtains a final non-appealable judgment against Landlord in a court of law relating to such default, and (c) such final judgment is not satisfied within 30 days after the rendering of such judgment or otherwise in accordance with its terms, then Tenant may offset the amount of such final judgment against rent hereunder. In the event of an emergency, Tenant shall give Landlord prompt notice of any action taken by Tenant pursuant to this Paragraph 16.2 and shall incur only such costs and expenses as are necessary to meet the emergency; no additional costs or expenses shall be incurred which are not necessary to meet the emergency until Tenant shall have given Landlord and Lender 30 days’ prior written notice of default, and as herein above provided in this Paragraph 16.2. Notwithstanding anything set forth in this Lease to the contrary, Tenant shall have no right of self-help and offset with regard to capital improvements (excluding repairs) costing in excess of $100,000, and no right of recovery or offset hereunder shall affect any obligation of Tenant to pay or reimburse Landlord for any item that is payable or reimbursable to Landlord pursuant to this Lease.

ARTICLE 17: SURRENDER

17.1     Surrender. Upon the expiration or termination of this Lease, Tenant shall surrender the Premises to Landlord in as good condition as at the Lease Commencement Date, except for normal wear and tear, damage due to casualty, matters covered by the mutual waiver of claims in Paragraph 7.4, damage or alterations due to condemnation, and Alterations that Tenant is not required to remove pursuant to this Lease and does not elect to remove. Tenant shall repair, at Tenant’s expense, any damage to the Premises caused by Tenant’s removal of its

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personal property or trade fixtures and shall restore the Premises to as good a condition as it existed on the Lease Commencement Date.

ARTICLE 18: PROTECTION OF LENDERS

18.1     Protection of Lenders. Tenant agrees that this Lease shall be subordinate to any ground lease or underlying lease, first-lien mortgage or deed of trust or other first lien covering the Property, upon and subject to the following terms and conditions. Tenant’s subordination is expressly conditioned on execution and delivery to Tenant by each lessor under a ground lease or underlying lease, and by each mortgagee, lien holder and beneficiary of a deed of trust, of a nondisturbance agreement reasonably acceptable to Tenant. Landlord agrees to provide such nondisturbance agreement(s) from each existing lessor, mortgagee, lien holder and beneficiary within 30 days after the execution of this Lease, failing which Tenant may terminate this Lease by giving notice to Landlord at any time thereafter prior to delivery of such nondisturbance agreement(s), and the delivery of the same shall in any event be a condition to Tenant’s obligation to pay rent under this Lease. The nondisturbance agreement shall be in recordable form and shall recognize Tenant’s rights under this Lease in the event Landlord’s interest is terminated while this Lease is in full force and effect. The nondisturbance agreement shall include a provision to the effect that in the event of a termination of the ground or underlying lease or foreclosure of the mortgage, deed of trust or other lien in favor of the secured party, or upon a sale of the property encumbered thereby pursuant to the trustee’s power of sale, or upon a transfer of the Property by deed in lieu of foreclosure, then for so long as there is no material event of default by Tenant under this Lease, this Lease shall continue in full force and effect as a direct lease between the owner or succeeding owner of the Property, as Landlord, and Tenant for the balance of the Lease Term, upon and subject to all of the terms, covenants and conditions of this Lease. The nondisturbance agreement shall not in an y event include any terms that are inconsistent with the terms of this Lease or that adversely affect Tenant’s rights or increase Tenant’s obligations under this Lease.

ARTICLE 19: WARRANTY OF TITLE AND OF QUIET ENJOYMENT

19.1     Warranty of Title and of Quiet Enjoyment. Landlord warrants that it has sufficient title to the Property to enable Landlord to perform its obligations under this Lease, that there is no ground lease or other underlying lease affecting the Property on the date hereof and that there is no mortgage, deed of trust or other lien affecting the Property on the date hereof other than the Industrial Board lease on the building and two mortgages to Regions Bank. Landlord warrants that for so long as no default has occurred and is continuing under this Lease which would allow Landlord to terminate Tenant’s right to possession of the Premises, Tenant shall have the right to peacefully and quietly use and enjoy the Premises

ARTICLE 20: MISCELLANEOUS PROVISIONS

20.1     Estoppel Certificates. Each party hereto shall, upon request from the other party, at any time and from time to time execute, acknowledge and deliver to such party a written statement, in the form generally acceptable to institutional purchasers or lenders, certifying as follows: that this Lease is unmodified and in full force and effect (or if there has been any modification thereof, that the same is in full force and effect as modified and stating the nature thereof); that to the best of its knowledge there are no uncured defaults on the part of the other party hereto (or if any such default exists, the specific nature and extent thereof); the date to which any rents and other charges have been paid in advance, if any; and such other factual matters as are typically contained in such certificates.

20.2     Landlord’s Access. Landlord or its agents may enter the Premises at all reasonable times to inspect and conduct tests in order to monitor Tenant’s compliance with all applicable environmental laws and all laws governing the presence and use of Hazardous Substances; or, upon reasonable advance notice to Tenant, to show the Premises to potential buyers, investors or other parties or for any other purpose Landlord deems reasonably necessary. Landlord shall give Tenant reasonable prior notice of such entry, except in the case of an emergency, in which event Landlord shall make reasonable efforts to notify Tenant. Landlord and its agents shall be accompanied by a representative of Tenant if required by Tenant. Landlord shall minimize interference with Tenant’s operations during any entry. Landlord acknowledges that certain portions of the Premises may be subject to security restrictions. In that connection, Landlord shall observe any Boeing Company and U.S. Government regulations, which apply to the Premises. Landlord may place customary “For Sale” signs on the

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Premises, and during the last six months of the Lease Term Landlord may place customary “For Lease” signs on the Premises.

20.3     Landlord’s Liability. No owner of the Premises shall be liable under this Lease except for breaches of Landlord’s obligations occurring while owner of the Premises. If the holder of any ground lease, deed of trust or mortgage encumbering the Premises, or any purchaser or transferee pursuant to the foreclosure or transfer of the Premises under any such instrument, becomes the Landlord, then the obligations of such Landlord shall be binding upon the assets of such Landlord which comprise the Premises (including rents, the proceeds of any sale or encumbrance of the Property, and the proceeds of any condemnation award or policy of property insurance covering the Property), but not upon other assets of such Landlord.

20.4     Severability. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision of this Lease, which shall remain in full force and effect.

20.5     Monetary Obligations. All monetary obligations of Tenant under this Lease are deemed to be rent, and except as provided herein the payment of rent is an independent covenant.

20.6     Covenants and Conditions. All provisions of this Lease to be observed and performed by Tenant are both covenants and conditions.

20.7     Interpretation. The captions of the Articles or Paragraphs of this Lease are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term “Tenant” shall include Tenant’s agents, employees, contractors, invitees, successors or others using the Premises with Tenant’s expressed or implied permission.

20.8     Incorporation of Prior Agreements; Modifications. This Lease is the only agreement between the parties pertaining to the lease of the Premises and no other agreements shall be effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void.

20.9     Notices. All notices, requests and other communications required or permitted under this Lease shall be in writing and shall be personally delivered or sent by a national overnight delivery service, which maintains delivery records, or by facsimile (provided such facsimile transmission is confirmed within three business days by duplicate notice delivered as otherwise provided herein). Notices to Tenant shall be delivered to the address specified in Paragraph 1.12 above. Notices to Landlord shall be delivered to the address specified in Paragraph 1.11 above. All notices shall be effective upon delivery (or refusal of delivery). Either party may change its notice address upon written notice to the other party.

20.10     Waivers. All waivers shall be in writing and signed by the waiving party. Landlord’s failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement.

20.11     No Recordation. Tenant shall not record this Lease. Either Landlord or Tenant may require that a notice, short form or memorandum of this Lease executed by both parties be recorded. The form of such short form lease is attached as Exhibit ______. The party requiring such recording shall pay all transfer taxes and recording fees.

20.12     Binding Effect; Choice of Law. This Lease shall bind any party who shall legally acquire any rights or interest in this Lease from Landlord or Tenant, provided that Landlord shall have no obligation to Tenant’s successor unless the rights or interests of Tenant’s successor are acquired in accordance with the terms of this Lease. The laws of the State of Alabama, without reference to its choice of law rules, shall govern this Lease.

20.13     Force Majeure. If either party cannot perform any of its obligations due to events beyond its reasonable control (other than the payment of money), the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond a party’s reasonable control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or materials, government regulations or restrictions and weather conditions.

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20.14     Effect of Termination. Termination of this Lease will not relieve either party of its obligations with respect to any indemnity or warranty, which arises out of events occurring prior to the date of such termination.

20.15     Parking. During the term of the lease, free parking shall be available for Tenant’s customers and employees with a minimum of 450-500 spaces. Landlord shall be responsible for design, Research Park Board approval, and the actual construction of the additional parking needed to provide this amount of parking as a Base Building Improvement. The additional parking shall be completed no later than November 15, 2002.

20.16     Landlord’s Furnishings. It is understood and agreed between the parties hereto that, in consideration for this lease, the Landlord shall provide the following for the Tenant’s use at no charge, throughout the term or any extensions, (i) the lobby furnishings, including light fixtures over the reception desk, (ii) half of the existing training room tables and (iii) 80% of the existing cafeteria tables and chairs.

20.17     Security. Tenant shall have the right to maintain, at its own cost and expense, a card key access system for its employees or any other security systems it deems necessary. Tenant shall have the right to fence the perimeter, at its own cost and expense, with Landlord’s written consent and the consent of the Cummings Research Park Board Authority. Should a fenced perimeter be required during any part of the term of this lease, it shall be removed at Tenant’s sole cost and expense upon lease expiration if requested by Landlord.

20.18     Antennae/Satellite Equipment. Tenant will be permitted to mount and install satellite dishes and/or antennae (together with cables) on the rooftop of the Building during the Lease Term (including renewals). Tenant shall be responsible for the maintenance and repair of roof penetrations where dishes are installed. There shall be no roof top charges to Tenant during the Lease Term (including renewals) of this Lease.

ARTICLE 21: BROKERS

21.1     Brokers. During the negotiation of this Lease, Landlord was represented by John Blue Realty (“Landlord’s Broker”) and Tenant was represented by CB Richard Ellis and Concourse Group, Inc. (“Tenant’s Broker”). Landlord shall be responsible for paying a commission equal to $268,500, which amount is equal to 6 percent multiplied by the total Base Rent payable by Tenant for the 64 month Lease Term, or $4,475,000. Two thirds of the commission, or $179,000, is to be paid to Tenant’s Broker and one third of the commission, or $89,500, is to be paid to Landlord’s Broker.

21.2     Indemnity. Landlord shall indemnify and hold Tenant harmless from and against any claim by any person other than Landlord’s Broker claiming to have represented Landlord in connection with the negotiation, execution or performance of this Lease for payment of any commission, finder’s fee or the like and from and against any claim by Landlord’s Broker for compensation in excess of that provided for in Paragraph 21.1. Tenant shall indemnify and hold Landlord harmless from and against any claim by any person other than Tenant’s Broker claiming to have represented Tenant in connection with the negotiation, execution or performance of this Lease for payment of any commission, finder’s fee or the like and from and against any claim by Tenant’s Broker for compensation in excess of that provided for in Paragraph 21.1.

ARTICLE 22: OPTION TO PURCHASE

22.1     Option to Purchase. Landlord hereby grants to Tenant, subject and pursuant to the terms and conditions outlined herein, an Option to Purchase Landlord’s leasehold interest (including Landlord’s right to purchase the underlying fee simple title) in the real property described in Exhibit “A” to this Agreement (the “Property”) at a Purchase Price of $7,500,000.00 under terms and conditions outlined under a separate Purchase and Sale Agreement. Such Option to Purchase is referred to as the “Option”. The Option shall become effective on the date of this Agreement and shall expire on November 1, 2002, unless extended in writing by mutual agreement between the Landlord and Tenant. Tenant may exercise the Option at any time prior to its expiration by delivering to Landlord written notice of its intent to purchase the Property, which written notice will outline (a) Purchase Price and (b) Estimated timeframe for Buyer’s Due Diligence, but in any event the closing shall occur within 45 days of Tenant’s written notice of its intent to purchase the Property. Once written notice is received negotiation of a Sale and Purchase Agreement shall begin. All written notices required to be given pursuant to the terms hereof shall be deliverable pursuant to Article 20.9 of this Agreement

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EXECUTED IN DUPLICATE as of the date set forth in Paragraph 1.1.

Landlord:	Tenant:
Verilink Corporation	The Boeing Company
By:        /s/ Leigh S. Belden	By:        /s/ Stephen J. Barker
Title:      President & CEO	Title:     Philip W. Cyburt
Printed Name:    Leigh S. Belden	Printed Name:    Vice President
	Stephen J. Barker                       Authorized Signatory

STATE OF ALABAMA	)
	)
COUNTY OF MADISON	)

                        I, the undersigned, a Notary Public in and for said County in said State, do hereby certify that Leigh S. Belden, whose name as President & CEO of Verilink Corporation , a Delaware corporation, is signed to the foregoing instrument, and who is known to me, and known to be such officer, acknowledged before me on this day that, being informed of the contents of said instrument, (s)he, as such officer and with full authority, executed the same voluntarily for and as the act of said corporation.

            Given under my hand and official seal this the 2nd day of August, 2002.

 /s/ Michael Terry

Notary Public

My Commission expires: 08/13/05

STATE OF CALIFORNIA	)
	)
COUNTY OF LOS ANGELES	)

                        On August 2, 2002, before me, T.S. Wertner, Notary Public, personally appeared Stephen J. Barker, personally know to me to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person or the entity upon behalf of which the person acted, executed the instrument.

WITNESS my hand and official seal

 /s/ T. S. Wertner

Commission # 1349842

Notary Public – California
Los Angeles County
My Comm. Expires Apr 6, 2006

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Exhibit A

Site Plan

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Exhibit B

Legal Description

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Exhibit C

Rental Schedule

Lease Period	Annual Rental		Monthly Rental
August 1 – November 30, 2002	$	-0-	$	-0-
December 1, 2002 – November 30, 2003	$	850,000.00	$	70,833.33
December 1, 2003 – November 30, 2004	$	872,500.00	$	72,708.33
December 1, 2004 – November 30, 2005	$	895,000.00	$	74,583.33
December 1, 2005 – November 30, 2006	$	917,500.00	$	76,458.33
December 1, 2006 – November 30, 2007	$	940,000.00	$	78,333.33

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EX-10

Exhibit 10.23

STOCK REPURCHASE AGREEMENT

             THIS STOCK REPURCHASE AGREEMENT (the “Agreement”) is entered into this 14th day of June, 2002, by and between VERILINK CORPORATION , a Delaware corporation (the “Buyer”) and BEACON TELCO, L.P., a Delaware limited partnership (the “Seller”). The Buyer and the Seller are referred to herein as the “Parties.”

WITNESSETH

             WHEREAS, the Seller owns 948,300shares of the Common Stock (collectively, the “Shares”) of Buyer; and

             WHEREAS, the Seller has agreed to sell the Shares to the Buyer and the Buyer has agreed to purchase the Shares from the Seller on the terms and conditions set forth in this Agreement; and

             WHEREAS, the parties have entered into a Warrant and Stockholder’s Agreement dated as of October 13, 2000, and modified such agreement by letter dated October 19, 2001 (as so modified, the “Warrant Agreement”); and

             WHEREAS, the parties entered into a Cooperative Research Agreement dated as of October 13, 2000 and terminated such agreement by letter dated October 19, 2001 (the “Termination Letter”), except for certain provisions which the Termination Letter provides shall survive such termination; and

             WHEREAS, the Parties are entering into this Agreement to set forth their agreements regarding the purchase and sale of the Shares, and terminate the Warrant Agreement.

             NOW, THEREFORE, for and in consideration of the premises, the mutual agreements and covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

            1.    Agreement to Sell the Shares . In consideration of and in express reliance upon the representations and warranties of the Seller in this Agreement, the Buyer agrees to purchase from the Seller and the Seller agrees to sell to the Buyer, the Shares.

            2.    Price . The aggregate purchase price for the Shares (the “Purchase Price”) shall be Three Hundred Thirty-One Thousand Nine Hundred Five and No/100 Dollars ($331,905.00) in cash, payable at the Closing against receipt of the stock certificates representing the Shares.

            3.    Closing . The closing of the purchase and sale of the Shares under this Agreement (the “Closing”) shall occur as soon as practicable following the execution and delivery of this Agreement. The Closing shall take place at the offices of the Buyer. At the Closing, the Parties shall deliver the following documents:

            (a)   The Seller shall deliver to the Buyer certificates for the Shares, duly endorsed for transfer or together with duly executed stock powers in substantially the form attached, against delivery of the Purchase Price; and

            (b)   The Buyer shall deliver to the Seller a check for the Purchase Price.

            4.    Representations and Warranties of the Seller . The Seller represents and warrants in favor of the Buyer as follows:

            (a)    Ownership of Shares . The Seller is the legal and beneficial owner of the Shares free and clear of all liens, charges, claims and encumbrances. There are no restrictions on the transfer of the Shares, except as set forth in the Warrant Agreement. The Seller has the unencumbered right and power to sell the Shares, except as set forth in Warrant Agreement. Seller does not beneficially own any shares of Common Stock of the Buyer other than the Shares to be sold to Buyer hereby.

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            (b)    Authority . This Agreement has been duly executed and delivered by Seller and constitutes the legal, valid and binding obligations of Seller enforceable against Seller in accordance with its terms. There are no actions or proceedings pending or, to Seller’s knowledge, threatened, involving the Seller which might reasonably be expected to materially and adversely affect the validity of this Agreement or the transfer of the Shares hereunder.

            (c)    No Conflict . Neither the execution or delivery of this Agreement or the consummation of the transaction contemplated hereby will constitute or result in a default or violation of any indentures, leases, instruments, judgments, agreements, decrees or orders of any Court, or to Seller’s knowledge, any law, ordinances, requirements or regulations which might reasonably be expected to materially and adversely affect the validity of this Agreement.

            (d)    No Bids . Since April 15, 2002, neither Seller nor any person acting on behalf of Seller, nor to Seller’s knowledge, any affiliate or representative or Seller, has directly or indirectly purchased, offered to purchase, or entered a bid to purchase any of the Buyer’s Common Stock or options to acquire the Buyer’s Common Stock, other than offer directly made to Buyer.

            (e)    Access to Information . Seller has had the opportunity to learn about the business affairs and financial condition of Buyer. Seller has received all information that it has requested from Buyer regarding Buyer, Buyer’s assets, financial condition, results of operations, business and its prospects, and has had an opportunity to discuss the foregoing with Buyer’s management and to ask questions of the officers of Buyer. Seller further represents and warrants that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of selling the Shares.

            (f)    Waiver and Acknowledgement regarding Non-public Information . Seller hereby acknowledges that: (i) Buyer, its officers, directors, employees or affiliates may be in possession of material, nonpublic information regarding Buyer, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects; and (ii) if Seller were in possession of some or all of such information Seller might not sell any or all of the Shares pursuant to this Agreement. Seller also agrees to waive any right to the information referred to in the preceding sentence. Seller further acknowledges that it has conducted its own investigation, to the extent that Seller has determined necessary or desirable, regarding the information described in the first sentence of this sub-paragraph 4(f).

The representations, warranties and covenants of Seller contained in this Agreement shall survive the Closing.

            5.    Representations and Warranties of the Buyer . The Buyer represents and warrants in favor of the Seller as follows:

            (a)    Authority . This Agreement has been duly executed and delivered by Buyer and constitutes the legal, valid and binding obligations of Buyer enforceable against Buyer in accordance with its terms. There are no actions or proceedings pending or, to Buyer’s knowledge, threatened, involving the Buyer which might reasonably be expected to materially and adversely affect the validity of this Agreement or the transfer of the Shares hereunder.

            (b)    No Conflict . Neither the execution or delivery of this Agreement or the consummation of the transaction contemplated hereby will constitute or result in a default or violation of any indentures, leases, instruments, judgments, agreements, decrees or orders of any Court, or to Buyer’s knowledge, any law, ordinances, requirements or regulations which might reasonably be expected to materially and adversely affect the validity of this Agreement.

            6.    Termination . The remaining provisions of the Warrant Agreement not previously terminated are hereby terminated.

            7.    Expenses . The Parties will be responsible for their respective costs and expenses of all attorneys, accountants, and advisors retained by or representing them in connection with this transaction. Seller shall pay all sales, documentary, stamp and other transfer taxes, if any, payable as a result of the sale and transfer of the Shares and the Warrant, or payable as the result of any other action contemplated by this Agreement.

            8.    Entire Agreement . This Agreement contains (and is intended by the Parties to be an integration of) all of the promises, agreements, conditions, terms, understandings, warranties and representations of the Parties with respect to the transactions and business relationships contemplated thereby and herein, and there are no

2

other promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, among them other than as set forth in this Agreement. This Agreement supersedes all prior agreements and understandings among the Parties with respect to its subject matter.

            9.    Governing Law . This Agreement and all amendments, modifications, authorizations or supplements to this Agreement and the rights, duties, obligations and liabilities of the Parties under such documents will be determined in accordance with the applicable provisions of the laws of the State of Delaware, without reference to its doctrines or principles of conflicts of laws.

            10.    Binding Effect . This Agreement will be binding upon and inure to the benefit of the Parties, their successors and assigns.

            11.    Assignment . No Party may assign either this Agreement or any of such Party’s rights, interests, or obligations hereunder without the prior written approval of the other Parties.

            12.    Further Documents . The Parties agree that they and each of them will take whatever action or actions as are deemed by their respective legal counsel to be reasonably necessary or desirable from time to time to effectuate the provisions or intent of this Agreement, and, to that end, the Parties agree that they will execute, acknowledge, seal and deliver any further instruments or documents that may be requested by their respective legal counsel to give force and effect to this Agreement or any of its provisions, or to carry out the intent of this Agreement or any of its provisions.

            13.    Counterparts . This Agreement may be executed in any number of counterparts and by the Parties in separate counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts taken together shall constitute one and the same instrument.

            14.    Separate Counsel . By signing this Agreement, the Parties acknowledge that they have had the opportunity to obtain separate counsel and advice regarding the Agreement and the Share purchase, and that they have read and understand this Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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               IN WITNESS WHEREOF, this Agreement has been executed as of the date and year first above written and the undersigned Parties by placing their signatures hereto agree to and adopt the terms hereof.

BUYER :

VERILINK CORPORATION.

By:       /s/ C. W. Smith                                        

       Name:   C. W. Smith                                     

       Title:    VP & CFO                                        

SELLER :

BEACON TELCO, L.P.

By:       /s/ Alok Prasad                                        

       Name:   Alok Prasad                                     

       Title:     President                                          

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STOCK POWER

[complete a stock power for each stock certificate]

FOR VALUE RECEIVED, Beacon Telco, L.P. hereby assigns and transfers unto Verilink Corporation _____________________________________ (____________) Shares of the Common Stock of Verilink Corporation, a Delaware Corporation, standing in its name on the books of said Corporation represented by Certificate No. _________ herewith, and does hereby irrevocably constitute and appoint _________________________ attorney to transfer the said stock on the books of said Corporation with full power of substitution in the premises.

Dated: ___________, 2002

	BEACON TELCO, L.P.
	By:
	Name:
	Title:
Sworn to and subscribed before me
this ____ day of ___________, 2002.
Notary Public
My Commission expires:

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EX-23

Exhibit 23.1

Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-88301, 333-69755, 333-42262, 333-05651, and 333-52958) of Verilink Corporation of our report dated July 24, 2002, except for Note 14, as to which the date is September 3, 2002, relating to the consolidated financial statements and financial statement schedule, which appear in this Form 10-K. We also consent to the reference to us under the heading “Selected Consolidated Financial Data” in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Birmingham, Alabama
September 26, 2002

EX-99

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

            In connection with the Annual Report of Verilink Corporation (the “Company”) on Form 10-K for the period ending June 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leigh S. Belden, President and Chief Executive Officer, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

                        (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

                        (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

/s/ Leigh S. Belden                               

Leigh S. Belden
President and Chief Executive Officer
(Principal Executive Officer)
September 26, 2002

EX-99

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

            In connection with the Annual Report of Verilink Corporation (the “Company”) on Form 10-K for the period ending June 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, C.W. Smith, Vice President and Chief Financial Officer, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

            (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

            (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

/s/ C.W. Smith                                         

C.W. Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
September 26, 2002