CASH COLLATERAL AGREEMENT

EXHIBIT 99.1
[EXECUTION COPY]

CASH COLLATERAL AGREEMENT

          THIS CASH COLLATERAL AGREEMENT (this “Agreement”) is made as of February 4, 2005 by and among VERSO TECHNOLOGIES, INC., a Minnesota corporation (the “Company”), the investors signatory hereto (each, an “Investor” and, collectively, the “Investors”), and WACHOVIA BANK, NATIONAL ASSOCIATION (the “Collateral Agent”). Capitalized terms used herein but not defined have the respective meanings set forth in the Securities Purchase Agreement, dated as of February 4, 2005, between each Investor and the Company (the “Purchase Agreement”).

          WHEREAS, on the terms and subject to the conditions set forth in the Purchase Agreement, each Investor has agreed to purchase from the Company, severally and not jointly with any other Investor, a 6% Senior Unsecured Convertible Debenture (collectively, the “Debentures”);

          WHEREAS, pursuant to the Purchase Agreement, on the Closing Date each Investor will deduct from the Purchase Price and deposit into a cash collateral account (the “Collateral Account”) an amount of cash (the “Collateral Amount”) equal to the aggregate amount of interest scheduled to accrue on the Debentures during the period beginning on the Closing Date and ending on the two (2) year anniversary of the Closing Date, assuming for such purpose that the aggregate original principal amount of the Debentures remains outstanding through the last day of such period (the “Initial Collateral Amount”);

          WHEREAS, the Company and each Investor have requested that the Collateral Agent (i) hold the Collateral Amount as secured party for the benefit of the Investors and successor holders of the Debentures (each, a “Holder” and, collectively, the “Holders”) to secure the Company’s performance of its obligations under the Debentures and (ii) disburse the Collateral Amount pursuant to the terms of this Agreement; and

          WHEREAS, the Collateral Agent is willing to hold the Collateral Amount as secured party for the benefit of the Holders and to disburse the Collateral Amount pursuant to the terms of this Agreement;

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

ARTICLE I

ESTABLISHMENT OF COLLATERAL ACCOUNT

     1.1 The parties hereby agree to establish the Collateral Account or, if the Collateral Account has been established prior to the date hereof, hereby ratify and approve such action. Each Investor shall, on the Closing Date, deposit such Investor’s Pro Rata Share of the Initial Collateral Amount into the Collateral Account by means a wire transfer made in accordance with the instructions attached as Exhibit A hereto. The name of each Investor and its Pro Rata Share are set forth on Schedule A attached hereto.

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     1.2 The Company and each Investor hereby directs the Collateral Agent to invest and reinvest the Collateral Amount in Evergreen US Government Money Market Fund #636 (the “Initial Investment”). The Company and each Investor acknowledge receipt of a prospectus and/or disclosure materials associated with the Initial Investment, either through means of hardcopy or via access to the website associated with the Initial Investment. Each party acknowledges that it has reviewed the Initial Investment and agrees that it constitutes an appropriate investment of the Collateral Amount. The Company and each Holder may change the investment in which amounts contained in the Collateral Account are invested (subject to applicable minimum investment requirements) by furnishing written joint instructions to the Collateral Agent; provided, however, that no such reinvestment may be made except in:

     a. direct obligations of the United States of America or obligations the principal of and the interest on which are unconditionally guaranteed by the United States of America;

     b. certificates of deposit issued by any bank, bank and trust company, or national banking association (including the Collateral Agent and its affiliates), and insured by the Federal Deposit Insurance Corporation or a similar governmental agency;

     c. repurchase agreements with any bank, trust company, or national banking association (including the Collateral Agent and its affiliates); or

     d. any institutional money market fund offered by the Collateral Agent, including any institutional money market fund managed by the Collateral Agent or any of its affiliates.

     If the Collateral Agent has not received written joint instructions from the Company and each Holder at the time that an investment decision must be made with respect to amounts contained in the Collateral Account, the Collateral Agent shall invest such amount, or such portion thereof as to which no written direction has been received, in investments described in clause (d) above. Each of the foregoing investments shall be made in the name of the Collateral Agent. No investment shall be made in any instrument or security that has a maturity of greater than six (6) months. Notwithstanding anything to the contrary contained herein, the Collateral Agent may, without notice to the Company or any Holder, sell or liquidate any of the foregoing investments at any time if the proceeds thereof are required for any disbursement of amounts contained in the Collateral Account that is permitted or required hereunder. All investment earnings shall become part of the Collateral Amount and investment losses shall be charged against the Collateral Amount. The Collateral Agent shall not be liable or responsible for loss in the value of any investment made pursuant to this Agreement, or for any loss, cost or penalty resulting from any sale or liquidation of the Collateral Amount. With respect to any Collateral Amount received by the Collateral Agent after ten o’clock, a.m., Boston, Massachusetts, time, the Collateral Agent shall not be required to invest such funds or to effect any investment instruction until the next Business Day.

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     1.3 The Company shall be responsible for any taxes due or payable in respect of interest generated by the investment of the Collateral Amount. The Company’s federal tax identification number, as set forth on the signature page hereof, shall be used to open the Collateral Account.

ARTICLE II

SECURITY INTEREST

     2.1 As security for the payment and performance of all of the Company’s indebtedness, liabilities and other obligations under and pursuant to the Debentures, including all unpaid principal of and all interest accrued thereon, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and including interest that accrues after the commencement by or against the Company of any bankruptcy or insolvency proceeding naming the Company as the debtor in such proceeding (collectively, the “Obligations”), the Company hereby grants to the Collateral Agent, in its capacity as secured party and as agent for the Holders, ratably in accordance with each Holder’s Pro Rata Share, a security interest in all of the Company’s right, title and interest in, to and under all funds held by the Collateral Agent under or pursuant to this Agreement, including without limitation the Collateral Amount and all proceeds of any and all of the foregoing, in each case whether presently existing or owned or hereafter arising or acquired (collectively, the “Pledged Collateral”).

     2.2 This Agreement shall create a continuing security interest in the Pledged Collateral which shall remain in effect until the Release Date (as defined below) and thereafter until all of the Pledged Collateral has been disbursed in accordance with Article III hereof.

     2.3 The Company shall (i) execute and deliver to the Collateral Agent, to hold on behalf and at the direction of the Holders, and the Company hereby authorizes the Collateral Agent to file or cause to be filed (with or without the Company’s signature), at any time and from time to time, all such financing statements, continuation financing statements, termination statements, notices, and all other documents and instruments which the Collateral Agent or any Holder may reasonably request, in form reasonably satisfactory to the Collateral Agent or any Holder, as the case may be, and (ii) take such other action, which the Collateral Agent or any Holder may reasonably request, to perfect and continue perfected, maintain the priority of or provide notice of the pledge of and security interest in the Pledged Collateral and to accomplish the purposes of this Agreement. The Company ratifies and authorizes the filing by the Collateral Agent of any financing statements filed prior to the date hereof.

     2.4 The Company shall not be entitled to withdraw or otherwise take possession of or exercise control over any of the Pledged Collateral other than as expressly provided in this Agreement.

     2.5 Except for the accounting for funds actually received by the Holders, no Holder shall have any duty or liability to exercise or preserve any rights, privileges or powers pertaining to the Pledged Collateral. The Company agrees that the Holders shall have no responsibility to the Company with respect to any losses sustained on any item of, or investment in, the Pledged Collateral or for any failure to realize any yields desired by the Company.

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     2.6 The Company represents and warrants to each Holder that the Company’s chief executive office and principal place of business, and all books and records concerning the Pledged Collateral, are located at its address set forth in the Purchase Agreement; and that the Company’s jurisdiction of organization and the Company’s exact legal name each is as set forth in the first paragraph of this Agreement.

     2.7 The Company waives, to the fullest extent permitted by law, any right to require the Holders (a) to proceed against any Person, (b) to exhaust any other collateral or security for any of the Obligations, (c) to pursue any remedy, or (d) to make or give any presentments, demands for performance, notices of nonperformance, protests, notices of protests or notices of dishonor in connection with any of the Pledged Collateral.

     2.8 So long as any of the Obligations remain unsatisfied, the Company agrees that:

     (a) The Company will, at its own expense, appear in and defend any action, suit or proceeding which purports to affect its title to, or right or interest in, the Pledged Collateral or the security interest of the Holders therein and the pledge to Holders thereof.

     (b) The Company shall give prior written notice to each Holder and to the Collateral Agent (and in any event not less than thirty (30) days’ written notice prior to any such change) of: (i) any change in the location of the Company’s chief executive office or principal place of business; (ii) any change in the location of books and records pertaining to Pledged Collateral; (iii) any change in its name; (iv) any changes in its identity or structure in any manner which might make any financing statement filed hereunder incorrect or misleading; (v) any change in its jurisdiction of organization; or (vi) any change in its registration as an organization (or any new such registration).

     (c) The Company will not convey, transfer, assign or otherwise dispose of or transfer the Pledged Collateral or any right, title or interest therein, nor will the Company create, incur or permit to exist any pledge, security interest, assignment, deposit arrangement, charge or encumbrance or other lien, upon or with respect to the Pledged Collateral, other than the security interest of and pledge to the Holders created by this Agreement.

     (d) The Company will promptly, upon the written request from time to time of the Collateral Agent, execute, acknowledge and deliver, and file and record, all such financing statements and other documents and instruments, and take all such action, as shall be reasonably necessary to carry out the purposes of this Agreement.

ARTICLE III

DISBURSEMENT OF COLLATERAL AMOUNT

     3.1 The Collateral Agent shall disburse the Collateral Amount as follows:

          (i) On or before the fifth (5^th) Business Day prior to each Designated Interest Payment Date (as defined below), the Company shall deliver to the Collateral Agent and to each Holder a written notice signed by the Chief Financial Officer of the Company (an “Interest

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Payment Notice”), which notice shall (A) specify the amount of interest accrued and owing on the Debentures on such date, both in the aggregate and as to each Holder and (B) certify that a copy of such notice has been delivered to each Holder. If the Company chooses or is required under the Debentures to pay all or a portion of such interest in cash, the Interest Payment Notice shall so state and shall direct the Collateral Agent to pay from the Collateral Account to the Holders in the respective amounts specified in such notice cash in an amount equal to such interest to be paid in cash. If the Company chooses to pay all or a portion of such interest in Common Stock, and the conditions to do so are satisfied, the Interest Payment Notice shall so specify. Upon written confirmation from each Holder that it has received payment of interest in shares of Common Stock, the Collateral Agent shall pay from the Collateral Account to the Company cash in an amount equal to the aggregate amount of such interest paid in Common Stock. In the event that the Company does not deliver an Interest Payment Notice on or before such fifth Business Day (in which case the Company shall be required to pay such interest in cash), or if the Collateral Agent receives notice from a Holder that conflicts with or disputes any information contained in an Interest Payment Notice, the Collateral Agent shall make payment of any undisputed amounts in accordance with this paragraph 3.1(i), but shall not be obligated to make any payment under this paragraph 3.1(i) with respect to any disputed payments except pursuant to the procedures described in Section 4.8 below. For purposes of this Agreement, “Designated Interest Payment Date” means each April 1, July 1, October 1 and January 1 from and including April 1, 2006 through January 1, 2008 (or if any such day is not a Business Day, on the next succeeding Business Day).

          (ii) In the event that the Company exercises its right to require a Forced Conversion (as defined in the Debentures) with a Forced Conversion Date (as defined in the Debentures) occurring at any time prior to the second anniversary of the Closing Date, then on or before the fifth (5^th) Business Day prior to such Forced Conversion Date, the Company shall deliver to the Collateral Agent and to each Holder a written notice signed by the Chief Financial Officer of the Company (a “Forced Conversion Release Notice”), which notice shall (A) specify the principal amount of the Debentures that are subject to such Forced Conversion, (B) specify the amount of interest accrued and owing as of the Forced Conversion Date on the Debentures to be so converted on such Forced Conversion Date, both in the aggregate and as to each Holder of Debentures to be so converted, (C) specify the amount of interest, if any, that would have accrued on such principal amount during the period beginning on the Forced Conversion Date and ending on the two (2) year anniversary of the Closing Date (the “Make-Whole Amount”), and (D) certify that a copy of such notice has been delivered to each Holder. If the Company chooses or is required under the Debentures to pay all or a portion of the Make-Whole Amount or accrued interest in cash, the Forced Conversion Release Notice shall so state and shall direct the Collateral Agent to pay from the Collateral Account to the Holders in the respective amounts specified in such Notice cash in an amount equal to such Make-Whole Amount and accrued interest to be paid in cash. If the Company chooses (and is entitled) to pay all or a portion of the Make-Whole Amount and/or such interest in Common Stock, then the Forced Conversion Release Notice shall so state. In such event, upon written confirmation from each Holder that it has received the Conversion Shares to which it is entitled in respect of such Forced Conversion (including, if applicable, Conversion Shares in respect of accrued interest and in respect of the Make-Whole Amount and any accrued interest in respect of the converted shares, the Collateral Agent shall pay from the Collateral Account to the Company cash in an amount equal to the

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aggregate amount of the Make-Whole Amount and accrued interest paid in Common Stock. In the event that the Collateral Agent receives notice from a Holder that conflicts wit